ARTISAN FUNDS, INC.
ARTISAN SMALL CAP FUND
ARTISAN INTERNATIONAL FUND
ARTISAN MID CAP FUND
ARTISAN SMALL CAP VALUE FUND
1000 North Water Street, Suite 1770
Milwaukee, Wisconsin 53202
(414) 390-6100 (800) 344-1770
STATEMENT OF ADDITIONAL INFORMATION
October 30, 1998
Supplemented April 2, 1999
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Artisan Small Cap Fund, Artisan International Fund, Artisan Mid Cap Fund
and Artisan Small Cap Value Fund (each, a "Fund," together, the "Funds") are
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 Funds dated October 30, 1998 and any supplement to the
prospectus. Copies of the 1998 annual report to shareholders of Artisan Funds
and the separate annual report for Artisan International Institutional Shares
accompany this Statement of Additional Information. Each report 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.
A copy of the prospectus and additional copies of the annual reports can be
obtained without charge by calling (800) 344-1770 or writing to Artisan Funds.
TABLE OF CONTENTS
Page
Information about the Funds and Artisan Partners.......B-2
Investment Objective and Policies......................B-2
Investment Techniques and Risks........................B-3
Investment Restrictions................................B-17
Performance Information................................B-20
Organization...........................................B-25
Directors and Officers.................................B-27
Principal Shareholders.................................B-30
Investment Advisory Services...........................B-31
Distributor............................................B-32
Portfolio Transactions.................................B-32
Purchasing and Redeeming Shares........................B-33
Additional Tax Information.............................B-35
Custodian..............................................B-36
Independent Accountants................................B-37
Financial Statements...................................B-37
Appendix - Description of Bond Ratings.................B-39
INFORMATION ABOUT THE FUNDS AND ARTISAN PARTNERS
Each Fund is a series of Artisan Funds, Inc. ("Artisan Funds"). Artisan
Partners Limited Partnership ("Artisan Partners") provides investment advisory
services to the Funds.
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. 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
that belief.
The discussion below supplements the description in the prospectus of each
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 $1.5 billion.
Artisan International Fund seeks to achieve its objective of long-term
capital growth by investing primarily in the stocks of foreign companies.
Artisan International Fund offers two classes of shares: Artisan International
Shares ("International Shares") and Artisan International Institutional Shares
("Institutional Shares"). As described more fully in the prospectus,
Institutional Shares are offered to certain institutional investors with a
minimum initial investment of $2 million.
Artisan Mid Cap Fund seeks long-term capital growth by investing 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 400 Index (the "MidCap Index"). As of October 15, 1998, the MidCap Index
included companies with capitalizations between approximately $260 million and
$24 billion. The market capitalization range in which Artisan Mid Cap Fund
invests will change as the range of the companies included in the MidCap Index
changes.
Artisan Small Cap Value Fund seeks long-term capital growth by investing
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
$1.5 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.
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Because Artisan Small Cap Value 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.
* 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, Artisan Small Cap Value Fund
attempts to manage portfolio risk by diversifying its holdings to avoid
concentration in any one stock or industry sector.
The Funds invest primarily in equity securities, including common and
preferred stocks, warrants or other similar rights, and convertible securities.
While Artisan International Fund invests mostly in the securities of foreign
issuers, each other Artisan Fund may from time to time have significant
portions of its portfolio invested in foreign securities. The Funds also may
invest in any other type of security, including debt securities.
The investment objective of each 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.
INVESTMENT TECHNIQUES AND RISKS
Foreign Securities
Each Fund may invest up to 25% of its total assets in foreign securities
(including American Depository Receipts ("ADRs") European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), or other securities representing
underlying shares of foreign issuers) , 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. Under normal market conditions, Artisan International Fund invests at
least 65% of its total assets in foreign securities. ADRs are receipts
typically issued by an American bank or trust company evidencing ownership of
the underlying securities. EDRs are European receipts evidencing a similar
arrangement. GDRs are receipts that may trade in U.S. or non-U.S. markets.
