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STATEMENT OF ADDITIONAL INFORMATION
Dated February 28, 2014
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PERRITT FUNDS, INC.
PERRITT MICROCAP OPPORTUNITIES FUND
(Ticker Symbol: PRCGX)
PERRITT ULTRA MICROCAP FUND
(Ticker Symbol: PREOX)
PERRITT LOW PRICED STOCK FUND
(Ticker Symbol: PLOWX)
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Investment Adviser:
Perritt Capital Management, Inc.
300 South Wacker Drive
Suite 2880
Chicago, Illinois 60606
Toll Free: (800) 332-3133
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Account Information and Shareholder Services:
Perritt Funds
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201
Toll Free: (800) 540-6807
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This Statement of Additional Information (the “SAI”) provides additional information about the Perritt MicroCap Opportunities Fund, the Perritt Ultra MicroCap Fund and the Perritt Low Priced Stock Fund (each a “Fund” and, collectively, the “Funds”), and should be read in conjunction with the Funds’ Prospectus dated February 28, 2014, as may be amended or supplemented from time to time. This SAI is not a prospectus. You may obtain a copy of the Prospectus without charge by contacting U.S. Bancorp Fund Services, LLC at the address or telephone number listed above or by visiting the Funds’ website at www.perrittcap.com.
Financial statements for the Perritt MicroCap Opportunities Fund and the Perritt Ultra MicroCap Fund are incorporated by reference to the Annual Report, dated October 31, 2013, filed with the Securities and Exchange Commission (“SEC”) on Form N-CSR on December 31, 2013 and are incorporated by reference into this SAI. Since the Perritt Low Priced Stock Fund had not commenced operations prior to the date of this SAI, no financial statements are available. Copies of the Annual Report may be obtained, without charge, upon request by contacting U.S. Bancorp Fund Services, LLC at the address or telephone number listed above.
PERRITT FUNDS, INC.
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No person has been authorized to give any information or to make any representations other than those contained in this SAI and the Prospectus dated February 28, 2014 and, if given or made, such information or representations may not be relied upon as having been authorized by Perritt Funds, Inc.
This SAI does not constitute an offer to sell securities.
Perritt Funds, Inc. (the “Company”) is an open-end, management investment company registered under the Investment Company Act of 1940 (the “1940 Act”). The Company was organized as a Maryland corporation on March 22, 2004. The Board of Directors of the Company (the “Board”) may, from time to time, issue additional series, the assets and liabilities of which will be separate and distinct from any other series. The Company currently offers the following
three
diversified separate investment series, or mutual funds: Perritt MicroCap Opportunities Fund
(the “MicroCap Fund”),
Perritt Ultra MicroCap Fund
(the “Ultra MicroCap Fund”) and the Perritt Low Priced Stock Fund (the “Low Priced Stock Fund”).
The MicroCap Fund became effective on February 28, 2013 and is the successor in interest to another fund having the same name and investment objective that was included as a series of another investment company, Perritt MicroCap Opportunities Fund, Inc. (the “Predecessor MicroCap Fund”) that was also advised by the Funds’ investment adviser, Perritt Capital Management, Inc. Effective as of the close of business on February 28, 2013, the assets and liabilities of the Predecessor MicroCap Fund were transferred to the Company and the Predecessor MicroCap Fund was reorganized into a newly created series of the Company–the MicroCap Fund.
Prior to April 30, 2012, the Ultra MicroCap Fund was named the Perritt Emerging Opportunities Fund.
The MicroCap Fund’s investment objective is long-term capital appreciation. The MicroCap Fund will, under normal circumstances, invest at least 80% of its net assets, plus borrowings for investment purposes, in common stocks of United States companies with market capitalizations that are below $500 million at the time of initial purchase.
The Ultra MicroCap Fund’s investment objective is long-term capital appreciation. The Ultra MicroCap Fund will, under normal circumstances, invest at least 80% of its net assets, plus borrowings for investment purposes, in common stocks of United States companies with market capitalizations that are below $300 million at the time of initial purchase.
The Perritt Low Priced Stock Fund (the “Low Priced Stock Fund”) will, under normal circumstances, invest at least 80% of its net assets (plus any borrowings for investment purchases) in low priced common stocks with market capitalizations that are below $3 billion at the time of initial purchase. (The Low Priced Stock Fund may continue to hold the securities of a company after it exceeds $3 billion in market capitalization.) Low priced stocks are those that are trading at or below $15 per share at the time of initial purchase. (Subsequent to the initial purchase, the Low Priced Stock Fund may purchase such securities at a price above $15 per share.) The Low Priced Stock Fund’s strategy is based on the premise that low priced stocks offer growth potential because these stocks have limited broker research coverage, the companies’ prospects are misunderstood by most investors, and some investors mistakenly believe stocks trading below $15 per share are more “speculative” than those trading at higher levels and therefore avoid low priced stocks.
From time to time, each Fund, to the extent consistent with its investment objective, investment restrictions and investment strategies, may invest in other equity-type securities such as convertible bonds, preferred stocks and warrants to purchase common stock. The Funds may invest in securities not listed on national or regional securities exchanges, but such securities typically will have an established over-the-counter market. The Funds do not currently intend to invest in any security that, at the time of purchase, is not readily marketable. Each Fund may, for temporary defensive purposes, invest more than 20% of its assets in money market securities, including U.S. government obligations, certificates of deposit, bankers’ acceptances, commercial paper or cash and cash equivalents. Except for temporary defensive purposes, the Funds will retain cash and cash equivalents only in amounts deemed adequate for current needs and to permit the Funds to take advantage of investment opportunities.
Recent Regulatory Events
The U.S. government, the Federal Reserve, the Treasury, the SEC, the Commodity Futures Trading Commission (“CFTC”), the Federal Deposit Insurance Corporation and other U.S. governmental and regulatory bodies have recently taken, or are considering taking, actions in response to the economic events of the past few years. These actions include, but are not limited to, the enactment by the United States Congress of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, which imposes a new regulatory framework over the U.S. financial services industry and the consumer credit markets in general, as well as requiring new regulations by the SEC, the CFTC and other regulators. The potential impact that such regulations could have on securities held by the Funds currently is unknown. There can be no assurance that these measures will not have an adverse effect on the value or marketability of securities held by the Funds.
Considerations Respecting the Funds’ Principal Investment Strateg
ies
Because the Funds intend to invest to a substantial degree in common stocks of smaller companies which are, in the opinion of Perritt Capital Management, Inc., the Funds’ investment adviser (the “Adviser”), rapidly growing, an investment in the Funds is subject to greater risks than those of funds that invest in larger companies.
Investments in relatively small companies tend to be speculative and volatile. Relatively small companies may lack depth in management on which to rely should loss of key personnel occur. Relatively small companies also may be involved in the development or marketing of new products or services, the market for which may not have been established. Such companies could sustain significant losses when projected markets do not materialize. Further, such companies may have, or may develop, only a regional market for products or services and may be adversely affected by purely local events. Moreover, such companies may be insignificant factors in their industries and may become subject to intense competition from larger companies.
Equity securities of relatively small companies frequently will be traded only in the over-the-counter market or on regional stock exchanges and often will be closely held with only a small proportion of the outstanding securities held by the general public. In view of such factors, the Funds may assume positions in securities with limited trading markets that are subject to wide price fluctuations. Therefore, the current net asset value (“NAV”) of the Funds may fluctuate significantly. Accordingly, the Funds should not be considered suitable for investors who are unable or unwilling to assume the risks of loss inherent in such a program, nor should an investment in a Fund, by itself, be considered a balanced or complete investment program.
Considerations Respecting
each
Fund’s Non-Principal Investment Strategies
Illiquid Securities
The Ultra MicroCap Fund and the Low Priced Stock Fund may invest up to 15% of their net assets in “illiquid securities”.
“Illiquid securities” are securities that cannot be readily resold because of legal or contractual restrictions or that cannot otherwise be marketed, redeemed or put to the issuer or a third party, that do not mature within seven days, or that the Adviser, in accordance with guidelines approved by the Board of Directors, has not determined to be liquid and includes, among other things, repurchase agreements maturing in more than seven days
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The 15% limitation includes certain securities whose disposition would be subject to legal restrictions (“restricted securities”). However, restricted securities that may be resold pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), may be considered liquid. Rule 144A permits certain qualified institutional buyers to trade in privately placed securities not registered under the Securities Act. Institutional markets for restricted securities have developed as a result of Rule 144A, providing both readily ascertainable market values for Rule 144A securities and the ability to liquidate these securities to satisfy redemption requests. However, an insufficient number of qualified institutional buyers interested in purchasing Rule 144A securities held by the Ultra MicroCap Fund and the Low Priced Stock Fund could adversely affect their marketability, causing the Ultra MicroCap Fund and the Low Priced Stock Fund to sell securities at unfavorable prices. The Board has delegated to the Adviser the day-to-day determination of the liquidity of a security although it has retained oversight and ultimate responsibility for such determinations. In determining the liquidity of a security, the Board has directed the Adviser to consider such factors as (i) the nature of the market for the security (including the institutional private resale markets); (ii) the terms of the security or other instrument allowing for the disposition to a third party or the issuer thereof (
e.g.,
certain repurchase obligations and demand instruments); (iii) the availability of market quotations; and (iv) other permissible factors.
Restricted securities may be sold in privately negotiated or other exempt transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. When registration is required, the Ultra MicroCap Fund and the Low Priced Stock Fund may be obligated to pay all or part of the registration expenses and a considerable time may elapse between the decision to sell and the sale date. If, during such period, adverse market conditions were to develop, the Ultra MicroCap Fund and the Low Priced Stock Fund might obtain a less favorable price than the price which prevailed when it decided to sell. Restricted securities for which there is no market will be priced at fair value as determined in good faith by the Board or by the Adviser pursuant to procedures set forth by the Board and reviewed by the Board.
Convertible Securities
Each Fund, to the extent consistent with its investment objective, investment restrictions and investment strategies, may invest in convertible securities. Convertible securities include fixed income securities that may be exchanged or converted into a predetermined number of shares of the issuer’s underlying common stock at the option of the holder during a specified period. Convertible securities may take the form of convertible preferred stock, convertible bonds or debentures, units consisting of “usable” bonds and warrants or a combination of the features of several of these securities. Convertible securities are senior to common stocks in an issuer’s capital structure, but are usually subordinated to similar non-convertible securities. While providing a fixed-income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar nonconvertible security), a convertible security also gives an investor the opportunity, through its conversion feature, to participate in the capital appreciation of the issuing company depending upon a market price advance in the convertible security’s underlying common stock.
