ARTISAN SMALL CAP VALUE FUND
ARTISAN FUNDS, INC.
1000 North Water Street, Suite 1770
Milwaukee, Wisconsin 53202
(414) 390-6100 (800) 344-1770
STATEMENT OF ADDITIONAL INFORMATION
August 20, 1997
Supplemented September 29, 1997 and January 14, 1998
Artisan Small Cap Value Fund (the "Fund") is a series of Artisan Funds,
Inc. ("Artisan Funds"). This statement of additional information is not a
prospectus. It should be read in conjunction with the prospectus of the
Fund dated August 20, 1997 and any supplement to the prospectus. That
prospectus can be obtained without charge by calling or writing to the Fund
at the telephone numbers and address shown above.
TABLE OF CONTENTS
Page
----
Information about the Fund and Artisan Partners 2
Investment Objective and Policies 2
Investment Techniques and Risks 3
Investment Restrictions 17
Performance Information 19
Directors and Officers 23
Investment Advisory Services 26
Portfolio Transactions 27
Purchasing and Redeeming Shares 28
Additional Tax Information 30
Custodian 31
Independent Accountants 31
<PAGE>
INFORMATION ABOUT THE FUND AND ARTISAN PARTNERS
The Fund is a series of Artisan Funds, Inc. ("Artisan Funds"). Artisan
Partners Limited Partnership ("Artisan Partners") provides investment
advisory services to the Fund.
Artisan Funds strives to offer distinctive, high-value-added investment
opportunities. Artisan Funds is not a "family" of indistinguishable
products devised by marketers in a financial services conglomerate.
Rather, Artisan Partners is a small partnership of investment
professionals, focused on a limited number of distinct investment
strategies, each of which is offered as a series of Artisan Funds. At the
date of this statement of additional information, those series are (in
addition to the Fund) are Artisan International Fund, Artisan Mid Cap Fund
and Artisan Small Cap Fund. The portfolio manager of each Fund is a
specialist in his or her market, with an investment process created and
refined through years of experience - an artisan. At Artisan Funds, we
believe that experienced, active managers investing in inefficient markets
can produce superior returns over time. The Artisan Funds are intended for
long-term investors who share on that belief.
The discussion below supplements the description in the prospectus of the
Fund's investment objectives, policies and restrictions.
INVESTMENT OBJECTIVE AND POLICIES
Artisan Small Cap Value Fund invests for long-term capital growth. The
investment objective of the Fund may be changed by the board of directors
without the approval of a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940) of the Fund.
The Fund invests primarily in common stocks that appear undervalued
relative to earnings, book value, cash flows or potential earnings growth,
and that are issued by small companies whose outstanding shares have an
aggregate market value of less than $1 billion. It attempts to manage
investment risk in the stocks it purchases by emphasizing investments in
businesses that have positive cash flow, strong balance sheets, and
business strategies that are economically sound under ordinary
circumstances. Stocks are generally sold when they approach the Fund's
estimate of their enterprise value.
Because the Fund typically invests in companies that are characterized by
sparse Wall Street research coverage, it uses its own detailed screening
and research process. Companies in which the Fund invests usually appear
undervalued because they fall into one of the following general categories:
- The company operates in an industry category that is cyclical in nature
and is presently out of favor.
- The company has assets which are not adequately reflected in its market
value.
B-2
<PAGE>
- The company has experienced problems leading to a depressed stock price,
but is undergoing or is likely to undergo some change which the Fund
believes will improve its operations.
- The company is undiscovered or misunderstood by Wall Street analysts.
In addition to emphasizing investments in companies that are undervalued
and represent acceptable investment risks, the Fund attempts to manage
portfolio risk by diversifying its holdings to avoid concentration in any
one stock or industry sector.
Artisan Partners believes that there are two distinct approaches to
investing in stocks: growth and value. Artisan Small Cap Value Fund
follows a value approach. Artisan Small Cap Fund, another series of
Artisan Funds, follows a growth approach. Each of these two complementary
investment approaches has proven its merit over time, and each can play a
significant role in a well-crafted equity portfolio. For example, growth
investors look for companies with above-average rates of earnings growth,
while value investors look for companies whose stock appear temporarily
depressed; many growth investors pay a premium for stocks, while value
investors look for bargains; growth stocks tend to be more volatile than
value stocks; and growth stocks typically outperform value stocks in
strong markets, but underperform them in weak markets.
The Fund invests primarily in equity securities, including common and
preferred stocks, warrants or other similar rights, and convertible
securities. In addition, the Fund may from time to time invest in foreign
securities. The types of investments the Fund may make are discussed in
the following pages.
INVESTMENT TECHNIQUES AND RISKS
Foreign Securities
The Fund may invest up to 25% (but does not expect to invest more than 10%)
of its total assets in foreign securities (including American Depository
Receipts ("ADRs")), which may entail a greater degree of risk (including
risks relating to exchange rate fluctuations, tax provisions, or
expropriation of assets) than does investment in securities of domestic
issuers. ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying securities. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored
ADR, the Fund is likely to bear its proportionate share of the expenses of
the depository and it may have greater difficulty in receiving shareholder
communications than it would have with a sponsored ADR. The Fund does not
intend to invest more than 5% of its net assets in unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is
affected by the strength or weakness of the U.S. dollar against these
currencies. For example, if the dollar falls in value relative to the
Japanese yen, the dollar value of a yen-denominated stock held in the
portfolio will rise even though the price of the stock remains unchanged.
Conversely, if the dollar rises in value relative
B-3
<PAGE>
to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under
"Managing Investment Exposure.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward
foreign currency exchange contracts involve certain considerations
comprising both risks and opportunities not typically associated with
investing in U.S. securities. These considerations include: fluctuations
in exchange rates of foreign currencies; possible imposition of exchange
control regulation or currency restrictions that would prevent cash from
being brought back to the United States; less public information with
respect to issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack of uniform
accounting, auditing, and financial reporting standards; lack of
uniform settlement periods and trading practices; less liquidity and
frequently greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of
foreign bank deposits or other assets, establishment of exchange controls,
the adoption of foreign government restrictions, or other adverse
political, social or diplomatic developments that could affect investment
in these nations.
Debt Securities
Under normal market conditions, the Fund does not intend to invest in debt
securities other than convertible securities. The risks inherent in debt
securities depend primarily on the term and quality of the obligations in
the Fund's portfolio as well as on market conditions. A decline in the
prevailing levels of interest rates generally increases the value of debt
securities, while an increase in rates usually reduces the value of those
securities.
Investments in debt securities by the Fund may be in those that are within
the four highest ratings categories of Standard & Poor's Corporation
("S&P") or Moody's Investors Services, Inc. ("Moody's") (generally referred
to as "investment grade") or, if unrated, deemed to be of comparable
quality by Artisan Partners. However, the Fund may invest up to 35% of its
net assets in debt securities that are rated below investment grade. The
Fund does not currently intend to invest more than 5% of its net assets in
securities rated below investment grade.
Debt securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely to
affect the issuer's capacity to pay interest and repay principal. If the
rating of a security held by the Fund is lost or reduced below investment
grade, the Fund is not required to dispose of the security, but Artisan
Partners will consider that fact in determining whether the Fund should
continue to hold the security.
B-4
<PAGE>
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal according to the terms of the obligation and
therefore carry greater investment risk, including the possibility of
issuer default and bankruptcy.
Defensive Investments
The Fund intends to be substantially fully invested in equity securities in
ordinary circumstances, although the Fund may invest without limit in
corporate or government obligations or hold cash or cash equivalents if
Artisan Partners determines that a temporary defensive position is
advisable.
Convertible Securities
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The
common stock underlying convertible securities may be issued by a different
entity than the issuer of the convertible securities. Convertible
securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock
until such time as the convertible security matures or is redeemed or until
the holder elects to exercise the conversion privilege.
The value of convertible securities is influenced by both the yield of non-
convertible securities of comparable issuers and by the value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." The investment value of the convertible security will
typically fluctuate inversely with changes in prevailing interest rates.
However, at the same time, the convertible security will be influenced by
its "conversion value," which is the market value of the underlying common
stock that would be obtained if the convertible security were converted.
Conversion value fluctuates directly with the price of the underlying
common stock.
By investing in convertible securities, the Fund obtains the right to
benefit from the capital appreciation potential in the underlying stock
upon exercise of the conversion right, while earning higher current income
than would be available if the stock were purchased directly. In
determining whether to purchase a convertible security, Artisan Partners
will consider the same criteria that would be considered in purchasing the
underlying stock. Although convertible securities purchased by the Fund
are frequently rated investment grade, the Fund also may purchase unrated
securities or securities rated below investment grade if the securities
meet Artisan Partners' other investment criteria. Convertible securities
rated below investment grade (a) tend to be more sensitive to interest rate
and economic changes, (b) may be obligations of issuers who are less
creditworthy than issuers of higher quality convertible securities, and (c)
may be more thinly traded due to such securities being less well known to
investors than either common stock or conventional debt securities. As a
result, Artisan Partners' own investment research and analysis tends to be
more important in the purchase of such securities than other factors.
B-5
<PAGE>
Managing Investment Exposure
The Fund uses various techniques to increase or decrease its exposure to
the effects of possible changes in security prices, currency exchange rates
or other factors that affect the value of its portfolio. These techniques
include buying and selling options, futures contracts, or options on
futures contracts, or entering into currency exchange contracts.
These techniques are used by Artisan Partners to adjust the risk and return
characteristics of the Fund's portfolio. If Artisan Partners judges market
conditions incorrectly or employs a strategy that does not correlate well
with the Fund's investments, or if the counterparty to the transaction does
not perform as promised, the transaction could result in a loss. Use of
these techniques may increase the volatility of the Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed.
These techniques are used by the Fund for hedging, risk management or
portfolio management purposes and not for speculation.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market or
through forward currency exchange contracts ("forward contracts"). Forward
contracts are contractual agreements to purchase or sell a specified
currency at a specified future date (or within a specified time period) and
price set at the time of the contract. Forward contracts are usually
entered into with banks, foreign exchange dealers or broker-dealers, are
not exchange traded, and are usually for less than one year, but may be
renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against
possible variations in the exchange rate between these currencies.
Currency transactions are limited to transaction hedging and portfolio
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward contracts with
respect to specific receivables or payables of the Fund accruing in
connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular currency.
Portfolio hedging allows the Fund to limit or reduce exposure in a foreign
currency by entering into a forward contract to sell or buy such foreign
currency (or another foreign currency that acts as a proxy for that
currency) so that the U.S. dollar value of certain underlying foreign
portfolio securities can be approximately matched by an equivalent U.S.
dollar liability. The Fund may not engage in portfolio hedging with
respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in that particular
currency, except that the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a proxy
currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the
value of the securities denominated in such currency. The use of this
basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Fund. The
Fund may not engage in "speculative" currency exchange transactions.
B-6
<PAGE>
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either
acquire the currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting contract
with the same currency trader obligating it to purchase on the same
maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly,
it may be necessary for the Fund to purchase additional currency on the
spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of
the currency. Conversely, it may be necessary to sell on the spot market
some of the currency received upon the sale of the portfolio security if
its market value exceeds the amount of currency the Fund is obligated to
deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward
contract to sell the currency. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of
a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
A default on the contract would deprive the Fund of unrealized profits or
force the Fund to cover its commitments for purchase or sale of currency,
if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates. The cost to the Fund of engaging in currency exchange
transactions varies with such factors as the currency involved, the length
of the contract period, and prevailing market conditions. Because currency
exchange transactions are usually conducted on a principal basis, no fees
or commissions are involved.
Options on Securities and Indexes. The Fund may purchase and sell put
options and call options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on the Nasdaq National Market. The
Fund may purchase agreements, sometimes called cash puts, that may
accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of
B-7
<PAGE>
the option the security underlying the option (or the cash value of the
index) at a specified exercise price at any time during the term of the
option (normally not exceeding nine months). The writer of an option on
an individual security or on a foreign currency has the obligation upon
exercise of the option to deliver the underlying security or foreign
currency upon payment of the exercise price or to pay the exercise price
upon delivery of the underlying security or foreign currency. Upon
exercise, the writer of an option on an index is obligated to pay the
difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option.
(An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the call or
has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is
required, cash or cash equivalents in such amount are held in a segregated
account by its custodian) upon conversion or exchange of other securities
held in its portfolio.
If an option written by the Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an
option purchased by the Fund expires, the Fund realizes a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Fund will realize a capital
loss. If the premium received from a closing sale transaction is more than
the premium paid to purchase the option, the Fund will realize a capital
gain or, if it is less, the Fund will realize a capital loss. The
principal factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of
an option purchased or written is marked-to-market daily and is valued at
the closing price on the exchange on which it is traded or, if not traded
on an exchange or no closing price is available, at the mean between the
last bid and asked prices.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options. For example, there are
significant differences between the securities markets, the currency
markets, and the options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to
achieve its
B-8
<PAGE>
objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because of market
behavior or expected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close
out an option that it had purchased on a security, it would have to
exercise the option in order to realize any profit or the option would
expire and become worthless. If the Fund were unable to close out a
covered call option that it had written on a security, it would not be able
to sell the underlying security until the option expired. As the writer of
a covered call option on a security, the Fund foregoes, during the
option's life, the opportunity to profit from increases in the market value
of the security covering the call option above the sum of the premium and
the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund,
the Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Fund might be unable to exercise an option it
has purchased.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate futures contracts, index futures contracts, and foreign
currency futures contracts. An interest rate, index or foreign currency
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or the cash
value of an index <F1> at a specified price and time. A public market
exists in futures contracts covering a number of indexes (including, but
not limited to: the Standard & Poor's 500 Index, the Value Line Composite
Index, the Russell 2000 Index, and the New York Stock Exchange Composite
Index) as well as financial instruments (including, but not limited to:
U.S. Treasury bonds, U.S. Treasury notes, Eurodollar certificates of
deposit, and foreign currencies). Other index and financial instrument
futures contracts are available and it is expected that additional futures
contracts will be developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives
the holder the right, in return for the premium paid, to assume a long
position (call) or short position (put) in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position in the
futures contract and the writer is assigned the opposite short position.
In the case of a put option, the opposite is true. The Fund might, for
example, use futures contracts to hedge against or gain exposure to
fluctuations in the general level of stock prices, anticipated changes in
interest rates or currency fluctuations that might adversely affect
--------------------------
<F1> A futures contract on an index is an agreement pursuant to which two
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 contract was
originally written. Although the value of a securities index is a fraction
of the value of certain specified securities, no physical delivery of
those securities is made.
B-9
<PAGE>
either the value of the Fund's securities or the price of the securities
that the Fund intends to purchase. Although other techniques could be
used to reduce or increase the Fund's exposure to stock price, interest
rate and currency fluctuations, the Fund may be able to achieve its
exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.
The Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade, or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on Artisan Partners
correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to
use futures contracts,
Artisan Partners might have taken portfolio actions in anticipation of the
same market movements with similar investment results but, presumably, at
greater transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of cash or U.S. Government securities or other
securities acceptable to the broker ("initial margin"). The margin
required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract,
although the Fund's broker may require margin deposits in excess of the
minimum required by the exchange. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract, which is
returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Fund expects to earn
interest income on its initial margin deposits. A futures contract held by
the Fund is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking-to-market." Variation margin
paid or received by the Fund does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract had expired at the
close of the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market
value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(same exchange, underlying security or index, and delivery month). If an
offsetting purchase price is less than the original sale price, the Fund
engaging in the transaction realizes a capital gain, or if it is more, the
Fund realizes a capital loss. Conversely, if an offsetting sale price is
more than the original purchase price, the Fund engaging
B-10
<PAGE>
in the transaction realizes a capital gain, or if it is less, the Fund
realizes a capital loss. The transaction costs must also be included in
these calculations.
Risks Associated with Futures. There are several risks associated with the
use of futures contracts and futures options. A purchase or sale of a
futures contract may result in losses in excess of the amount invested in
the futures contract. In trying to increase or reduce market exposure,
there can be no guarantee that there will be a correlation between price
movements in the futures contract and in the portfolio exposure sought. In
addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given transaction not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures options and
the related securities, including technical influences in futures and
futures options trading and differences between the securities market and
the securities underlying the standard contracts available for trading.
For example, in the case of index futures contracts, the composition of the
index, including the issuers and the weighting of each issue, may differ
from the composition of the Fund's portfolio, and, in the case of interest
rate futures contracts, the interest rate levels, maturities, and
creditworthiness of the issues underlying the futures contract may differ
from the financial instruments held in the Fund's portfolio. A decision as
to whether, when and how to use futures contracts involves the exercise of
skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock
price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end
of the current trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made on that
day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock index
futures contracts are not normally subject to such daily price change
limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the
contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that
an active secondary market will develop or continue to exist.
Limitations on Options and Futures. If other options, futures contracts,
or futures options of types other than those described herein are traded in
the future, the Fund also may use those investment vehicles, provided the
board of directors determines that their use is consistent with the Fund's
investment objective.
B-11
<PAGE>
The Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money,"
<F2> would exceed 5% of the Fund's total assets. The Fund currently
intends to limit its use of options and futures so that not more than 5% of
its total assets are at risk.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian or broker, assets
(including any margin) equal to the market value of such contract.
When writing a call option on a futures contract, the Fund similarly
will maintain with its custodian assets (including any margin) equal
to the amount by which such option is in-the-money until the option
expires or is closed out by the Fund.
The Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if,
in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized
gains and losses on the open positions, adjusted for the historical
relative volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Fund has written call
options on specific securities in its portfolio, the value of those
securities will be deducted from the current market value of the securities
portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the Fund will
use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or,
with respect to positions in commodity futures and commodity options
contracts that do not come within the meaning and intent of Regulation
1.3(z), the aggregate initial margin and premiums required to establish
such positions will not exceed 5% of the fair market value of the assets of
the Fund, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the Commission Regulations) may be excluded
in computing such 5%).
Taxation of Options and Futures. If the Fund exercises a call or put
option that it holds, the premium paid for the option is added to the cost
basis of the security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures options
exercised by the Fund, the difference between the cash received at exercise
and the premium paid, plus other capitalized costs of the option, is a
capital gain or loss.
If a call or put option written by the Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security
----------------------------
<F2> A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option
is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
B-12
<PAGE>
purchased (put). For cash settlement options and futures options written
by the Fund, the difference between the cash paid at exercise, plus other
capitalized costs of the option, and the premium received is a capital
gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Fund is in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss
realized as a result of a closing purchase transaction will be long-term.
The holding period of the securities covering an in-the-money option will
not include the period of time the option is outstanding.
If the Fund writes an equity call option <F3> other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss
on such option transaction, to the extent it does not exceed the unrealized
gains on the securities covering the option, may be subject to deferral
until the securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into, plus other capitalized costs of the option, and the
settlement price on the earlier of delivery notice date or expiration date.
If the Fund delivers securities under a futures contract, the Fund also
realizes a capital gain or loss on those securities.
For Federal income tax purposes, the Fund generally is required to
recognize for each taxable year its net unrealized gains and losses as of
the end of the year on futures, and non-equity options positions ("year-end
mark-to-market"). Generally, any gain or loss recognized with respect to
such positions (either by year-end mark-to-market or by actual closing of
the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the
case of positions classified as part of a "mixed straddle," the recognition
of losses on certain positions (including options, futures and futures
options positions, the related securities and certain successor positions
thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or buying
put options (or futures put options) that are intended to hedge against a
change in the value of securities held by the Fund may affect the holding
period of the hedged securities.
If the Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed
to "mimic" the performance of the index underlying such contract, the
option or futures contract position and the Fund's stock
---------------------
<F3> An equity option is defined to mean any option to buy or sell stock,
and any other option the value of which is determined by reference to an
index of stocks that is ineligible to be traded on a commodity futures
exchange (e.g., an option contract on a sub-index based on the price
of nine hotel-casino stocks). The definition of equity option excludes
options on broad-based stock indexes (such as the Standard & Poor's
500 index).
B-13
<PAGE>
positions may be deemed to be positions in a mixed straddle, subject to
the above-mentioned loss deferral rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for Federal income tax purposes on certain hedging strategies
with respect to appreciated securities. Under these rules taxpayers will
recognize gain, but not loss, with respect to securities if they enter
into short sales of "offsetting notional principal contracts" (as defined
by the Act) with respect to, or futures or "forward contracts" (as defined
by the Act) with respect to, the same or substantially identical property,
or if they enter into such transactions and then acquire the same or
substantially indentical property. These changes generally apply to
constructive sales after June 8, 1997. Furthermore, the Secretary of the
Treasury is authorized to promulgate regulations that will treat as
constructive sales certain transactions that have substantially the same
effect as short sales, offsetting notional principal contracts, and
futures or forward contracts to deliver the same or substantially similar
property.
In order for the Fund to qualify for Federal income tax treatment as a
regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale
of securities or foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts). Any net
gain realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In addition, for tax years
beginning before August 5, 1997, gains realized on the sale or other
disposition of securities held less than three months must be
less than 30% of the Fund's annual gross income. In order to avoid
realizing excessive gains on securities held less than three months, the
Fund may be required to defer the closing out of certain positions beyond
the time when it would otherwise be advantageous to do so.
The Fund intends to distribute to shareholders annually any capital gains
that have been recognized for Federal income tax purposes (including year-
end mark-to-market gains) on options and futures transactions, together
with gains on other Fund investments, to the extent such gains exceed
recognized capital losses and any net capital loss carryovers of the Fund.
Shareholders will be advised of the nature of such capital gain
distributions.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on the Fund or an
investor. Investors are urged to consult their own tax advisers for a
complete review of the tax ramifications of an investment in the Fund.
Rule 144A Securities
The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the 1933 Act
("Rule 144A securities"). That Rule permits certain qualified
institutional buyers, including investment companies that own and invest at
least $100 million in securities, to trade in privately placed securities
that have not been registered for sale under the 1933 Act. Artisan
Partners, under the supervision of the board of directors, will consider
whether Rule 144A securities are illiquid and thus subject to the Fund's
B-14
<PAGE>
restriction of investing no more than 10% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or
not is a question of fact. In making this determination, Artisan Partners
will consider the trading markets for the specific security, taking into
account the unregistered nature of a Rule 144A security. In addition,
Artisan Partners could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchasers, (3) dealer undertakings to make
a market, and (4) nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions,
Artisan Partners determined that a Rule 144A security is no longer liquid,
the Fund's holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that the Fund does not invest
more than 10% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the
Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Lending of Portfolio Securities
Subject to restriction (3) under "Investment Restrictions" in this
statement of additional information, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the securities
loaned by the Fund. The Fund would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities loaned, and
also would receive an additional return that may be in the form of a
fixed fee or a percentage of the collateral. The Fund would have the right
to call the loan and obtain the securities loaned at any time on notice of
not more than five business days. The Fund would not have the right to vote
the securities during the existence of the loan but would call the loan to
permit voting of the securities if, in Artisan Partners' judgment, a
material event requiring a shareholder vote would otherwise occur before
the loan was repaid. In the event of bankruptcy or other default of the
borrower, the Fund could experience both delays in liquidating the loan
collateral or recovering the loaned securities and losses, including (a)
possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its
rights thereto, (b) possible subnormal levels of income and lack of access
to income during this period, and (c) expenses of enforcing its rights.
The Fund does not currently intend to loan more than 5% of its net assets.
Repurchase Agreements
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously
commits to resell that security to the bank or dealer at an agreed-upon
price, date, and market rate of interest unrelated to the coupon rate or
maturity of the purchased security. Although repurchase agreements carry
certain risks not associated with direct investments in securities, the
Fund will enter into repurchase agreements only with banks and dealers
believed by Artisan Partners to present minimum credit risks in accordance
with guidelines approved by the board of trustees. Artisan Partners will
review and monitor the creditworthiness of such institutions, and will
consider the capitalization
B-15
<PAGE>
of the institution, Artisan Partners' prior dealings with the institution,
any rating of the institution's senior long-term debt by independent
rating agencies, and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued
interest. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase were less than the
repurchase price, the Fund would suffer a loss. If the financial
institution which is party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to bankruptcy or other liquidation
proceedings there may be restrictions on the Fund's ability to sell the
collateral and the Fund could suffer a loss. However, with respect to
financial institutions whose bankruptcy or liquidation proceedings are
subject to the U.S. Bankruptcy Code, the Fund intends to comply with
provisions under such Code that would allow it immediately to resell
such collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase Agreements
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities
may be delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such commitments only
with the intention of actually acquiring the securities, but may sell the
securities before settlement date if Artisan Partners deems it advisable
for investment reasons. The Fund does not currently intend to have
commitments to purchase when-issued securities in excess of 5% of its net
assets.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase
agreement in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time and price.
Use of a reverse repurchase agreement may be preferable to a regular sale
and later repurchase of securities because it avoids certain market risks
and transaction costs. However, reverse repurchase agreements will be
treated as borrowing and subject to the Artisan Funds' fundamental
limitation on borrowing.