The Funds may invest in sponsored or unsponsored ADRs, EDRs or GDRs. In the
case of an unsponsored depositary receipt, a Fund is likely to bear its
proportionate share of the expenses of the depository and it may have greater
difficulty in receiving shareholder
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communications than it would have with a sponsored depositary receipt. No
Fund intends to invest more than 5% of its net assets in unsponsored depositary
receipts.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, a 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 Funds 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, a 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 Funds 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, each Fund may invest up to 35% of its net assets in
debt securities that are rated below investment grade. No Fund currently
intends to invest more than 5% of its net assets in securities rated below
investment grade.
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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 a 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
Each Fund intends to be substantially fully invested in equity securities
in ordinary circumstances, although a Fund may invest without limit in
corporate or government obligations (U.S. or non-U.S., in the case of Artisan
International Fund) or hold cash or cash equivalents if Artisan Partners
determines that a temporary defensive position is advisable. During those
periods, a Fund's assets may not be invested in accordance with its strategy
and the Fund may not achieve its investment objective.
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). The estimated price at which a
convertible security would be valued by the marketplace if it had no conversion
feature 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, a 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 a 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
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(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 Funds may use various techniques to increase or decrease their exposure
to the effects of possible changes in security prices, currency exchange rates
or other factors that affect the value of their portfolios. 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 a Fund's portfolio. If Artisan Partners judges market
conditions incorrectly or employs a strategy that does not correlate well with a
particular 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 that Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. These
techniques are used by the Funds 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 at a 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 a 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 a Fund accruing in connection with the purchase and sale of its
portfolio securities or income receivables. Portfolio hedging is the use of
forward contracts with respect to portfolio security positions denominated or
quoted in a particular currency. Portfolio hedging allows a 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. A 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
B-6
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 portfolio of a particular Fund. The Funds may not
engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency, a
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 a 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 a 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 a 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 Funds may purchase and write (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 Funds may purchase
agreements, sometimes called cash puts, that may accompany the purchase of a new
issue of bonds from a dealer.
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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 a 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 a 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 a 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 a Fund desires.
A 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 a 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
B-8
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
unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a 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
a 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, a 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 a 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 Funds 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 Funds 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. A 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.
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<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.
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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 Funds 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, a 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 a 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. Each Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by a 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 a 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, each Fund will mark-to-market its open futures
positions.
Each 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 that 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.
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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 a 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 a 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 a
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, a Fund also may use those investment vehicles, provided the board of
directors determines that their use is consistent with that Fund's investment
objective.
A 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
B-11
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, a 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, a 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 a 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," each 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 each 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 a 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 a 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 a 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 a 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 a 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
- ------------------
<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
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 a 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 a Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For federal income tax purposes, a 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 a Fund may affect
the holding period of the hedged securities.
If a 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 or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) to deliver the
same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property.
Furthermore, the Secretary of the Treasury is authorized to
- ------------------
<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-13
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 each 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.
Each Fund intends to distribute to shareholders at least 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 a Fund.
Shareholders will be advised of the nature of such capital gain distributions.
Rule 144A Securities
The Funds 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 each 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, a 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 a 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, each 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.
B-14
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. No Fund currently
intends to loan more than 5% of its net assets.
Repurchase Agreements
Repurchase agreements are transactions in which a 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, a 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
directors. 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.
A 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, each 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
Each Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at a 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. A 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.
No Fund currently intends to have commitments to purchase when-issued securities
in excess of 5% of its net assets.
B-15
A Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which a 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 a 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
Each Fund may make short sales "against the box." In a short sale, a 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 a Fund to obtain the current
market price of a security which it desires to sell but is unavailable for
settlement. No Fund currently intends 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 a Fund would
be subject to restriction (4) under "Investment Restrictions" in this Statement
of Additional Information.
Portfolio Turnover
Although the Funds do 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 Funds 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 each 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. For the years ended
June 30, 1998 and 1997, each Fund's portfolio turnover rates were as follows:
Artisan Small Cap Fund, 134.67% and 87.18%; Artisan International Fund, 109.42%
and 103.66%; and Artisan Mid Cap Fund, 235.65% and 0.00% (for the period from
commencement of operations on June 27, 1997 through June 30, 1997). From
commencement of operations on September 29, 1997 through
B-16
June 30, 1998 Artisan Small Cap Value Fund's portfolio turnover rate was 52.58%.