Preferred Stocks
Each Fund, to the extent consistent with its investment objective, investment restrictions and investment strategies, may invest in preferred stocks. Preferred stock includes convertible and non-convertible preferred and preference stocks that are senior to common stock. Preferred stock has a preference over common stock in liquidation (and generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Short Sales
The Ultra MicroCap Fund and the Low Priced Stock Fund may seek to realize additional gains through short sale transactions in securities listed on one or more national securities exchanges, or in unlisted securities. Short selling involves the sale of borrowed securities. At the time a short sale is effected, the Ultra MicroCap Fund and the Low Priced Stock Fund incurs an obligation to replace the security borrowed at whatever its price may be at the time the Ultra MicroCap Fund and the Low Priced Stock Fund purchases it for delivery to the lender. The price at such time may be more or less than the price at which the security was sold by the Ultra MicroCap Fund and the Low Priced Stock Fund. Until the security is replaced, the Ultra MicroCap Fund and the Low Priced Stock Fund is required to pay the lender amounts equal to any dividends or interest which accrue during the period of the loan. To borrow the security, the Ultra MicroCap Fund and the Low Priced Stock Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed.
Until the Ultra MicroCap Fund and the Low Priced Stock Fund closes their short position or replaces the borrowed security, the Funds will: (a) maintain cash or liquid securities at such a level that the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise cover the Funds’ short position.
Borrowing
Each Fund is authorized to borrow money from banks as a temporary measure for extraordinary or emergency purposes. However, the MicroCap Fund may not borrow for the purpose of purchase of investments, and may only borrow in an amount not to exceed 5% of the value of the MicroCap Fund’s net assets at the time the borrowing is incurred. For example, a Fund may borrow money to facilitate management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio investments would be inconvenient or disadvantageous. As required by the 1940 Act, a Fund may only borrow from a bank and must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the Fund’s assets should fail to meet this 300% coverage test, the Fund will reduce the amount of the Fund’s borrowings to the extent necessary to meet this 300% coverage within three (3) days (not including Sundays and holidays). Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would be disadvantageous to do so.
Lending Portfolio Securities
In order to generate additional income, the Low Priced Stock Fund may lend portfolio securities constituting up to 30% of its total assets to unaffiliated broker-dealers, banks or other recognized institutional borrowers of securities, provided that the borrower, at all times during the loan, must maintain with the Fund cash, U.S. Government securities or equivalent collateral or provide to the Fund an irrevocable letter of credit in favor of the Fund equal in value to at least 102% of the value of loaned domestic securities and 105% of the value of loaned foreign securities on a daily basis. During the time portfolio securities are on loan, the borrower pays the Low Priced Stock Fund an amount equivalent to any dividends or interest paid on such securities, and the Low Priced Stock Fund may receive an agreed-upon amount of interest income from the borrower who delivered equivalent collateral or provided a letter of credit. Loans are subject to termination at the option of the Low Priced Stock Fund or the borrower. The Low Priced Stock Fund may pay reasonable administrative and custodial fees in connection with a loan of portfolio securities and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower or placing broker. The Low Priced Stock Fund does not have the right to vote securities on a loan, but could terminate the loan and regain the right to vote if that were considered important with respect to the investment.
The primary risk in securities lending is a default by the borrower during a sharp rise in price of the borrowed security resulting in a deficiency in the collateral posted by the borrower. The Low Priced Stock Fund will seek to minimize this risk by requiring that the value of the securities loaned will be computed each day and additional collateral be furnished each day if required.
Rights and Warrants
The Ultra MicroCap Fund and the Low Priced Stock Fund may purchase rights and warrants to purchase equity securities. The MicroCap Fund may purchase warrants to purchase equity securities, but may invest no more then 5% of its total assets in warrants, whether or not the warrants are listed on the New York Stock Exchange or on the NYSE Amex, formerly the American Stock Exchange, or more than 2% of the value of the assets of the Funds in warrants which are not listed on those exchanges. Warrants acquired in units or attached to securities are not subject to these limitations.
Investments in rights and warrants are pure speculation in that they have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. Rights and warrants basically are options to purchase equity securities at a specific price valid for a specific period of time. They do not represent ownership of the securities, but only the right to buy them. Rights and warrants differ from call options in that rights and warrants are issued by the issuer of the security which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of rights (if traded independently) and warrants do not necessarily move parallel to the prices of the underlying securities. Rights and warrants involve the risk that the Funds could lose the purchase value of the right or warrant if the right or warrant is not exercised prior to its expiration. They also involve the risk that the effective price paid for the right or warrant added to the subscription price of the related security may be greater than the value of the subscribed security’s market price.
Money Market Instruments
The Funds may invest in cash and money market securities. The Funds may do so to “cover” investment techniques (for example, when the Ultra MicroCap Fund purchases or sells a stock index futures contract, the Ultra MicroCap Fund may invest in cash and money market securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the stock index futures contract), when taking a temporary defensive position or to have assets available to pay expenses, satisfy redemption requests or take advantage of investment opportunities. The money market securities in which the Funds invest include U.S. Treasury Bills, commercial paper, commercial paper master notes and repurchase agreements.
The Funds may invest in commercial paper or commercial paper master notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor’s
®
Corporation or Prime-1 or Prime-2 by Moody’s Investors Services
©
, Inc. Commercial paper master notes are demand instruments without a fixed maturity bearing interest at rates that are fixed to known lending rates and automatically adjusted when such lending rates change.
Repurchase Agreements
Under a repurchase agreement, the Ultra MicroCap Fund and the Low Priced Stock may purchase a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one (1) day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser’s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Ultra MicroCap Fund and the Low Priced Stock Fund will enter into repurchase agreements only with member banks of the Federal Reserve System or primary dealers of U.S. government securities. The Adviser will monitor the creditworthiness of each of the firms which is a party to a repurchase agreement with the Ultra MicroCap Fund and the Low Priced Stock Fund. In the event of a default or bankruptcy by the seller, the Ultra MicroCap Fund and the Low Priced Stock Fund will liquidate those securities (whose market value, including accrued interest, must be at least equal to 100% of the dollar amount invested by the Fund in each repurchase agreement) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s obligation to pay. However, liquidation could involve costs or delays and, to the extent proceeds from the sale of these securities were less than the agreed-upon repurchase price, the Ultra MicroCap Fund and the Low Priced Stock Fund would suffer a loss. The Ultra MicroCap Fund and the Low Priced Stock Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Ultra MicroCap Fund and the Low Priced Stock Fund to treat repurchase agreements that do not mature within seven (7) days as illiquid for the purposes of its investment policies.
Registered Investment Companies
Any investment in a registered investment company involves investment risk. Additionally an investor could invest directly in the registered investment companies in which the Funds invest. By investing indirectly through a Fund, an investor bears not only his or her proportionate share of the expenses of the Fund (including operating costs and investment advisory fees) but also indirect similar expenses of the registered investment companies in which the Fund invests. An investor may also indirectly bear expenses paid by registered investment companies in which the Funds invest related to the distribution of such registered investment company’s shares.
Under certain circumstances, an open-end investment company in which the Funds invest may determine to make payment of a redemption by the Fund (wholly or in part) by a distribution in kind of securities from its portfolio, instead of in cash. As a result, the Funds may hold such securities until the Adviser determines it appropriate to dispose of them. Such disposition will impose additional costs on the Fund.
Investment decisions by the investment advisers to the registered investment companies in which the Funds invest are made independently of the Funds and the Adviser. At any particular time, one registered investment company in which the Funds invest may be purchasing shares of an issuer whose shares are being sold by another registered investment company in which the Fund invests. As a result, the Funds indirectly would incur certain transactional costs without accomplishing any investment purpose.
Stock Index Futures Contracts and Options Thereon
The Ultra MicroCap Fund and the Low Priced Stock Fund may purchase and write (sell) stock index futures contracts as a substitute for a comparable market position in the underlying securities. A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified commodity on the expiration date of the contract. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. It is the practice of holders of futures contracts to close out their positions on or before the expiration date by use of offsetting contract positions and physical delivery is thereby avoided.
The Ultra MicroCap Fund and the Low Priced Stock Fund may purchase put and call options on stock index futures contracts and write call options on stock index futures contracts. When the Ultra MicroCap Fund and the Low Priced Stock Fund purchase a put or call option on a stock index futures contract, the Fund pays a premium for the right to sell or purchase the underlying stock index futures contract for a specified price upon exercise at any time during the options period. By writing a call option on a stock index futures contract, the Ultra MicroCap Fund and the Low Priced Stock Fund receive a premium in return for granting to the purchaser of the option the right to buy from the Fund the underlying stock index futures contract for a specified price upon exercise at any time during the option period. The Ultra MicroCap Fund and the Low Priced Stock Fund may not invest more than 20% of its assets in stock index futures contracts.
Some futures and options strategies tend to hedge the Ultra MicroCap Fund’s and the Low Priced Stock Fund’s equity positions against price fluctuations, while other strategies tend to increase market exposure. Whether the Ultra MicroCap Fund and the Low Priced Stock Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying stock index. The extent of the Ultra MicroCap Fund’s and the Low Priced Stock Fund’s loss from an unhedged short position in stock index futures contracts or call options on stock index futures contracts is potentially unlimited. The Ultra MicroCap Fund and the Low Priced Stock Fund may engage in related closing transactions with respect to options on stock index futures contracts. The Ultra MicroCap Fund and the Low Priced Stock Fund will purchase or write options only on stock index futures contracts that are traded on a United States exchange or board of trade.
Each of the Funds will only invest in futures contracts after complying with the requirements of the CFTC. Pursuant to CFTC Rule 4.5, the Company has filed a notice of exemption from registration as a commodity pool operator in respect of each Fund. To rely on the exemption, a Fund’s commodities transactions must be made solely for bona fide hedging purposes as defined by the CFTC. In addition, the Fund may invest in commodity interests for other than bona fide hedging purposes if it meets either the 5% trading de minimis test (the “5% Test”) or a test based on the net notional value of the Fund’s commodities transactions (the “Notional Test”). Under the 5% Test, the aggregate initial margin and premiums required to establish positions in commodity futures, commodity options or swaps may not exceed 5% of the Fund’s net asset value. Under the Notional Test, the aggregate net notional value of commodity futures, commodity options or swaps not used solely for bona fide hedging purposes may not exceed 100% of the Fund’s net asset value.