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued or delayed-delivery basis or enters into a
reverse repurchase agreement, assets of the Fund having a value at least as
great as the purchase price of the securities to be purchased will be
segregated on the books of the Fund and held by the custodian throughout
the period of the obligation. The use of these investment strategies, as
well as borrowing under a line of credit as described below, may increase
net asset value fluctuation.
Short Sales
The Fund may make short sales "against the box." In a short sale, the Fund
sells a borrowed security and is required to return the identical security
to the lender. A short sale "against the box" involves the sale of a
security with respect to which the Fund already owns an equivalent security
in kind and amount. A short sale "against the box" enables the Fund to
obtain the current market price of a security which it desires to sell but
is unavailable
B-16
<PAGE>
for settlement. The Fund does not currently intend to have
commitments to make short sales "against the box" in excess of 5% of its
net assets.
Line of Credit
Artisan Funds maintains a line of credit with a bank in order to permit
borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation
of portfolio securities. Any borrowings under that line of credit by the
Fund would be subject to restriction (4) under "Investment Restrictions"
in this statement of additional information.
Portfolio Turnover
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. At times, the Fund may invest for short-term
capital appreciation. Portfolio turnover can occur for a number of reasons
such as general conditions in the securities markets, more favorable
investment opportunities in other securities, or other factors relating to
the desirability of holding or changing a portfolio investment. Because of
the Fund's flexibility of investment and emphasis on growth of capital, it
may have greater portfolio turnover than that of mutual funds that have
primary objectives of income or maintenance of a balanced investment
position. The future turnover rate may vary greatly from year to year. A
high rate of portfolio turnover in the Fund, if it should occur, would
result in increased transaction expense, which must be borne by the Fund.
High portfolio turnover also may result in the realization of capital gains
or losses and, to the extent net short-term capital gains are realized,
any distributions resulting from such gains will be considered ordinary
income for Federal income tax purposes. (See "Dividends, Capital Gains,
and Taxes" in the prospectus, and "Additional Tax Information" in this
statement of additional information.)
INVESTMENT RESTRICTIONS
Fundamental Restrictions
Artisan Funds has adopted the following investment restrictions which may
not be changed without the approval of the Fund's shareholders, under which
the Fund may not:
(1) act as an underwriter of securities, except insofar as it may be deemed an
underwriter for purposes of the Securities Act of 1933 on disposition of
securities acquired subject to legal or contractual restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities secured
by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein), commodities, or
commodity contracts, except that it may enter into (a) futures and options
on futures and (b) forward contracts;
B-17
<PAGE>
(3) make loans, but this restriction shall not prevent the Fund from (a) buying
a part of an issue of bonds, debentures, or other obligations which are
publicly distributed, or from investing up to an aggregate of 15% of its
total assets (taken at market value at the time of each purchase) in parts
of issues of bonds, debentures or other obligations of a type privately
placed with financial institutions, (b) investing in repurchase agreements,
or (c) lending portfolio securities, provided that it may not lend
securities if, as a result, the aggregate value of all securities loaned
would exceed 33% of its total assets (taken at market value at the time of
such loan);
(4) borrow (including entering into reverse repurchase agreements), except that
it may (a) borrow up to 33 1/3% of its total assets, taken at market value
at the time of such borrowing, as a temporary measure for extraordinary or
emergency purposes, but not to increase portfolio income and (b) enter
into transactions in options, futures, and options on futures; <F4>
(5) invest in a security if more than 25% of its total assets (taken at market
value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(6) issue any senior security except to the extent permitted under the
Investment Company Act of 1940;
(7) with respect to 75% of its total assets, invest more than 5% of its total
assets, taken at market value at the time of a particular purchase, in the
securities of a single issuer, except for securities issued or guaranteed
by the Government of the U.S. or any of its agencies or instrumentalities
or repurchase agreements for such securities;
(8) acquire more than 10%, taken at the time of a particular purchase, of the
outstanding voting securities of any one issuer.
The Fund's investment objective is not a fundamental restriction and,
therefore, a change in the objective is not subject to shareholder
approval. However, investors in the Fund will receive written notification
at least 30 days' prior to any change in the Fund's investment objective.
Non-Fundamental Restrictions
The Fund also is subject to the following non-fundamental restrictions and
policies, which may be changed by the board of directors:
(a) invest in companies for the purpose of exercising control or management;
-----------------------------
<F4> The Fund will not purchase securities when total borrowings by the
Fund are greater than 5% of its net asset value.
B-18
<PAGE>
(b) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of the
Fund's total assets (valued at time of purchase) in the case of any one
other investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the aggregate;
any such purchases are to be made in the open market where no profit to a
sponsor or dealer results from the purchase, other than the customary
broker's commission, except for securities acquired as part of a merger,
consolidation, acquisition or reorganization;
(c) invest more than 25% of its total assets (valued at time of purchase) in
securities of foreign issuers;
(d) purchase securities on margin (except for use of short-term credits as are
necessary for the clearance of transactions), or sell securities short
unless (i) the Fund owns or has the right to obtain securities equivalent
in kind and amount to those sold short at no added cost or (ii) the
securities sold are "when issued" or "when distributed" securities which
the Fund expects to receive in recapitalization, reorganization, or other
exchange for securities the Fund contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and options on
futures are not treated as short sales; or
(e) invest more than 10% of its net assets (taken at market value at the time
of each purchase) in illiquid securities, including repurchase agreements
maturing in more than seven days.
(f) under normal market conditions, invest less than 65% of its total assets in
securities of issuers having aggregate common stock market capitalizations
of less than $1 billion, in each case taken at the time of investment.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return"
for a period is the percentage change in value during the period of an
investment in shares of a fund, including the value of shares acquired
through reinvestment of all dividends and capital gains distributions.
"Average Annual Total Return" is the average annual compounded rate of
change in value represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(l+T)n
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
B-19
<PAGE>
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by the
Fund are not necessarily indicative of future results. The Fund's
performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information about
past performance is useful in reviewing the Fund's performance and in
providing some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using different
reinvestment assumptions or time periods.
In advertising and sales literature, the performance of the Fund may be
compared with that of other mutual funds, indexes or averages of other
mutual funds, indexes of related financial assets or data, other accounts
or partnerships managed by Artisan Partners, and other competing investment
and deposit products available from or through other financial
institutions. The composition of these indexes, averages or accounts
differs from that of the Fund. Comparison of the Fund to an alternative
investment should consider differences in features and expected
performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Fund generally believes
to be accurate. The Fund also may note its mention (including performance
or other comparative rankings) in newspapers, magazines, or other media
from time to time. However, the Fund assumes no responsibility for the
accuracy of such data. Newspapers and magazines and other media which
might mention the Fund include, but are not limited to, the following:
B-20
<PAGE>
Atlanta Constitution Mutual Fund Letter
Barron's Mutual Fund News Service
Boston Herald Mutual Fund Values
Business Week Morningstar Publications
Chicago Tribune Newsweek
Chicago Sun-Times The New York Times
Cleveland Plain Dealer No-Load Fund Investor
CNBC Outstanding Investor Digest
CNN Pension World
Crain's Pensions and Investments
Chicago Business Personal Investor
Consumer Reports Jane Bryant Quinn
Consumer Digest (syndicated column)
Financial World Louis Rukeyser's Mutual Fund
Forbes The San Francisco Chronicle
Fortune Smart Money
Fund Action Stranger's Investment Adviser
Investor's Business Daily 13D Opportunities Report
Kiplinger's Personal Time
Finance Magazine United Mutual Fund Selector
Knight-Ridder USA Today
Los Angeles Times U.S. News and World Report
Milwaukee Business Journal The Wall Street Journal
Milwaukee Journal Sentinel Working Woman
Money Worth
Your Money
When a newspaper, magazine or other publication mentions the Fund, such
mention may include: (i) listings of some or all of the Fund's holdings,
(ii) descriptions of characteristics of some or all of the securities held
by the Fund, including price-earnings ratios, earnings, growth rates and
other statistical information, and comparisons of that information to
similar statistics for the securities comprising any of the indexes or
averages listed above; and (iii) descriptions of the Fund's or a portfolio
manager's economic and market outlook, generally and for the Fund.
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Fund may be compared to the following indexes or
averages:
B-21
<PAGE>
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Russell 2000 Small Stock Index American Stock Exchange Composite Index
Russell Mid-Cap Stock Index NASDAQ Composite NASDAQ Industrials
Russell Mid-Cap Value Index (These indexes generally reflect the
Standard & Poor's 500 Stock Index performance of stocks traded in the
Standard & Poor's 400 Industrials indicated markets.)
Standard & Poor's Mid-Cap 400 Index
Wilshire 5000
Wilshire 4500
Wilshire 4000
Wilshire Small-Cap Index
Wilshire Small-Cap Value Index
(These indexes are widely
recognized indicators of general
U.S. stock market results.)
The performance of the Fund also may be compared to the following mutual
fund industry indexes or averages: Value Line Index; Lipper Capital
Appreciation Fund Average; Lipper Growth Funds Average; Lipper Small
Company Growth Funds Average; Lipper General Equity Funds Average; Lipper
Equity Funds Average; Lipper Small Company Growth Fund Index; ICD
Aggressive Growth and Long Term Growth Funds Average; ICD Aggressive Growth
Fund Large Index; ICD Aggressive Growth Fund Small Index; ICD Aggressive
Growth Funds Average; ICD All Equity Funds Average; Morningstar Growth
Average; Morningstar Small-Cap Funds Average; Morningstar Aggressive Growth
Average; Morningstar U.S. Diversified Average; Morningstar Equity Fund
Average; Morningstar Hybrid Fund Average; Morningstar All Equity Funds
Average; and Morningstar General Equity Average.
The ICD Indexes reflect the unweighted average total return of the largest
twenty four funds within their respective category as calculated and
published by ICD.
The Lipper Small Company Growth Fund Index reflects the net asset value
weighted total return of the largest thirty growth funds as calculated and
published by Lipper Analytical Services, Inc. ("Lipper"), an independent
service that monitors the performance of more than 1,000 funds.
The Lipper, ICD and Morningstar averages are unweighted averages of total
return performance of mutual funds as classified, calculated and published
by these independent services that monitor the performance of mutual funds.
The Fund also may use comparative performance as computed in a ranking by
Lipper or category averages and rankings provided by another independent
service. Should Lipper or another service reclassify the Fund to a
different category or develop (and place the Fund into) a new category, the
Fund may compare its performance or ranking against other funds in the
newly assigned category, as published by the service. The Fund may compare
its performance or ranking against all funds tracked by Lipper or another
independent service.
The Fund may cite its rating, recognition or other mention by Morningstar,
Inc. ("Morningstar") or any other entity. Morningstar proprietary ratings
reflect historical risk-
B-22
<PAGE>
adjusted performance as of the date indicated. The ratings are subject to
change every month. Morningstar ratings are calculated from the fund's
three-, five-, and ten-year average annual returns in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor
that reflects fund performance below 90-day T-bill returns. Ten percent
of the funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and 10%
receive one star. A high rating reflects either above-average returns
or below-average risk, or both.
To illustrate the historical returns on various types of financial assets,
the Fund may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for
example, total return indexes, total return percentages, average annual
total returns and standard deviations of such returns) for the following
asset types: common stocks, small company stocks, long-term corporate
bonds, long-term government bonds, intermediate-term government bonds, U.S.
Treasury bills and Consumer Price Index. The Fund also may use historical
data compiled by Prudential Securities, Inc., or by other similar sources
believed by the Fund to be accurate, illustrating the past performance of
small-capitalization stocks, large-capitalization stocks, common stocks,
equity securities, growth stocks (small-capitalization, large-
capitalization, or both) and value stocks (small-capitalization, large-
capitalization, or both).
DIRECTORS AND OFFICERS
Directors and officers of Artisan Funds, and their principal business
occupations during at least the last five (5) years, are shown below.
Directors deemed to be "interested persons" of Artisan Funds for purposes
of the 1940 Act are indicated with an asterisk.
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND AGE WITH REGISTRANT DURING THE PAST 5 YEARS
- ------------ --------------- -----------------------
Andrew A. Ziegler Director, Chairman Managing Director of Artisan
(39) of the Board Partners; prior to founding
and Chief Artisan Partners, president
Executive Officer and chief operating officer
of Strong/Corneliuson Capital
Management ("Strong") and president
of the Strong Funds from 1990 to
1994; prior thereto, attorney with
the law firm of Godfrey & Kahn,
S.C., Milwaukee, WI.
B-23
<PAGE>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND AGE WITH REGISTRANT DURING THE PAST 5 YEARS
- ------------ --------------- -----------------------
Carlene Murphy Ziegler Director and Managing Director of Artisan
(41) President Partners; co-portfolio manager,
Artisan Small Cap Fund; prior to
founding Artisan Partners, a co-
portfolio manager of the Strong
Common Stock Fund, Strong
Opportunity Fund and numerous
institutional small-capitalization
equity portfolios at Strong since
March 1991; prior thereto, a co-
portfolio manager of the Stein Roe
Special Fund.
David A. Erne Director Partner of the law firm
(53) Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, S.C.,
Milwaukee, WI.
Thomas R. Hefty Director President of United Wisconsin
(49) Services, Inc. (a provider of
managed care and specialty business
services) since 1986 and chairman
of the board and chief executive
officer since 1991; and chairman of
the board of Blue Cross & Blue
Shield United of Wisconsin (parent
company of United Wisconsin
Services, Inc.) since 1988 and
president since 1982.
Howard B. Witt Director President and chief executive
(56) officer of Littelfuse, Inc.
(a manufacturer of advanced circuit
protection devices) since 1990 and
chairman of the board of Littelfuse
since 1993; prior thereto executive
vice president of Littelfuse; and
director of Franklin Electric Co.,
Inc. (a manufacturer of electronic
motors) since 1994.
John M. Blaser Chief Financial Chief financial officer of
(40) Officer, Treasurer Artisan Partners; prior to
and Secretary joining Artisan Partners, senior
vice president with Kemper
Securities, Inc. since 1993; prior
thereto, with Price Waterhouse.
B-24
<PAGE>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME AND AGE WITH REGISTRANT DURING THE PAST 5 YEARS
- ------------ --------------- -----------------------
Mark L. Yockey Vice President Portfolio manager, Artisan
(41) International Fund; prior to
joining Artisan Partners in
November 1995, portfolio manager of
the United International Growth
Fund and vice president of Waddell
& Reed (investment management firm)
since January 1990; prior thereto,
equity analyst for Waddell & Reed.
Sandra Jean Vice President Equity trader for Artisan Partners;
Voss-Reinhardt prior to joining Artisan Partners,
(32) equity trader with Northwestern
Mutual since January 1989, prior
thereto, sales associate with Dean
Witter Reynolds.
Millie Adams Hurwitz Vice President Co-portfolio manager of the Fund
(34) since August 1996; senior analyst
of Artisan Partners' small
capitalization equity products
since February 1995; prior to
joining Artisan Partners, co-
portfolio manager at Stein Roe &
Farnham Incorporated from 1992
until 1995, and an analyst with OLC
Corporation from 1989 to 1991.
Scott C. Satterwhite Vice President Portfolio manager, Artisan Small
(40) Cap Value Fund; prior to joining
Artisan Partners in June 1997,
portfolio manager of the Biltmore
Special Values from August 1, 1993
through May 31, 1997 and Senior
Vice President and Manager of
Personal Trust Portfolio Management
for the Personal Financial Services
Group of Wachovia Bank of North
Carolina, N.A.
Andrew C. Stephens Vice President Portfolio manager, Artisan Mid Cap
(33) Fund; co-manager of Strong Asset
Allocation Fund at Strong, February
1993 through March 1997, and senior
research analyst for Strong Common
Stock Fund and Strong Opportunity
Fund, September 1994 through March
1996; prior to February 1933, head
trader, Strong.
B-25
<PAGE>
The business address of the officers and directors affiliated with Artisan
Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin
53202. The addresses of the other directors are: Mr. Erne - 1000 N.
Water Street, Milwaukee, Wisconsin 53202; Mr. Hefty - 401 W. Michigan
Street, Milwaukee, Wisconsin 53203; and Mr. Witt - 800 E. Northwest
Highway, Des Plaines, Illinois 60016.
Mr. Ziegler and Ms. Ziegler are married to each other.
Mr. Ziegler and Ms. Ziegler serve as members of the Executive Committee of
the Board of Directors. The Executive Committee, which meets between
regular meetings of the Board, is authorized to exercise all of the powers
of the Board of Directors.
The only compensation paid to directors and officers of Artisan Funds for
their services as such consists of an annual $5,000 retainer fee (per
series of Artisan Funds) paid to directors who are not interested persons
of Artisan Funds or Artisan Partners. Artisan Funds has no retirement or
pension plans.
The following table sets forth compensation paid by the Fund and by Artisan
Funds, Inc. during the fiscal year ended June 30, 1997 to each of the
directors of the Fund.
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM ARTISAN
AGGREGATE ACCRUED AS PART BENEFITS MID CAP FUND AND
FROM SMALL OF FUND UPON FUND COMPLEX
NAME OF DIRECTOR CAP VALUE FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- ---------------- -------------- -------- ---------- -----------------
Andrew A. Ziegler $ 0 $ 0 $ 0 $ 0
Carlene Murphy
Ziegler 0 0 0 0
David A. Erne 0 0 0 10,000
Thomas R. Hefty 0 0 0 10,000
Howard B. Witt 0 0 0 10,000
No shares of the Fund were outstanding on the date of this Statement of
Additional Information. However, prior to the commencement of public
offering of shares of the Fund, Artisan Partners or one or more of its
principals, will purchase shares of the Fund at an initial price of $10 per
share.
INVESTMENT ADVISORY SERVICES
Artisan Partners Limited Partnership ("Artisan Partners") provides
investment advisory services to the Fund pursuant to an Investment Advisory
Agreement dated August 20, 1997 (the "Advisory Agreement"). Artisan
Partners is a Delaware limited partnership. Artisan Investment Corporation
was incorporated on December 7, 1994 for the sole purpose of acting as
general partner of Artisan Partners. Mr. Ziegler and Ms. Ziegler, as
officers of Artisan Investment Corporation, manage Artisan Partners. The
principal address of Artisan Partners is 1000 North Water Street, Suite
1770, Milwaukee, Wisconsin 53202. Artisan Partners also has offices at 100
B-26
<PAGE>
Pine Street, Suite 3250, San Francisco, California and Five
Concourse Parkway, Suite 2120, Atlanta, Georgia 30328.
In return for its services, the Fund pays Artisan Partners a monthly fee at
the annual rate of 1% of the Fund's average daily net assets up to $500
million; .975 of 1% of average daily net assets from $500 million up to
$750 million; .950 of 1% of average daily net assets from $750 million to
$1 billion; and .925 of 1% of average daily net assets over $1 billion.
Artisan Partners has undertaken to reimburse the Fund for any ordinary
operating expenses in excess of 2.00% of average net assets over each
fiscal year.
The Advisory Agreement provides that Artisan Partners shall not be liable
for any loss suffered by the Fund or its shareholders as a consequence of
any act of omission in connection with investment advisory or portfolio
services under the agreement, except by reason of willful misfeasance, bad
faith or gross negligence on the part of Artisan Partners in the
performance of its duties or from reckless disregard by Artisan Partners of
its obligations and duties under the Advisory Agreement.
The Advisory Agreement will expire on April 30, 1999, but may be continued
from year to year thereafter so long as the continuance is approved
annually (a) by the vote of a majority of the directors of the Fund who are
not "interested persons" of the Fund or Artisan Partners cast in person at
a meeting called for the purpose of voting on such approval, and (b)by the
board of directors or by the vote of a majority (as defined in the 1940
Act) of the outstanding shares of the portfolio. The Agreement will
terminate automatically in the event of its assignment (as defined in the
1940 Act).
PORTFOLIO TRANSACTIONS
Artisan Partners places the orders for the purchase and sale of the Fund's
portfolio securities and options and futures contracts. Artisan Partners'
overriding objective in effecting portfolio transactions is to seek to
obtain the best combination of price and execution. The best net price,
giving effect to brokerage commissions, if any, and other transaction
costs, normally is an important factor in this decision, but a number of
other judgmental factors also may enter into the decision. These include:
Artisan Partners' knowledge of negotiated commission rates currently
available and other current transaction costs; the nature of the security
being traded; the size of the transaction; the desired timing of the trade;
the activity existing and expected in the market for the particular
security; confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others which are
considered; Artisan Partners' knowledge of the financial stability of the
broker or dealer selected and such other problems of any broker or dealer.
Recognizing the value of these factors, the Fund may pay a brokerage
commission in excess of that which another broker or dealer may have
charged for effecting the same transaction. Evaluations of the
reasonableness of brokerage commissions, based on the foregoing factors,
are made on an ongoing basis by Artisan Partners' staff while effecting
portfolio transactions. The general level of brokerage commissions paid is
reviewed by Artisan Partners, and reports are made annually to the board of
directors.
B-27
<PAGE>
With respect to issues of securities involving brokerage commissions, when
more than one broker or dealer is believed to be capable of providing the
best combination of price and execution with respect to a particular
portfolio transaction for the Fund, Artisan Partners often selects a broker
or dealer that has furnished it with research products or services such as
research reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings, dividends, and
similar data, and computer data bases, quotation equipment and services,
research-oriented computer software and services, and services of economic
and other consultants. Selection of brokers or dealers is not made pursuant
to an agreement or understanding with any of the brokers or dealers;
however, Artisan Partners uses internal allocation procedures to identify
those brokers or dealers who provide it with research products or services
and the amount of research products or services they provide, and endeavors
to direct sufficient commissions generated by its clients' accounts in the
aggregate, including the Fund, to such brokers or dealers to ensure the
continued receipt of research products or services Artisan Partners feels
are useful. In certain instances, Artisan Partners receives from brokers
and dealers products or services that are used both as investment research
and for administrative, marketing, or other non-research purposes. In such
instances, Artisan Partners makes a good faith effort to determine the
relative proportions of such products or services which may be considered
as investment research. The portion of the costs of such products or
services attributable to research usage may be defrayed by Artisan
Partners (without prior agreement or understanding, as noted above)
through brokerage commissions generated by transactions by clients
(including the Fund), while the portions of the costs attributable to non-
research usage of such products or services is paid by Artisan Partners in
cash. No person acting on behalf of the Fund is authorized, in recognition
of the value of research products or services, to pay a commission in
excess of that which another broker or dealer might have charged for
effecting the same transaction. Research products or services furnished by
brokers and dealers may be used in servicing any or all of the clients of
Artisan Partners and not all such research products or services are used in
connection with the management of the Fund.
With respect to the Fund's purchases and sales of portfolio securities
transacted with a broker or dealer of a net basis, Artisan Partners also
may consider the part, if any, played by the broker or dealer in bringing
the security involved to Artisan Partners' attention, including investment
research related to the security and provided to the Fund.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the prospectus under the
headings "How to Buy Shares," and "How to Sell Shares." All of that
information is incorporated herein by reference.
Shares of the Fund may be purchased or redeemed through certain financial
services companies some of which may charge a transaction fee. The Fund
may authorize from time to time certain financial services companies,
broker-dealers or their designees ("authorized agents") to accept share
purchase and redemption orders on the Fund's behalf. For purchase orders
placed through an authorized agent, a shareholder will pay the Fund's NAV
per share (see "Net Asset Value," below), next computed after the receipt
by the authorized agent of such purchase order
B-28
<PAGE>
plus any applicable transaction fee imposed by the agent. For redemption
orders placed through an authorized agent, a shareholder will receive
redemption proceeds with reflect the NAV per share next computed after the
receipt by the authorized agent of the redemption order, less any
redemption fees imposed by the agent.
In some instances, an authorized agent or other financial services company
may not charge any transaction fees directly to investors in the Fund.
However, for accounting and shareholder services provided by such company
with respect to Fund shares held by that company for its customers, the
company may charge a fee (currently up to 0.35%) of the annual average
value of those accounts. The Fund pays a portion of those fees not to
exceed the estimated fees and expenses that the Fund would pay to its own
transfer agent if the shares of the Fund held by such customers of the
company were registered directly in their names on the books of the Fund's
transfer agent. The balance of those fees is paid by Artisan Partners.
Net Asset Value. Share purchase and redemption orders will be priced at the
Fund's net asset value next computed after such orders are received and
accepted by: (i) the Fund; (ii) a broker-dealer or other financial
services company authorized by the Fund to accept purchase and redemption
orders on the Fund's behalf; or (iii) such authorized broker-dealer's
designee. The net asset value of the shares of the Fund is determined as
of the close of regular session trading on the New York Stock Exchange
("NYSE") (currently 3:00 p.m., Central time) each day the NYSE is open
for trading. The NYSE is regularly closed on Saturdays and Sundays
and on New Year's Day, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and Christmas.
If one of these holidays falls on a Saturday or Sunday, the NYSE will be
closed on the preceding Friday or the following Monday, respectively. Net
asset value will not be determined on days when the NYSE is closed unless,
in the judgment of the board of directors, net asset value of the Fund
should be determined on any such day, in which case the determination will
be made at 3:00 p.m., Central time. The net asset value per share of the
Fund is determined by dividing the value of all its securities and other
assets, less its liabilities, by the number of shares of the Fund
outstanding.