The future turnover rate may vary greatly from year to year. A high rate of
portfolio turnover in the Funds, if it should occur, would result in increased
transaction costs, which must be borne by that 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 lesser of (i) 67% of each Fund's
shares present at a meeting if more than 50% of the shares outstanding are
present or (ii) more than 50% of each Fund's outstanding shares, under which a
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 a 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;4
(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
- ------------------
<F4> A Fund will not purchase securities when total borrowings by the Fund are
greater than 5% of its net asset value.
B-17
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
U.S. Government 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.
A 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 a Fund will receive written notification at least 30 days'
prior to any change in that Fund's investment objective.
Non-Fundamental Restrictions
The Funds also are 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 a Fund are offered for sale. It is expected that certain of
the following restrictions, with respect to Artisan Small Cap Fund and Artisan
International Fund, (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. A 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
[Artisan Small Cap Fund and Artisan International Fund only];
(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;
B-18
(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 [Artisan Small Cap Fund and Artisan International
Fund only];
(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) [Artisan Small Cap
Fund and Artisan International Fund only];
(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 [Artisan Small Cap Fund and Artisan International Fund
only];
(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 [Artisan Small Cap Fund and Artisan
International Fund only];
(h) invest more than 25% of its total assets (valued at time of purchase) in
securities of foreign issuers [Artisan Small Cap Fund, Artisan Mid Cap Fund and
Artisan Small Cap Value Fund only];
(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
[Artisan Small Cap Fund and Artisan International Fund only];
(j) purchase a put or call option if the aggregate premiums paid for all put
and call options exceed (i) 20% of its net assets [for Artisan Small Cap Fund
only] or (ii) 5% of its net assets [for Artisan International Fund only] (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 [Artisan Small Cap Fund and Artisan International Fund only];
(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
B-19
(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.
(n) 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 [Artisan Mid Cap Fund only]; or
(o) 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 $1.5 billion, in each case taken at the time of investment,
approval of the lesser of (i) 67% of each fund's shares present at a meeting if
more than 50% of the shares outstanding are present or (ii) more than 50% of
each fund's outstanding shares [Artisan Small Cap Value Fund only].
PERFORMANCE INFORMATION
From time to time the Funds 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:
n
ERV = P(l+T)
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-20
Each Fund's Total Return and Average Annual Total Return for various periods
ended June 30, 1998 is shown below:
Artisan Small Cap Fund
- ----------------------
Average Annual
Total Return Total Return
------------ --------------
1 year 14.73% 14.73%
Life of Fund<F1> 88.83% 21.51%
---------------------------
<F1> from March 28, 1995 (commencement of operations)
Artisan International Fund
- --------------------------
International Shares
--------------------
Average Annual
Total Return Total Return
------------ --------------
1 year 24.12% 24.12%
Life of Fund<F1> 81.31% 26.76%
---------------------------
<F1> from December 28, 1995 (commencement of operations)
Institutional Shares
--------------------
Average Annual
Total Return Total Return
------------ --------------
1 year 24.40% 24.40%
Life of Class<F1> 24.40% 24.40%
---------------------------
<F1> from the date the class was first offered for sale (July 1, 1997)
Total Return and Average Annual Total Return of Institutional Shares are
calculated in the same way as for International Shares. The performance of
Institutional Shares is different from the performance of International Shares
because the expenses allocated to the classes are 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. If you were a shareholder of
International Shares prior to July 1, 1997, and your shares were transferred to
Institutional Shares, the total return and average annual total return shown
above for 1 year would have been 24.40%, and the total return and average annual
total return for the life of the Fund would have been 81.71% and 26.87%,
respectively.