When the Ultra MicroCap Fund and the Low Priced Stock Fund purchase or sell a stock index futures contract, the Funds “cover” their positions. To cover their positions, the Ultra MicroCap Fund and the Low Priced Stock Fund may maintain with their custodian banks (and mark-to-market on a daily basis) cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the stock index futures contract or otherwise cover its position. If the Ultra MicroCap Fund and the Low Priced Stock Fund continue to engage in the described securities trading practices and so maintain cash or liquid securities, the maintained cash or liquid securities will function as a practical limit on the amount of leverage which the Funds may undertake and on the potential increase in the speculative character of the Funds’ outstanding portfolio securities. Additionally, such maintained cash or liquid securities will assure the availability of adequate funds to meet the obligations of the Ultra MicroCap Fund and the Low Priced Stock Fund arising from such investment activities.
The Ultra MicroCap Fund and the Low Priced Stock Fund may cover their long position in a stock index futures contract by purchasing a put option on the same stock index futures contract with a strike price (
i.e.,
an exercise price) as high or higher than the price of the stock index futures contract, or, if the strike price of the put is less than the price of the stock index futures contract, the Ultra MicroCap Fund and the Low Priced Stock Fund will maintain cash or liquid securities equal in value to the difference between the strike price of the put and the price of the stock index futures contract. The Ultra MicroCap Fund and the Low Priced Stock Fund may also cover their long position in a stock index futures contract by taking a short position in the instruments underlying the stock index futures contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the stock index futures contract. The Ultra MicroCap Fund and the Low Priced Stock Fund may cover their short position in a stock index futures contract by taking a long position in the instruments underlying the stock index futures contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the stock index futures contract.
The Ultra MicroCap Fund and the Low Priced Stock Fund may cover their sale of a call option on a stock index futures contract by taking a long position in the underlying stock index futures contract at a price less than or equal to the strike price of the call option, or, if the long position in the underlying stock index futures contract is established at a price greater than the strike price of the written call, the Ultra MicroCap Fund and the Low Priced Stock Fund will maintain cash or liquid securities equal in value to the difference between the strike price of the call and the price of the stock index futures contract. The Ultra MicroCap Fund and the Low Priced Stock Fund may also cover their sale of a call option by taking positions in instruments the prices of which are expected to move relatively consistently with the call option.
Although the Ultra MicroCap Fund and the Low Priced Stock Fund intend to purchase or sell stock index futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in stock index futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. Stock index futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Ultra MicroCap Fund and the Low Priced Stock Fund to substantial losses. If trading is not possible, or the Ultra MicroCap Fund and the Low Priced Stock Fund determine not to close a futures position in anticipation of adverse price movements, the Funds will be required to make daily cash payments of variation margin. The risk that the Ultra MicroCap Fund and the Low Priced Stock Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market.
In seeking to achieve its investment objectives, each Fund has adopted the following restrictions which are matters of fundamental policy and cannot be changed without approval by the holders of the lesser of:
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(i)
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67% of the Fund’s shares present or represented at a meeting of shareholders at which the holders of more than 50% of such shares are present or represented; or
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(ii)
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More than 50% of the outstanding shares of the Fund.
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If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of assets will not constitute a violation of that restriction other than with respect to a Fund’s borrowing of money.
The Funds may not:
1.
Purchase the securities of any issuer if such purchase would cause more than 5% of the value of a Fund’s total assets to be invested in securities of any one issuer (except securities of the United States government or any agency or instrumentality thereof), or more than 10% of the outstanding voting securities of any one issuer (except that up to 25% of the value of the Fund’s total assets may be invested without regard to these limitations).
2.
The MicroCap Fund may not borrow money except from banks for temporary or emergency purposes (but not for the purpose of purchase of investments) and then only in an amount not to exceed 5% of the value of the Fund’s net assets at the time the borrowing is incurred. The Ultra MicroCap Fund and the Low Priced Stock Fund may not borrow money to an extent or in a manner not permitted under the 1940 Act. (As of the date of this SAI, the 1940 Act generally permits borrowing, whether unsecured or secured by up to all of a Fund’s assets, so long as the Fund maintains continuous asset coverage 300% and also permits borrowing of up to 5% of a Fund’s total assets for temporary administrative purposes.)
3.
Invest in real estate (although a Fund may purchase securities secured by real estate or interests therein, or securities issued by companies that invest in real estate or interests therein), commodities, commodities contracts or interests in oil, gas and/or mineral exploration or development programs, except that the Ultra MicroCap Fund and the Low Priced Stock Fund may invest in financial futures contracts, options thereon, and other similar instruments.
4.
The MicroCap Fund may not act as an underwriter of securities or participate on a joint or joint and several basis in any trading account in any securities. The Ultra MicroCap Fund and the Low Priced Stock Fund may not act as an underwriter or distributor of securities other than shares of the Fund, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act in the disposition of restricted securities.
5.
Invest in companies for the primary purpose of acquiring control or management thereof.
6.
The MicroCap Fund may not purchase securities on margin, except such short-term credits as are necessary for the clearance of transactions and make short sales of securities (except short sales against the box). The Ultra MicroCap Fund and the Low Priced Stock Fund may not purchase securities on margin. However, the Ultra MicroCap Fund and the Low Priced Stock Fund may obtain such short-term credits as may be necessary for the clearance of transactions and may make margin payments in connection with transactions in futures and options, and the Funds may borrow money to the extent and in the manner permitted by the 1940 Act, as provided in Investment Restriction No. 2.
7.
The Ultra MicroCap Fund and the Low Priced Stock Fund may not sell securities short and sell (write) or purchase put and call options to an extent not permitted by the 1940 Act.
8.
The MicroCap Fund may not pledge, mortgage, hypothecate or otherwise encumber any of its assets, except as a temporary measure for extraordinary or emergency purposes, and then not in excess of 15% of its assets taken as cost. The Ultra MicroCap Fund and the Low Priced Stock Fund may not pledge, mortgage, hypothecate or otherwise encumber any of their assets, except to secure their borrowings.
9.
Concentrate 25% or more of the value of its total assets (taken at market value at the time of each investment) in securities of non-governmental issuers whose principal business activities are in the same industry.
10.
Make loans, except that this restriction shall not prohibit the purchase and holding of a portion of an issue of publicly distributed debt securities and, with regard to the Ultra MicroCap Fund and the Low Priced Stock Fund, securities of a type normally acquired by institutional investors, and except that the Ultra MicroCap Fund and the Low Priced Stock Fund may lend their portfolio securities.
11.
The MicroCap Fund may not issue senior securities. The Ultra MicroCap Fund and the Low Priced Stock Fund may not issue senior securities to an extent not permitted under the 1940 Act. (As of the date of this SAI, as noted above, the 1940 Act permits a Fund to borrow money from banks provided that it maintains continuous asset coverage of at least 300% of all amounts borrowed and also permits borrowing of up to 5% of a Fund's total assets for temporary administrative purposes. For purposes of this investment restriction, entry into the following transactions shall not constitute senior securities to the extent a Fund covers the transaction or maintains sufficient liquid assets in accordance with applicable requirements: when-issued securities transactions, forward roll transactions, short sales, forward commitments, futures contracts and reverse repurchase agreements. In addition, hedging transactions in which a Fund may engage and similar investment strategies are not treated as senior securities for purposes of this investment restriction.)
12.
The MicroCap Fund may not purchase or retain the securities of any issuer if those officers or directors of the Fund or its investment adviser owning individually more than 1/2 of 1% of the securities of such issuer together own more than 5% of the securities of such issuer.
13.
The MicroCap Fund may not invest in restricted securities or illiquid or other securities without readily available market quotations, including repurchase agreements.
14.
The MicroCap Fund may not purchase securities of any company having less than three years of continuous operation (including operations of any predecessors) if such purchase would cause the value of the Fund’s investments in all such companies to exceed 5% of the value of its assets.
15.
The MicroCap Fund may not invest more than 5% of its total assets in warrants, whether or not the warrants are listed on the New York Stock Exchange or the NYSE Amex, or more than 2% of the value of the assets of the Fund in warrants which are not listed on those exchanges. Warrants acquired in units or attached to securities are not included in this restriction.
The Funds have adopted certain other investment restrictions which are not fundamental policies and which may be changed by the Board without shareholder approval. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of assets will not constitute a violation of that restriction. However, should a change in NAV or other external events cause the Ultra MicroCap Fund’s investments in illiquid securities to exceed the limitation set forth below, the Fund will act to cause the aggregate amount of illiquid securities to come within such limit as soon as reasonably practicable. Any changes in these non-fundamental investment restrictions made by the Board will be communicated to shareholders prior to their implementation. The non-fundamental investment restrictions are as follows:
1. The Ultra MicroCap Fund and the Low Priced Stock Fund will not invest more than 15% of the value of their net assets in illiquid securities.
2.
The Funds will not purchase the securities of other investment companies except: (a) as part of a plan of merger, consolidation or reorganization approved by the shareholders of a Fund; (b) securities of registered open-end investment companies; or (c) securities of registered closed-end investment companies on the open market where no commission results, other than the usual and customary broker’s commission. Subject to certain exemptions that may be available under the 1940 Act, no purchases described in (b) and (c) (except for purchases of money market funds) will be made if as a result of such purchases (i) a Fund and its affiliated persons would hold more than 3% of any class of securities, including voting securities, of any registered investment company; (ii) more than 5% of a Fund’s net assets would be invested in shares of any one registered investment company; and (iii) more than 10% of a Fund’s net assets would be invested in shares of registered investment companies.
3.
The MicroCap Fund will normally invest 80% of the value of its net assets in common stocks of companies with market capitalizations that are below $500 million at the time of initial purchase, and the Ultra MicroCap Fund will normally invest 80% of the value of its net assets in common stocks of companies with market capitalizations that are below $300 million at the time of initial purchase. The Low Priced Stock Fund will normally invest at least 80% of its net assets (plus any borrowings for investment purchases) in low priced common stocks with market capitalizations that are below $3 billion at the time of initial purchase. (The Low Priced Stock Fund may continue to hold the securities of a company after it exceeds $3 billion in market capitalization.) Low priced stocks are those that are trading at or below $15 per share at the time of initial purchase. (Subsequent to the initial purchase, the Fund may purchase such securities at a price above $15 per share.) If the Board approves a change to this non-fundamental policy for a Fund, then the Fund will provide a sixty (60) day written notice to the shareholders before implementing the change of policy. Any such notice will be provided in plain English in a separate written disclosure document containing the following prominent statement in bold-type: “Important Notice Regarding Change in Investment Policy.” If the notice is included with other communications to shareholders, the aforementioned statement will also be included on the envelope in which the notice is delivered.