The Fund intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the
net assets of the Fund during any 90-day period for any one shareholder.
However, redemptions in excess of such limit may be paid wholly or partly
by a distribution in kind of readily marketable securities. If redemptions
were made in kind, the redeeming shareholders might incur transaction costs
in selling the securities received in the redemptions.
The Fund reserves the right to suspend or postpone redemptions of its
shares during any period when: (a) trading on the NYSE is restricted, as
determined by the Commission, if the NYSE is closed for other than
customary weekend and holiday closings; (b) the Commission has by order
permitted such suspension; or (c) an emergency, as determined by the
Commission, exists, making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable.
B-29
<PAGE>
The Fund and Artisan Partners each have adopted a code of ethics that,
among other things, regulates the personal transactions in securities
of certain officers, directors, partners and employees of the Fund and
Artisan Partners.
ADDITIONAL TAX INFORMATION
Artisan Funds intends for the Fund to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and thus not be subject to federal income taxes on
amounts which it distributes to shareholders.
Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in the
prior calendar year is deemed paid in the prior calendar year.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gain. Distributions of net long-
term capital gain will be taxable to you as long-term capital gain
regardless of the length of time you have held your shares.
You will be advised annually as to the source if distributions for tax
purposes. If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale of Fund shares held for six months or
less, your short-term loss is recharacterized as long-term to the extent
of any long-term capital gain distributions you have received with
respect to those shares.
The Taxpayer Relief Act of 1997 reduced from 28% to 20% the maximum tax
rate on long-term capital gains. This reduced rate generally applies to
securities held more than 18 months and sold after July 28, 1997, and
securities held more than one year and sold between May 6, 1997 and
July 29, 1997.
The Fund may be required to withhold federal income tax ("backup
withholding") from certain payments to you, generally redemption
proceeds. Backup withholding may be required if:
- You fail to furnish your properly certified social security
or other tax identification number;
- You fail to certify that your tax identification number is correct
or that you are not subject to backup withholding due to the
underreporting of certain income;
- The IRS informs the Fund that your tax identification number is
incorrect.
These certifications are contained in the application that you complete
when you open your Fund account. The Fund must promptly pay the IRS all
amounts withheld. Therefore, it is not usually possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount
withheld as a credit on your federal income tax return.
B-30
<PAGE>
The Fund may purchase the securities of certain foreign investment funds
or trusts called passive foreign investment companies ("PFICs"). In
addition to bearing their proportionate share of the Fund's expenses
(management fees and operating expenses), shareholders will also
indirectly bear similar expenses of PFICs. Capital gains on the sale of
PFIC holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition, the Fund may be subject
to corporate income tax and an interest charge on certain dividends and
capital gains earned from PFICs, regardless of whether such income and
gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat securities
in PFICs as sold on the last day of the Fund's fiscal year and recognize
any gains for tax purposes at that time; losses will not be recognized.
Such gains will be considered ordinary income which the Fund will be
required to distribute even though it has not sold the security and
received cash to pay such distributions.
The discussion of taxation above is not intended to be a full discussion
of income tax laws and their effect on shareholders. You are encouraged
to consult your own tax advisor. The foregoing information applies to
U.S. shareholders. Foreign shareholders should consult their tax
advisors as to the tax consequences of ownership of Fund shares.
CUSTODIAN
State Street Bank & Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, MA 02171, acts as custodian of the securities and other
assets of the Fund. State Street is responsible for, among other things,
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends
on the Fund's investments. State Street also performs portfolio accounting
services for the Fund. State Street is not an affiliate of Artisan
Partners or its affiliates. State Street is authorized to deposit
securities in securities depositories for the use of services of sub-
custodians.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
serves as the Fund's independent accountants, providing services including
(i) audit of the annual financial statements; (ii) assistance and
consultation in connection with Securities and Exchange Commission filings;
and (iii) review of the annual income tax returns filed on behalf of the
Fund.
B-31
<PAGE>
ARTISAN SMALL CAP FUND
ARTISAN FUNDS, INC.
1000 North Water Street, Suite 1770
Milwaukee, Wisconsin 53202
(414) 390-6100 (800) 344-1770
STATEMENT OF ADDITIONAL INFORMATION
October 28, 1997
Supplemented January 14, 1998
Artisan Small Cap Fund (the "Fund") is a series of Artisan Funds, Inc.
("Artisan Funds"). This statement of additional information is not a
prospectus. It should be read in conjunction with the prospectus of the Fund
dated October 28, 1997 and any supplement to the prospectus. That prospectus
can be obtained without charge by calling or writing to the Fund.
TABLE OF CONTENTS
Page
Information about the Fund and Artisan Partners....................B-2
Investment Objective and Policies..................................B-2
Investment Techniques and Risks....................................B-2
Investment Restrictions...........................................B-16
Performance Information...........................................B-19
Directors and Officers............................................B-23
Principal Shareholders............................................B-26
Investment Advisory Services......................................B-26
Portfolio Transactions............................................B-27
Purchasing and Redeeming Shares...................................B-29
Additional Tax Information........................................B-30
Custodian.........................................................B-31
Independent Accountants...........................................B-32
Financial Statements..............................................B-32
<PAGE>
INFORMATION ABOUT THE FUND AND ARTISAN PARTNERS
The Fund is a series of Artisan Funds, Inc. ("Artisan Funds"). Artisan
Partners Limited Partnership ("Artisan Partners") provides investment advisory
services to the Fund.
Artisan Funds strives to offer distinctive, high-value-added investment
opportunities. Artisan Funds is not a "family" of indistinguishable products
devised by marketers in a financial services conglomerate. Rather, Artisan
Partners is a small partnership of investment professionals, focused on a
limited number of distinct investment strategies, each of which is offered as
a series of Artisan Funds. At the date of this statement of additional
information, those series are (in addition to the Fund) are Artisan
International Fund, Artisan Mid Cap Fund and Artisan Small Cap Value Fund.
The portfolio manager of each Fund is a specialist in his or her market, with
an investment process created and refined through years of experience - an
artisan. At Artisan Funds, we believe that experienced, active managers
investing in inefficient markets can produce superior returns over time.
The Artisan Funds are intended for long-term investors who share on that belief.
The discussion below supplements the description in the prospectus of the
Fund's investment objectives, policies and restrictions.
INVESTMENT OBJECTIVE AND POLICIES
Artisan Small Cap Fund invests for maximum long-term capital growth
primarily in the common stocks of small companies whose outstanding shares have
an aggregate market value of less than $1 billion. The investment objective of
the Fund may be changed by the board of directors without the approval of a
"majority of the outstanding voting securities" (as defined in the Investment
Company Act of 1940) of the Fund.
The Fund invests primarily in equity securities, including common and
preferred stocks, warrants or other similar rights, and convertible securities.
In addition, the Fund may from time to time have significant portions of its
portfolio invested in foreign securities. The Fund also may invest in any other
type of security, including debt securities.
INVESTMENT TECHNIQUES AND RISKS
Foreign Securities
The Fund may invest up to 25% of its total assets in foreign securities
(including American Depository Receipts ("ADRs")), which may entail a greater
degree of risk (including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than does investment in securities of
domestic issuers. ADRs are receipts typically issued by an American bank or
trust company evidencing ownership of the underlying securities. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the
Fund is likely to
B-2
<PAGE>
bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored ADR. The Fund does not intend to invest more
than 5% of its net assets in unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is affected
by the strength or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under "Managing
Investment Exposure.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward
foreign currency exchange contracts involve certain considerations comprising
both risks and opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in exchange rates of
foreign currencies; possible imposition of exchange control regulation or
currency restrictions that would prevent cash from being brought back to the
United States; less public information with respect to issuers of securities;
less governmental supervision of stock exchanges, securities brokers, and
issuers of securities; lack of uniform accounting, auditing, and financial
reporting standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price volatility in
foreign markets than in the United States; possible imposition of foreign
taxes; possible investment in securities of companies in developing as
well as developed countries; and sometimes less advantageous legal,
operational, and financial protections applicable to foreign sub-custodial
arrangements.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
Debt Securities
In pursuing its investment objective, the Fund may invest in debt
securities of corporate and governmental issuers. The risks inherent in debt
securities depend primarily on the term and quality of the obligations in the
Fund's portfolio as well as on market conditions. A decline in the prevailing
levels of interest rates generally increases the value of debt securities, while
an increase in rates usually reduces the value of those securities.
Investments in debt securities by the Fund may be in those that are within
the four highest ratings categories of Standard & Poor's Corporation ("S&P")
or Moody's Investors Services, Inc. ("Moody's") (generally referred to as
"investment grade") or, if unrated, deemed to be of comparable quality by
Artisan Partners. However, the Fund may invest up to 35% of its net
B-3
<PAGE>
assets in debt securities that are rated below investment grade. The Fund
does not currently intend to invest more than 5% of its net assets in securities
rated below investment grade.
Debt securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely to affect
the issuer's capacity to pay interest and repay principal. If the rating of a
security held by the Fund is lost or reduced below investment grade, the Fund is
not required to dispose of the security, but Artisan Partners will consider that
fact in determining whether the Fund should continue to hold the security.
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and therefore carry
greater investment risk, including the possibility of issuer default and
bankruptcy.
Defensive Investments
The Fund intends to be substantially fully invested in equity securities in
ordinary circumstances, although the Fund may invest without limit in corporate
or government obligations or hold cash or cash equivalents if Artisan Partners
determines that a temporary defensive position is advisable.
Convertible Securities
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The common
stock underlying convertible securities may be issued by a different entity than
the issuer of the convertible securities. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege.
The value of convertible securities is influenced by both the yield of non-
convertible securities of comparable issuers and by the value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." The
investment value of the convertible security will typically fluctuate inversely
with changes in prevailing interest rates. However, at the same time, the
convertible security will be influenced by its "conversion value," which is
the market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock.
By investing in convertible securities, the Fund obtains the right to
benefit from the capital appreciation potential in the underlying stock upon
exercise of the conversion right, while earning higher current income than would
be available if the stock were purchased directly. In determining whether to
purchase a convertible security, Artisan Partners will consider the same
criteria that would be considered in purchasing the underlying stock. Although
convertible securities purchased by the Fund are frequently rated investment
grade, the Fund also may purchase unrated securities or securities rated below
investment grade if the securities meet
B-4
<PAGE>
Artisan Partners' other investment criteria. Convertible securities rated
below investment grade (a) tend to be more sensitive to interest rate and
economic changes, (b) may be obligations of issuers who are less creditworthy
than issuers of higher quality convertible securities, and (c) may be more
thinly traded due to such securities being less well known to investors than
either common stock or conventional debt securities. As a result, Artisan
Partners' own investment research and analysis tends to be more important
in the purchase of such securities than other factors.
Managing Investment Exposure
The Fund uses various techniques to increase or decrease its exposure to
the effects of possible changes in security prices, currency exchange rates or
other factors that affect the value of its portfolio. These techniques include
buying and selling options, futures contracts, or options on futures contracts,
or entering into currency exchange contracts.
These techniques are used by Artisan Partners to adjust the risk and return
characteristics of the Fund's portfolio. If Artisan Partners judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, or if the counterparty to the transaction does not
perform as promised, the transaction could result in a loss. Use of these
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. These
techniques are used by the Fund for hedging, risk management or portfolio
management purposes and not for speculation.
CURRENCY EXCHANGE TRANSACTIONS. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks and broker-
dealers, are not exchange traded, and are usually for less than one year, but
may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. Currency transactions
are limited to transaction hedging and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities. Portfolio hedging is the use of forward contracts with
respect to portfolio security positions denominated or quoted in a particular
currency. Portfolio hedging allows the Fund to limit or reduce exposure in a
foreign currency by entering into a forward contract to sell or buy such foreign
currency (or another foreign currency that acts as a proxy for that currency) so
that the U.S. dollar value of certain underlying foreign portfolio securities
can be approximately matched by an equivalent U.S. dollar liability. The Fund
may not engage in portfolio hedging with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular currency, except that the Fund may hedge all or part of its
foreign currency exposure through the use of a
B-5
<PAGE>
basket of currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign currency
to be sold exceeds the value of the securities denominated in such currency.
The use of this basket hedging technique may be more efficient and economical
than entering into separate forward contracts for each currency held in the
Fund. The Fund may not engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Because currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
B-6
<PAGE>
OPTIONS ON SECURITIES AND INDEXES. The Fund may purchase and sell put
options and call options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on NASDAQ. The Fund may purchase
agreements, sometimes called cash puts, that may accompany the purchase of a new
issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying security or
foreign currency upon payment of the exercise price or to pay the exercise price
upon delivery of the underlying security or foreign currency. Upon exercise,
the writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price multiplied by the
specified multiplier for the index option. (An index is designed to reflect
specified facets of a particular financial or securities market, a specific
group of financial instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an option
written by the Fund is recorded
B-7
<PAGE>
as a deferred credit. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES. There are several
risks associated with transactions in options. For example, there are
significant differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or expected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire and become
worthless. If the Fund were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered call option
on a security, the Fund foregoes, during the option's life, the opportunity
to profit from increases in the market value of the security covering the
call option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund,
the Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may use
interest rate futures contracts, index futures contracts, and foreign currency
futures contracts. An interest rate, index or foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument or the cash value of an index <F1>
at a specified price and time. A public market exists in futures contracts
covering a number of indexes (including, but not limited to: the Standard &
Poor's 500 Index, the Value Line Composite Index, the Russell 2000 Index and
the New York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
<F1> A futures contract on an index is an agreement pursuant to which two
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 contract was
originally written. Although the value of a securities index is a function
of the value of certain specified securities, no physical delivery of those
securities is made.
B-8
<PAGE>
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true. The Fund might, for example, use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices, anticipated changes in interest rates or currency fluctuations that
might adversely affect either the value of the Fund's securities or the price of
the securities that the Fund intends to purchase. Although other techniques
could be used to reduce or increase the Fund's exposure to stock price, interest
rate and currency fluctuations, the Fund may be able to achieve its exposure
more effectively and perhaps at a lower cost by using futures contracts and
futures options.
The Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade, or similar entity,
or quoted on an automated quotation system.
The success of any futures transaction depends on Artisan Partners
correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, Artisan Partners might have taken portfolio actions in
anticipation of the same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or broker a specified amount of cash
or U.S. Government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is generally
set by the exchange on which the contract is traded, although the margin
requirement may be modified during the term of the contract and the Fund's
broker may require margin deposits in excess of the minimum required by the
exchange. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract, which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in
value of the futures contract. This process is known as "marking-to-market."
Variation margin paid or received by the Fund does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker of
the amount one would owe the other if the futures contract had expired at the
close of the previous day. In computing daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the
B-9
<PAGE>
nature of the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other futures
positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Fund engaging in the transaction realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must
also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES. There are several risks associated with the
use of futures contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. In trying to increase or reduce market exposure, there can be no
guarantee that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In addition, there
are significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets,
causing a given transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as: variations
in speculative market demand for futures, futures options and the related
securities, including technical influences in futures and futures
options trading and differences between the securities market and the
securities underlying the standard contracts available for trading. For
example, in the case of index futures contracts, the composition of the
index, including the issuers and the weighting of each issue, may differ
from the composition of the Fund's portfolio, and, in the case of interest
rate futures contracts, the interest rate levels, maturities, and
creditworthiness of the issues underlying the futures contract may differ
from the financial instruments held in the Fund's portfolio. A decision
as to whether, when and how to use futures contracts involves the exercise
of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock
price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the
B-10
<PAGE>
position during the interval of inability to close, and would continue to be
required to meet margin requirements until the position is closed. In
addition, many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES. If other options, futures contracts,
or futures options of types other than those described herein are traded in the
future, the Fund also may use those investment vehicles, provided the board of
directors determines that their use is consistent with the Fund's investment
objective.
The Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money,"
<F2> would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) assets (including any margin) equal to the market value of such
contract. When writing a call option on a futures contract, the Fund similarly
will maintain with its custodian assets (including any margin) equal to the
amount by which such option is in-the-money until the option expires or is
closed out by the Fund.
The Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the Fund will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts that do not come
within the meaning and intent of Regulation 1.3(z), the aggregate initial margin
and premiums required to establish such positions will not exceed 5% of the fair
market value of the assets of the Fund, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into (in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount (as defined in Section 190.01(x) of the Commission Regulations) may be
excluded in computing such 5%).
<F2> A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
B-11
<PAGE>
TAXATION OF OPTIONS AND FUTURES. If the Fund exercises a call or put
option that it holds, the premium paid for the option is added to the cost basis
of the security purchased (call) or deducted from the proceeds of the security
sold (put). For cash settlement options and futures options exercised by the
Fund, the difference between the cash received at exercise and the premium paid
is a capital gain or loss.
If a call or put option written by the Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by the Fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Fund is in-the-money at the time it was
written and the security covering the option was held for more than the long-
term holding period prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The holding period
of the securities covering an in-the-money option will not include the period of
time the option is outstanding.
If the Fund writes an equity call option <F3> other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on
such option transaction, to the extent it does not exceed the unrealized gains
on the securities covering the option, may be subject to deferral until the
securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If the Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For Federal income tax purposes, the Fund generally is required to
recognize for each taxable year its net unrealized gains and losses as of the
end of the year on futures, futures options and non-equity options positions
("year-end mark-to-market"). Generally, any gain or loss recognized with
respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses
on certain positions (including options, futures and futures options positions,
the related securities and certain successor positions thereto) may be deferred
to a later taxable year. Sale of futures contracts or writing of call options
(or futures call options) or buying put options (or futures put options) that
are intended to hedge against a
<F3> An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index
of stocks of the type that is ineligible to be traded on a commodity
futures exchange (e.g., an option contract on a sub-index based on the
price of nine hotel-casino stocks). The definition of equity option
excludes options on broad-based stock indexes (such as the Standard &
Poor's 500 index).
B-12
<PAGE>
change in the value of securities held by the Fund may affect the holding
period of the hedged securities.
If the Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for Federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales
of "offsetting notional principal contracts" (as defined by the Act) with
respect to, or futures or "forward contracts" (as defined by the Act) with
respect to, the same or substantially identical property, or if they enter
into such transactions and then acquire the same or substantially identical
property. These changes generally apply to constructive sales after June 8,
1997. Furthermore, the Secretary of the Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting notional
principal contracts, and futures or forward contracts to deliver the same
or substantially similar property.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain realized from
futures (or futures options) contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In addition, for tax years beginning before August 5, 1997, gains
realized on the sale or other disposition of securities held less than three
months must be less than 30% of the Fund's annual gross income. In order to
avoid realizing excessive gains on securities held less than three months, the
Fund may be required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so.
The Fund intends to distribute to shareholders annually any capital gains
that have been recognized for Federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions, together with gains
on other Fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the Fund. Shareholders will be
advised of the nature of such capital gain distributions.
RULE 144A SECURITIES
The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the 1933 Act ("Rule
144A securities"). That Rule permits certain qualified institutional buyers,
including investment companies that own and invest at least $100 million in
securities, to trade in privately placed securities that have not been
B-13
<PAGE>
registered for sale under the 1933 Act. Artisan Partners, under the supervision
of the board of directors, will consider whether Rule 144A securities are
illiquid and thus subject to the Fund's restriction of investing no more than
10% of its net assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, Artisan Partners will consider the trading markets for the
specific security, taking into account the unregistered nature of a Rule 144A
security. In addition, Artisan Partners could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions,
Artisan Partners determined that a Rule 144A security is no longer liquid,
the Fund's holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that the Fund does not invest
more than 10% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the
Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (3) under "Investment Restrictions" in this
statement of additional information, the Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and also would receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities if, in
Artisan Partners' judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights. The Fund does not
currently intend to loan more than 5% of its net assets.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date, and
market rate of interest unrelated to the coupon rate or maturity of the
purchased security. Although repurchase agreements carry certain risks not
associated with direct investments in securities, the Fund will enter into
repurchase agreements only with banks and dealers believed by Artisan Partners
to present minimum credit
B-14
<PAGE>
risks in accordance with guidelines approved by the board of trustees.
Artisan Partners will review and monitor the creditworthiness of such
institutions, and will consider the capitalization of the institution,
Artisan Partners' prior dealings with the institution, any rating of
the institution's senior long-term debt by independent rating agencies,
and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
Fund's ability to sell the collateral and the Fund could suffer a loss.
However, with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if Artisan Partners deems it advisable for investment reasons.
The Fund does not currently intend to have commitments to purchase when-issued
securities in excess of 5% of its net assets.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
However, reverse repurchase agreements will be treated as borrowing and subject
to the Artisan Funds' fundamental limitation on borrowing.
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued or delayed-delivery basis or enters into a reverse
repurchase agreement, assets of the Fund having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Fund and held by the custodian throughout the period of the obligation.
The use of these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value fluctuation.
SHORT SALES
The Fund may make short sales "against the box." In a short sale, the
Fund sells a borrowed security and is required to return the identical security
to the lender. A short sale "against the box" involves the sale of a security
with respect to which the Fund already owns an
B-15
<PAGE>
equivalent security in kind and amount. A short sale "against the box" enables
the Fund to obtain the current market price of a security which it desires
to sell but is unavailable for settlement. The Fund does not currently
intend to have commitments to make short sales "against the box" in
excess of 5% of its net assets.
LINE OF CREDIT
Artisan Funds maintains a line of credit with a bank in order to permit
borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation of
portfolio securities. Any borrowings under that line of credit by the Fund
would be subject to restriction (4) under "Investment Restrictions" in
this statement of additional information.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. At times, the Fund may invest for short-term capital
appreciation. Portfolio turnover can occur for a number of reasons such as
general conditions in the securities markets, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. Because of the Fund's
flexibility of investment and emphasis on growth of capital, it may have greater
portfolio turnover than that of mutual funds that have primary objectives of
income or maintenance of a balanced investment position. The future turnover
rate may vary greatly from year to year. A high rate of portfolio turnover in
the Fund, if it should occur, would result in increased transaction expense,
which must be borne by the Fund. High portfolio turnover also may result in the
realization of capital gains or losses and, to the extent net short-term capital
gains are realized, any distributions resulting from such gains will be
considered ordinary income for Federal income tax purposes. (See "Dividends,
Capital Gains, and Taxes' in the prospectus, and "Additional Tax Information"
in this statement of additional information.)
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Artisan Funds has adopted the following investment restrictions which
may not be changed without the approval of the Fund's shareholders, under which
the Fund may not:
(1) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933 on disposition
of securities acquired subject to legal or contractual restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate or
B-16
<PAGE>
interests therein), commodities, or commodity contracts, except that it may
enter into (a) futures and options on futures and (b) forward contracts;
(3) make loans, but this restriction shall not prevent the Fund from
(a) buying a part of an issue of bonds, debentures, or other obligations which
are publicly distributed, or from investing up to an aggregate of 15% of its
total assets (taken at market value at the time of each purchase) in parts of
issues of bonds, debentures or other obligations of a type privately placed with
financial institutions, (b) investing in repurchase agreements, or (c) lending
portfolio securities, provided that it may not lend securities if, as a result,
the aggregate value of all securities loaned would exceed 33% of its total
assets (taken at market value at the time of such loan);
(4) borrow (including entering into reverse repurchase agreements),
except that it may (a) borrow up to 33 1/3% of its total assets, taken at market
value at the time of such borrowing, as a temporary measure for extraordinary
or emergency purposes, but not to increase portfolio income and (b) enter into
transactions in options, futures, and options on futures; <F4>
(5) invest in a security if more than 25% of its total assets (taken
at market value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this restriction
does not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(6) issue any senior security except to the extent permitted under
the Investment Company Act of 1940;
(7) with respect to 75% of its total assets, invest more than 5% of
its total assets, taken at market value at the time of a particular purchase, in
the securities of a single issuer, except for securities issued or guaranteed by
the Government of the U.S. or any of its agencies or instrumentalities or
repurchase agreements for such securities;
(8) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one issuer.
The Fund's investment objective is not a fundamental restriction and,
therefore, a change in the objective is not subject to shareholder approval.
However, investors in the Fund will receive written notification at least 30
days' prior to any change in the Fund's investment objective.
NON-FUNDAMENTAL RESTRICTIONS
The Fund also is subject to the following non-fundamental restrictions and
policies, which may be changed by the board of directors. Many of these
restrictions were formerly
<F4> The Fund will not purchase securities when total borrowings by the Fund are
greater than 5% of its net asset value.