B-21
Artisan Mid Cap Fund
- --------------------
Average Annual
Total Return Total Return
------------ --------------
1 year 46.07% 46.07%
Life of Fund<F1> 46.07% 45.47%
---------------------------
<F1> from June 27, 1997 (commencement of operations)
Artisan Small Cap Value Fund
- ----------------------------
Average Annual
Total Return Total Return
------------ --------------
Life of Fund<F1> 13.70% <F2>
---------------------------
<F1> from September 29, 1997 (commencement of operations)
<F2> not meaningful
The Funds impose no sales charges and pay no distribution expenses. Income
taxes are not taken into consideration. Performance figures quoted by the Funds
are not necessarily indicative of future results. Each 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 a 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 a 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 those of the
Funds. Comparison of a 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 Artisan Funds generally believe
to be accurate. The Funds also may note their mention (including performance or
other comparative rankings) in newspapers, magazines, or other media from time
to time. However, Artisan Funds assumes no responsibility for the accuracy of
such data. Newspapers and magazines and other media which might mention the
Funds include, but are not limited to, the following:
B-22
Atlanta Constitution
Barron's
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago
Business
Consumer Reports
Consumer Digest
Financial World
Forbes
Fortune
Fund Action
Investor's Business Daily
Kiplinger's Personal
Finance Magazine
Knight-Ridder
Los Angeles Times
Milwaukee Business Journal
Milwaukee Journal Sentinel
Money
Mutual Fund Letter
Mutual Fund News Service
Mutual Fund Values
Morningstar Publications
Newsweek
The New York Times
No-Load Fund Investor
Outstanding Investor Digest
Pension World
Pensions and Investments
Personal Investor
Jane Bryant Quinn (syndicated
column)
Louis Rukeyser's Mutual Fund
The San Francisco Chronicle
Smart Money
Stranger's Investment Adviser
13D Opportunities Report
Time
United Mutual Fund Selector
USA Today
U.S. News and World Report
The Wall Street Journal
Working Woman
Worth
Your Money
When a newspaper, magazine or other publication mentions a 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.
Various newspapers and publications including those listed above may also
make mention of a Fund's portfolio manager. Portfolio managers and other
members of the Adviser's staff may make presentations at conferences or trade
shows, appear on television or radio programs, or conduct or participate in
telephone conference calls, and the Funds may announce those presentations,
appearances or calls to some or all shareholders, or to potential investors in
the Funds. Biographical and other information about a Fund's portfolio manager,
including information about awards received by that portfolio manager or
mentions of the manager in the media, may also be described or quoted in Fund
advertisements or sales literature. Mark L. Yockey, portfolio manager of
Artisan International Fund, was named "Morningstar International Fund Manager of
the Year for 1998" by Morningstar, Inc. ("Morningstar"). Morningstar presents
the award to a portfolio manager based on, according to Morningstar, "excellent
investment skill, the courage to differ from consensus and the commitment to
shareholders deemed necessary to deliver outstanding long-term performance."
B-23
A Fund may compare its performance to the Consumer Price Index (All Urban),
a widely recognized measure of inflation.
The performance of a Fund may be compared to the following indexes or
averages:
Dow-Jones Industrial Average
Russell 2000 Index
Russell 2000 Growth Index
Russell 2000 Value Index
Russell Mid-Cap Stock Index
Russell Mid-Cap Value Index
Standard & Poor's 500 Stock Index
Standard & Poor's 400 Industrials
Standard & Poor's 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.)
New York Stock Exchange Composite Index
American Stock Exchange Composite Index
NASDAQ Composite
NASDAQ Industrials
(These indexes generally reflect the
performance of stocks traded in the
indicated markets.)
Lipper International Index
Lipper International & Global Funds Average
Morgan Stanley Capital International
Europe, Australasia and Far East (EAFE) Index
Morningstar International Stock Average
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 a 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 Cap Fund Index; Lipper
Mid Cap Fund Index; Lipper General Equity Funds Average; Lipper Equity Funds
Average; Lipper Small Company Growth Fund Index; 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 Lipper Small Cap Fund Index reflects the net asset value weighted total
return of the thirty largest small cap 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 Mid Cap Fund
Index reflects the net asset value weighted total return of the thirty largest
mid cap funds, and the Lipper International Index reflects the net asset value
weighted total return of the thirty largest international equity funds.
The Lipper and Morningstar averages are unweighted averages of total return
performance of mutual funds as classified, calculated and published by these
independent
B-24
services that monitor the performance of mutual funds. The Funds 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 a Fund to a different category or develop (and place that
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.
A Fund may also compare its performance or ranking against all funds tracked by
Lipper or another independent service.
A Fund may cite its rating, recognition or other mention by 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 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,
Artisan Funds 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 Funds also may use historical data compiled by Prudential
Securities, Inc., or by other similar sources believed by Artisan Funds 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).
ORGANIZATION
The Funds are series of Artisan Funds, Inc. ("Artisan Funds"), an open-end,
diversified management investment company which was incorporated under Wisconsin
law on January 5, 1995.