Each Fund’s investment objective (
i.e.,
long-term capital appreciation) is a non-fundamental policy and may be changed by the Board without shareholder approval. If the Board approves a change to the investment objective for any Fund, such Fund will provide a sixty (60) day written notice to the shareholders before implementing the change of investment objective.
The portfolio turnover rate of a Fund may vary significantly from year to year, but as indicated in the Prospectus it is expected, though not assured, that that the annual portfolio turnover rate of each Fund will not typically exceed 100%. During the last five fiscal years, the annual portfolio turnover rate for the Predecessor MicroCap Fund and the Ultra MicroCap Fund has averaged 29.5% and 23.0%, respectively. A turnover rate of 100% or more would result in correspondingly greater brokerage commission expenses or other transaction expenses, which must be borne, directly or indirectly, by the Fund and ultimately by the Fund’s shareholders. Payment of these transaction costs could reduce the Fund’s total return. High portfolio turnover could also result in the payment by the Fund’s shareholders of increased taxes on realized gains.
The portfolio turnover rate of the Funds for the fiscal years ended October 31, 2013 and 2012, was as follows:
|
|
Fiscal Year Ended
10-31-13
|
|
Fiscal Year Ended
10-31-12
|
|
MicroCap Fund
(1)(2)
|
41.4%
(2)
|
|
14.0%
|
|
Ultra MicroCap Fund
(2)
|
33.9%
(2)
|
|
14.6%
|
|
________________________
|
|
|
|
|
(1)
Prior to February 28, 2013, the portfolio turnover information relates to the Predecessor MicroCap Fund.
|
|
(2)
Significant inflows lead to an increase in purchase and sales of portfolio securities, resulting in a higher portfolio turnover rate for the Fund in the fiscal year ended October 31, 2013 compared to the fiscal year ended October 31, 2012.
|
The Low Priced Stock Fund had not commenced operations prior to the date of this SAI; therefore, portfolio turnover information is not available.
Shares of the Funds may be purchased in connection with many types of tax-deferred retirement plans. Initial purchase payments in connection with tax-deferred retirement plans must be $250. It is advisable for an individual considering the establishment of a retirement plan to consult with an attorney and/or an accountant with respect to the terms and tax aspects of the plan. Additional details about these plans, application forms and plan documents may be obtained by contacting the Funds.
Automatic Investment Plan
The Funds offer an Automatic Investment Plan (“AIP”), which may be established at any time. By participating in the AIP, shareholders may automatically make purchases of shares of a Fund on a regular, convenient basis. A shareholder may elect to make automatic deposits on any day of the month. There is a $50 minimum for each automatic transaction.
Under the AIP, shareholders’ banks or other financial institutions debit pre-authorized amounts drawn on their accounts each month and apply such amounts to the purchase of shares of a Fund. The AIP can be implemented with any financial institution that is a member of the Automated Clearing House. No service fee is charged to shareholders for participating in the AIP. An application to establish the AIP may be obtained from the Funds. The Funds reserve the right to suspend, modify or terminate the AIP without notice.
Dividend Reinvestment Plan
Unless a shareholder elects otherwise by written notice to a Fund, all income dividends and all capital gains distributions payable on shares of the Fund will be reinvested in additional shares of the Fund at the NAV in effect on the dividend or distribution payment date. Each Fund acts as the shareholder’s agent to reinvest dividends and distributions in additional shares and hold for his/her account the additional full and fractional shares so acquired. A shareholder may at any time change his/her election as to whether to receive his/her dividends and distributions in cash or have them reinvested by giving written notice of such change of election to the Fund. Such change of election applies to dividends and distributions, the record dates of which fall on or after the date that the Fund receives the written notice.
Systematic Withdrawal Plan
A shareholder who owns shares in a Fund worth at least $10,000 at the current NAV may, by completing an Application which may be obtained from the Funds’ transfer agent, U.S. Bancorp Fund Services, LLC, create a Systematic Withdrawal Plan (“SWP”) from which a fixed sum will be paid to the shareholder at regular intervals. To establish the SWP, the shareholder appoints the Fund as the shareholder’s agent to effect redemptions of Fund shares held in the shareholder’s account for the purpose of making monthly or quarterly withdrawal payments of a fixed amount from the account.
The minimum amount of a withdrawal payment is $250. These payments will be made out of the proceeds of periodic redemption of shares in the account at NAV. Redemptions will be made on the business day of each month selected by a shareholder or, if that day is a holiday, on the next business day. Because a SWP may reduce, and eventually deplete, a shareholder’s account over time, it may be advisable to reinvest all income dividends and capital gains distributions payable by the Fund (please note that income dividends an capital gains distributions are reinvested unless a shareholder elects otherwise by written notice to the Fund). The shareholder may purchase additional Fund shares in the shareholder’s account at any time.
Withdrawal payments cannot be considered to be yield or income on the shareholder’s investment, since portions of each payment will normally consist of a return of capital. Depending on the size or the frequency of the disbursements requested and the fluctuation in the value of the Fund’s portfolio, redemptions for the purpose of making such disbursements may reduce or even exhaust the shareholder’s account.
The Funds have established an Anti-Money Laundering Compliance Program (the “Program”) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). In order to ensure compliance with this law, the Funds’ Program provides for the development of internal practices, procedures and controls, designation of anti-money laundering officers, an ongoing training program and an independent audit function to determine the effectiveness of the Program.
Procedures to implement the Program include, but are not limited to, determining that the Funds’ transfer agent has established proper anti-money laundering procedures, reporting suspicious and/or fraudulent activity, checking shareholder names against designated government lists, including checking to ensure that a customer does not appear on the Treasury’s Office of Foreign Asset Control “Specifically Designated Nationals and Blocked Persons” list, and a complete and thorough review of all new applications to open an account. The Funds will not transact business with any person or entity whose identity cannot be adequately verified under the provisions of the USA PATRIOT Act.
The Funds maintain written policies and procedures regarding the disclosure of their portfolio holdings to ensure that disclosure of information about portfolio securities are in the best interests of each Fund’s shareholders.
Portfolio Holdings Disclosure Policies
The Funds are required by the SEC to file their complete portfolio holdings schedule with the SEC on a quarterly basis. This schedule is filed with the Funds’ annual and semi-annual reports on Form N-CSR for the second and fourth fiscal quarters and on Form N-Q for the first and third quarters. The portfolio holdings information provided in these reports is as of the end of the quarter in question. Form N-CSR must be filed with the SEC no later than ten (10) calendar days after the Funds transmit their annual or semi-annual report to its shareholders. Form N-Q must be filed with the SEC no later than sixty (60) calendar days after the end of the applicable quarter. Additionally, the Funds will post their portfolio holdings on its website no later than thirty (30) calendar days after each calendar quarter end.
The service providers of the Funds which have contracted to provide services to the Funds including, for example, the Funds’ custodian, the Funds’ accountant and the Funds’ administrator, and which require portfolio holdings information in order to perform those services may receive the Funds’ holdings information prior to and more frequently than the public disclosure of such information (“non-standard disclosure”). Non-standard disclosure of portfolio holdings information may also be provided to legal counsel, regulators such as the SEC or the Financial Industry Regulatory Authority (as requested), entities that provide a service to the Funds’ investment adviser (provided that the service is related to the investment advisory services that such investment adviser provides to the Funds), and to other third-parties when the Funds have a legitimate business purpose for doing so. Specifically, the Funds’ disclosure of their portfolio holdings may include disclosure:
|
·
|
to the Funds’ auditors for use in providing audit opinions;
|
|
·
|
to financial printers for the purpose of preparing the Funds’ regulatory filings;
|
|
·
|
for the purpose of due diligence regarding a merger or acquisition;
|
|
·
|
to a new adviser or sub-adviser prior to the commencement of its management of the Fund;
|
|
·
|
to rating agencies for use in developing a rating for a Fund;
|
|
·
|
to service providers, such as proxy voting services providers and portfolio-management database providers in connection with their providing services benefiting the Funds; and
|
|
·
|
for purposes of effecting in-kind redemptions of securities to facilitate orderly redemption of portfolio assets and minimal impact on remaining Fund shareholders.
|
As permitted by the Funds’ written policies and procedures, the Funds’ Vice President and Treasurer, has determined that the Funds may provide their portfolio holdings to the rating and ranking organizations listed below on a quarterly basis:
Morningstar
®
, Inc.
Lipper, Inc.
Standard & Poor’s
®
Ratings Group
Bloomberg™, L.P.
In all instances of such non-standard disclosure, unless such party is a regulatory or other governmental entity, the receiving party will either be subject to a confidentiality agreement that restricts the use of such information to purposes specified in such agreement, or, by reason of the federal securities laws, will be (1) prohibited as an “insider” from trading on the information and (2) have a duty of trust and confidence to the Funds because the receiving party has a history and practice of sharing confidences such that the receiving party knows or reasonably should know that the Funds expect that the receiving party will maintain its confidentiality.
Other than the non-standard disclosure discussed above, if a third-party requests specific, current information regarding a Fund’s portfolio holdings, the Fund will refer the third-party to the latest regulatory filing or the website.
It is the Funds’ policy that neither the Funds, nor their investment adviser, nor any other party shall accept any compensation or other consideration in connection with the disclosure of information about portfolio securities.
Portfolio Holdings Disclosure Procedures
There may be instances where the interests of a Fund’s shareholders respecting the disclosure of information about portfolio securities may conflict or appear to conflict with the interests of the Fund’s investment adviser, any principal underwriter for the Fund or an affiliated person of the Fund (including such affiliated person’s investment adviser or principal underwriter). In such situations, the conflict must be disclosed to the Board of Directors of the Funds, and the Board must be afforded the opportunity to determine whether or not to allow such disclosure.
The Board will regularly review a list of recipients of non-standard disclosure of portfolio holdings information.