B-17
<PAGE>
required by law or regulation of one or more states in which shares of the
Fund are offered for sale. The Fund expects that certain of the following
restrictions (including restrictions (a), (d) through (g), and (i) through
(k)) will be revised or eliminated, although no change in the Fund's
operations is expected to result. The Fund may not:
(a) invest in any of the following: (i) interests in oil, gas, or
other mineral leases or exploration or development programs (except readily
marketable securities, including but not limited to master limited partnership
interests, that may represent indirect interests in oil, gas, or other mineral
exploration or development programs); (ii) puts, calls, straddles, spreads, or
any combination thereof if by reason thereof the value of the Fund's aggregate
investment in such securities exceed 5% of its total assets (except that the
Fund may enter into transactions in options, futures, and options on futures);
and (iii) limited partnerships in real estate unless they are readily
marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment company
or purchase stock of other investment companies equal to more than 5% of the
Fund's total assets (valued at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at time of purchase) in the
case of all other investment companies in the aggregate; any such purchases
are to be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's commission,
except for securities acquired as part of a merger, consolidation, acquisition
or reorganization;
(d) purchase or hold securities of an issuer if 5% of the securities
of such issuer are owned by those officers, directors or partners of the Fund or
of its investment adviser, who each own beneficially more than 1/2 of 1% of the
securities of that issuer;
(e) purchase securities of issuers (other than issuers of Federal
agency obligations or securities issued or guaranteed by any foreign country or
asset-backed securities) that, including their predecessors or unconditional
guarantors, have been in operation for less than three years, if by reason of
such purchase the value of the Fund's investment in all such securities will
exceed 5% of its total assets (valued at time of purchase);
(f) mortgage, pledge, or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with options,
futures, and options on futures;
(g) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in warrants that are
not listed on the New York or American stock exchange;
(h) invest more than 25% of its total assets (valued at time of
purchase) in securities of foreign issuers;
B-18
<PAGE>
(i) buy or sell an option on a security, a futures contract, or an
option on a futures contract unless the option, the futures contract, or the
option on the futures contract is offered through the facilities of a recognized
securities association or listed on a recognized exchange or similar entity;
(j) purchase a put or call option if the aggregate premiums paid for
all put and call options exceed 20% of its net assets (less the amount by which
any such positions are in-the-money), excluding put and call options purchased
as closing transactions;
(k) invest more than 5% of its net assets in restricted securities,
other than securities eligible for resale pursuant to Rule 144A of the
Securities Act of 1933;
(l) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), or sell securities
short unless (i) the Fund owns or has the right to obtain securities equivalent
in kind and amount to those sold short at no added cost or (ii) the securities
sold are "when issued" or "when distributed" securities which the Fund
expects to receive in recapitalization, reorganization, or other exchange for
securities the Fund contemporaneously owns or has the right to obtain and
provided that transactions in options, futures, and options on futures are not
treated as short sales; or
(m) invest more than 10% of its net assets (taken at market value at
the time of each purchase) in illiquid securities, including repurchase
agreements maturing in more than seven days.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total
Return" for a period is the percentage change in value during the period of an
investment in shares of a fund, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return" is the average annual compounded rate of change in value
represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(l+T)n
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
B-19
<PAGE>
The Fund's Total Return and Average Total Return for various periods
ended June 30, 1997 is shown below:
Average Annual
Total Return Total Return
------------ --------------
1 year 11.3% 11.3%
Life of Fund <F5> 64.6% 24.6%
<F5> from March 28, 1995 (commencement of operations)
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by the Fund
are not necessarily indicative of future results. The Fund's performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing the Fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the performance of the Fund may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, other accounts or
partnerships managed by Artisan Partners Limited Partners, and other competing
investment and deposit products available from or through other financial insti-
tutions. The composition of these indexes, averages or accounts differs from
that of the Fund. Comparison of the Fund to an alternative investment should
consider differences in features and expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Fund generally believes to be
accurate. The Fund also may note its mention (including performance or other
comparative rankings) in newspapers, magazines, or other media from time to
time. However, the Fund assumes no responsibility for the accuracy of such
data. Newspapers and magazines and other media which might mention the Fund
include, but are not limited to, the following:
B-20
<PAGE>
Atlanta Constitution Mutual Fund Letter
Barron's Mutual Fund News Service
Boston Herald Mutual Fund Values
Business Week Morningstar Publications
Chicago Tribune Newsweek
Chicago Sun-Times The New York Times
Cleveland Plain Dealer No-Load Fund Investor
CNBC Outstanding Investor Digest
CNN Pension World
Crain's Chicago Pensions and Investments
Business Personal Investor
Consumer Reports Jane Bryant Quinn (syndicated
Consumer Digest column)
Financial World Louis Rukeyser's Mutual Fund
Forbes The San Francisco Chronicle
Fortune Smart Money
Fund Action Stranger's Investment Adviser
Investor's Business Daily 13D Opportunities Report
Kiplinger's Personal Time
Finance Magazine United Mutual Fund Selector
Knight-Ridder USA Today
Los Angeles Times U.S. News and World Report
Milwaukee Business Journal The Wall Street Journal
Milwaukee Journal Sentinel Working Woman
Money Worth
Your Money
When a newspaper, magazine or other publication mentions the Fund, such
mention may include: (i) listings of some or all of the Fund's holdings, (ii)
descriptions of characteristics of some or all of the securities held by the
Fund, including price-earnings ratios, earnings, growth rates and other
statistical information, and comparisons of that information to similar
statistics for the securities comprising any of the indexes or averages listed
above; and (iii) descriptions of the Fund's or a portfolio manager's economic
and market outlook, generally and for the Fund.
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Fund may be compared to the following indexes or
averages:
B-21
<PAGE>
Dow-Jones Industrial Average New York Stock Exchange
Russell 2000 Small Stock Index Composite Index
Russell Mid-Cap Stock Index American Stock Exchange
Russell Mid-Cap Value Index Composite Index
Standard & Poor's 500 Stock Index NASDAQ Composite
Standard & Poor's 400 Industrials NASDAQ Industrials
Standard & Poor's Mid-Cap 400 (These indexes generally
Index reflect the performance
Wilshire 5000 of stocks traded in the
Wilshire 4500 indicated markets.)
Wilshire 4000
Wilshire Small-Cap Index
Wilshire Small-Cap Value Index
(These indexes are widely
recognized indicators of general
U.S. stock market results.)
The performance of the Fund also may be compared to the following mutual
fund industry indexes or averages: Value Line Index; Lipper Capital
Appreciation Fund Average; Lipper Growth Funds Average; Lipper Small Company
Growth Funds Average; Lipper General Equity Funds Average; Lipper Equity Funds
Average; Lipper Small Company Growth Fund Index; ICD Aggressive Growth and Long
Term Growth Funds Average; ICD Aggressive Growth Fund Large Index; ICD
Aggressive Growth Fund Small Index; ICD Aggressive Growth Funds Average; ICD All
Equity Funds Average; Morningstar Growth Average; Morningstar Small-Cap Funds
Average; Morningstar Aggressive Growth Average; Morningstar U.S. Diversified
Average; Morningstar Equity Fund Average; Morningstar Hybrid Fund Average;
Morningstar All Equity Funds Average; and Morningstar General Equity Average.
The ICD Indexes reflect the unweighted average total return of the largest
twenty four funds within their respective category as calculated and published
by ICD.
The Lipper Small Company Growth Fund Index reflects the net asset value
weighted total return of the largest thirty growth funds as calculated and
published by Lipper Analytical Services, Inc. ("Lipper"), an independent
service that monitors the performance of more than 1,000 funds.
The Lipper, ICD and Morningstar averages are unweighted averages of total
return performance of mutual funds as classified, calculated and published by
these independent services that monitor the performance of mutual funds. The
Fund also may use comparative performance as computed in a ranking by Lipper or
category averages and rankings provided by another independent service. Should
Lipper or another service reclassify the Fund to a different category or develop
(and place the Fund into) a new category, the Fund may compare its performance
or ranking against other funds in the newly assigned category, as published by
the service. The Fund may compare its performance or ranking against all funds
tracked by Lipper or another independent service.
The Fund may cite its rating, recognition or other mention by Morningstar,
Inc. ("Morningstar") or any other entity. Morningstar's rating system is
based on risk-adjusted total
B-22
<PAGE>
return performance and is expressed in a star-rating format. The risk-adjusted
number is computed by subtracting a Fund's risk score (which is a function of
the Fund's monthly returns less the 3-month Treasury bill return) from the
Fund's load-adjusted total return score. This numerical score is then
translated into rating categories, with the top 10% labeled five star, the next
22.5% labeled four star, the next 35% labeled three star, the next 22.5% labeled
two star and the bottom 10% one star. A high rating reflects either above-
average returns or below-average risk, or both.
To illustrate the historical returns on various types of financial assets,
the Fund may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for example,
total return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types: common
stocks, small company stocks, long-term corporate bonds, long-term government
bonds, intermediate-term government bonds, U.S. Treasury bills and Consumer
Price Index. The Fund also may use historical data compiled by Prudential
Securities, Inc., or by other similar sources believed by the Fund to be
accurate, illustrating the past performance of small-capitalization stocks,
large-capitalization stocks, common stocks, equity securities, growth stocks
(small-capitalization, large-capitalization, or both) and value stocks (small-
capitalization, large-capitalization, or both).
DIRECTORS AND OFFICERS
Directors and officers of Artisan Funds, their dates of birth and their
principal business occupations during at least the last five (5) years, are
shown below. Directors deemed to be "interested persons" of Artisan Funds for
purposes of the 1940 Act are indicated with an asterisk.
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS DURING
BIRTH WITH REGISTRANT PAST 5 YEARS
- ----------------- --------------------- ----------------------------------
Andrew A. Ziegler Director, Chairman of Managing Partner of Artisan
10/7/57 the Board and Chief Partners; prior to founding
Executive Officer Artisan Partners, president and
chief operating officer of
Strong/Corneliuson Capital
Management ("Strong") and
president of the Strong Funds from
1990 to 1994; prior thereto,
attorney with the law firm of
Godfrey & Kahn, S.C., Milwaukee,
WI.
B-23
<PAGE>
Carlene Murphy Director and President Managing Partner of Artisan
Ziegler Partners; prior to founding
6/20/56 Artisan Partners, a co-portfolio
manager of the Strong Common
Stock Fund, Strong Opportunity
Fund and numerous institutional
small-capitalization equity
portfolios at Strong since March
1991; prior thereto, a co-
portfolio manager of the Stein
Roe Special Fund.
David A. Erne Director Partner of the law firm Reinhart,
5/6/43 Boerner, Van Deuren, Norris &
Rieselbach, S.C., Milwaukee, WI.
Thomas R. Hefty Director President of United Wisconsin
6/9/47 Services, Inc. (a provider of
managed care and specialty
business services) since 1986 and
chairman of the board and chief
executive officer since 1991; and
chairman of the board of Blue
Cross & Blue Shield United of
Wisconsin (parent company of
United Wisconsin Services, Inc.)
since 1988 and president since
1982.
Howard B. Witt Director President and chief executive
5/17/40 officer of Littelfuse, Inc. (a
manufacturer of advanced circuit
protection devices) since 1990
and chairman of the board of
Littelfuse since 1993; prior
thereto executive vice president
of Littelfuse; and director of
Franklin Electric Co., Inc. (a
manufacturer of electronic
motors) since 1994.
John M. Blaser Chief Financial Chief financial officer of
11/2/56 Officer, Treasurer and Artisan Partners; prior to
Secretary joining Artisan Partners, senior
vice president with Kemper
Securities, Inc. since 1993;
prior thereto, with Price
Waterhouse.
B-24
<PAGE>
Mark L. Yockey Vice President Partner of Artisan Partners; prior
6/5/56 to joining Artisan Partners,
portfolio manager of the United
International Growth Fund and vice
president of Waddell & Reed
(investment management firm) since
January 1990; prior thereto,
equity analyst for Waddell & Reed.
Sandra Jean Voss- Vice President Equity trader for Artisan
Reinhardt Partners; prior to joining Artisan
3/6/64 Partners, equity trader with
Northwestern Mutual since January
1989, prior thereto, sales
associate with Dean Witter
Reynolds.
Millie Adams Vice President Co-portfolio manager of the Fund;
Hurwitz prior to joining Artisan Partners,
12/16/62 co-portfolio manager at Stein Roe
& Farnham Incorporated from 1992
until 1995, and an analyst with
OLC Corporation from 1989 to 1991.
Scott C. Vice President Portfolio manager, Artisan Small
Satterwhite Cap Value Fund; prior to joining
7/15/57 Artisan Partners in June 1997,
portfolio manager of the Biltmore
Special Values Fund from August 1,
1993 through May 31, 1997 and
Senior Vice President and Manager
of Personal Trust Portfolio
Management for the Personal
Financial Services Group of
Wachovia Bank of North Carolina,
N.A.
Andrew C. Stephens Vice President Portfolio manager, Artisan Mid Cap
10/31/63 Fund; co-manager of Strong Asset
Allocation Fund at Strong,
February 1993 through March 1997,
and senior research analyst for
Strong Common Stock Fund and
Strong Opportunity Fund, September
1994 through March 1996; prior to
February 1933, head trader,
Strong.
The business address of the officers and directors affiliated with Artisan
Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin 53202.
The addresses of the other
B-25
<PAGE>
directors are: Mr. Erne - 1000 N. Water Street, Milwaukee, Wisconsin 53202;
Mr. Hefty - 401 W. Michigan Street, Milwaukee, Wisconsin 53203; and
Mr. Witt - 800 E. Northwest Highway, Des Plaines, Illinois 60016.
Mr. Ziegler and Ms. Ziegler are married to each other.
Mr. Ziegler and Ms. Ziegler serve as members of the Executive Committee of
the Board of Directors. The Executive Committee, which meets between regular
meetings of the Board, is authorized to exercise all of the powers of the Board
of Directors.
The only compensation paid to directors and officers of Artisan Funds for
their services as such consists of an annual $5,000 retainer fee (per series of
Artisan Funds) paid to directors who are not interested persons of Artisan Funds
or Artisan Partners. Artisan Funds has no retirement or pension plans.
The following table sets forth compensation paid by the Fund and by Artisan
Funds, Inc. (comprised of the Fund and Artisan International Fund) during the
fiscal year ended June 30, 1997 to each of the directors of the Fund.
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM ARTISAN
AGGREGATE BENEFITS ESTIMATED SMALL CAP FUND
COMPENSATION ACCRUED ANNUAL AND FUND
NAME OF FROM ARTISAN AS PART OF BENEFITS UPON COMPLEX PAID
DIRECTOR SMALL CAP FUND FUND EXPENSES RETIREMENT TO DIRECTORS
- -------- -------------- ------------- ---------- ------------
Andrew A. Ziegler $ 0 $ 0 $ 0 $ 0
Carlene Murphy Ziegler 0 0 0 0
David A. Erne 5,000 0 0 10,000
Thomas R. Hefty 5,000 0 0 10,000
Howard B. Witt 5,000 0 0 10,000
On September 30, 1997, the officers and directors of Artisan Funds as a
group owned less than 1% of the outstanding shares of the Fund and less than 1%
of the outstanding shares of Artisan Funds.
PRINCIPAL SHAREHOLDERS
No person was known by Artisan Funds to own of record or beneficially 5% or
more of the outstanding shares of the Fund at September 30, 1997 except for
persons acting as nominees for their clients, without the power to vote or
dispose of Fund shares.
INVESTMENT ADVISORY SERVICES
Artisan Partners Limited Partnership ("Artisan Partners") provides
investment advisory services to the Fund pursuant to an Investment Advisory
Agreement dated March 27, 1995 (the "Advisory Agreement"). Artisan Partners
is a Delaware limited partnership. Artisan Investment Corporation was
incorporated on December 7, 1994 for the sole purpose of acting as general
partner of Artisan Partners. Mr. Ziegler and Ms. Ziegler, as officers of
Artisan Investment
B-26
<PAGE>
Corporation, manage Artisan Partners. The principal address of Artisan
Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin
53202. Artisan Partners also has offices at 100 Pine Street, Suite 3250, San
Francisco, California, and Five Concourse Parkway, Suite 208, Atlanta, Georgia
30328.
In return for its services, the Fund pays Artisan Partners a monthly fee at
the annual rate of 1% of the Fund's average daily net assets up to $500 million;
.975 of 1% of average daily net assets from $500 million up to $750 million;
.950 of 1% of average daily net assets from $750 million to $1 billion; and .925
of 1% of average daily net assets over $1 billion. Artisan Partners has
undertaken to reimburse the Fund for certain expenses, as described in the
prospectus. The advisory fees paid by the Fund to Artisan Partners during
fiscal years 1997 and 1996, and for the period March 28, 1995 through June 30,
1995, aggregated $2,906,791, $2,734,855 and $66,510, respectively.
The Advisory Agreement provides that Artisan Partners shall not be liable
for any loss suffered by the Fund or its shareholders as a consequence of any
act of omission in connection with investment advisory or portfolio services
under the agreement, except by reason of willful misfeasance, bad faith or gross
negligence on the part of Artisan Partners in the performance of its duties or
from reckless disregard by Artisan Partners of its obligations and duties under
the Advisory Agreement.
The Advisory Agreement may be continued from year to year only so long as
the continuance is approved annually (a) by the vote of a majority of the
directors of the Fund who are not "interested persons" of the Fund or Artisan
Partners cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the board of directors or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the portfolio. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
PORTFOLIO TRANSACTIONS
Artisan Partners places the orders for the purchase and sale of the Fund's
portfolio securities and options and futures contracts. Artisan Partners'
overriding objective in effecting portfolio transactions is to seek to obtain
the best combination of price and execution. The best net price, giving effect
to brokerage commissions, if any, and other transaction costs, normally is an
important factor in this decision, but a number of other judgmental factors also
may enter into the decision. These include: Artisan Partners' knowledge of
negotiated commission rates currently available and other current transaction
costs; the nature of the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected in the market
for the particular security; confidentiality; the execution, clearance and
settlement capabilities of the broker or dealer selected and others which are
considered; Artisan Partners' knowledge of the financial stability of the broker
or dealer selected and such other problems of any broker or dealer. Recognizing
the value of these factors, the Fund may pay a brokerage commission in excess of
that which another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of brokerage commissions, based
on the foregoing factors, are made on an ongoing basis by Artisan Partners'
staff while effecting
B-27
<PAGE>
portfolio transactions. The general level of brokerage commissions paid is
reviewed by Artisan Partners, and reports are made annually to the board of
directors.
With respect to issues of securities involving brokerage commissions, when
more than one broker or dealer is believed to be capable of providing the best
combination of price and execution with respect to a particular portfolio
transaction for the Fund, Artisan Partners often selects a broker or dealer that
has furnished it with research products or services such as research reports,
subscriptions to financial publications and research compilations, compilations
of securities prices, earnings, dividends, and similar data, and computer data
bases, quotation equipment and services, research-oriented computer software and
services, and services of economic and other consultants. Selection of brokers
or dealers is not made pursuant to an agreement or understanding with any of the
brokers or dealers; however, Artisan Partners uses internal allocation
procedures to identify those brokers or dealers who provide it with research
products or services and the amount of research products or services they
provide, and endeavors to direct sufficient commissions generated by its
clients' accounts in the aggregate, including the Fund, to such brokers or
dealers to ensure the continued receipt of research products or services Artisan
Partners feels are useful. In certain instances, Artisan Partners receives from
brokers and dealers products or services that are used both as investment
research and for administrative, marketing, or other non-research purposes. In
such instances, Artisan Partners makes a good faith effort to determine the
relative proportions of such products or services which may be considered as
investment research. The portion of the costs of such products or services
attributable to research usage may be defrayed by Artisan Partners (without
prior agreement or understanding, as noted above) through brokerage commissions
generated by transactions by clients (including the Fund), while the portions of
the costs attributable to non-research usage of such products or services is
paid by Artisan Partners in cash. No person acting on behalf of the Fund is
authorized, in recognition of the value of research products or services, to pay
a commission in excess of that which another broker or dealer might have charged
for effecting the same transaction. Research products or services furnished by
brokers and dealers may be used in servicing any or all of the clients of
Artisan Partners and not all such research products or services are used in
connection with the management of the Fund.
With respect to the Fund's purchases and sales of portfolio securities
transacted with a broker or dealer of a net basis, Artisan Partners also may
consider the part, if any, played by the broker or dealer in bringing the
security involved to Artisan Partners' attention, including investment research
related to the security and provided to the Fund.
During fiscal years 1997 and 1996, and during the period March 28, 1995
(commencement of operations) through June 30, 1995, the Fund paid brokerage
commissions of $650,359, $942,389 and $309,765, respectively, to brokers who
furnished research services to the Fund or Artisan Partners on purchases and
sales aggregating $637,608,952, $775,778,115 and $92,293,148, respectively.
B-28
<PAGE>
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the prospectus under the
headings "How to Buy Shares," and "How to Sell Shares." All of that
information is incorporated herein by reference.
Shares of the Fund may be purchased or redeemed through certain financial
services companies, some of which may charge a transaction fee. The Fund may
authorize from time to time certain financial services companies, broker-dealers
or their designees ("authorized agents") to accept share purchase and
redemption orders on the Fund's behalf. For purchase orders placed through an
authorized agent, a shareholder will pay the Fund's NAV per share (see "Net
Asset Value," below), next computed after the receipt by the authorized agent
of such purchase order, plus any applicable transaction charge imposed by the
agent. For redemption orders placed through an authorized agent, a shareholder
will receive redemption proceeds which reflect the NAV per share next computed
after the receipt by the authorized agent of the redemption order, less any
redemption fees imposed by the agent.
In some instances, an authorized agent or other financial services company
may not charge any transaction fees directly to investors in the Fund. However,
accounting and shareholder servicing services provided by such a company with
respect to Fund shares held by that company for its customers, the company may
charge a fee of up to 0.35% of the annual average value of those accounts. The
Fund pays a portion of those fees not to exceed the estimated fees and expenses
that the Fund would pay to its own transfer agent if the shares of the Fund held
by such customers of the company were registered directly in their names on the
books of the Fund's transfer agent. The balance of those fees is paid by
Artisan Partners.
NET ASSET VALUE. Share purchase and redemption orders will be priced at
the Fund's net asset value next computed after such orders are received and
accepted by: (i) the Fund; (ii) a broker-dealer or other financial services
company authorized by the Fund to accept purchase and redemption orders on the
Fund's behalf; or (iii) such authorized broker-dealer's designee. The net asset
value of the shares of the Fund is determined as of the close of regular session
trading on the New York Stock Exchange ("NYSE") (currently 3:00 p.m., Central
time) each day the NYSE is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in January, the
third Monday in February, Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving, and Christmas. If one of these holidays falls on a
Saturday or Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be determined on days
when the NYSE is closed unless, in the judgment of the board of directors, net
asset value of the Fund should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Central time. The net asset value per
share of the Fund is determined by dividing the value of all its securities and
other assets, less its liabilities, by the number of shares of the Fund
outstanding.
The Fund intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets of the Fund during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly by a
distribution in kind of readily marketable securities. If redemptions were
B-29
<PAGE>
made in kind, the redeeming shareholders might incur transaction costs in
selling the securities received in the redemptions.
The Fund reserves the right to suspend or postpone redemptions of its
shares during any period when: (a) trading on the NYSE is restricted, as
determined by the Commission, if the NYSE is closed for other than customary
weekend and holiday closings; (b) the Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Commission, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Fund and Artisan Partners each have adopted a code of ethics that,
among other things, regulates the personal transactions in securities of certain
officers, directors, partners and employees of the Fund and Artisan Partners.
ADDITIONAL TAX INFORMATION
Artisan Funds intends for the Fund to continue to qualify as a "regulated
investment company' under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and thus not be subject to federal income taxes on
amounts which it distributes to shareholders.
Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in the prior
calendar year is deemed paid in the prior calendar year.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gain. Distributions of mid-term capital
gains will be taxable to you as mid-term capital gains. Distributions of net
long-term capital gain will be taxable to you as long-term capital gain
regardless of the length of time you have held your shares.
You will be advised annually as to the source of distributions for tax
purposes. If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale of Fund shares held for six months or
less, your short-term loss is recharacterized as long-term to the extent of any
long-term capital gain distributions you have received with respect to those
shares.
The Taxpayer Relief Act of 1997 reduced from 28% to 20% the maximum tax
rate on long-term capital gains. This reduced rate generally applies to
securities held more than 18 months and sold after July 28, 1997, and securities
held for more than one year and sold between May 6, 1997 and July 29, 1997.
The Fund may be required to withhold federal income tax ("backup
withholding") from certain payments to you, generally redemption proceeds.
Backup withholding may be required if:
B-30
<PAGE>
- You fail to furnish your properly certified social security or
other tax identification number;
- You fail to certify that your tax identification number is correct
or that you are not subject to backup withholding due to the
underreporting of certain income;
- The IRS informs the Fund that your tax identification number is
incorrect.
These certifications are contained in the application that you complete
when you open your Fund account. The Fund must promptly pay the the IRS all
amounts withheld. Therefore, it is not usually possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). In addition to
bearing their proportionate share of the Fund's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses of
PFICs. Capital gains on the sale of PFIC holdings will be deemed to be ordinary
income regardless of how long the Fund holds its investment. In addition, the
Fund may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from PFICs, regardless of whether such income
and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat securities in
PFICs as sold on the last day of the Fund's fiscal year and recognize any gains
for tax purposes at that time; losses will not be recognized. Such gains will
be considered ordinary income which the Fund will be required to distribute even
though it has not sold the security and received cash to pay such distributions.