Each share of a Fund has one vote. All shares participate equally in
dividends and other distributions declared by the board of directors, and all
shares of a Fund have equal rights in the event of liquidation of that Fund.
Shares of the Funds have no preemptive, conversion or subscription rights.
Artisan Funds is governed by a board of directors which is responsible for
protecting the interests of the shareholders of the Funds. The directors are
experienced executives and professionals who meet at regular intervals to
oversee the activities of the Funds, review contractual arrangements with
companies that provide services to the Funds and review performance. A majority
of directors are not otherwise affiliated with Artisan Funds or Artisan
Partners.
B-25
The Wisconsin Business Corporation Law permits registered investment
companies to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company Act
of 1940 (the federal securities law that governs the regulation of investment
companies). Artisan Funds has adopted the appropriate provisions in its bylaws
and does not expect to hold an annual meeting in any year in which the election
of directors is not required to be acted on by shareholders. Artisan Funds
believes that not holding shareholder meetings except as otherwise required
reduces each Fund's expenses and enhances shareholder return.
The Funds may hold special meetings of shareholders to elect or remove
directors, change fundamental policies, approve a management contract, or for
other purposes. The Funds will mail proxy materials in advance, including a
voting card and information about the proposals to be voted on. You are
entitled to one vote for each share of any Fund that you own. Shareholders not
attending these meetings are encouraged to vote by proxy.
B-26
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 DURING
NAME AND DATE OF BIRTH WITH REGISTRANT PAST 5 YEARS
- ---------------------- --------------- ----------------------------
Andrew A. Ziegler* Director, Chairman of the Managing Partner of Artisan
10/7/57 Board and Chief Executive Partners; prior to founding
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.
Carlene Murphy Ziegler*Director and President Managing Partner of Artisan
6/20/56 Partners; co-manager of
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
5/6/43 Reinhart, 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.
B-27
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.
Lawrence A. Totsky Chief Financial Officer, Chief financial officer,
5/6/59 Treasurer and Secretary Artisan Partners; prior to
joining Artisan Partners,
senior vice president (since
1994) and director of mutual
fund administration, Strong
Capital Management, Inc.,
prior thereto.
Mark L. Yockey Vice President Partner of Artisan Partners;
6/5/56 portfolio manager of Artisan
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 Vice President Equity trader for Artisan
Voss-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.
B-28
Scott C. Satterwhite Vice President Portfolio manager, Artisan
7/15/57 Small Cap Value Fund; prior
to joining 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
of North Carolina, N.A.
Andrew C. Stephens Vice President Portfolio manager, Artisan
10/31/63 Mid 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 1993,
head trader, Strong.
Marina T. Carlson Vice President Partner of Artisan Parnters;
5/9/64 portfolio co-manager, Artisan
Small Cap Fund; manager of
Strong Mid Cap Disciplined
Fund from its inception in
December 1998 through March
1999 and co-manager of Strong
Opportunity Fund and Strong
Common Stock Fund from 1993
through December 1998.
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.
B-29
The following table sets forth compensation paid by Artisan Funds, Inc.
during the fiscal year ended June 30, 1998 to each of the directors of the Fund.
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM ARTISAN FUND
COMPENSATION AS PART OF FUND AND FUND COMPLEX(4)
NAME OF DIRECTOR FROM ARTISAN FUNDS EXPENSES PAID TO DIRECTORS
---------------- ------------------ ---------------- -------------------
Andrew A. Ziegler $ 0 $ 0 $ 0
Carlene Murphy
Ziegler 0 0 0
David A. Erne 15,000 0 15,000
Thomas R. Hefty 15,000 0 15,000
Howard B. Witt 15,000 0 15,000
At September 30, 1998, the officers and directors of Artisan Funds as a
group owned 6.3% of the outstanding shares of Artisan Mid Cap Fund and less than
1% of the outstanding shares in the case of each other Fund.