Only the Board may waive these portfolio holdings disclosure policies and procedures. Although the Funds cannot presently visualize that any proposed waivers would be given, the Funds do recognize that waivers may be granted in the event of unusual or unforeseen circumstances so long as the Board makes a specific determination that the waiver is in the best interests of the Funds and their shareholders. Only the Board may amend the Funds’ portfolio holdings disclosure policies and procedures.
Review of Portfolio Holdings Disclosure Policies and Procedures
The Board of the Funds will periodically review the Funds’ portfolio holdings disclosure policies and procedures and recommend such changes as the Board determines to be appropriate.
The Board is responsible for the overall management of the Funds. This includes establishing the Funds’ policies, approval of all significant agreements between the Funds and persons or companies providing services to the Funds, and the general supervision and review of the Funds’ investment activities. As a Maryland corporation, the day-to-day operations of the Funds are delegated to the officers of the Funds, subject to the investment objectives and policies of the Funds and to general supervision by the Board.
Management Information
The name, age (as of the date of this SAI), address, principal occupations during the past five years, and other information with respect to each of the directors are set forth in the following tables, along with information for the officers of the Funds. The information is provided as of the date of this SAI.
|
Name, Address, and Age
|
|
Position(s) Held with Funds and Number of Portfolios in Fund Complex Overseen by Director
|
|
Term of Office and Length of Time Served
|
|
Principal Occupation(s) during Past 5 Years
|
|
Other Directorships Held by Director during the Past 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
“Disinterested” Directors
of the Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dianne C. Click
Age: 51
300 South Wacker Drive,
Suite 2880 Chicago, IL
60606
|
|
Director
Portfolios in Fund Complex Overseen: 3
|
|
Indefinite, until successor elected
Director since 2004
|
|
Ms. Click is a licensed Real Estate Broker in the State of Montana. She has been a partner and a principal owner of a real estate sales company, Bozeman Broker Group, since 2004. She has been licensed in the
state of Montana since 1995.
|
|
Perritt MicroCap Opportunities Fund, Inc. (1994–2013)
|
|
|
|
|
|
|
|
|
|
|
|
David S. Maglich
Age: 56
300 South Wacker Drive,
Suite 2880 Chicago, IL
60606
|
|
Director
Portfolios in Fund Complex Overseen: 3
|
|
Indefinite, until successor elected
Director since 2004
|
|
Mr. Maglich is a Shareholder with the law firm of Fergeson, Skipper et. al. in Sarasota, Florida and has been employed with such firm since 1989.
|
|
Perritt MicroCap Opportunities Fund, Inc. (1987–2013)
|
|
Name, Address, and Age
|
|
Position(s) Held with Fund and Number of Portfolios in Fund Complex Overseen by Director
|
|
Term of Office and Length of Time Served
|
|
Principal Occupation(s) during Past 5 Years
|
|
Other Directorships Held by Director during the Past 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
“Interested” Director
of the Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Corbett
(1)
Age: 48
300 South Wacker Drive,
Suite 2880 Chicago, IL
60606
|
|
President
Portfolios in Fund Complex Overseen: 3
|
|
One-year term as President
As Director, indefinite, until successor elected
Director since 2010
President since 2004
|
|
Mr. Corbett was President of the Perritt MicroCap Opportunities Fund, Inc. (1999–2013) and President of the Perritt Funds, Inc. since 2004. He has served as President of the Adviser since 2010, and previously served as Vice President of the Adviser from 1997 until 2010. Mr. Corbett began his tenure with Perritt Capital management in 1990 as a research analyst. He assumed portfolio management responsibilities in 1996 and now serves as portfolio manager for both Funds.
|
|
Perritt MicroCap Opportunities Fund, Inc. (2010–2013)
|
(1)
Mr. Corbett is an interested person of the Funds based upon his position with the Adviser.
|
Name, Address, and Age
|
|
Position(s) Held with Fund and Number of Portfolios in Fund Complex Overseen by Director
|
|
Term of Office and Length of Time Served
|
|
Principal Occupation(s) during Past 5 Years
|
|
Other Directorships Held by Director during the Past 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
Officers of the Funds Other
Than Mr. Corbett
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Buh
Age: 52
300 South Wacker Drive,
Suite 2880
Chicago, IL 60606
|
|
Vice President and Treasurer
|
|
One-year term
Since 2012
|
|
Mr. Buh has been Vice President and Treasurer of the Funds and Chief Financial Officer of the Adviser since 2012. He has over 25 years of experience in corporate accounting, administration, tax analysis and strategic planning for growth and development. He has a BS in accounting, an MBA from DePaul University, and is a CPA and CFA.
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Allison B. Hearst
Age: 51
300 South Wacker Drive,
Suite 2880
Chicago, IL 60606
|
|
Secretary
|
|
One-year term
Since 2010
|
|
Mrs. Hearst has 14 years of experience in the mutual fund industry, including a previous tenure at the Adviser beginning in 1990. Mrs. Hearst returned to the Adviser in 2007.
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Lynn E. Burmeister
Age: 54
300 South Wacker Drive,
Suite 2880
Chicago, IL 60606
|
|
Vice President and Chief Compliance Officer
|
|
One-year term
Since 2010
|
|
Mrs. Burmeister has been the Chief Compliance Officer since May 1, 2010, and oversees all compliance matters for the Funds and the Adviser. She also coordinates the administration of the Funds and is a liaison with the firm’s corporate counsel. Mrs. Burmeister has worked in the financial industry since 1980. Her previous experience includes work at Harris Associates, Gofen & Glossberg and Optimum Investments.
|
|
N/A
|
Qualification of Directors
Michael J. Corbett has been the president and a portfolio manager of the MicroCap Fund (including the Predecessor MicroCap Fund) since 1996, a portfolio manager of the Ultra MicroCap Fund since its inception in 2004, and a portfolio manager of the Low Priced Stock Fund since its inception in 2014. His experience and skills as a portfolio manager, as well as his familiarity with the investment strategies utilized by the Adviser and with the Funds’ portfolios, led to the conclusion that he should serve as a director. Dianne C. Click’s experience as a partner and principal owner of a real estate sales company has provided her with a firm understanding of financial statements and the issues that confront businesses, enabling her to provide the Board of Directors valuable input and oversight. As a partner in a law firm, David S. Maglich has extensive experience working with regulated industries, and a deep understanding of financial statements, making him a valuable source of information and insight. Each of Ms. Click and Mr. Maglich take a conservative and thoughtful approach to addressing issues facing the Funds. These combinations of skills and attributes led to the conclusion that each of Ms. Click and Mr. Maglich should serve as a director.
Board Leadership Structure
The Board has general oversight responsibility with respect to the operation of the Funds. The Board has engaged the Adviser to manage the Funds and is responsible for overseeing the Adviser and other service providers to the Funds in accordance with the provisions of the 1940 Act and other applicable laws.
The Board does not have a Chairman of the Board. As President of the Funds, Mr. Corbett is the presiding officer at all meetings of the Board. The Board does not have a lead independent director. The Board has determined that its leadership structure is appropriate because it has been in place for many years and during that time the Funds have delivered positive returns for their investors.
Board Oversight of Risk
Through the Board’s direct oversight role and the officers and service providers of the Funds, the Board performs a risk oversight function for the Funds. To effectively perform its risk oversight function, the Board, among other things, performs the following activities: receives and reviews reports related to the performance and operations of the Funds; reviews and approves, as applicable, the compliance policies and procedures of the Funds; approves the Funds’ principal investment policies; adopts policies and procedures designed to deter market timing; meets with representatives of various service providers, including the Adviser and the independent registered public accounting firm of the Funds, to review and discuss the activities of the Funds and to provide direction with respect thereto; and appoints a chief compliance officer of the Funds who oversees the implementation and testing of the Funds’ compliance program and reports to the Board regarding compliance matters for the Funds and their service providers.
Not all risks that may affect the Funds can be identified nor can controls be developed to eliminate or mitigate their occurrence or effects. It may not be practical or cost effective to eliminate or mitigate certain risks, the processes and controls employed to address certain risks may be limited in their effectiveness, and some risks are simply beyond the reasonable control of the Funds, the Adviser or other service providers. Moreover, it is necessary to bear certain risks (such as investment-related risks) to achieve the Funds’ goals. As a result of the foregoing and other factors, the Funds’ ability to manage risk is subject to substantial limitations.
Board Committees and Disinterested Directors
The Board has no committees. Pursuant to the Company’s Bylaws, while the Company does not have an Audit Committee, the directors who are not “interested persons” of the Company or any of its affiliates, within the meaning of the 1940 Act, and are “independent” of the Company and any of its affiliates as that term is defined in Section 301 of the Sarbanes-Oxley Act of 2002, have the responsibility for overseeing the Company’s accounting and auditing processes, including the responsibility and authority to engage the independent registered public accounting firm selected to perform audit functions for the Company.
In overseeing the independent registered public accounting firm (the “Auditor”), the disinterested directors: (1) review the Auditor’s independence from the Funds and management, and from the Adviser; (2) review periodically the level of fees approved for payment to the Auditor and the pre-approved non-audit services it has provided to the Funds to ensure their compatibility with the Auditor’s independence; (3) review the Auditor’s performance, qualifications and quality control procedures; (4) review the scope of and overall plans for the annual audit; (5) review the Auditor’s performance, qualifications and quality control procedures; (6) consult with management and the Auditors with respect to the Funds’ processes for risk assessment and risk management; and (7) review with management the scope and effectiveness of the Funds’ disclosure controls and procedures, including for purposes of evaluating the accuracy and fair presentation of the Company’s financial statements in connection with certifications made by the CEO and CFO.
In determining each year whether to reappoint the Auditors as the Funds’ independent registered public accounting firm, the disinterested directors take into consideration their experience overseeing the Auditors, and a number of other factors, including the following: (1) the length of time the Auditor has been engaged by the Funds as the independent registered public accounting firm; (2) the Auditor’s historical and recent performance on the audit; (3) an assessment of the professional qualifications and past performance of the lead audit partner and the Auditor; (4) the quality of the disinterested directors’ ongoing discussions with the Auditor; and (5) external data relating to audit quality and performance, including recent Public Company Accounting Oversight Board (PCAOB) reports on the Auditor and its peer firms. Based on the disinterested directors’ evaluation, the disinterested directors then determine whether they believe that the Auditor is independent and that it is in the best interests of the Funds and their shareholders to retain the Auditor to serve as the independent registered public accounting firm.