The discussion of taxation above is not intended to be a full discussion of
income tax laws and their effect on shareholders. You are encouraged to consult
your own tax advisor. The foregoing information applies to U.S. shareholders.
Foreign shareholders should consult their tax advisors as to the tax
consequences of ownership of Fund shares.
CUSTODIAN
State Street Bank & Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, MA 02171, acts as custodian of the securities and other assets of
the Fund. State Street is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on the Fund's investments.
State Street also performs portfolio accounting services for the Fund. State
Street is not an affiliate of Artisan Partners or its affiliates. State Street
is authorized to deposit securities in securities depositories for the use of
services of sub-custodians.
B-31
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
serves as the Fund's independent accountants, providing services including (i)
audit of the annual financial statements; (ii) assistance and consultation in
connection with Securities and Exchange Commission filings; and (iii) review of
the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
The 1997 annual report to shareholders of the Fund, a copy of which
accompanies this statement of additional information, contains financial
statements, notes thereto, supplementary information entitled "Financial
Highlights," and a report of independent accountants, all of which (but no
other part of the annual report) are incorporated herein by reference.
Additional copies of the annual report may be obtained from Artisan Funds at no
charge by writing or telephoning Artisan Funds at the address or telephone
number on the cover page of this statement of additional information.
B-32
<PAGE>
ARTISAN INTERNATIONAL FUND
ARTISAN FUNDS, INC.
1000 North Water Street, Suite 1770
Milwaukee, Wisconsin 53202
(414) 390-6100
(800) 344-1770
STATEMENT OF ADDITIONAL INFORMATION
October 28, 1997
Supplemented January 14, 1998
Artisan International Fund (the "Fund") is a series of Artisan Funds,
Inc. ("Artisan Funds"). This statement of additional information is not a
prospectus. It should be read in conjunction with the prospectus dated October
28, 1997 for Artisan International Fund, Artisan International Shares
("International Shares") and Artisan International Fund, Artisan International
Institutional Shares ("Institutional Shares"), and any additional supplements
to those prospectuses. Copies of the prospectuses can be obtained without
charge by calling or writing to the Fund.
TABLE OF CONTENTS
Page
Information about the Fund and Artisan Partners.............................B-2
Investment Objective and Policies...........................................B-2
Investment Techniques and Risks.............................................B-2
Investment Restrictions....................................................B-17
Performance Information....................................................B-20
Directors and Officers.....................................................B-24
Principal Shareholders.....................................................B-27
Investment Advisory Services...............................................B-27
Portfolio Transactions.....................................................B-28
Purchasing and Redeeming Shares............................................B-29
Additional Tax Information.................................................B-31
Custodian..................................................................B-33
Independent Accountants....................................................B-33
Financial Statements.......................................................B-33
<PAGE>
INFORMATION ABOUT THE FUND AND ARTISAN PARTNERS
The Fund is a series of Artisan Funds, Inc. ("Artisan Funds"). Artisan
Partners Limited Partnership ("Artisan Partners") provides investment advisory
services to the Fund.
Artisan Funds strives to offer distinctive, high-value-added investment
opportunities. Artisan Funds is not a "family" of indistinguishable products
devised by marketers in a financial services conglomerate. Rather, Artisan
Partners is a small partnership of investment professionals, focused on a
limited number of distinct investment strategies, each of which is offered as
a series of Artisan Funds. At the date of this statement of additional
information, those series are (in addition to the Fund) are Artisan
Small Cap Fund, Artisan Mid Cap Fund and Artisan Small Cap Value Fund.
The portfolio manager of each Fund is a specialist in his or her market, with
an investment process created and refined through years of experience - an
artisan. At Artisan Funds, we believe that experienced, active managers
investing in inefficient markets can produce superior returns over time. The
Artisan Funds are intended for long-term investors who share on that belief.
The Fund offers shares of two classes: International Shares and
International Institutional Shares. Each class is offered pursuant to a
separate prospectus. This Statement of Additional Information relates to both
classes.
INVESTMENT OBJECTIVE AND POLICIES
The discussion below supplements the description in the prospectus of the
Fund's investment objective, policies and restrictions.
Artisan International Fund invests for maximum long-term capital growth.
The Fund seeks to achieve its objective by investing primarily in the stocks of
foreign companies. The investment objective of the Fund may be changed by the
board of directors without the approval of a "majority of the outstanding
voting securities" (as defined in the Investment Company Act of 1940) of the
Fund.
The Fund invests primarily in equity securities, including common and
preferred stocks, warrants or other similar rights, and convertible securities,
of foreign issuers. The Fund also may invest in any other type of security,
including debt securities.
INVESTMENT TECHNIQUES AND RISKS
FOREIGN SECURITIES
Under normal market conditions, the Fund invests at least 65% of its total
assets in foreign securities (including American Depository Receipts
("ADRs")), which may entail a greater degree of risk (including risks relating
to exchange rate fluctuations, tax provisions, or expropriation of assets) than
does investment in securities of domestic issuers. ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of the
B-2
<PAGE>
underlying securities. The Fund may invest in sponsored or unsponsored ADRs.
In the case of an unsponsored ADR, the Fund is likely to bear its proportionate
share of the expenses of the depository and it may have greater difficulty in
receiving shareholder communications than it would have with a sponsored ADR.
The Fund does not intend to invest more than 5% of its net assets in unsponsored
ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is affected
by the strength or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under "Managing
Investment Exposure.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading practices; less
liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements. Because U.S. and foreign
stock markets typically move in different cycles, combining international and
U.S. investments can protect an investment portfolio against the full impact of
a downturn in any single market, thus helping to enhance returns by lowering
risk.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
DEBT SECURITIES
In pursuing its investment objective, the Fund may invest in debt
securities of corporate and governmental issuers. The risks inherent in debt
securities depend primarily on the term and quality of the obligations in the
Fund's portfolio as well as on market conditions. A decline in the prevailing
levels of interest rates generally increases the value of debt securities, while
an increase in rates usually reduces the value of those securities.
B-3
<PAGE>
Investments in debt securities by the Fund may be in those that are within
the four highest ratings categories of Standard & Poor's Corporation ("S&P")
or Moody's Investors Services, Inc. ("Moody's") (generally referred to as
"investment grade") or, if unrated, deemed to be of comparable quality by
Artisan Partners. However, the Fund may invest up to 35% of its net assets in
debt securities that are rated below investment grade. The Fund does not
currently intend to invest more than 5% of its net assets in securities rated
below investment grade.
Debt securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely to affect
the issuer's capacity to pay interest and repay principal. If the rating of a
security held by the Fund is lost or reduced below investment grade, the Fund
is not required to dispose of the security, but Artisan Partners will consider
that fact in determining whether the Fund should continue to hold the security.
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and therefore carry
greater investment risk, including the possibility of issuer default and
bankruptcy.
DEFENSIVE INVESTMENTS
The Fund intends to be substantially fully invested in equity securities of
non-U.S. issuers in ordinary circumstances, although the Fund may invest without
limit in corporate or government obligations (U.S. or non-U.S.) or hold cash or
cash equivalents if Artisan Partners determines that a temporary defensive
position is advisable.
CONVERTIBLE SECURITIES
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The common
stock underlying convertible securities may be issued by a different entity than
the issuer of the convertible securities. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege.
The value of convertible securities is influenced by both the yield of non-
convertible securities of comparable issuers and by the value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." The
investment value of the convertible security will typically fluctuate inversely
with changes in prevailing interest rates. However, at the same time, the
convertible security will be influenced by its "conversion value," which is
the market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock.
By investing in convertible securities, the Fund obtains the right to
benefit from the capital appreciation potential in the underlying stock upon
exercise of the conversion right, while earning higher current income than would
be available if the stock were purchased directly. In
B-4
<PAGE>
determining whether to purchase a convertible security, Artisan Partners
will consider the same criteria that would be considered in purchasing the
underlying stock. Although convertible securities purchased by the Fund
are frequently rated investment grade, the Fund also may purchase unrated
securities or securities rated below investment grade if the securities meet
Artisan Partners' other investment criteria. Convertible securities rated
below investment grade (a) tend to be more sensitive to interest rate and
economic changes, (b) may be obligations of issuers who are less creditworthy
than issuers of higher quality convertible securities, and (c) may be more
thinly traded due to such securities being less well known to investors than
either common stock or conventional debt securities. As a result, Artisan
Partners' own investment research and analysis tends to be more important
in the purchase of such securities than other factors.
MANAGING INVESTMENT EXPOSURE
The Fund uses various techniques to increase or decrease its exposure to
the effects of possible changes in security prices, currency exchange rates or
other factors that affect the value of its portfolio. These techniques include
buying and selling options, futures contracts, or options on futures contracts,
or entering into currency exchange contracts.
These techniques are used by Artisan Partners to adjust the risk and return
characteristics of the Fund's portfolio. If Artisan Partners judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, or if the counterparty to the transaction does not
perform as promised, the transaction could result in a loss. Use of these
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. These
techniques are used by the Fund for hedging, risk management or portfolio
management purposes and not for speculation.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks and broker-
dealers, are not exchange traded, and are usually for less than one year, but
may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. Currency transactions
are limited to transaction hedging and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities. Portfolio hedging is the use of forward contracts with
respect to portfolio security positions denominated or quoted in a particular
currency. Portfolio hedging allows the Fund to limit or reduce exposure in a
foreign currency by entering into a forward contract to sell or buy such foreign
currency (or another foreign currency that acts as a proxy for that currency) so
that the U.S. dollar value of certain
B-5
<PAGE>
underlying foreign portfolio securities can be approximately matched by an
equivalent U.S. dollar liability. The Fund may not engage in portfolio hedging
with respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in that particular currency, except
that the Fund may hedge all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency where such currencies or
currency act as an effective proxy for other currencies. In such a case, the
Fund may enter into a forward contract where the amount of the foreign currency
to be sold exceeds the value of the securities denominated in such currency.
The use of this basket hedging technique may be more efficient and economical
than entering into separate forward contracts for each currency held in the
Fund. The Fund may not engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange
B-6
<PAGE>
transactions varies with such factors as the currency involved, the length of
the contract period, and prevailing market conditions. Because currency
exchange transactions are usually conducted on a principal basis, no fees or
commissions are involved.
Options on Securities and Indexes. The Fund may purchase and sell put
options and call options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on NASDAQ. The Fund may purchase
agreements, sometimes called cash puts, that may accompany the purchase of a new
issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying security or
foreign currency upon payment of the exercise price or to pay the exercise price
upon delivery of the underlying security or foreign currency. Upon exercise,
the writer of an option on an index is obligated to pay the difference between
the cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect specified
facets of a particular financial or securities market, a specific group of
financial instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio.
A put option is "covered" if the Fund maintains assets with a value equal
to the exercise price in a segregated account with its custodians, or owns on a
share-for-share or equal principal amount basis a put on the same security as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written.
If an option written by the Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the
B-7
<PAGE>
Fund will realize a capital loss. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option, the Fund
will realize a capital gain or, if it is less, the Fund will realize a capital
loss. The principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid
and asked prices.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options. For example, there are
significant differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to
some degree because of market behavior or expected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option would expire and become worthless.
If the Fund were unable to close out a covered call option that it had written
on a security, it would not be able to sell the underlying security until the
option expired. As the writer of a covered call option on a security, the Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund,
the Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it had purchased.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate futures contracts, index futures contracts, and foreign currency
futures contracts. An interest rate, index or foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument or the cash value of an index <F1>
at a specified price and time. A public market exists in futures contracts
covering a
<F1> A futures contract on an index is an agreement pursuant to which two
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 contract was
originally written. Although the value of a securities index is a function
of the value of certain specified securities, no physical delivery of those
securities is made.
B-8
<PAGE>
number of indexes (including, but not limited to: the Standard &
Poor's 500 Index, the Value Line Composite Index, the Russell 2000 Index and
the New York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true. The Fund might, for example, use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices, anticipated changes in interest rates or currency fluctuations that
might adversely affect either the value of the Fund's securities or the price
of the securities that the Fund intends to purchase. Although other techniques
could be used to reduce or increase the Fund's exposure to stock price,
interest rate and currency fluctuations, the Fund may be able to achieve its
exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.
The Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade, or similar entity,
or quoted on an automated quotation system.
The success of any futures transaction depends on Artisan Partners
correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, Artisan Partners might have taken portfolio actions in
anticipation of the same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or broker a specified amount of cash
or U.S. Government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is generally
set by the exchange on which the contract is traded and may be modified during
the term of the contract (although the Fund's broker may require margin deposits
in excess of the minimum required by the exchange). The initial margin is in
the nature of a performance bond or good faith deposit on the futures contract,
which is returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Fund expects to earn interest
income on its initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value
B-9
<PAGE>
of the futures contract. This process is known as "marking-to-market."
Variation margin paid or received by the Fund does not represent a borrowing
or loan by the Fund but is instead settlement between the Fund and the broker
of the amount one would owe the other if the futures contract had expired at
the close of the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more than the original
purchase price, the Fund engaging in the transaction realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must
also be included in these calculations.
Risks Associated with Futures. There are several risks associated with the
use of futures contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. In trying to increase or reduce market exposure, there can be no
guarantee that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given
transaction not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in speculative market
demand for futures, futures options and the related securities, including
technical influences in futures and futures options trading and differences
between the securities market and the securities underlying the standard
contracts available for trading. For example, in the case of index futures
contracts, the composition of the index, including the issuers and the weighting
of each issue, may differ from the composition of the Fund's portfolio, and, in
the case of interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the futures contract
may differ from the financial instruments held in the Fund's portfolio. A
decision as to whether, when and how to use futures contracts involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock price
or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does
B-10
<PAGE>
not limit potential losses because the limit may work to prevent the liquidation
of unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses. Stock index futures
contracts are not normally subject to such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
Limitations on Options and Futures. If other options, futures contracts,
or futures options of types other than those described herein are traded in the
future, the Fund also may use those investment vehicles, provided the board of
directors determines that their use is consistent with the Fund's investment
objective.
The Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money," <F2>
would exceed 5% of the Fund's total assets.
When purchasing or selling a futures contract or writing a put option on a
futures contract, the Fund must maintain with its custodian or broker assets
(including any margin) equal to the market value of such contract. When writing
a call option on a futures contract, the Fund similarly will maintain with its
custodian assets (including any margin) equal to the amount by which such option
is in-the-money until the option expires or is closed out by the Fund.
The Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the Fund will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and
<F2> A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
B-11
<PAGE>
intent of Regulation 1.3(z), or, with respect to positions in commodity futures
and commodity options contracts that do not come within the meaning and intent
of Regulation 1.3(z), the aggregate initial margin and premiums required to
establish such positions will not exceed 5% of the fair market value of the
assets of the Fund, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into (in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the Commission Regulations) may be excluded
in computing such 5%).
As long as the Fund continues to sell its shares in certain states and
applicable state law or regulation so requires, the Fund's options and futures
transactions also will be subject to certain non-fundamental investment
restrictions set forth under "Investment Restrictions" in this statement of
additional information.
Taxation of Options and Futures. If the Fund exercises a call or put
option that it holds, the premium paid for the option is added to the cost basis
of the security purchased (call) or deducted from the proceeds of the security
sold (put). For cash settlement options and futures options exercised by the
Fund, the difference between the cash received at exercise and the premium paid
is a capital gain or loss.
If a call or put option written by the Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by the Fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Fund is in-the-money at the time it was
written and the security covering the option was held for more than the long-
term holding period prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The holding period
of the securities covering an in-the-money option will not include the period of
time the option is outstanding.
If the Fund writes an equity call option <F3> other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on
such option transaction, to the extent it does not exceed the unrealized gains
on the securities covering the option, may be subject to deferral until the
securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the
<F3> An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index
of stocks of the type that is ineligible to be traded on a commodity
futures exchange (e.g., an option contract on a sub-index based on the
price of nine hotel-casino stocks). The definition of equity option
excludes options on broad-based stock indexes (such as the Standard &
Poor's 500 index).
B-12
<PAGE>
earlier of delivery notice date or expiration date. If the Fund delivers
securities under a futures contract, the Fund also realizes a capital
gain or loss on those securities.
For Federal income tax purposes, the Fund generally is required to
recognize for each taxable year its net unrealized gains and losses as of the
end of the year on futures, futures options and non-equity options positions
("year-end mark-to-market"). Generally, any gain or loss recognized with
respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses
on certain positions (including options, futures and futures options positions,
the related securities and certain successor positions thereto) may be
deferred to a later taxable year. Sale of futures contracts or writing of
call options (or futures call options) or buying put options (or futures put
options) that are intended to hedge against a change in the value of securities
held by the Fund may affect the holding period of the hedged securities.
If the Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for Federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property.
These changes generally apply to constructive sales after June 8, 1997.
Furthermore, the Secretary of the Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that have
substantially the same effect as short sales, offsetting notional principal
contracts, and futures or forward contracts to deliver the same or substantially
similar property.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain realized from
futures (or futures options) contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In addition, for tax years beginning before August 5, 1997, gains
realized on the sale or other disposition of securities held less than three
months must be less than 30% of the Fund's annual gross income. In order to
avoid realizing excessive gains on securities held less than three months, the
Fund may be required to
B-13
<PAGE>
defer the closing out of certain positions beyond the time when it would
otherwise be advantageous to do so.
The Fund intends to distribute to shareholders annually any capital gains
that have been recognized for Federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions, together with gains
on other Fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the Fund. Shareholders will be
advised of the nature of such capital gain distributions.
RULE 144A SECURITIES
The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the 1933 Act ("Rule
144A securities"). That Rule permits certain qualified institutional buyers,
including investment companies that own and invest at least $100 million in
securities, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. Artisan Partners, under the
supervision of the board of directors, will consider whether Rule 144A
securities are illiquid and thus subject to the Fund's restriction of
investing no more than 10% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a
question of fact. In making this determination, Artisan Partners will
consider the trading markets for the specific security, taking into account
the unregistered nature of a Rule 144A security. In addition,
Artisan Partners could consider the (1) frequency of trades and quotes,
(2) number of dealers and potential purchasers, (3) dealer undertakings
to make a market, and (4) nature of the security and of marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). The liquidity of Rule 144A securities
would be monitored and, if as a result of changed conditions, Artisan
Partners determined that a Rule 144A security is no longer liquid, the Fund's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Fund does not invest more than 10% of its
assets in illiquid securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (3) under "Investment Restrictions" in this
statement of additional information, the Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and also would receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities if, in
Artisan Partners' judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy
B-14
<PAGE>
or other default of the borrower, the Fund could experience both delays in
liquidating the loan collateral or recovering the loaned securities and losses,
including (a) possible decline in the value of the collateral or in the value of
the securities loaned during the period while the Fund seeks to enforce its
rights thereto, (b) possible subnormal levels of income and lack of access to
income during this period, and (c) expenses of enforcing its rights. The Fund
does not currently intend to loan more than 5% of its net assets.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date, and
market rate of interest unrelated to the coupon rate or maturity of the
purchased security. Although repurchase agreements carry certain risks
not associated with direct investments in securities, the Fund will enter into
repurchase agreements only with banks and dealers believed by Artisan Partners
to present minimum credit risks in accordance with guidelines approved by the
board of trustees. Artisan Partners will review and monitor the
creditworthiness of such institutions, and will consider the capitalization of
the institution, Artisan Partners prior dealings with the institution, any
rating of the institution's senior long-term debt by independent rating
agencies, and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
Fund's ability to sell the collateral and the Fund could suffer a loss.
However, with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if Artisan Partners deems it advisable for investment reasons.
The Fund does not currently intend to have commitments to purchase when-issued
securities in excess of 5% of its net assets.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
However,
B-15
<PAGE>
reverse repurchase agreements will be treated as borrowing and subject
to Artisan Funds' fundamental limitation on borrowing.
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued or delayed-delivery basis or enters into a reverse
repurchase agreement, assets of the Fund having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Fund and held by the custodian throughout the period of the obligation.
The use of these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value fluctuation.
SHORT SALES
The Fund may make short sales "against the box." In a short sale, the
Fund sells a borrowed security and is required to return the identical security
to the lender. A short sale "against the box" involves the sale of a security
with respect to which the Fund already owns an equivalent security in kind and
amount. A short sale "against the box" enables the Fund to obtain the current
market price of a security which it desires to sell but is unavailable for
settlement. The Fund does not currently intend to have commitments to make
short sales "against the box" in excess of 5% of its net assets.
LINE OF CREDIT
Artisan Funds maintains a line of credit with a bank in order to permit
borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation of
portfolio securities. Any borrowings under that line of credit by the Fund
would be subject to restriction (4) under "Investment Restrictions" in this
statement of additional information.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. At times, the Fund may invest for short-term capital
appreciation. Portfolio turnover can occur for a number of reasons such as
general conditions in the securities markets, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. Because of the Fund's
flexibility of investment and emphasis on growth of capital, it may have greater
portfolio turnover than that of mutual funds that have primary objectives of
income or maintenance of a balanced investment position. The future turnover
rate may vary greatly from year to year. A high rate of portfolio turnover in
the Fund, if it should occur, would result in increased transaction expense,
which must be borne by the Fund. High portfolio turnover also may result in the
realization of capital gains or losses and, to the extent net short-term capital
gains are realized, any distributions resulting from such gains will be
considered ordinary income for Federal income tax purposes. (See "Dividends,
Capital Gains and Taxes" in the prospectus, and "Additional Tax Information"
in this statement of additional information.)
B-16
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Artisan Funds has adopted the following investment restrictions for Artisan
International Fund, which may not be changed without the approval of the Fund's
shareholders.
The Fund may not:
(1) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933 on disposition
of securities acquired subject to legal or contractual restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein), commodities, or commodity
contracts, except that it may enter into (a) futures and options on futures and
(b) forward contracts;
(3) make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations which are
publicly distributed, or from investing up to an aggregate of 15% of its total
assets (taken at market value at the time of each purchase) in parts of issues
of bonds, debentures or other obligations of a type privately placed with
financial institutions, (b) investing in repurchase agreements, or (c) lending
portfolio securities, provided that it may not lend securities if, as a result,
the aggregate value of all securities loaned would exceed 33% of its total
assets (taken at market value at the time of such loan);
(4) borrow (including entering into reverse repurchase agreements), except
that it may (a) borrow up to 33 1/3% of its total assets, taken at market value
at the time of such borrowing, as a temporary measure for extraordinary or
emergency purposes, but not to increase portfolio income and (b) enter into
transactions in options, futures, and options on futures; <F4>
(5) invest in a security if more than 25% of its total assets (taken at
market value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this restriction
does not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(6) issue any senior security except to the extent permitted under the
Investment Company Act of 1940;
(7) with respect to 75% of its total assets, invest more than 5% of its
total assets, taken at market value at the time of a particular purchase, in the
securities of a single issuer,
<F4> The Fund will not purchase securities when total borrowings by the Fund are
greater than 5% of its net asset value.
B-17
<PAGE>
except for securities issued or guaranteed by the Government of the U.S. or any
of its agencies or instrumentalities or repurchase agreements for such
securities;
(8) acquire more than 10%, taken at the time of a particular purchase, of
the outstanding voting securities of any one issuer.
The Fund's investment objective is not a fundamental restriction and,
therefore, a change in the objective is not subject to shareholder approval.
However, investors in the Fund will receive written notification at least 30
days' prior to any change in the Fund's investment objective.
NON-FUNDAMENTAL RESTRICTIONS
The Fund also is subject to the following non-fundamental restrictions and
policies, which may be changed by the board of directors. Many of these
restrictions were formerly required by law or regulation of one or more states
in which shares of the Fund are offered for sale. The Fund expects that certain
of the following restrictions (including restrictions (a) and (d) through (j))
will be revised or eliminated, although no change in the Fund's operations is
expected to result. The Fund may not:
(a) invest in any of the following: (i) interests in oil, gas, or other
mineral leases or exploration or development programs (except readily marketable
securities, including but not limited to master limited partnership interests,
that may represent indirect interests in oil, gas, or other mineral exploration
or development programs); (ii) puts, calls, straddles, spreads, or any
combination thereof if by reason thereof the value of the Fund's aggregate
investment in such securities exceed 5% of its total assets (except that the
Fund may enter into transactions in options, futures, and options on futures);
and (iii) limited partnerships in real estate unless they are readily
marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of the Fund's
total assets (valued at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at time of purchase) in the
case of all other investment companies in the aggregate; any such purchases are
to be made in the open market where no profit to a sponsor or dealer results
from the purchase, other than the customary broker's commission, except for
securities acquired as part of a merger, consolidation, acquisition or
reorganization; <F5>
<F5> As long as Fund shares are offered for sale in California and applicable
California law or regulation so requires, the Fund will not acquire or
retain the shares of other open-end investment companies.