PRINCIPAL SHAREHOLDERS
The only persons known by Artisan Funds to own of record or beneficially 5%
or more of the outstanding shares of any Fund (or class in the case of
International Fund) as of September 30, 1998 were:
PERCENTAGE OF
OUTSTANDING
NAME AND ADDRESS FUND SHARES HELD
---------------- ---- -------------
Charles Schwab & Co. Inc. <F1> Small Cap Fund 20.72%
101 Montgomery Street Mid Cap Fund 35.72
San Francisco, CA 94104-4122 International Fund -
International Shares 54.82
Small Cap Value Fund 26.57
National Financial Services Corp. <F1> Mid Cap Fund 9.40
P.O. Box 3908 International Fund -
Church Street Station International Shares 19.58
New York, NY 10008-3908 Small Cap Value Fund 15.26
State University of Iowa Small Cap Fund 7.54
One West Park Road International Fund -
P.O. Box 4550 Institutional Shares 29.69
Iowa City, IA 52244-4550
The Professional Golfers Association International Fund -
P.O. Box 109601 Institutional Shares 16.64
Palm Beach, FL 33410-9601
Everett Clinic 401(k) Plan <F2> Small Cap Value Fund 6.26
P.O. Box 98000
MAC #9139 027
Calabras, CA 91372
- ------------------
<F1> Shares are held of record on behalf of customers, and not beneficially.
<F2> Shares are held of record on behalf of plan participants, and not
beneficially.
B-30
INVESTMENT ADVISORY SERVICES
Artisan Partners Limited Partnership ("Artisan Partners") provides
investment advisory services to each Fund pursuant to each Fund's Investment
Advisory Agreement dated March 27, 1995 (the "Advisory Agreements"). 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 Pine Street, Suite 3250, San
Francisco, California, and Five Concourse Parkway, Suite 208, Atlanta, Georgia
30328.
In return for its services, each 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. In addition Artisan
Partners has undertaken to reimburse Artisan International Fund for any ordinary
operating expenses in excess of 2.50% of average net assets annually, and has
undertaken to reimburse each of Artisan Small Cap Fund, Artisan Mid Cap Fund and
Artisan Small Cap Value Fund for any ordinary operating expenses in excess of
2.00% of average net assets over each fiscal year.
The advisory fees paid by Artisan Small Cap Fund for the fiscal years ended
June 30, 1998, 1997 and 1996 were $2,900,335, $2,906,791 and $2,734,855. The
investment advisory fees paid by Artisan International Fund for the fiscal years
ended June 30, 1998 and 1997, and for the period from December 28, 1995 through
June 30, 1996 were $3,923,189, $2,444,080 and $133,215. For the fiscal year
ended June 30, 1998, Artisan Mid Cap Fund would have paid investment advisory
fees of $93,853 if not for expense fee waivers; from its inception on June 27,
1997 through June 30, 1997, Artisan Mid Cap Fund did not pay any investment
advisory fees. From its inception on September 29, 1997 through June 30, 1998,
Artisan Small Cap Value Fund paid investment advisory fees of $252,397.
Each Advisory Agreement provides that Artisan Partners shall not be liable
for any loss suffered by a 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.
Each 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 each 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. Each
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
B-31
DISTRIBUTOR
Shares of the Funds are offered for sale by Artisan Distributors LLC
("Distributors") without any sales commissions, 12b-1 fees, or other charges to
the Funds or their shareholders. Distributors is wholly-owned by Artisan
Partners. All distribution expenses relating to the Funds are paid by Artisan
Partners, including the payment or reimbursement of any expenses incurred by
Distributors. The Distribution Agreement will continue in effect through
October 30, 2000 and thereafter from year to year provided such continuance is
approved annually (i) by a majority of the directors or by a majority of the
outstanding voting securities of the Funds and (ii) by a majority of the
directors who are not parties to the Agreement or interested persons of any such
party.
Artisan Funds has agreed to pay all expenses in connection with
registration of its shares with the Securities and Exchange Commission and any
auditing and filing fees required in compliance with various state securities
laws. Artisan Partners bears all sales and promotional expenses, including the
cost of prospectuses and other materials used for sales and promotional purposes
by Distributors. Distributors offers the Funds' shares only on a best efforts
basis. Distributors is located at 1000 North Water Street, Suite 1770,
Milwaukee, Wisconsin 53202.
PORTFOLIO TRANSACTIONS
Artisan Partners places the orders for the purchase and sale of each 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, a 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.
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 a 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
B-32
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 Artisan Funds, 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 Artisan Funds), 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 Artisan Funds 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 Artisan Funds.