Compensation
The Funds’ standard method of compensating the non-interested Directors is to pay each such Director an annual retainer of $12,000 plus $3,000 for each face-to-face meeting of the Board of Directors that the Director attends, $1,000 for each telephonic meeting of the Board of Directors that the Director attends and $500 for each meeting with the Chief Compliance Officer that the Director attends. Under normal circumstances, the compensation for each of the non-interested Directors will amount to $44,000 from the Funds annually based on two face-to-face meetings, two telephonic meetings, and four meetings with the Chief Compliance Officer. The Funds also reimburse such Directors for their reasonable travel expenses incurred in attending meetings of the Board of Directors. The Funds do not provide pension or retirement benefits to its Directors. The table below sets forth the compensation paid by the Funds to the directors of the Funds during the fiscal year ended October 31, 2013:
COMPENSATION TABLE
|
Name of Person
|
|
Aggregate Compensation from Funds
|
|
Pension or Retirement Benefits Accrued as Part of Fund Expenses
|
|
Estimated Annual Benefits Upon Retirement
|
|
Total Compensation from Fund Complex
Paid to Trustees
|
|
|
|
|
|
|
|
|
|
|
|
Disinterested Persons of the Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dianne C. Click
|
|
$44,000
|
|
$0
|
|
$0
|
|
$44,000
|
|
|
|
|
|
|
|
|
|
|
|
David S. Maglich
|
|
$44,000
|
|
$0
|
|
$0
|
|
$44,000
|
|
|
|
|
|
|
|
|
|
|
|
Interested Person of the Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Corbett
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Code of Ethics
The Funds and the Adviser have each adopted a Code of Ethics. Each Code of Ethics permits personnel subject to the Code to invest in securities, including securities held by the Funds, subject to certain restrictions. The Code generally prohibits, among other things, persons subject thereto from purchasing or selling securities if they know at the time of such purchase or sale that the security is being considered for purchase or sale by the Funds or is being purchased or sold by the Funds.
Proxy Voting Policy
The Funds have adopted a Proxy Voting Policy (the “Proxy Voting Policy”) that sets forth their proxy voting policies and related procedures. When a Fund votes proxies relating to securities that it owns, the Fund generally follows the so-called “Wall Street Rule” (
i.e.
, it votes as management recommends or instructs the Adviser to sell the stock prior to the meeting). The Funds believe that following the “Wall Street Rule” is consistent with the economic best interests of their shareholders.
There may be instances where the interests of the Adviser, employees of which are officers of the Funds and vote proxies for the Funds, may conflict or appear to conflict with the interests of the Funds. In such situations the Funds’ officers will, consistent with their duty of loyalty, vote the securities in accordance with the Funds’ pre-determined voting policy, the “Wall Street Rule,” but only after disclosing any such conflict to the Board prior to voting and affording the Board the opportunity to direct the officers in the voting of such securities.
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling 1-800-332-3133 and on the SEC’s website at http://www.sec.gov.
Set forth below are the names and addresses of all holders of each Fund’s shares who as of January 31, 2014, owned more than 5% of the then outstanding shares of such Fund. These holders are referred to as principal shareholders. As a group, all of the officers and directors of the Fund (six persons in total) owned less than 1% of each Fund’s outstanding shares as of January 31, 2014.
MicroCap Fund
|
Name of Shareholder
|
% Ownership
|
Record or Beneficial Holder
|
|
Charles Schwab & Co., Inc.
For the benefit of its customers
101 Montgomery Street
San Francisco, CA 94104-4151
|
42.47%
|
Record
|
|
National Financial Services, LLC
For the benefit of its customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
|
25.42%
|
Record
|
|
TD Ameritrade Inc.
For The Exclusive Benefit of Its Clients
PO Box 2226
Omaha, NE 68103-2226
|
8.11%
|
Record
|
Ultra MicroCap Fund
|
Name and Address
|
% Ownership
|
Record or Beneficial Holder
|
|
National Financial Services, LLC
For the benefit of its customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
|
43.36%
|
Record
|
|
TD Ameritrade Inc.
For The Exclusive Benefit of Its Clients
PO Box 2226
Omaha, NE 68103-2226
|
23.17%
|
Record
|
|
Charles Schwab & Co., Inc.
For the benefit of its customers
101 Montgomery St.
San Francisco, CA 94104-4151
|
20.14%
|
Record
|
No shareholder information is provided for the Low Priced Stock Fund since it had not commenced operations prior to the date of this SAI.
No person is deemed to “control” the Funds, as that term is defined in the 1940 Act, because the Funds do not know of any person who owns beneficially or through controlled companies more than 25% of a Fund’s shares or who acknowledges the existence of control. The Funds do not control any person.
The following table sets forth the dollar range of shares of the Funds beneficially owned by each director of the Funds as of December 31, 2013:
|
Name of Director
|
|
Dollar Range of Shares of the Predecessor MicroCap Fund
|
|
Dollar Range of Shares of the Ultra MicroCap Fund
|
|
Aggregate Dollar Range of Shares in All Funds Overseen by Director in Family of Investment Companies
|
|
|
|
|
|
|
|
|
|
Disinterested Persons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dianne C. Click
|
|
$10,001 – $50,000
|
|
$10,001 – $50,000
|
|
$50,001 – 100,000
|
|
|
|
|
|
|
|
|
|
David S. Maglich
|
|
$50,001 – 100,000
|
|
$10,001 – $50,000
|
|
over $100,000
|
|
|
|
|
|
|
|
|
|
Interested Persons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Corbett
|
|
Over $100,000
|
|
over $100,000
|
|
over $100,000
|
No ownership information is provided for the Low Priced Stock Fund since it had not commenced operations prior to the date of this SAI.
Perritt Capital Management, Inc., 300 South Wacker Drive, Suite 2880, Chicago, Illinois, currently serves as investment adviser to the MicroCap Fund pursuant to an investment advisory agreement dated February 28, 2013, as investment adviser to the Ultra MicroCap Fund pursuant to an investment advisory agreement dated October 5, 2010 and as investment advisor to the Low Priced Stock Fund pursuant to an investment agreement dated February 28, 2014 (collectively, the “Advisory Agreements”). The Adviser is a wholly owned subsidiary of Investment Information Services, Inc. (“
IIS
”). Michael J. Corbett, President of the Adviser, owns a majority of the outstanding common stock of IIS and controls both IIS and the Adviser.
None of the directors who are Disinterested Persons, or any members of their immediate family, own shares of the Adviser or companies controlled by or under common control with the Adviser.
Under the terms of the Advisory Agreements, the Adviser manages each Fund’s investments subject to the supervision of the Company’s Board of Directors. The Adviser is responsible for investment decisions and supplies investment research and portfolio management. Under the Advisory Agreements, the Adviser, at its own expense and without reimbursement from the Funds, will furnish office space and all necessary office facilities, equipment and executive personnel for making the investment decisions necessary for managing the Funds and maintaining its organization, will pay the salaries and fees of all officers and directors of the Funds (except the fees paid to disinterested directors) and will bear all sales and promotional expenses of the Funds.
For the foregoing, the MicroCap Fund and the Low Priced Stock Fund will pay to the Adviser a monthly advisory fee at the annual rate of 1.00% of each of its average daily net assets, and the Ultra MicroCap Fund will pay the Adviser an annual investment advisory fee equal to 1.25% of its average daily net assets less than or equal to $100 million; 1.00% with respect to average daily net assets in excess of $100 million and less than or equal to $200 million; and 0.50% with respect to average daily net assets in excess of $200 million.
The Funds will pay all of their expenses not assumed by the Adviser including, but not limited to, the professional costs of preparing and the cost of printing registration statements required under the Securities Act and the 1940 Act and any amendments thereto, the expenses of registering shares with the SEC and in the various states, the printing and distribution cost of prospectuses for existing shareholders, the cost of director and officer liability insurance, fidelity bond insurance, reports to shareholders, reports to government authorities and proxy statements, interest charges, brokerage commissions, and expenses incurred in connection with portfolio transactions. The Funds will also pay salaries of administrative and clerical personnel, association membership dues, auditing and accounting services, fees and expenses of any custodian or trustees having custody of a Fund’s assets, expenses of calculating the NAV and repurchasing and redeeming shares, and charges and expenses of dividend disbursing agents, registrars, and share transfer agents, including the cost of keeping all necessary shareholder records and accounts and handling any problems relating thereto.
The Adviser has undertaken to reimburse the Funds in the event that the expenses and charges payable by a Fund in any fiscal year, including the investment advisory fee but excluding interest, reimbursement payments to securities lenders for dividend and interest payments on securities sold short, taxes, brokerage commissions and extraordinary items, exceed that percentage of the average NAV of the Fund for such year, as determined by valuations made as of the close of each business day of the year, which is the most restrictive percentage provided by the state laws of the various states in which a Fund’s common stock is qualified for sale. If the states in which the MicroCap Fund’s common stock is qualified for sale impose no restrictions, the Adviser will waive its advisory fee to the extent that the MicroCap Fund’s total operating expenses exceed 1.75% of the Fund’s average net assets. As of the date of this SAI, no such state law provision was applicable to the Funds. Reimbursement of expenses in excess of the applicable limitation will be made on a monthly basis and will be paid to the Funds by reduction of the Adviser’s fee, subject to later adjustment month by month for the remainder of the Funds’ fiscal year. The Adviser may from time to time, at its sole discretion, reimburse the Funds for expenses incurred in addition to the reimbursement of expenses in excess of applicable limitations.
The table below shows the amount of advisory fees paid by the Funds and the amount of fees recouped by the Adviser for the fiscal years shown:
|
Fund
|
Advisory Fees Incurred
|
Waived Fees and/or Expenses Reimbursed by Adviser
|
Recouped Fees and Expenses
|
Net Fees paid to the Adviser
|
|
Predecessor MicroCap Fund
|
|
|
|
|
|
Year Ended October 31, 2013
|
$3,660,508
|
$0
|
$0
|
$3,660,508
|
|
Year Ended October 31, 2012
|
$3,362,222
|
$0
|
$0
|
$3,362,222
|
|
Year Ended October 31, 2011
|
$4,124,167
|
$0
|
$0
|
$4,124,167
|
|
|
|
|
|
|
|
Ultra MicroCap Fund
|
|
|
|
|
|
Year Ended October 31, 2013
|
$692,727
|
$0
|
$0
|
$692,727
|
|
Year Ended October 31, 2012
|
$690,395
|
$0
|
$0
|
$690,395
|
|
Year Ended October 31, 2011
|
$1,142,164
|
$0
|
$0
|
$1,142,164
|
No advisory fee information is provided since the Low Priced Stock Fund had not commenced operations prior to the date of this SAI.