B-18
<PAGE>
(d) purchase or hold securities of an issuer if 5% of the securities of
such issuer are owned by those officers, directors or partners of the Fund or of
its investment adviser, who each own beneficially more than 1/2 of 1% of the
securities of that issuer;
(e) purchase securities of issuers (other than issuers of Federal agency
obligations or securities issued or guaranteed by any foreign country or asset-
backed securities) that, including their predecessors or unconditional
guarantors, have been in operation for less than three years, if
by reason of such purchase the value of the Fund's investment in all such
securities will exceed 5% of its total assets (valued at time of purchase);
(f) mortgage, pledge, or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with options,
futures, and options on futures;
(g) invest more than 5% of its net assets (valued at time of purchase) in
warrants, nor more than 2% of its net assets in warrants that are not listed on
the New York or American stock exchange;
(h) buy or sell an option on a security, a futures contract, or an option
on a futures contract unless the option, the futures contract, or the option on
the futures contract is offered through the facilities of a recognized
securities association or listed on a recognized exchange or similar entity;
(i) purchase a put or call option if the aggregate premiums paid for all
put and call options exceed 5% of its net assets (less the amount by which any
such positions are in-the-money), excluding put and call options purchased as
closing transactions;
(j) invest more than 10% of its net assets in restricted securities, other
than securities eligible for resale pursuant to Rule 144A of the Securities Act
of 1933;
(k) purchase securities on margin (except for use of short-term credits as
are necessary for the clearance of transactions), or sell securities short
unless (i) the Fund owns or has the right to obtain securities equivalent in
kind and amount to those sold short at no added cost or (ii) the securities sold
are "when issued" or "when distributed" securities which the Fund expects to
receive in recapitalization, reorganization, or other exchange for securities
the Fund contemporaneously owns or has the right to obtain and provided that
transactions in options, futures, and options on futures are not treated as
short sales; or
(l) invest more than 10% of its net assets (taken at market value at the
time of each purchase) in illiquid securities, including repurchase agreements
maturing in more than seven days.
B-19
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may quote Total Return or Average Annual Total
Return for its International Shares or its International Institutional Shares.
"Total Return" for a period is the percentage change in value during the
period of an investment in shares of that class of the Fund, including the value
of shares acquired through reinvestment of all dividends and capital gains
distributions. "Average Annual Total Return" is the average annual compounded
rate of change in value represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(l+T)n
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
The Fund's Total Return and Average Total Return for various periods
ended June 30, 1997 is shown below:
Average Annual
Total Return Total Return
------------ ------------
1 year 20.9% 20.9%
Life of Fund <F6> 46.1% 28.5%
<F6> from December 28, 1995 (commencement of operations)
Total Return and Average Annual Total Return of Institutional Shares will
be calculated in the same way as for International Shares. The performance of
Institutional Shares will be different from the performance of International
Shares because the expenses allocated to the classes will be different and their
expense reimbursement or waiver arrangements may be different. Because the
expense ratio for Institutional Shares is expected to be lower, the Total Return
and Average Annual Total Return of Institutional Shares are expected to be
greater than for International Shares.
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by the Fund
are not necessarily indicative of future results. The Fund's performance is a
function of conditions in the securities markets,
B-20
<PAGE>
portfolio management, and operating expenses. Although information about
past performance is useful in reviewing the Fund's performance and in providing
some basis for comparison with other investment alternatives, it should not be
used for comparison with other investments using different reinvestment
assumptions or time periods.
In advertising and sales literature, the performance of International
Shares or Institutional Shares may be compared with that of other mutual funds,
indexes or averages of other mutual funds, indexes of related financial assets
or data, other accounts or partnerships managed by Artisan Partners, and other
competing investment and deposit products available from or through other
financial institutions. The composition of these indexes, averages or accounts
differs from that of the Fund. Comparison of International Shares or
Institutional Shares to an alternative investment should consider differences
in features and expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Fund generally believes to be
accurate. The Fund also may note its mention (including performance or other
comparative rankings) or mention of its officers or portfolio manager in
newspapers, magazines, or other media from time to time. However, the Fund
assumes no responsibility for the accuracy of such data. Mention of the Fund's
portfolio manager may include reference to his management of another mutual
fund, the past performance of which should not be considered an indication of
the Fund's performance. Newspapers and magazines and other media which might
mention the Fund or its officers or portfolio manager include, but are not
limited to, the following:
B-21
<PAGE>
Atlanta Constitution Mutual Fund Letter
Barron's Mutual Fund News Service
Boston Herald Mutual Fund Values
Business Week Morningstar Publications
Chicago Tribune Newsweek
Chicago Sun-Times The New York Times
Cleveland Plain Dealer No-Load Fund Investor
CNBC Outstanding Investor Digest
CNN Pension World
Crain's Chicago Pensions and Investments
Business Personal Investor
Consumer Reports Jane Bryant Quinn (syndicated
Consumer Digest column)
Financial World Louis Rukeyser's Mutual Fund
Forbes The San Francisco Chronicle
Fortune Smart Money
Fund Action Stranger's Investment Adviser
Investor's Business Daily 13D Opportunities Report
Kiplinger's Personal Time
Finance Magazine United Mutual Fund Selector
Knight-Ridder USA Today
Los Angeles Times U.S. News and World Report
Milwaukee Business Journal The Wall Street Journal
Milwaukee Journal Sentinel Working Woman
Money Worth
Your Money
When a newspaper, magazine or other publication mentions the Fund, such
mention may include: (i) listings of some or all of the Fund's holdings, (ii)
descriptions of characteristics of some or all of the securities held by the
Fund, including price-earnings ratios, earnings, growth rates and other
statistical information, and comparisons of that information to similar
statistics for the securities comprising any of the indexes or averages listed
above; and (iii) descriptions of the Fund's or a portfolio manager's economic
and market outlook, generally and for the Fund.
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Fund may be compared to the following indexes or
averages:
B-22
<PAGE>
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Standard & Poor's 500 Stock Index American Stock Exchange Composite Index
Standard & Poor's 400 Industrials NASDAQ Composite
Standard & Poor's Mid-Cap 400 Index NASDAQ Industrials
Wilshire 5000
(These indexes are widely (These indexes generally
recognized indicators of general reflect the performance
U.S. stock market results.) of stocks traded in the
indicated markets.)
Morgan Stanley Capital International Europe, Australasia and Far East (EAFE)
Index
Financial Times-Actuaries World Index (Ex-U.S.)
Morgan Stanley Capital International World Index
(These indexes are widely recognized indicators of the international markets)
The performance of International Shares or Institutional Shares also may be
compared to the following mutual fund industry indexes or averages: Lipper
International & Global Funds Average; Lipper General Equity Funds Average;
Lipper Equity Funds Average; Lipper International Index; ICD International
Equity Funds Average; ICD All Equity Funds Average; ICD General Equity Average;
ICD Global Equity Funds Average; ICD International Equity and Global Equity
Funds Average; ICD Foreign Securities Index; Morningstar International Stock
Average; Morningstar U.S. Diversified Average; Morningstar Equity Fund Average;
Morningstar Hybrid Fund Average; Morningstar All Equity Funds Average; and
Morningstar General Equity Average.
The ICD Indexes reflect the unweighted average total return of the largest
twenty four funds within their respective category as calculated and published
by ICD.
The Lipper International Fund index reflects the net asset value weighted
return of the ten largest international funds.
The Lipper, ICD and Morningstar averages are unweighted averages of total
return performance of mutual funds as classified, calculated and published by
these independent services that monitor the performance of mutual funds. The
Fund also may use comparative performance as computed in a ranking by Lipper or
category averages and rankings provided by another independent service. Should
Lipper or another service reclassify the Fund to a different category or develop
(and place the Fund into) a new category, the Fund may compare its performance
or ranking against other funds in the newly assigned category, as published by
the service. The Fund may compare its performance or ranking against all funds
tracked by Lipper or another independent service.
The Fund may cite its rating, recognition or other mention by Morningstar,
Inc. ("Morningstar") or any other entity. Morningstar's rating system is
based on risk-adjusted total return performance and is expressed in a star-
rating format. The risk-adjusted number is computed by subtracting a Fund's
risk score (which is a function of the Fund's monthly returns less the 3-month
Treasury bill return) from the Fund's load-adjusted total return score. This
B-23
<PAGE>
numerical score is then translated into rating categories, with the top 10%
labeled five star, the next 22.5% labeled four star, the next 35% labeled three
star, the next 22.5% labeled two star and the bottom 10% one star. A high
rating reflects either above-average returns or below-average risk, or both.
To illustrate the historical returns on various types of financial assets,
the Fund may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for example,
total return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types: common
stocks, small company stocks, long-term corporate bonds, long-term government
bonds, intermediate-term government bonds, U.S. Treasury bills and Consumer
Price Index. The Fund also may use historical data compiled by Prudential
Securities, Inc., Morgan Stanley Capital International, or other similar sources
believed by the Fund to be accurate, illustrating the past performance of small-
capitalization stocks, large-capitalization stocks, common stocks, equity
securities, growth stocks (small-capitalization, large-capitalization, or both),
value stocks (small-capitalization, large-capitalization, or both), the U.S.
stock market generally, or the U.S. stock market compared to other stock markets
throughout the world.
DIRECTORS AND OFFICERS
Directors and officers of Artisan Funds, their dates of birth and principal
business occupations during at least the last five (5) years, are shown below.
Directors deemed to be "interested persons" of Artisan Funds for purposes of
the 1940 Act are indicated with an asterisk.
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS DURING
BIRTH WITH REGISTRANT PAST 5 YEARS
- ----------------- --------------- ----------------------------------
Andrew A. Ziegler Director, Chairman of Managing Partner of Artisan
10/7/57 the Board and Chief Partners; prior to founding
Executive Officer Artisan Partners, president and
chief operating officer of
Strong/Corneliuson Capital
Management ("Strong") and
president of the Strong Funds from
1990 to 1994; prior thereto,
attorney with the law firm of
Godfrey & Kahn, S.C., Milwaukee,
WI.
B-24
<PAGE>
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS DURING
BIRTH WITH REGISTRANT PAST 5 YEARS
- ---------------- --------------- ----------------------------------
Carlene Murphy Director and President Managing Partner of Artisan
Ziegler Partners; prior to founding
6/20/56 Artisan Partners, a co-portfolio
manager of the Strong Common
Stock Fund, Strong Opportunity
Fund and numerous institutional
small-capitalization equity
portfolios at Strong since March
1991; prior thereto, a co-
portfolio manager of the SteinRoe
Special Fund.
David A. Erne Director Partner of the law firm Reinhart,
5/6/43 Boerner, Van Deuren, Norris &
Rieselbach, S.C., Milwaukee, WI.
Thomas R. Hefty Director President of United Wisconsin
6/9/47 Services, Inc. (a provider of
managed care and specialty
business services) since 1986
and chairman of the board and
chief executive officer since
1991; and chairman of the board
of Blue Cross & Blue Shield
United of Wisconsin (parent
company of United Wisconsin
Services, Inc.) since 1988 and
president since 1982.
Howard B. Witt Director President and chief executive
5/17/40 officer of Littelfuse, Inc. (a
manufacturer of advanced circuit
protection devices) since 1990
and chairman of the board of
Littelfuse since 1993; prior
thereto executive vice president
of Littelfuse; and director of
Franklin Electric Co., Inc. (a
manufacturer of electronic
motors) since 1994.
John M. Blaser Chief Financial Chief financial officer of
11/2/56 Officer, Treasurer and Artisan Partners; prior to
Secretary joining Artisan Partners, senior
vice president with Kemper
Securities, Inc. since 1993;
prior thereto, with Price
Waterhouse.
B-25
<PAGE>
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS DURING
BIRTH WITH REGISTRANT PAST 5 YEARS
- ---------------- --------------- -----------------------------------
Mark L. Yockey Vice President Partner of Artisan Partners;
6/5/56 prior to joining Artisan
Partners, portfolio manager of
the United International Growth
Fund and vice president of
Waddell & Reed (investment
management firm) since January
1990; prior thereto, equity
analyst for Waddell & Reed.
Sandra Jean Voss- Vice President Equity trader for Artisan
Reinhardt Partners; prior to joining
3/6/64 Artisan Partners, equity trader
with Northwestern Mutual since
January 1989, prior thereto,
sales associate with Dean Witter
Reynolds.
Millie Adams Vice President Co-portfolio manager of Artisan
Hurwitz Small Cap Fund; prior to joining
12/16/62 Artisan Partners, co-portfolio
manager at Stein Roe & Farnham
Incorporated from 1992 until
1995; and an analyst with OLC
Corporation from 1989 to 1991.
Scott C. Vice President Portfolio manager, Artisan Small
Satterwhite Cap Value Fund; prior to joining
7/15/57 Artisan Partners in June 1997,
portfolio manager of the Biltmore
Special Values Fund from August
1, 1993 through May 31, 1997 and
Senior Vice President and Manager
of Personal Trust Portfolio
Management for the Personal
Financial Services Group of
Wachovia Bank of North Carolina,
N.A.
Andrew C. Stephens Vice President Portfolio manager, Artisan Mid
10/31/63 Cap Fund; co-manager of Strong
Asset Allocation Fund at Strong,
February 1993 through March 1997,
and senior research analyst for
Strong Common Stock Fund and
Strong Opportunity Fund,
September 1994 through March
1996; prior to February 1933,
head trader, Strong.
The business address of the officers and directors affiliated with Artisan
Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin 53202.
The addresses of the other directors are: Mr. Erne - 1000 N. Water Street,
Milwaukee, Wisconsin 53202; Mr. Hefty - 401
B-26
<PAGE>
W. Michigan Street, Milwaukee, Wisconsin 53203; and Mr. Witt - 800 E. Northwest
Highway, Des Plaines, Illinois 60016.
Mr. Ziegler and Ms. Ziegler are married to each other.
Mr. Ziegler and Ms. Ziegler serve as members of the Executive Committee of
the Board of Directors. The Executive Committee, which meets between regular
meetings of the Board, is authorized to exercise all of the powers of the Board
of Directors.
The only compensation paid to directors and officers of Artisan Funds for
their services as such consists of an annual $5,000 retainer fee (per series of
Artisan Funds) paid to directors who are not interested persons of Artisan Funds
or Artisan Partners. Artisan Funds has no retirement or pension plans.
The following table sets forth compensation paid by the Fund and by Artisan
Funds (comprised of the Fund and Artisan Small Cap Fund) during the fiscal year
ended June 30, 1996 to each of the directors of Artisan Funds.
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ESTIMATED FROM ARTISAN
COMPENSATION ACCRUED ANNUAL INTERNATIONAL
FROM ARTISAN AS PART OF BENEFITS FUND AND FUND
INTERNATIONAL FUND UPON COMPLEX PAID
NAME OF DIRECTOR FUND EXPENSES RETIREMENT TO DIRECTORS
- ---------------- ------------- ---------- ---------- ------------
Andrew A. Ziegler $ 0 $ 0 $ 0 $ 0
Carlene Murphy Ziegler 0 0 0 0
David A. Erne 2,500 0 0 10,000
Thomas R. Hefty 2,500 0 0 10,000
Howard B. Witt 2,500 0 0 10,000
As of September 30, 1997, the directors and officers of Artisan Funds, as a
group, owned less than 1% of the outstanding shares of the Fund and less than 1%
of the outstanding shares of Artisan Funds.
PRINCIPAL SHAREHOLDERS
No person was known by Artisan Funds to own of record or beneficially 5% or
more of the outstanding shares of the Fund at September 30, 1997 except for
persons acting as nominees for their clients, without the power to vote or
dispose of Fund shares.
INVESTMENT ADVISORY SERVICES
Artisan Partners Limited Partnership ("Artisan Partners") provides
investment advisory services to the Fund pursuant to an Investment Advisory
Agreement dated December 27, 1995 (the "Advisory Agreement"). Artisan
Partners is a Delaware limited partnership. Artisan Investment Corporation was
incorporated on December 7, 1994 for the sole purpose of acting as general
partner of Artisan Partners. Mr. Ziegler and Ms. Ziegler, as officers of
Artisan
B-27
<PAGE>
Investment Corporation, manage Artisan Partners. The principal address
of Artisan Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin
53202. Artisan Partners also has offices at 100 Pine Street, Suite 3250, San
Francisco, California and Five Concourse Parkway, Suite 2120, Atlanta, Georgia
30328.
In return for its services, the Fund pays Artisan Partners a monthly fee at
the annual rate of 1% of the Fund's average daily net assets up to $500 million;
.975 of 1% of average daily net assets from $500 million up to $750 million;
.950 of 1% of average daily net assets from $750 million to $1 billion; and .925
of 1% of average daily net assets over $1 billion. Artisan Partners has
undertaken to reimburse the Fund for any ordinary operating expenses in excess
of 2.50% of average net asset annually. The advisory fees paid by the Fund to
Artisan Partners during fiscal year 1997 and for the period December 28, 1995
through June 30, 1996, totalled $2,444,080 and $133,215, respectively.
The Advisory Agreement provides that Artisan Partners shall not be liable
for any loss suffered by the Fund or its shareholders as a consequence of any
act or omission in connection with investment advisory or portfolio services
under the agreement, except by reason of willful misfeasance, bad faith or gross
negligence on the part of Artisan Partners in the performance of its duties or
from reckless disregard by Artisan Partners of its obligations and duties under
the Advisory Agreement.
The Advisory Agreement may be continued from year to year only so long as
the continuance is approved annually (a) by the vote of a majority of the
directors of the Fund who are not "interested persons" of the Fund or Artisan
Partners cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the board of directors or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the portfolio. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
PORTFOLIO TRANSACTIONS
Artisan Partners places the orders for the purchase and sale of the Fund's
portfolio securities and options and futures contracts. Artisan Partners'
overriding objective in effecting portfolio transactions is to seek to obtain
the best combination of price and execution. The best net price, giving effect
to brokerage commissions, if any, and other transaction costs, normally is an
important factor in this decision, but a number of other judgmental factors also
may enter into the decision. These include: Artisan Partners' knowledge of
negotiated commission rates currently available and other current transaction
costs; the nature of the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected in the market
for the particular security; confidentiality; the execution, clearance and
settlement capabilities of the broker or dealer selected and others which are
considered; Artisan Partners' knowledge of the financial stability of the broker
or dealer selected and such other problems of any broker or dealer. Recognizing
the value of these factors, the Fund may pay a brokerage commission in excess of
that which another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of brokerage commissions, based
on the foregoing factors, are made on an ongoing basis by Artisan Partners'
staff while effecting
B-28
<PAGE>
portfolio transactions. The general level of brokerage commissions paid is
reviewed by Artisan Partners, and reports are made annually to the board of
directors.
With respect to issues of securities involving brokerage commissions, when
more than one broker or dealer is believed to be capable of providing the best
combination of price and execution with respect to a particular portfolio
transaction for the Fund, Artisan Partners often selects a broker or dealer that
has furnished it with research products or services such as research reports,
subscriptions to financial publications and research compilations, compilations
of securities prices, earnings, dividends, and similar data, and computer data
bases, quotation equipment and services, research-oriented computer software and
services, and services of economic and other consultants. Selection of brokers
or dealers is not made pursuant to an agreement or understanding with any of the
brokers or dealers; however, Artisan Partners uses internal allocation
procedures to identify those brokers or dealers who provide it with research
products or services and the amount of research products or services they
provide, and endeavors to direct sufficient commissions generated by its
clients' accounts in the aggregate, including the Fund, to such brokers or
dealers to ensure the continued receipt of research products or services Artisan
Partners feels are useful. In certain instances, Artisan Partners receives from
brokers and dealers products or services that are used both as investment
research and for administrative, marketing, or other non-research purposes. In
such instances, Artisan Partners makes a good faith effort to determine the
relative proportions of such products or services which may be considered as
investment research. The portion of the costs of such products or services
attributable to research usage may be defrayed by Artisan Partners (without
prior agreement or understanding, as noted above) through brokerage commissions
generated by transactions by clients (including the Fund), while the portions of
the costs attributable to non-research usage of such products or services is
paid by Artisan Partners in cash. No person acting on behalf of the Fund is
authorized, in recognition of the value of research products or services, to pay
a commission in excess of that which another broker or dealer might have charged
for effecting the same transaction. Research products or services furnished by
brokers and dealers may be used in servicing any or all of the clients of
Artisan Partners and not all such research products or services are used in
connection with the management of the Fund.
With respect to the Fund's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis, Artisan Partners also may
consider the part, if any, played by the broker or dealer in bringing the
security involved to Artisan Partners' attention, including investment research
related to the security and provided to the Fund.
During the fiscal year ended June 30, 1997 and during the period December
28, 1995 (commencement of operations) through June 30, 1996, the Fund paid
brokerage commissions of $2,960,678 and $425,266, respectively, to brokers who
furnished research services to the Fund or Artisan Partners on purchases and
sales aggregating $824,170,635 and $97,912,681, respectively.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the prospectus under the
headings "How to Buy Shares" and "How to Sell Shares" in the International
Shares prospectus and "Purchasing
B-29
<PAGE>
and Redeeming Shares" in the International Institutional Shares prospectus.
All of that information is incorporated herein by reference.
Shares of the Fund may be purchased or redeemed through certain financial
services companies, some of which may charge a transaction fee. The Fund may
authorize from time to time certain financial services companies, broker-dealers
or their designees ("authorized agents") to accept share purchase and
redemption orders on the Fund's behalf. For purchase orders placed through an
authorized agent, a shareholder will pay the Fund's NAV per share (see "Net
Asset Value," below), next computed after the receipt by the authorized agent
of such purchase order, plus any applicable transaction charge imposed by the
agent. For redemption orders placed through an authorized agent, a shareholder
will receive redemption proceeds which reflect the NAV per share next computed
after the receipt by the authorized agent of the redemption order, less any
redemption fees imposed by the agent.
In some instances, an authorized agent or other financial services company
may not charge any transaction fees directly to investors in the Fund. However,
for accounting and shareholder servicing services provided by such a company
with respect to International Shares of the Fund held by that company for its
customers, the company may charge a fee (currently up to 0.35%) of the annual
average value of those accounts. The Fund pays a portion of those fees not to
exceed the estimated fees and expenses that the Fund would pay to its own
transfer agent if the shares of the Fund held by such customers of the company
were registered directly in their names on the books of the Fund's transfer
agent. That portion of the fee paid by the Fund is allocated to the
International Shares. The balance of those fees is paid by Artisan Partners.
Net Asset Value. Share purchase and redemption orders will be priced at
the net asset value for the applicable class of shares next computed after such
orders are received and accepted by: (i) the Fund; (ii) a broker-dealer or
other financial services company authorized by the Fund to accept purchase and
redemption orders on the Fund's behalf; or (iii) such authorized broker-dealer's
designee. The net asset value of the shares of each class of the Fund is
determined as of the close of regular session trading on the New York Stock
Exchange ("NYSE") (currently 3:00 p.m., Central time) each day the NYSE is
open for trading. The NYSE is regularly closed on Saturdays and Sundays and on
New Year's Day, the third Monday in January, the third Monday in February, Good
Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE
will be closed on the preceding Friday or the following Monday, respectively.
Net asset value will not be determined on days when the NYSE is closed unless,
in the judgment of the board of directors, net asset value of the Fund should be
determined on any such day, in which case the determination will be made at 3:00
p.m., Central time. The net asset value per share of each class of shares the
Fund is determined by dividing the value of that class's pro rata portion of all
the Fund's securities and other assets, subtracting that class's pro rata
portion of the Fund's liabilities and any liabilities specifically allocated to
that class, by the number of shares of that class outstanding.
Trading in the portfolio securities of the Fund takes place in various
foreign markets on certain days (such as Saturdays or U.S. holidays) when
Artisan Funds is not open for business
B-30
<PAGE>
and the net asset value of the Fund is not calculated. Conversely, trading
in the Fund's portfolio securities may not occur on days when Artisan Funds
is open. As a result, the calculation of net asset value does not take
place contemporaneously with the determinations of the prices of many of
the Fund's portfolio securities and the value of the Fund's portfolio may
be significantly affected on days when shares of the Fund may not
be purchased or redeemed.
The Fund intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets of the Fund during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly by a
distribution in kind of readily marketable securities. If redemptions were made
in kind, the redeeming shareholders might incur transaction costs in selling the
securities received in the redemptions.
The Fund reserves the right to suspend or postpone redemptions of its
shares during any period when: (a) trading on the NYSE is restricted, as
determined by the Commission, if the NYSE is closed for other than customary
weekend and holiday closings; (b) the Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Commission, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
The Fund and Artisan Partners each have adopted a code of ethics that,
among other things, regulates the personal transactions in securities of certain
officers, directors, partners and employees of the Fund and Artisan Partners.
ADDITIONAL TAX INFORMATION
Artisan Funds intends for the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and thus not be subject to federal income taxes on
amounts which it distributes to shareholders.
Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in the prior
calendar year is deemed paid in the prior calendar year.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gain. Distributions of mid-term capital
gains will be taxable to you as mid-term capital gains. Distributions of net
long-term capital gain will be taxable to you as long-term capital gain
regardless of the length of time you have held your shares.
You will be advised annually as to the source of distributions for tax
purposes. If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale of Fund shares held for six months or
less, your short-term loss is recharacterized as long-term to the extent of any
long-term capital gain distributions you have received with respect to those
shares.