With respect to each 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 Artisan Funds. During fiscal years
1998, 1997, and 1996, Artisan Small Cap Fund paid brokerage commissions of
$1,866,349, $1,877,158 and $2,220,846, respectively, to brokers who furnished
research services to the Fund or Artisan Partners on purchases and sales
aggregating $762,845,329, $637,608,952 and $775,778,115, respectively. During
fiscal years 1998 and 1997, and from the period from December 28, 1995 through
June 30, 1996, Artisan International Fund paid brokerage commissions of
$2,893,523, $2,960,678 and $425,266 to brokers who furnished research services
to the Fund or Artisan Partners on purchases and sales aggregating $885,882,850,
$824,170,635 and $97,912,681. For the fiscal year ended June 30, 1998 Artisan
Mid Cap Fund paid brokerage commissions of $72,800 to brokers who furnished
research services to the Fund or Artisan Partners on purchases and sales
aggregating and $50,307,734 (from its inception on June 27, 1997 through June
30, 1997, Artisan Mid Cap Fund had no purchases or sales of its portfolio
securities). From its inception on September 29, 1997 through June 30, 1998,
Artisan Small Cap Value Fund paid brokerage commissions of $184,278 to brokers
who furnished research services to the Fund or Artisan Partners on purchases and
sales aggregating $70,354,053.
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.
B-33
Shares of each Fund may be purchased or redeemed through certain financial
services companies, some of which may charge a transaction fee. Each 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 its behalf. For purchase orders placed through an authorized agent, a
shareholder will pay a 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 a 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 based on a percentage of the annual average value of those
accounts. A 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.
Reopening of Small Cap Fund. As of April 1, 1999, Small Cap Fund was
re-opened to purchases by new investors. At the same time, Marina T. Carlson
was named portfolio co-manager of the Fund. Artisan Funds' board of directors
approved the Fund's re-opening in light of the addition of Ms. Carlson, Artisan
Partners' belief that the historically low valuation levels of most small cap
stocks at the time of re-opening presented attractive investment opportunities
for the Fund, and the possibility of preserving the Fund's economies of scale
by attracting new assets. The board of directors also determined that Small
Cap Fund would again be closed to most new investors when it reaches about $300
million in total assets.
Net Asset Value. Share purchase and redemption orders will be priced at a
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.
A 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 are made
in kind, the redeeming shareholders might incur transaction costs in selling the
securities received in the redemptions.
Each 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,
B-34
exists, making disposal of portfolio securities or valuation of net assets of
the Fund not reasonably practicable.
Artisan Funds 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 Artisan Funds and Artisan
Partners.
ADDITIONAL TAX INFORMATION
Artisan Funds intends for each 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. If Artisan Funds should fail to qualify
for pass-through tax treatment under Subchapter M, then it would be required to
pay tax on any income and realized capital gains, reducing the amount of income
and realized capital gains that would otherwise be available for distribution to
shareholders of the Funds.
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 October,
November or December of the prior calendar year is deemed paid in the prior
calendar year.
The Internal Revenue Service Restructuring and Reform Act of 1998
eliminated the requirement that capital assets be held for more than 18 months
in order to be taxed at the lowest rate in effect under current law, and instead
permits capital assets to be so taxed if held for more than one year. This
change applies generally to sales transactions which occur after December 31,
1997. Distributions of long-term capital gains declared prior to that date will
be taxed at the rate of 28%, which was in effect prior to the enactment of the
new legislation. 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 gains are taxable to you as long-term capital gains
(currently taxed at a maximum rate of 20%) regardless of the length of time you
have held your shares. Long-term gains are those derived from securities held
by the fund for more than one year. You are urged to consult your tax advisor to
assess the impact of the new legislation on your individual circumstances.
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.
A 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:
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* 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. Artisan Funds must promptly pay the IRS all
amounts withheld. Therefore, it is not usually possible for Artisan Funds to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.
The Funds 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 a 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, a
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 laws, each 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 may be recognized to the extent of any gains
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.
U.S. citizens residing in a foreign country should consult their tax advisors as
to the tax consequences of ownership of Fund shares.
CUSTODIAN
State Street Bank & Trust Company ("State Street"), 66 Brooks Drive,
Braintree, MA 02184, 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.
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202 serves as the Funds' independent accountants, providing services including
(i) an 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 Funds.
FINANCIAL STATEMENTS
The 1998 annual report to shareholders of Artisan Funds, 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.