The Advisory Agreements continue in effect for as long as their continuance is specifically approved at least annually, by (i) the Board, or by the vote of a majority (as defined in the 1940 Act) of the outstanding shares of the applicable Fund, and (ii) by the vote of a majority of the directors of the Company who are not parties to the Advisory Agreements or interested persons of the Adviser, cast in person at a meeting called for the purpose of voting on such approval (after its initial two year term, the Advisory Agreement for the MicroCap Fund and the Low Priced Stock Fund will be required to be approved annually by the Board or by vote of a majority of the MicroCap Fund’s and the Low Priced Stock Fund’s outstanding voting securities). The Advisory Agreements provide that they may be terminated at any time without the payment of any penalty, by the Board or by vote of a majority of a Fund’s shareholders, on a sixty (60) day written notice to the Adviser, and by the Adviser on the same notice to the Company, and that it shall be automatically terminated if it is assigned.
The adviser to the Funds is Perritt Capital Management, Inc. Michael Corbett serves as portfolio manager of all the Funds. George Metrou serves as the co-portfolio manager of the MicroCap Opportunities Fund, Matthew Brackmann serves as the co-portfolio manager of the Ultra MicroCap Fund, and Brian Gillespie serves as the co-portfolio manager of the Low Priced Stock Fund. In addition to the Funds, Mr. Corbett, Mr. Metrou, Mr. Brackmann and Mr. Gillespie are responsible for the day-to-day management of accounts other than the Funds. Information regarding the other accounts managed by the Funds’ portfolio managers, including the number of accounts, the total assets in those accounts and the categorization of the accounts as of October 31, 2013 is set forth in the following table.
|
Other Accounts
|
|
Total Number of Accounts
|
|
Total Assets
|
|
Total Number of Accounts with Performance Based Fees
|
|
Total Assets of
Accounts with Performance Based Fees
|
|
Michael Corbett
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
0
|
|
$546 million
|
|
0
|
|
0
|
|
Other Pooled Investment Vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other Accounts
|
|
190
|
|
$113 million
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
George Metrou
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
0
|
|
$464 million
|
|
0
|
|
0
|
|
Other Pooled Investment Vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Matthew Brackmann
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
0
|
|
$82 million
|
|
0
|
|
0
|
|
Other Pooled Investment Vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Brian Gillespie
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other Pooled Investment Vehicles
|
|
0
|
|
0
|
|
0
|
|
0
|
|
Other Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
Perritt Capital Management has not identified any material conflicts between the Funds and other accounts managed by the portfolio managers. However, actual or apparent conflicts of interest may arise in connection with the day-to-day management of the Funds and other accounts. The management of the Funds and other accounts may result in unequal time and attention being devoted to the Funds and other accounts. Perritt Capital Management’s fees for the services it provides to other accounts vary and may be higher or lower than the advisory fees it receives from the Funds. This could create potential conflicts of interest in which a portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out performing another.
The portfolio managers’ compensation consists of a fixed salary and bonus. The fixed salary is reviewed periodically by Mr. Corbett as the sole member of the Board of Directors of the Adviser, and may be increased based on the consideration of various factors including, but not limited to, portfolio manager’s experience, overall performance (including how well the Funds and the other accounts perform generally under the management of the portfolio managers), and management responsibilities with the Adviser. The portfolio managers’ fixed salary is not based on the Funds or the other accounts achieving certain performance targets or certain asset values in their portfolios. When the Adviser’s Board of Directors considers the overall performance of the portfolio managers in managing the Funds and the other accounts, it uses the same methods for determining their performance with respect to the Funds and the other accounts. Along with all other employees of the Adviser, the portfolio managers are eligible to receive a discretionary contribution from the Adviser to their IRA account. These contributions range from 0% to 20% of their salary based on the Adviser’s profitability. The portfolio managers are also eligible to receive a bonus based on the pre-tax investment performance of the MicroCap Fund measured against the performance of the Russell 2000
®
Index over rolling one, three and five calendar year periods, and a bonus based on the pre-tax investment performance of the Ultra MicroCap Fund measured against the performance of the Russell Microcap
®
Index over rolling one, three and five calendar year periods. For each such period that the performance of a Fund outperforms its respective index, the portfolio managers receive a bonus equal to a percentage of the portfolio managers’ fixed salary. The percentage is determined by the Adviser in its discretion.
The following table sets forth the dollar range of Fund shares beneficially owned by each portfolio manager as of October 31, 2013, stated using the following ranges: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000.
|
Fund / Portfolio Manager
|
|
Dollar Range of Shares Owned
|
|
MicroCap Fund
|
|
|
|
Michael Corbett
|
|
$100,001 – 500,000
|
|
George Metrou
|
|
$1-10,000
|
|
|
|
|
|
Ultra MicroCap Fund
|
|
|
|
Michael Corbett
|
|
$100,001 – 500,000
|
|
Matthew Brackmann
|
|
$10,001 – 50,000
|
No ownership information is provided for the Low Priced Stock Fund since it had not commenced operations prior to the date of this SAI.
Decisions to buy and sell securities for the Funds are made by the Adviser subject to review by the Board. In placing purchase and sale orders for portfolio securities for the Funds, it is the policy of the Adviser to seek the best execution of orders at the most favorable price in light of the overall quality of custodial, brokerage, soft dollar and research services provided, as described in this and the following paragraph. In selecting brokers to effect portfolio transactions, the determination of what is expected to result in best execution at the most favorable price involves a number of largely judgmental considerations. Among these are the Adviser’s evaluation of the broker’s efficiency in executing and clearing transactions, block trading capability (including the broker’s willingness to position securities) and the broker’s financial strength and stability. Over-the-counter securities are generally purchased and sold directly with principal market makers who retain the difference in their cost in the security and its selling price. In some instances, better prices may be available from non-principal market makers who are paid commissions directly. While some brokers with whom the Funds effect portfolio transactions may recommend the purchase of a Fund’s shares, the Funds may not allocate portfolio brokerage on the basis of recommendations to purchase shares of the Funds.
In allocating brokerage business for the Funds, the Adviser may take into consideration the research, analytical, statistical and other information and services provided by the broker, such as general economic reports and information, reports or analyses of particular companies or industry groups, market timing and technical information, and the availability of the brokerage firm’s analysts for consultation. While the Adviser believes these services have substantial value, they are considered supplemental to the Adviser’s own efforts in the performance of its duties under the Advisory Agreements. Other clients of the Adviser may indirectly benefit from the availability of these services to the Adviser, and the Funds may indirectly benefit from services available to the Adviser as a result of transactions for other clients.
Section 28(e) of the Securities Exchange Act of 1934 (“Section 28(e)”) permits an investment adviser, under certain circumstances, to cause an account to pay a broker or dealer who supplies brokerage and research services a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction. Brokerage and research services include (a) furnishing advice as to the value of securities, the advisability of investing, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts and (c) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement and custody).
The Advisory Agreements provide that the Adviser may cause the Funds to pay a broker that provides brokerage and research services to the Adviser a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting the transaction, if (a) the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of brokerage and research services provided by the executing broker viewed in terms of either the particular transaction or the Adviser’s overall responsibilities with respect to the Funds and the other accounts as to which it exercises investment discretion, (b) such payment is made in compliance with the provisions of Section 28(e), other applicable state and federal laws, and the Advisory Agreements and (c) in the opinion of the Adviser, the total commissions paid by the Funds will be reasonable in relation to the benefits to the Funds over the long term. The investment advisory fee paid by the Funds under the Advisory Agreements is not reduced as a result of the Adviser’s receipt of research services.
The Adviser places portfolio transactions for other advisory accounts. Research services furnished by firms through which the Funds effect their securities transactions may be used by the Adviser in servicing all of its accounts; not all of such services may be used by the Adviser in connection with the Funds. In the opinion of the Adviser, it is not possible to measure separately the benefits from research services to each of the accounts (including the Funds) managed by the Adviser. Because the volume and nature of the trading activities of the accounts are not uniform, the amount of commissions in excess of those charged by another broker paid by each account for brokerage and research services will vary. However, in the opinion of the Adviser, such costs to the Funds will not be disproportionate to the benefits received by the Funds on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Funds and another advisory account. In some cases, this procedure could have an adverse effect on the price or the amount of securities available to the Funds. In making such allocations between the Funds and other advisory accounts, the main factors considered by the Adviser are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and opinions of the persons responsible for recommending the investment.
The table below shows the aggregate brokerage commissions paid by the Predecessor MicroCap Fund and the Ultra MicroCap Fund for the past three fiscal years.
|
Fund
|
Total Brokerage Commissions
|
|
MicroCap Fund*
|
|
|
Year Ended October 31, 2013
|
$773,150
|
|
Year Ended October 31, 2012
|
$659,041
|
|
Year Ended October 31, 2011
|
$765,501
|
|
|
|
|
Ultra MicroCap Fund
|
|
|
Year Ended October 31, 2013
|
$232,005
|
|
Year Ended October 31, 2012
|
$197,842
|
|
Year Ended October 31, 2011
|
$342,503
|
|
______________________________
|
|
|
*Prior to February 28, 2013, these brokerage commissions were paid by the
Predecessor MicroCap Fund.
|
For the fiscal year ended October 31, 2013, the MicroCap Fund and the Ultra MicroCap Fund paid the following brokerage commissions to brokers who also provided research services. The dollar values of the securities traded for the fiscal year ended October 31, 2013 are also shown below:
|
|
Commissions Paid for Soft-Dollar Arrangements
|
Dollar Value of Securities Traded
|
|
MicroCap Fund
|
$ 708,916
|
$ 205,990,657
|
|
Ultra MicroCap Fund
|
$ 141,236
|
$ 25,300,235
|
No brokerage commission information is provided for the Low Priced Stock Fund since it had not commenced operations prior to the date of this SAI.
As of the fiscal year ended October 31, 2013, the following Funds owned the following securities of its “regular brokers or dealers” or their parents:
|
Fund
|
Security of
“Regular Broker/Dealer”
of the Portfolio
|
Value of Portfolio’s
Aggregate Holding of
Securities as of 10/31/13
|
|
MicroCap Fund
|
Oppenheimer Holdings, Inc.
|
$4,623,166
|
No information about the Low Priced Stock Fund’s ownership of its regular brokers or dealers is provided because the Fund had not commenced operations prior to the date of this SAI.