B-31
<PAGE>
The Taxpayer Relief Act of 1997 reduced from 28% to 20% the maximum tax
rate on long-term capital gains. This reduced rate generally applies to
securities held more than 18 months and sold after July 28, 1997, and securities
held for more than one year and sold between May 6, 1997 and July 29, 1997.
The Fund may be required to withhold federal income tax ("backup
withholding') from certain payments to you, generally redemption proceeds.
Backup withholding may be required if:
- You fail to furnish your properly certified social security or
other tax identification number;
- You fail to certify that your tax identification number is correct
or that you are not subject to backup withholding due to the
underreporting of certain income;
- The IRS informs the Fund that your tax identification number is
incorrect.
These certifications are contained in the application that you complete
when you open your Fund account. The Fund must promptly pay the the IRS all
amounts withheld. Therefore, it is not usually possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.
To the extent the Fund invests in foreign securities, it may be subject to
withholding and other taxes imposed by foreign countries. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxed, subject to certain provisions and limitations contained in the Code.
Specifically, if more than 50% of the Fund's total assets at the close of any
fiscal year consist of stock or securities of foreign corporations, the Fund may
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to (i) include in ordinary gross
income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by the Fund even though not actually
received, (ii) treat such respective pro rata shares as foreign income taxes
paid by them, and (iii) deduct such pro rata shares in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their United States income taxes. Shareholders
who do not itemize deductions for Federal income tax purposes will not, however,
be able to deduct their pro rata portion of foreign taxes paid by the Fund,
although such shareholders will be required to include their share of such taxes
in gross income. Shareholders who claim a foreign tax credit may be required to
treat a portion of dividends received from the Fund as separate category income
for purposes of computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily benefit from
this election relating to foreign taxes. Each year, the Fund will notify
shareholders of the amount of (i) each shareholder's pro rata share of foreign
income taxes paid by the Fund, and (ii) the portion of Fund dividends which
represent income from each foreign country if the Fund qualifies to pass along
such credit.
B-32
<PAGE>
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). In addition to
bearing their proportionate share of the Fund's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses of
PFICs. Capital gains on the sale of PFIC holdings will be deemed to be ordinary
income regardless of how long the Fund holds its investment. In addition, the
Fund may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from PFICs, regardless of whether such income
and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat PFICs as sold
on the last day of the Fund's fiscal year and recognize any gains for tax
purposes at that time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to distribute even
though it has not sold the security and received cash to pay such distributions.
CUSTODIAN
State Street Bank & Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, MA 02171, acts as custodian of the securities and other assets of
the Fund. State Street is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on the Fund's investments.
State Street also performs portfolio accounting services for the Fund. State
Street is not an affiliate of Artisan Partners or its affiliates. State Street
is authorized to deposit securities in securities depositories for the use of
services of sub-custodians.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
serves as the Fund's independent accountants, providing services including (i)
audit of the annual financial statements; (ii) assistance and consultation in
connection with Securities and Exchange Commission filings; and (iii) review of
the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
Audited Financial Statements. The 1997 annual report to shareholders of
the Fund, a copy of which accompanies this Statement of Additional Information,
contains financial statements, notes thereto, supplementary information entitled
"Financial Highlights," and a report of independent accountants, all of which
(but no other part of the annual report) are incorporated herein by reference.
The "Financial Highlights" included in the annual report relate to the Fund's
International Shares. Additional copies of the annual report may be obtained
from Artisan Funds at no charge by writing or telephoning Artisan Funds at the
address or telephone number on cover page of this Statement of Additional
Information.
B-33
<PAGE>
ARTISAN MID CAP FUND
ARTISAN FUNDS, INC.
1000 North Water Street, Suite 1770
Milwaukee, Wisconsin 53202
(414) 390-6100 (800) 344-1770
STATEMENT OF ADDITIONAL INFORMATION
October 28, 1997
Supplemented January 14, 1998
Artisan Mid Cap Fund (the "Fund") is a series of Artisan Funds, Inc.
("Artisan Funds"). This statement of additional information is not a
prospectus. It should be read in conjunction with the prospectus of the Fund
dated October 28, 1997 and any supplement to the prospectus. That prospectus
can be obtained without charge by calling or writing to the Fund at the
telephone numbers and address shown above.
TABLE OF CONTENTS
Page
-----
Information about the Fund and Artisan Partners..................B-2
Investment Objective and Policies................................B-2
Investment Techniques and Risks..................................B-2
Investment Restrictions.........................................B-17
Performance Information.........................................B-19
Directors and Officers..........................................B-22
Investment Advisory Services....................................B-25
Portfolio Transactions..........................................B-26
Purchasing and Redeeming Shares.................................B-27
Additional Tax Information......................................B-29
Custodian.......................................................B-30
Independent Accountants.........................................B-30
INFORMATION ABOUT THE FUND AND ARTISAN PARTNERS
The Fund is a series of Artisan Funds, Inc. ("Artisan Funds"). Artisan
Partners Limited Partnership ("Artisan Partners") provides investment advisory
services to the Fund.
Artisan Funds strives to offer distinctive, high-value-added investment
opportunities. Artisan Funds is not a "family" of indistinguishable products
devised by marketers in a financial services conglomerate. Rather, Artisan
Partners is a small partnership of investment professionals, focused on a
limited number of distinct investment strategies, each of which is offered as
a series of Artisan Funds. At the date of this statement of additional
information, those series are (in addition to the Fund) are Artisan
Small Cap Fund, Artisan International Fund, and Artisan Small Cap Value Fund.
The portfolio manager of each Fund is a specialist in his or her market, with
an investment process created and refined through years of experience - an
artisan. At Artisan Funds, we believe that experienced, active managers
investing in inefficient markets can produce superior returns over time.
The Artisan Funds are intended for long-term investors who share on that belief.
The discussion below supplements the description in the prospectus of the
Fund's investment objectives, policies and restrictions.
INVESTMENT OBJECTIVE AND POLICIES
Artisan Mid Cap Fund invests for maximum long-term capital growth. The
Fund invests primarily in the common stocks of medium-sized companies. Medium-
sized companies are those whose market capitalizations fall within the range of
companies in the S&P MidCap 400 Index (the "MidCap Index"). As of September
30, 1997, the MidCap Index included companies with capitalizations between
approximately $250 million and $12 billion. the market capitalization range in
which the Fund invests will change as the range of the companies included in the
MidCap Index changes. The investment objective of the Fund may be changed by
the board of directors without the approval of a "majority of the outstanding
voting securities' (as defined in the Investment Company Act of 1940) of the
Fund.
The Fund invests primarily in equity securities, including common and
preferred stocks, warrants or other similar rights, and convertible securities.
In addition, the Fund may from time to time have significant portions of its
portfolio invested in foreign securities. The Fund also may invest in any other
type of security, including debt securities.
INVESTMENT TECHNIQUES AND RISKS
FOREIGN SECURITIES
The Fund may invest up to 25% of its total assets in foreign securities
(including American Depository Receipts ("ADRs")), which may entail a greater
degree of risk (including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than does
B-2
<PAGE>
investment in securities of domestic issuers. ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of the
underlying securities. The Fund may invest in sponsored or unsponsored ADRs.
In the case of an unsponsored ADR, the Fund is likely to bear its proportionate
share of the expenses of the depository and it may have greater difficulty in
receiving shareholder communications than it would have with a sponsored ADR.
The Fund does not intend to invest more than 5% of its net assets in
unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is affected
by the strength or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under "Managing
Investment Exposure.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading practices; less
liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
DEBT SECURITIES
In pursuing its investment objective, the Fund may invest in debt
securities of corporate and governmental issuers. The risks inherent in debt
securities depend primarily on the term and quality of the obligations in the
Fund's portfolio as well as on market conditions. A decline in the prevailing
levels of interest rates generally increases the value of debt securities, while
an increase in rates usually reduces the value of those securities.
Investments in debt securities by the Fund may be in those that are within
the four highest ratings categories of Standard & Poor's Corporation ("S&P")
or Moody's Investors Services, Inc.
B-3
<PAGE>
("Moody's") (generally referred to as "investment grade") or, if unrated,
deemed to be of comparable quality by Artisan Partners. However, the Fund may
invest up to 35% of its net assets in debt securities that are rated below
investment grade. The Fund does not currently intend to invest more than 5% of
its net assets in securities rated below investment grade.
Debt securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely to affect
the issuer's capacity to pay interest and repay principal. If the rating of a
security held by the Fund is lost or reduced below investment grade, the Fund is
not required to dispose of the security, but Artisan Partners will consider that
fact in determining whether the Fund should continue to hold the security.
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and therefore carry
greater investment risk, including the possibility of issuer default and
bankruptcy.
DEFENSIVE INVESTMENTS
The Fund intends to be substantially fully invested in equity securities in
ordinary circumstances, although the Fund may invest without limit in corporate
or government obligations or hold cash or cash equivalents if Artisan Partners
determines that a temporary defensive position is advisable.
CONVERTIBLE SECURITIES
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The common
stock underlying convertible securities may be issued by a different entity than
the issuer of the convertible securities. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege.
The value of convertible securities is influenced by both the yield of non-
convertible securities of comparable issuers and by the value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." The
investment value of the convertible security will typically fluctuate inversely
with changes in prevailing interest rates. However, at the same time, the
convertible security will be influenced by its "conversion value," which is
the market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock.
By investing in convertible securities, the Fund obtains the right to
benefit from the capital appreciation potential in the underlying stock upon
exercise of the conversion right, while earning higher current income than would
be available if the stock were purchased directly. In determining whether to
purchase a convertible security, Artisan Partners will consider the same
criteria that would be considered in purchasing the underlying stock. Although
convertible
B-4
<PAGE>
securities purchased by the Fund are frequently rated investment
grade, the Fund also may purchase unrated securities or securities rated below
investment grade if the securities meet Artisan Partners' other investment
criteria. Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be obligations of
issuers who are less creditworthy than issuers of higher quality convertible
securities, and (c) may be more thinly traded due to such securities being less
well known to investors than either common stock or conventional debt
securities. As a result, Artisan Partners' own investment research and analysis
tends to be more important in the purchase of such securities than other
factors.
<PAGE>
MANAGING INVESTMENT EXPOSURE
The Fund uses various techniques to increase or decrease its exposure to
the effects of possible changes in security prices, currency exchange rates or
other factors that affect the value of its portfolio. These techniques include
buying and selling options, futures contracts, or options on futures contracts,
or entering into currency exchange contracts.
These techniques are used by Artisan Partners to adjust the risk and return
characteristics of the Fund's portfolio. If Artisan Partners judges market
conditions incorrectly or employs a strategy that does not correlate well with
the Fund's investments, or if the counterparty to the transaction does not
perform as promised, the transaction could result in a loss. Use of these
techniques may increase the volatility of the Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. These
techniques are used by the Fund for hedging, risk management or portfolio
management purposes and not for speculation.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward contracts are
contractual agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks, foreign
exchange dealers or broker-dealers, are not exchange traded, and are usually for
less than one year, but may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. Currency transactions
are limited to transaction hedging and portfolio hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities. Portfolio hedging is the use of forward contracts with
respect to portfolio security positions denominated or quoted in a particular
currency. Portfolio hedging allows the Fund to limit or reduce exposure in a
foreign currency by entering into a forward contract to sell or buy such foreign
currency (or another foreign currency that acts as a proxy for that currency) so
that the U.S. dollar value of certain underlying foreign portfolio securities
can be approximately matched by an equivalent U.S.
B-5
<PAGE>
dollar liability. The Fund may not engage in portfolio hedging with respect
to the currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in that particular currency,
except that the Fund may hedge all or part of its foreign currency exposure
through the use of a basket of currencies or a proxy currency where such
currencies or currency act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the
amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The Fund may not engage
in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period,
B-6
<PAGE>
and prevailing market conditions. Because currency exchange transactions are
usually conducted on a principal basis, no fees or commissions are involved.
Options on Securities and Indexes. The Fund may purchase and sell put
options and call options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on the Nasdaq National Market. The Fund
may purchase agreements, sometimes called cash puts, that may accompany the
purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the purchaser
(holder) of the option, in return for a premium, the right to buy from (call) or
sell to (put) the seller (writer) of the option the security underlying the
option (or the cash value of the index) at a specified exercise price at any
time during the term of the option (normally not exceeding nine months).
The writer of an option on an individual security or on a foreign currency
has the obligation upon exercise of the option to deliver the underlying
security or foreign currency upon payment of the exercise price or to pay
the exercise price upon delivery of the underlying security or foreign currency.
Upon exercise, the writer of an option on an index is obligated to pay the
difference between the cash value of the index and the exercise price multiplied
by the specified multiplier for the index option. (An index is designed to
reflect specified facets of a particular financial or securities market, a
specific group of financial instruments or securities, or certain economic
indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
B-7
<PAGE>
A put or call option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an option
written by the Fund is recorded as a deferred credit. The value of an option
purchased or written is marked-to-market daily and is valued at the closing
price on the exchange on which it is traded or, if not traded on an exchange or
no closing price is available, at the mean between the last bid and asked
prices.
Risks Associated with Options on Securities and Indexes. There are several
risks associated with transactions in options. For example, there are
significant differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its objectives.
A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or expected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option would expire and become worthless.
If the Fund were unable to close out a covered call option that it had written
on a security, it would not be able to sell the underlying security until the
option expired. As the writer of a covered call option on a security, the Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund,
the Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate futures contracts, index futures contracts, and foreign currency
futures contracts. An interest rate, index or foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument or the cash value of an index <F1>
at a specified price and time. A public market exists in futures contracts
covering a number of indexes (including, but not limited to: the Standard &
Poor's 500 Index, the Value Line Composite Index, the Russell 2000 Index and the
New York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes,
Eurodollar certificates of deposit, and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
<F1> A futures contract on an index is an agreement pursuant to which two
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 contract was
originally written. Although the value of a securities index is a function
of the value of certain specified securities, no physical delivery of those
securities is made.
B-8
<PAGE>
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true. The Fund might, for example, use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices, anticipated changes in interest rates or currency fluctuations that
might adversely affect either the value of the Fund's securities or the price
of the securities that the Fund intends to purchase. Although other
techniques could be used to reduce or increase the Fund's exposure to stock
price, interest rate and currency fluctuations, the Fund may be able to achieve
its exposure more 2effectively and perhaps at a lower cost by using futures
contracts and futures options.
The Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade, or similar entity,
or quoted on an automated quotation system.
The success of any futures transaction depends on Artisan Partners
correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, Artisan Partners might have taken portfolio actions in
anticipation of the same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or broker a specified amount of cash
or U.S. Government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is generally
set by the exchange on which the contract is traded, although the margin
requirement may be modified during the term of the contract and the Fund's
broker may require margin deposits in excess of the minimum required by the
exchange. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract, which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in
value of the futures contract. This process is known as "marking-to-market."
Variation margin paid or received by the Fund does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker of
the amount one would owe the other if the futures contract had expired at the
close of the previous day. In computing daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the
B-9
<PAGE>
nature of the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other futures
positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund engaging
in the transaction realizes a capital gain, or if it is more, the Fund realizes
a capital loss. Conversely, if an offsetting sale price is more than the
original purchase price, the Fund engaging in the transaction realizes a
capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Risks Associated with Futures. There are several risks associated with the
use of futures contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. In trying to increase or reduce market exposure, there can be no
guarantee that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given
transaction not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in speculative market
demand for futures, futures options and the related securities, including
technical influences in futures and futures options trading and differences
between the securities market and the securities underlying the standard
contracts available for trading. For example, in the case of index futures
contracts, the composition of the index, including the issuers and the weighting
of each issue, may differ from the composition of the Fund's portfolio, and, in
the case of interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the futures contract
may differ from the financial instruments held in the Fund's portfolio. A
decision as to whether, when and how to use futures contracts involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock price
or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the
B-10
<PAGE>
position during the interval of inability to close, and would continue to be
required to meet margin requirements until the position is closed. In addition,
many of the contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Limitations on Options and Futures. If other options, futures contracts,
or futures options of types other than those described herein are traded in the
future, the Fund also may use those investment vehicles, provided the board of
directors determines that their use is consistent with the Fund's investment
objective.
The Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money," <F2>
would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) assets (including any margin) equal to the market value of such
contract. When writing a call option on a futures contract, the Fund similarly
will maintain with its custodian assets (including any margin) equal to the
amount by which such option is in-the-money until the option expires or is
closed out by the Fund.
The Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the Fund will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts that do not come
within the meaning and intent of Regulation 1.3(z), the aggregate initial margin
and premiums required to establish such positions will not exceed 5% of the fair
market value of the assets of the Fund, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into (in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount (as defined in Section 190.01(x) of the Commission Regulations) may be
excluded in computing such 5%).
<F2> A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
B-11
<PAGE>
As long as the Fund continues to sell its shares in certain states and
applicable state law or regulation so requires, the Fund's options and futures
transactions also will be subject to certain non-fundamental investment
restrictions set forth under "Investment Restrictions" in this statement of
additional information.
Taxation of Options and Futures. If the Fund exercises a call or put
option that it holds, the premium paid for the option is added to the cost basis
of the security purchased (call) or deducted from the proceeds of the security
sold (put). For cash settlement options and futures options exercised by the
Fund, the difference between the cash received at exercise and the premium paid,
plus other capitalized costs of the option, is a capital gain or loss.
If a call or put option written by the Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by the Fund, the difference between the cash
paid at exercise, plus other capitalized costs of the option, and the premium
received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Fund is in-the-money at the time it was
written and the security covering the option was held for more than the long-
term holding period prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The holding period
of the securities covering an in-the-money option will not include the period of
time the option is outstanding.
If the Fund writes an equity call option <F3> other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on
such option transaction, to the extent it does not exceed the unrealized
gains on the securities covering the option, may be subject to deferral until
the securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into, plus other capitalized costs of the option, and the settlement
price on the earlier of delivery notice date or expiration date. If the Fund
delivers securities under a futures contract, the Fund also realizes a capital
gain or loss on those securities.
For Federal income tax purposes, the Fund generally is required to
recognize for each taxable year its net unrealized gains and losses as of the
end of the year on futures, and non-equity options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized
<F3> An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index
of stocks of the type that is ineligible to be traded on a commodity
futures exchange (e.g., an option contract on a sub-index based on the
price of nine hotel-casino stocks). The definition of equity option
excludes options on broad-based stock indexes (such as the Standard &
Poor's 500 index).
B-12
<PAGE>
with respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case
of positions classified as part of a "mixed straddle," the recognition of losses
on certain positions (including options, futures and futures options positions,
the related securities and certain successor positions thereto) may be deferred
to a later taxable year. Sale of futures contracts or writing of call options
(or futures call options) or buying put options (or futures put options) that
are intended to hedge against a change in the value of securities held by the
Fund may affect the holding period of the hedged securities.
If the Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for Federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property.
These changes generally apply to constructive sales after June 8, 1997.
Furthermore, the Secretary of the Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that have
substantially the same effect as short sales, offsetting notional principal
contracts, and futures or forward contracts to deliver the same or substantially
similar property.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). Any net gain realized from
futures (or futures options) contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In addition, for tax years beginning before August 5, 1997, gains
realized on the sale or other disposition of securities held less than three
months must be less than 30% of the Fund's annual gross income. In order to
avoid realizing excessive gains on securities held less than three months, the
Fund may be required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so.
The Fund intends to distribute to shareholders annually any capital gains
that have been recognized for Federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions, together with gains
on other Fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the Fund. Shareholders will be
advised of the nature of such capital gain distributions.
B-13
<PAGE>
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on the Fund or an investor.
Investors are urged to consult their own tax advisers for a complete review of
the tax ramifications of an investment in the Fund.
RULE 144A SECURITIES
The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the 1933 Act ("Rule
144A securities'). That Rule permits certain qualified institutional buyers,
including investment companies that own and invest at least $100 million in
securities, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. Artisan Partners, under the supervision
of the board of directors, will consider whether Rule 144A securities are
illiquid and thus subject to the Fund's restriction of investing no more than
10% of its net assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, Artisan Partners will consider the trading markets for the
specific security, taking into account the unregistered nature of a Rule 144A
security. In addition, Artisan Partners could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, Artisan
Partners determined that a Rule 144A security is no longer liquid, the Fund's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Fund does not invest more than 10% of its
assets in illiquid securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (3) under "Investment Restrictions" in this
statement of additional information, the Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and also would receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities if, in
Artisan Partners' judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to
B-14
<PAGE>
income during this period, and (c) expenses of enforcing its rights. The Fund
does not currently intend to loan more than 5% of its net assets.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date, and
market rate of interest unrelated to the coupon rate or maturity of the
purchased security. Although repurchase agreements carry certain risks not
associated with direct investments in securities, the Fund will enter into
repurchase agreements only with banks and dealers believed by Artisan Partners
to present minimum credit risks in accordance with guidelines approved by the
board of trustees. Artisan Partners will review and monitor the
creditworthiness of such institutions, and will consider the capitalization of
the institution, Artisan Partners' prior dealings with the institution, any
rating of the institution's senior long-term debt by independent rating
agencies, and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
Fund's ability to sell the collateral and the Fund could suffer a loss.
However, with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if Artisan Partners deems it advisable for investment reasons.
The Fund does not currently intend to have commitments to purchase when-issued
securities in excess of 5% of its net assets.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
However, reverse repurchase agreements will be treated as borrowing and subject
to the Artisan Funds' fundamental limitation on borrowing.
B-15
<PAGE>
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued or delayed-delivery basis or enters into a reverse
repurchase agreement, assets of the Fund having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Fund and held by the custodian throughout the period of the obligation.
The use of these investment strategies, as well as borrowing under a line of
credit as described below, may increase net asset value fluctuation.
SHORT SALES
The Fund may make short sales "against the box." In a short sale, the
Fund sells a borrowed security and is required to return the identical security
to the lender. A short sale "against the box" involves the sale of a security
with respect to which the Fund already owns an equivalent security in kind and
amount. A short sale "against the box" enables the Fund to obtain the current
market price of a security which it desires to sell but is unavailable for
settlement. The Fund does not currently intend to have commitments to make
short sales "against the box" in excess of 5% of its net assets.
LINE OF CREDIT
Artisan Funds maintains a line of credit with a bank in order to permit
borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation of
portfolio securities. Any borrowings under that line of credit by the Fund
would be subject to restriction (4) under "Investment Restrictions" in this
statement of additional information.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. At times, the Fund may invest for short-term capital
appreciation. Portfolio turnover can occur for a number of reasons such as
general conditions in the securities markets, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. Because of the Fund's
flexibility of investment and emphasis on growth of capital, it may have greater
portfolio turnover than that of mutual funds that have primary objectives of
income or maintenance of a balanced investment position. The future turnover
rate may vary greatly from year to year. A high rate of portfolio turnover in
the Fund, if it should occur, would result in increased transaction expense,
which must be borne by the Fund. High portfolio turnover also may result in the
realization of capital gains or losses and, to the extent net short-term capital
gains are realized, any distributions resulting from such gains will be
considered ordinary income for Federal income tax purposes. (See "Dividends,
Capital Gains, and Taxes" in the prospectus, and "Additional Tax Information"
in this statement of additional information.)
B-16
<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
Artisan Funds has adopted the following investment restrictions which may
not be changed without the approval of the Fund's shareholders, under which the
Fund may not:
(1) act as an underwriter of securities, except insofar as it may be deemed an
underwriter for purposes of the Securities Act of 1933 on disposition of
securities acquired subject to legal or contractual restrictions on resale;
(2) purchase or sell real estate (although it may purchase securities secured
by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein), commodities, or
commodity contracts, except that it may enter into (a) futures and options
on futures and (b) forward contracts;
(3) make loans, but this restriction shall not prevent the Fund from (a) buying
a part of an issue of bonds, debentures, or other obligations which are
publicly distributed, or from investing up to an aggregate of 15% of its
total assets (taken at market value at the time of each purchase) in parts
of issues of bonds, debentures or other obligations of a type privately
placed with financial institutions, (b) investing in repurchase agreements,
or (c) lending portfolio securities, provided that it may not lend
securities if, as a result, the aggregate value of all securities loaned
would exceed 33% of its total assets (taken at market value at the time of
such loan);
(4) borrow (including entering into reverse repurchase agreements), except that
it may (a) borrow up to 33 1/3% of its total assets, taken at market value
at the time of such borrowing, as a temporary measure for extraordinary or
emergency purposes, but not to increase portfolio income and (b) enter into
transactions in options, futures, and options on futures; <F4>
(5) invest in a security if more than 25% of its total assets (taken at market
value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(6) issue any senior security except to the extent permitted under the
Investment Company Act of 1940;
(7) with respect to 75% of its total assets, invest more than 5% of its total
assets, taken at market value at the time of a particular purchase, in the
securities of a single issuer, except for securities issued or guaranteed
by the Government of the U.S. or any of its agencies or instrumentalities
or repurchase agreements for such securities;
<F4> The Fund will not purchase securities when total borrowings by the Fund are
greater than 5% of its net asset value.
B-17
<PAGE>
(8) acquire more than 10%, taken at the time of a particular purchase, of the
outstanding voting securities of any one issuer.