Financial Statements incorporated by reference into this Statement of Additional
Information include the following:
Artisan Small Cap Fund
----------------------
The following financial statements, but no other part of the report, are
incorporated by reference to the following portions of Registrant's
annual report to shareholders for the fiscal year ended June 30, 1998,
which was filed with the Commission on August 28, 1998:
- Schedule of Investments at June 30, 1998
- Statement of Assets and Liabilities at June 30, 1998
- Statement of Operations for the Year Ended June 30, 1998
- Statement of Changes in Net Assets for the Years Ended June 30, 1998
and June 30, 1997
- Notes to Financial Statements
- Report of Independent Accountants
Artisan International Fund - International Shares
-------------------------------------------------
The following financial statements, but no other part of the report, are
incorporated by reference to the following portions of Registrant's
annual report to shareholders for the fiscal year ended June 30, 1998,
which was filed with the Commission on August 28, 1998:
- Schedule of Investments at June 30, 1998
- Statement of Assets and Liabilities at June 30, 1998
- Statement of Operations for the Year Ended June 30, 1998
- Statement of Changes in Net Assets for the Years ended June 30, 1998
and June 30, 1997
- Notes to Financial Statements
- Report of Independent Accountants
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Artisan International Fund - Institutional Shares
-------------------------------------------------
The following financial statements, but no other part of the report, are
incorporated by reference to the following portions of Registrant's
annual report to shareholders for the fiscal year ended June 30, 1998,
which was filed with the Commission on August 28, 1998:
- Schedule of Investments at June 30, 1998
- Statement of Assets and Liabilities at June 30, 1998
- Statement of Operations for the Year Ended June 30, 1998
- Statement of Changes in Net Assets for the Years ended June 30, 1998
and June 30, 1997
- Notes to Financial Statements
- Report of Independent Accountants
Artisan Mid Cap Fund
--------------------
The following financial statements, but no other part of the report, are
incorporated by reference to the following portions of Registrant's
annual report to shareholders for the fiscal year ended June 30,
1998,which was filed with the Commission on August 28, 1998:
-Schedule of Investments at June 30, 1998
-Statement of Assets and Liabilities at June 30, 1998
-Statement of Operations for the Year ended June 30, 1998
-Statement of Changes in Net Assets for the Year ended June 30, 1998
and the Period ended June 30, 1997
-Notes to Financial Statements
-Report of Independent Accountants
Artisan Small Cap Value Fund
----------------------------
The following financial statements, but no other part of the report, are
incorporated by reference to the following portions of Registrant's
annual report to shareholders for the fiscal year ended June 30, 1998,
which was filed with the Commission on August 28, 1998:
-Schedule of Investments at June 30, 1998
-Statement of Assets and Liabilities at June 30, 1998
-Statement of Operations for the Period Ended June 30, 1998 (from
commencement of operations on September 29, 1997)
-Statement of Changes in Net Assets for the Period Ended June 30, 1998
(from commencement of operations on September 29, 1997)
-Notes to Financial Statements
-Report of Independent Accountants
The following schedules have been omitted for the following reasons:
Schedule I - The required information is presented in the Schedules of
Investments at June 30, 1998.
Schedules II, III, IV and V - the required information is not present.
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APPENDIX
DESCRIPTION OF BOND RATINGS
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Fund's investment adviser believes that the quality of
debt securities in which the Fund invests should be continuously reviewed and
that individual analysts give different weightings to the various factors
involved in credit analysis. A rating is not a recommendation to purchase, sell
or hold a security, because it does not take into account market value or
suitability for a particular investor. When a security has received a rating
from more than one service, each rating should be evaluated independently.
Ratings are based on current information furnished by the issuer or obtained by
the ratings services from other sources which they consider reliable. Ratings
may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information, or for other reasons.
The following is a description of the characteristics of rating used by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P").
RATINGS BY MOODY'S
Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt-edge." Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa--Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa bonds.
A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba--Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and
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thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B--Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or
there may be present elements of danger with respect to principal or interest.
Ca--Bonds rated Ca represent obligations which are speculative in a high degree.
Such bonds are often in default or have other marked shortcomings.
S&P RATINGS
AAA--Bonds rated AAA have the highest rating. Capacity to pay principal and
interest is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay principal and interest and
differ from AAA bonds only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
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