The Fund's investment objective is not a fundamental restriction and,
therefore, a change in the objective is not subject to shareholder approval.
However, investors in the Fund will receive written notification at least 30
days' prior to any change in the Fund's investment objective.
NON-FUNDAMENTAL RESTRICTIONS
The Fund also is subject to the following non-fundamental restrictions and
policies, which may be changed by the board of directors:
(a) invest in companies for the purpose of exercising control or management;
(b) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of the
Fund's total assets (valued at time of purchase) in the case of any one
other investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the aggregate;
any such purchases are to be made in the open market where no profit to a
sponsor or dealer results from the purchase, other than the customary
broker's commission, except for securities acquired as part of a merger,
consolidation, acquisition or reorganization;
(c) invest more than 25% of its total assets (valued at time of purchase) in
securities of foreign issuers;
(d) purchase securities on margin (except for use of short-term credits as are
necessary for the clearance of transactions), or sell securities short
unless (i) the Fund owns or has the right to obtain securities equivalent
in kind and amount to those sold short at no added cost or (ii) the
securities sold are "when issued" or "when distributed" securities which
the Fund expects to receive in recapitalization, reorganization, or other
exchange for securities the Fund contemporaneously owns or has the right to
obtain and provided that transactions in options, futures, and options on
futures are not treated as short sales; or
(e) invest more than 10% of its net assets (taken at market value at the time
of each purchase) in illiquid securities, including repurchase agreements
maturing in more than seven days.
(f) under normal market conditions, invest less than 65% of its total assets in
securities of issuers having aggregate common stock market capitalizations
within the range of the aggregate common stock market capitalizations of
issuers included in the S&P MidCap 400 Index, in each case at the time of
investment.
B-18
<PAGE>
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total
Return" for a period is the percentage change in value during the period of an
investment in shares of a fund, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return' is the average annual compounded rate of change in value
represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(l+T)n
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by the Fund
are not necessarily indicative of future results. The Fund's performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing the Fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the performance of the Fund may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, other accounts or
partnerships managed by Artisan Partners Limited Partners, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or accounts differs
from that of the Fund. Comparison of the Fund to an alternative investment
should consider differences in features and expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Fund generally believes to be
accurate. The Fund also may note its mention (including performance or other
comparative rankings) in newspapers, magazines, or other media from time to
time. However, the Fund assumes no responsibility for the accuracy of such
data. Newspapers and magazines and other media which might mention the Fund
include, but are not limited to, the following:
B-19
<PAGE>
Atlanta Constitution Mutual Fund Letter
Barron's Mutual Fund News Service
Boston Herald Mutual Fund Values
Business Week Morningstar Publications
Chicago Tribune Newsweek
Chicago Sun-Times The New York Times
Cleveland Plain Dealer No-Load Fund Investor
CNBC Outstanding Investor Digest
CNN Pension World
Crain's Chicago Pensions and Investments
Business Personal Investor
Consumer Reports Jane Bryant Quinn
Consumer Digest (syndicated column)
Financial World Louis Rukeyser's Mutual Fund
Forbes The San Francisco Chronicle
Fortune Smart Money
Fund Action Stranger's Investment Adviser
Investor's Business Daily 13D Opportunities Report
Kiplinger's Personal Time
Finance Magazine United Mutual Fund Selector
Knight-Ridder USA Today
Los Angeles Times U.S. News and World Report
Milwaukee Business Journal The Wall Street Journal
Milwaukee Journal Sentinel Working Woman
Money Worth
Your Money
When a newspaper, magazine or other publication mentions the Fund, such
mention may include: (i) listings of some or all of the Fund's holdings, (ii)
descriptions of characteristics of some or all of the securities held by the
Fund, including price-earnings ratios, earnings, growth rates and other
statistical information, and comparisons of that information to similar
statistics for the securities comprising any of the indexes or averages listed
above; and (iii) descriptions of the Fund's or a portfolio manager's economic
and market outlook, generally and for the Fund.
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Fund may be compared to the following indexes or
averages:
B-20
<PAGE>
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Russell 2000 Small Stock Index American Stock Exchange Composite Index
Russell Mid-Cap Stock Index NASDAQ Composite
Russell Mid-Cap Growth Index NASDAQ Industrials
Standard & Poor's 500 Stock Index
Standard & Poor's 400 Industrials
Standard & Poor's Mid-Cap 400 Index (These indexes generally reflect the
Standard & Poor's Mid-Cap Growth Index performance of stocks traded in the
Wilshire 5000 indicated markets.)
Wilshire 4500
Wilshire 4000
Wilshire Small-Cap Index
(These indexes are widely
recognized indicators of general
U.S. stock market results.)
The performance of the Fund also may be compared to the following mutual
fund industry indexes or averages: Value Line Index; Lipper Capital
Appreciation Fund Average; Lipper Growth Funds Average; Lipper Small Company
Growth Funds Average; Lipper General Equity Funds Average; Lipper Equity Funds
Average; Lipper Small Company Growth Fund Index; ICD Aggressive Growth and Long
Term Growth Funds Average; ICD Aggressive Growth Fund Large Index; ICD
Aggressive Growth Fund Small Index; ICD Aggressive Growth Funds Average; ICD All
Equity Funds Average; Morningstar Growth Average; Morningstar Small-Cap Funds
Average; Morningstar Aggressive Growth Average; Morningstar U.S. Diversified
Average; Morningstar Equity Fund Average; Morningstar Hybrid Fund Average;
Morningstar All Equity Funds Average; and Morningstar General Equity Average.
The ICD Indexes reflect the unweighted average total return of the largest
twenty four funds within their respective category as calculated and published
by ICD.
The Lipper Small Company Growth Fund Index reflects the net asset value
weighted total return of the largest thirty growth funds as calculated and
published by Lipper Analytical Services, Inc. ("Lipper"), an independent
service that monitors the performance of more than 1,000 funds.
The Lipper, ICD and Morningstar averages are unweighted averages of total
return performance of mutual funds as classified, calculated and published by
these independent services that monitor the performance of mutual funds. The
Fund also may use comparative performance as computed in a ranking by Lipper or
category averages and rankings provided by another independent service. Should
Lipper or another service reclassify the Fund to a different category or develop
(and place the Fund into) a new category, the Fund may compare its performance
or ranking against other funds in the newly assigned category, as published by
the service. The Fund may compare its performance or ranking against all funds
tracked by Lipper or another independent service.
The Fund may cite its rating, recognition or other mention by Morningstar,
Inc. ("Morningstar") or any other entity. Morningstar proprietary ratings
reflect historical risk-
B-21
<PAGE>
adjusted performance as of the date indicated. The ratings are subject to
change every month. Morningstar ratings are calculated from the fund's
three-, five-, and ten-year average annual returns in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects fund performance below 90-day T-bill returns. Ten percent of the
funds in an investment category receive five stars, 22.5% receive four stars,
35% receive three stars, 22.5% receive two stars, and 10% receive one star. A
high rating reflects either above-average returns or below-average risk, or
both.
To illustrate the historical returns on various types of financial assets,
the Fund may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for example,
total return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types: common
stocks, small company stocks, long-term corporate bonds, long-term government
bonds, intermediate-term government bonds, U.S. Treasury bills and Consumer
Price Index. The Fund also may use historical data compiled by Prudential
Securities, Inc., or by other similar sources believed by the Fund to be
accurate, illustrating the past performance of small-capitalization stocks,
large-capitalization stocks, common stocks, equity securities, growth stocks
(small-capitalization, large-capitalization, or both) and value stocks (small-
capitalization, large-capitalization, or both).
DIRECTORS AND OFFICERS
Directors and officers of Artisan Funds, their dates of birth and their
principal business occupations during at least the last five (5) years, are
shown below. Directors deemed to be "interested persons" of Artisan Funds
for purposes of the 1940 Act are indicated with an asterisk.
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS
BIRTH WITH REGISTRANT DURING THE PAST 5 YEARS
- ---------------- --------------- --------------------------------
Andrew A. Ziegler Director, Chairman of Managing Director of Artisan
10/7/57 the Board and Chief Partners; prior to founding
Executive Officer Artisan Partners, president and
chief operating officer of
Strong/Corneliuson Capital
Management ("Strong") and
president of the Strong Funds
from 1990 to 1994; prior thereto,
attorney with the law firm of
Godfrey & Kahn, S.C., Milwaukee,
WI.
B-22
<PAGE>
NAME AND DATE OF POSITIONS HELD PRINCIPAL OCCUPATIONS
BIRTH WITH REGISTRANT DURING THE PAST 5 YEARS
- ---------------- --------------- ----------------------------------
Carlene Murphy Director and President Managing Director of Artisan
Ziegler Partners; co-portfolio manager,
6/20/56 Artisan Small Cap Fund; prior to
founding Artisan Partners, a co-
portfolio manager of the Strong
Common Stock Fund, Strong
Opportunity Fund and numerous
institutional small-
capitalization equity portfolios
at Strong since March 1991; prior
thereto, a co-portfolio manager
of the Stein Roe Special Fund.
David A. Erne Director Partner of the law firm Reinhart,
5/6/43 Boerner, Van Deuren, Norris &
Rieselbach, S.C., Milwaukee, WI.
Thomas R. Hefty Director President of United Wisconsin
6/9/47 Services, Inc. (a provider of
managed care and specialty
business services) since 1986 and
chairman of the board and chief
executive officer since 1991; and
chairman of the board of Blue
Cross & Blue Shield United of
Wisconsin (parent company of
United Wisconsin Services, Inc.)
since 1988 and president since
1982.
Howard B. Witt Director President and chief executive
5/17/40 officer of Littelfuse, Inc. (a
manufacturer of advanced circuit
protection devices) since 1990 and
chairman of the board of
Littelfuse since 1993; prior
thereto executive vice president
of Littelfuse; and director of
Franklin Electric Co., Inc. (a
manufacturer of electronic motors)
since 1994.
John M. Blaser Chief Financial Chief financial officer of Artisan
11/2/57 Officer, Treasurer and Partners; prior to joining Artisan
Secretary Partners, senior vice president
with Kemper Securities, Inc. since
1993; prior thereto, with Price
Waterhouse.
Mark L. Yockey Vice President Portfolio manager, Artisan
6/5/56 International Fund; prior to
joining Artisan Partners,
portfolio manager of the United
International Growth Fund and vice
president of Waddell & Reed
(investment management firm) since
January 1990; prior thereto,
equity analyst for Waddell & Reed.
Sandra Jean Voss- Vice President Equity trader for Artisan
Reinhardt Partners; prior to joining Artisan
3/6/64 Partners, equity trader with
Northwestern Mutual since January
1989, prior thereto, sales
associate with Dean Witter
Reynolds.
B-23
<PAGE>
Millie Adams Vice President Co-portfolio manager of the Fund
Hurwitz since August 1996; senior
12/16/62 analyst of Artisan Partners'
small capitalization equity
products since February 1995;
prior to joining Artisan
Partners, co-portfolio manager at
Stein Roe & Farnham Incorporated
from 1992 until 1995, and an
analyst with OLC Corporation from
1989 to 1991.
Scott C. Vice President Portfolio manager, Artisan Small
Satterwhite Cap Value Fund; prior to joining
7/15/57 Artisan Partners in June 1997,
portfolio manager of the Biltmore
Special Values Fund from August
1, 1993 through May 31, 1997 and
Senior Vice President and Manager
of Personal Trust Portfolio
Management for the Personal
Financial Services Group of
Wachovia Bank of North Carolina,
N.A.
Andrew C. Stephens Vice President Portfolio manager, Artisan Mid
10/31/63 Cap Fund; co-manager of Strong
Asset Allocation Fund at Strong,
February 1993 through March 1997,
and senior research analyst for
Strong Common Stock Fund and
Strong Opportunity Fund,
September 1994 through March
1996; prior to February 1933,
head trader, Strong.
The business address of the officers and directors affiliated with Artisan
Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin 53202.
The addresses of the other directors are: Mr. Erne - 1000 N. Water Street,
Milwaukee, Wisconsin 53202; Mr. Hefty - 401
B-24
<PAGE>
W. Michigan Street, Milwaukee,
Wisconsin 53203; and Mr. Witt - 800 E. Northwest Highway, Des Plaines, Illinois
60016.
Mr. Ziegler and Ms. Ziegler are married to each other.
Mr. Ziegler and Ms. Ziegler serve as members of the Executive Committee of
the Board of Directors. The Executive Committee, which meets between regular
meetings of the Board, is authorized to exercise all of the powers of the Board
of Directors.
The only compensation paid to directors and officers of Artisan Funds for
their services as such consists of an annual $5,000 retainer fee (per series of
Artisan Funds) paid to directors who are not interested persons of Artisan Funds
or Artisan Partners. Artisan Funds has no retirement or pension plans.
The following table sets forth compensation paid by the Fund and by Artisan
Funds, Inc. during the fiscal year ended June 30, 1997 to each of the directors
of the Fund.
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED ANNUAL FROM ARTISAN MID
COMPENSATION AS PART OF BENEFITS CAP FUND AND FUND
FROM ARTISAN FUND ESTIMATED COMPLEX
NAME OF DIRECTOR MID CAP FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- ---------------- ------------ -------- ---------- -----------------
Andrew A. Ziegler $ 0 $ 0 $ 0 $ 0
Carlene Murphy Ziegler 0 0 0 0
David A. Erne 0 0 0 10,000
Thomas R. Hefty 0 0 0 10,000
Howard B. Witt 0 0 0 10,000
On September 30, 1997, the officers and directors of Artisan Funds as a
group owned less than 1% of the outstanding shares of the Fund and less than 1%
of the outstanding shares of Artisan Funds.
PRINCIPAL SHAREHOLDERS
No person was known by Artisan Funds to own of record or beneficially 5% or
more of the outstanding shares of the Fund at September 30, 1997 except for
persons acting as nominees for their clients, without the power to vote or
dispose of Fund shares.
INVESTMENT ADVISORY SERVICES
Artisan Partners Limited Partnership ("Artisan Partners") provides
investment advisory services to the Fund pursuant to an Investment Advisory
Agreement dated April 30, 1997 (the "Advisory Agreement"). Artisan Partners
is a Delaware limited partnership. Artisan Investment Corporation was
incorporated on December 7, 1994 for the sole purpose of acting as general
partner of Artisan Partners. Mr. Ziegler and Ms. Ziegler, as officers of
Artisan Investment Corporation, manage Artisan Partners. The principal address
of Artisan Partners is 1000 North Water Street, Suite 1770, Milwaukee, Wisconsin
53202. Artisan Partners also has offices at 100
B-25
<PAGE>
Pine Street, Suite 3250, San Francisco, California and Five Concourse Parkway,
Suite 2120, Atlanta, Georgia 30328.
In return for its services, the Fund pays Artisan Partners a monthly fee at
the annual rate of 1% of the Fund's average daily net assets up to $500 million;
.975 of 1% of average daily net assets from $500 million up to $750 million;
.950 of 1% of average daily net assets from $750 million to $1 billion; and .925
of 1% of average daily net assets over $1 billion. Artisan Partners has
undertaken to reimburse the Fund for any ordinary operating expenses in excess
of 2.0% of average net assets over each fiscal year. For the period from June
28, 1997 (commencement of operations) through June 30, 1997, the Fund made no
advisory fee payments to Artisan Partners.
The Advisory Agreement provides that Artisan Partners shall not be liable
for any loss suffered by the Fund or its shareholders as a consequence of any
act or omission in connection with investment advisory or portfolio services
under the agreement, except by reason of willful misfeasance, bad faith or gross
negligence on the part of Artisan Partners in the performance of its duties or
from reckless disregard by Artisan Partners of its obligations and duties under
the Advisory Agreement.
The Advisory Agreement may be continued from year to year only so long as
the continuance is approved annually (a) by the vote of a majority of the
directors of the Fund who are not "interested persons" of the Fund or Artisan
Partners cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the board of directors or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the portfolio. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
PORTFOLIO TRANSACTIONS
Artisan Partners places the orders for the purchase and sale of the Fund's
portfolio securities and options and futures contracts. Artisan Partners'
overriding objective in effecting portfolio transactions is to seek to obtain
the best combination of price and execution. The best net price, giving effect
to brokerage commissions, if any, and other transaction costs, normally is an
important factor in this decision, but a number of other judgmental factors also
may enter into the decision. These include: Artisan Partners' knowledge of
negotiated commission rates currently available and other current transaction
costs; the nature of the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected in the market
for the particular security; confidentiality; the execution, clearance and
settlement capabilities of the broker or dealer selected and others which are
considered; Artisan Partners' knowledge of the financial stability of the broker
or dealer selected and such other problems of any broker or dealer. Recognizing
the value of these factors, the Fund may pay a brokerage commission in excess of
that which another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of brokerage commissions, based
on the foregoing factors, are made on an ongoing basis by Artisan Partners'
staff while effecting portfolio transactions. The general level of brokerage
commissions paid is reviewed by Artisan Partners, and reports are made annually
to the board of directors.
B-26
With respect to issues of securities involving brokerage commissions, when
more than one broker or dealer is believed to be capable of providing the best
combination of price and execution with respect to a particular portfolio
transaction for the Fund, Artisan Partners often selects a broker or dealer that
has furnished it with research products or services such as research reports,
subscriptions to financial publications and research compilations, compilations
of securities prices, earnings, dividends, and similar data, and computer data
bases, quotation equipment and services, research-oriented computer software and
services, and services of economic and other consultants. Selection of brokers
or dealers is not made pursuant to an agreement or understanding with any of the
brokers or dealers; however, Artisan Partners uses internal allocation
procedures to identify those brokers or dealers who provide it with research
products or services and the amount of research products or services they
provide, and endeavors to direct sufficient commissions generated by its
clients' accounts in the aggregate, including the Fund, to such brokers or
dealers to ensure the continued receipt of research products or services
Artisan Partners feels are useful. In certain instances, Artisan Partners
receives from brokers and dealers products or services that are used both as
investment research and for administrative, marketing, or other non-research
purposes. In such instances, Artisan Partners makes a good faith effort to
determine the relative proportions of such products or services which may be
considered as investment research. The portion of the costs of such products
or services attributable to research usage may be defrayed by Artisan Partners
(without prior agreement or understanding, as noted above) through brokerage
commissions generated by transactions by clients (including the Fund), while
the portions of the costs attributable to non-research usage of such products
or services is paid by Artisan Partners in cash. No person acting on behalf
of the Fund is authorized, in recognition of the value of research products
or services, to pay a commission in excess of that which another broker or
dealer might have charged for effecting the same transaction. Research
products or services furnished by brokers and dealers may be used in servicing
any or all of the clients of Artisan Partners and not all such research
products or services are used in connection with the management of the Fund.
With respect to the Fund's purchases and sales of portfolio securities
transacted with a broker or dealer of a net basis, Artisan Partners also may
consider the part, if any, played by the broker or dealer in bringing the
security involved to Artisan Partners' attention, including investment research
related to the security and provided to the Fund. For the period from June 28,
1997 (commencement of operations) through June 30, 1997, there were no purchases
or sales of portfolio securities.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the prospectus under the
headings "How to Buy Shares," and "How to Sell Shares." All of that
information is incorporated herein by reference.
Shares of the Fund may be purchased or redeemed through certain financial
services companies, some of which may charge a transaction fee. The Fund may
authorize from time to time certain financial services companies, broker-dealers
or their designees ("authorized agents") to accept share purchase and
redemption orders on the Fund's behalf. For purchase orders placed
B-27
<PAGE>
through an authorized agent, a shareholder will pay the Fund's NAV per share
(see "Net Asset Value," below), next computed after the receipt by the
authorized agent of such purchase order, plus any applicable transaction charge
imposed by the agent. For redemption orders placed through an authorized agent,
a shareholder will receive redemption proceeds which reflect the NAV per share
next computed after the receipt by the authorized agent of the redemption order,
less any redemption fees imposed by the agent.
In some instances, an authorized agent or other financial services company
may not charge any transaction fees directly to investors in the Fund. However,
accounting and shareholder servicing services provided by such a company with
respect to Fund shares held by that company for its customers, the company may
charge a fee of up to 0.35% of the annual average value of those accounts. The
Fund pays a portion of those fees not to exceed the estimated fees and expenses
that the Fund would pay to its own transfer agent if the shares of the
Fund held by such customers of the company were registered directly in their
names on the books of the Fund's transfer agent. The balance of those fees
is paid by Artisan Partners.
Net Asset Value. Share purchase and redemption orders will be priced at
the Fund's net asset value next computed after such orders are received and
accepted by: (i) the Fund; (ii) a broker-dealer or other financial services
company authorized by the Fund to accept purchase and redemption orders on the
Fund's behalf; or (iii) such authorized broker-dealer's designee. The net asset
value of the shares of the Fund is determined as of the close of regular session
trading on the New York Stock Exchange ("NYSE") (currently 3:00 p.m., Central
time) each day the NYSE is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in January, the
third Monday in February, Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving, and Christmas. If one of these holidays falls on a
Saturday or Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be determined on days
when the NYSE is closed unless, in the judgment of the board of directors, net
asset value of the Fund should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Central time. The net asset value per
share of the Fund is determined by dividing the value of all its securities and
other assets, less its liabilities, by the number of shares of the Fund
outstanding.
The Fund intends to pay all redemptions in cash and is obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
assets of the Fund during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly by a
distribution in kind of readily marketable securities. If redemptions were made
in kind, the redeeming shareholders might incur transaction costs in selling the
securities received in the redemptions.
The Fund reserves the right to suspend or postpone redemptions of its
shares during any period when: (a) trading on the NYSE is restricted, as
determined by the Commission, if the NYSE is closed for other than customary
weekend and holiday closings; (b) the Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Commission, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
B-28
<PAGE>
The Fund and Artisan Partners each have adopted a code of ethics that,
among other things, regulates the personal transactions in securities of certain
officers, directors, partners and employees of the Fund and Artisan Partners.
ADDITIONAL TAX INFORMATION
Artisan Funds intends for the Fund to continue to qualify as a "regulated
investment company' under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") and thus not be subject to federal income taxes on
amounts which it distributes to shareholders.
Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in the prior
calendar year is deemed paid in the prior calendar year.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gain. Distributions of mid-term capital
gains will be taxable to you as mid-term capital gains. Distributions of net
long-term capital gain will be taxable to you as long-term capital gain
regardless of the length of time you have held your shares.
You will be advised annually as to the source of distributions for tax
purposes. If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you realize a loss on the sale of Fund shares held for six months or
less, your short-term loss is recharacterized as long-term to the extent of any
long-term capital gain distributions you have received with respect to those
shares.
The Taxpayer Relief Act of 1997 reduced from 28% to 20% the maximum tax
rate on long-term capital gains. This reduced rate generally applies to
securities held more than 18 months and sold after July 28, 1997, and securities
held for more than one year and sold between May 6, 1997 and July 29, 1997.
The Fund may be required to withhold federal income tax ("backup
withholding") from certain payments to you, generally redemption proceeds.
Backup withholding may be required if:
- You fail to furnish your properly certified social security or other tax
identification number;
- You fail to certify that your tax identification number is correct or
that you are not subject to backup withholding due to the underreporting
of certain income;
- The IRS informs the Fund that your tax identification number is
incorrect.
These certifications are contained in the application that you complete
when you open your Fund account. The Fund must promptly pay the the IRS all
amounts withheld. Therefore,
B-29
<PAGE>
it is not usually possible for the Fund to reimburse you for amounts withheld.
You may, however, claim the amount withheld as a credit on your federal income
tax return.
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). In addition to
bearing their proportionate share of the Fund's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses of
PFICs. Capital gains on the sale of PFIC holdings will be deemed to be ordinary
income regardless of how long the Fund holds its investment. In addition, the
Fund may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from PFICs, regardless of whether such income
and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat securities in
PFICs as sold on the last day of the Fund's fiscal year and recognize any gains
for tax purposes at that time; losses will not be recognized. Such gains will
be considered ordinary income which the Fund will be required to distribute
even though it has not sold the security and received cash to pay such
distributions.
CUSTODIAN
State Street Bank & Trust Company ("State Street"), 1776 Heritage Drive,
North Quincy, MA 02171, acts as custodian of the securities and other assets of
the Fund. State Street is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, and collecting interest and dividends on the Fund's investments.
State Street also performs portfolio accounting services for the Fund. State
Street is not an affiliate of Artisan Partners or its affiliates. State Street
is authorized to deposit securities in securities depositories for the use of
services of sub-custodians.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
serves as the Fund's independent accountants, providing services including (i)
audit of the annual financial statements; (ii) assistance and consultation in
connection with Securities and Exchange Commission filings; and (iii) review of
the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
The 1997 annual report to shareholders of the Fund, a copy of which
accompanies this statement of additional information, contains financial
statements, notes thereto, supplementary information entitled "Financial
Highlights," and a report of independent accountants, all of which (but no
other part of the annual report) are incorporated herein by reference.
Additional copies of the annual report may be obtained from Artisan Funds at no
charge by writing or telephoning Artisan Funds at the address or telephone
number on the cover page of this statement of additional information.
B-30
<PAGE>