Although the Funds have differing investment objectives (the MicroCap Fund generally invests in larger capitalization companies than the Ultra MicroCap Fund and the Low Priced Stock Fund), there will be times when certain securities will be eligible for purchase by multiple Funds or will be contained in the portfolios of multiple Funds. Although securities of a particular company may be eligible for purchase by the Funds, the Adviser may determine at any particular time to purchase a security for one Fund, but not the another, based on each Fund’s investment objective and in a manner that is consistent with the Adviser’s fiduciary duties under federal and state law to act in the best interests of each Fund.
There may also be times when a given investment opportunity is appropriate for some, or all, of the Adviser’s other client accounts. It is the policy and practice of the Adviser not to favor or disfavor consistently or consciously any client or class of clients in the allocation of investment opportunities, so that to the extent practical, such opportunities will be allocated among clients, including the Funds, over a period of time on a fair and equitable basis.
It is the Adviser’s policy to aggregate the transactions of its large institutional clients (“block trades”), including the Funds, when it believes this will result in the best execution at the most favorable price. When securities are being purchased and/or sold by the Adviser’s large institutional clients, including the Funds, the Adviser will attempt to allocate block trades on a pro rata basis based on the dollar amount available for investing by the client accounts and each client account’s proportionate share of that amount. Each large institutional client, including the Funds, that participates in a block trade will participate at the average share price for all of the Adviser’s transactions in that security on that business day, entered into on behalf of the same group of client accounts.
It is the Adviser’s general policy not to purchase a security in one Fund while simultaneously selling it in another Fund. However, there may be circumstances outside of the Adviser’s control that require the purchase of a security in one portfolio and a sale in the other. For example, when one Fund experiences substantial cash inflows while another Fund experiences substantial cash outflows, the Adviser may be required to buy securities to maintain a fully invested position in one Fund, while selling securities in another Fund to meet shareholder redemptions. In such circumstances, a Fund may acquire assets from another Fund that are otherwise qualified investments for the acquiring Fund, so long as no Fund bears any markup or spread, and no commission, fee or other remuneration is paid in connection with the acquisition, and the acquisition complies with Section 17(a) of the 1940 Act and Rule 17a-7 thereunder. If the purchase and sale are not effected pursuant to Rule 17a-7, then the purchase and/or sale of a security common to both portfolios may result in a higher price being paid by a Fund in the case of a purchase than would otherwise have been paid, or a lower price being received by a Fund in the case of a sale than would otherwise have been received, as a result of a Fund’s transactions affecting the market for such security. In any event, the Funds management believes that under normal circumstances such events will have a minimal impact on a Fund’s per share NAV and its subsequent long-term investment return.
The Funds impose a 2% redemption/exchange fee on the value of shares redeemed ninety (90) days or less after the date of purchase. The redemption/exchange fee will not apply to shares redeemed through the SWP, nor does it apply to shares acquired through the reinvestment of dividends and capital gains. The Funds reserve the right to waive the redemption/exchange fee, subject to their sole discretion, in instances deemed by the Adviser not to be disadvantageous to the Funds or their shareholders and which do not indicate market timing strategies. The redemption/exchange fee is part of the Funds’ market timing policy and is designed to deter market timers and excessive trading. Any proceeds of the fee will be paid to that Fund.
In calculating whether a redemption of Fund shares is subject to a redemption/exchange fee, a shareholder’s holdings will be viewed on a “first in/first out” basis. This means that, in determining whether any fee is due, the shareholder will be deemed to have redeemed the shares he or she acquired earliest. The fee will be calculated based on the current price of the shares as of the redemption date.
Pursuant to Rule 22c-2 under the 1940 Act and shareholder information agreements with financial intermediaries, the Funds have the ability to request information from financial intermediaries concerning trades placed in an omnibus or other multi-investor account (“Omnibus Account”), in order to attempt to monitor trades that are placed by the underlying shareholders of the Omnibus Account. The ability of the Funds to apply their market timing policy to investors investing through financial intermediaries is dependent on the receipt of information necessary to identify transactions by the underlying investors and the financial intermediary’s cooperation in implementing the policy. Investors seeking to engage in excessive short-term trading practices may deploy a variety of strategies to avoid detection, and despite the efforts of the Funds to prevent excessive short-term trading, there is no assurance that the Funds or their agents will be able to identify those shareholders or curtail their trading practices. The ability of the Funds and their agents to detect and limit excessive short-term trading also may be restricted by operational systems and technological limitations.
If suspicious trading patterns are detected in an Omnibus Account, the Funds will request information from the financial intermediary concerning trades placed in the Omnibus Account. The Funds will use this information to monitor trading in the Funds and to attempt to identify shareholders in the Omnibus Account engaged in trading that is inconsistent with the market timing policy or otherwise not in the best interests of the Funds. If the Funds detect such activity then the Funds may request that the financial intermediary take action to prevent the particular investor or investors from engaging in frequent or short-term trading. The Funds generally will communicate with the financial intermediary and request that the financial intermediary take action to cause the inappropriate trading by that participant or participants to cease. If inappropriate trading recurs, the Funds may refuse all future purchases from the Omnibus Account, including those of plan participants not involved in the inappropriate activity.
U.S. Bancorp Fund Services, LLC (“USBFS”), 615 East Michigan Street, Milwaukee, Wisconsin 53202, an affiliate of U.S. Bank, N.A., serves as administrator and fund accountant to the Funds, subject to the overall supervision of the Board. Pursuant to a Fund Administration Servicing Agreement (the “Administration Agreement”), USBFS provides certain administrative services to the Funds. USBFS services include, but are not limited to, the following: acting as a liaison among the Funds’ service providers; coordinating the Board’s communications; maintaining and managing a regulatory compliance calendar; preparing and filing appropriate state securities law filings; maintaining state registrations; preparing and filing annual and semiannual reports on Forms N-CSR, N-Q and N-SAR; preparing financial reports for officers, shareholders, tax authorities and independent registered public accountants; monitoring expense accruals; and preparing monthly financial statements.
The table below shows the administration fees paid by the MicroCap Fund and the Ultra MicroCap Fund for the past three fiscal years.
|
Fund
|
Administration Fee
Paid to USBFS
|
|
MicroCap Fund*
|
|
|
Year Ended October 31, 2013
|
$150,209
|
|
Year Ended October 31, 2012
|
$149,720
|
|
Year Ended October 31, 2011
|
$160,362
|
|
|
|
|
Ultra MicroCap Fund
|
|
|
Year Ended October 31, 2013
|
$22,083
|
|
Year Ended October 31, 2012
|
$27,059
|
|
Year Ended October 31, 2011
|
$37,559
|
|
_________________________
|
|
|
*Prior to February 28, 2013, these administration fees were paid by the Predecessor
MicroCap Fund
|
No administration fee information is provided for the Low Priced Stock Fund since it had not commenced operations prior to the date of this SAI.
The Administration Agreement provides that USBFS shall not be liable to the Funds or their shareholders for anything other than bad faith, negligence or willful misconduct of its obligations or duties. The Administration Agreement does not prohibit USBFS from engaging in other businesses whether of a similar or dissimilar nature or rendering services to others.
USBFS has entered into a fund accounting services agreement with the Funds pursuant to which it acts as fund accountant. As fund accountant, USBFS maintains and keeps current the books, accounts, journals and other records of original entry relating to the business of the Fund and calculates each Fund’s NAV on a daily basis. USBFS also acts as the Funds’ transfer agent and dividend disbursing agent. As transfer agent, USBFS keeps records of shareholder accounts and transactions.
U.S. Bank, N.A., 1555 North RiverCenter Drive, Suite 302, Milwaukee, WI 53212, an affiliate of USBFS, acts as custodian for the Funds pursuant to a custody agreement. As such, U.S. Bank, N.A. holds all securities and cash of the Funds, delivers and receives payment for securities sold, receives and pays for securities purchased, collects income from investments and performs other duties, all as directed by officers of the Funds. U.S. Bank, N.A. does not exercise any supervisory function over the management of the Funds, the purchase and sale of securities or the payment of distributions to shareholders.
The Funds and the Adviser entered into a Distribution Agreement with Quasar Distributors, LLC (“Quasar”), an affiliate of USBFS, pursuant to which Quasar serves as principal underwriter for the Funds. Its principal business address is 615 East Michigan Street, Milwaukee, WI 53202. Quasar sells the Funds’ shares on a best efforts basis. Shares of the Funds are offered continuously. Pursuant to the terms of the Distribution Agreement, the Adviser compensates Quasar for the services that Quasar provides to the Funds under the Agreement. The Funds did not pay any underwriting commissions to Quasar during the fiscal year ended October 31, 2013.
The Low Priced Stock Fund has adopted a plan of distribution (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act, which permits the Fund to pay for expenses incurred in the distribution and promotion of the Fund’s shares and for services provided to shareholders. The Plan is a “reimbursement” plan. This means that the Fund only pays a particular 12b-1 fee to the extent that the Adviser, Quasar or others have incurred expenses in the promotion and distribution of the shares, including but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparation of sales literature and related expenses, advertisements, and other distribution-related expenses, as well as any distribution fees paid to securities dealers or others.
Under the Plan, the Low Priced Stock Fund may pay compensation to any broker-dealer with whom Quasar or the Fund has entered into a contract to distribute shares of the Fund, or to any other qualified financial services firm, for distribution and/or shareholder-related services with respect to shares held or purchased by their respective customers or in connection with the purchase of shares attributable to their efforts. The amount of payments under the Plan in any year shall not exceed 0.25% annually of the Fund’s average daily net assets.
The Plan will remain in effect from year to year provided such continuance is approved at least annually by the vote of a majority of
those Directors who are not “interested persons” (as defined in the 1940 Act) of Perritt Funds, Inc. or the Adviser and who have no direct or indirect interest in the operation of the Plan or any related agreement, including the Distribution Agreement (as described above) (the “Rule 12b-1 Directors”),
and additionally by a vote of either a majority of the Directors or a majority of the outstanding shares of the Low Priced Stock Fund
. The vote for approval of the Plan by Directors
must be cast in person at a meeting called for the purpose of voting on such approval.
The Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the Low Priced Stock Fund’s shareholders. The Plan may not be amended to increase materially the amount of distribution expenses payable under the Plan without approval of the Low Priced Stock Fund’s shareholders. In addition, all material amendments to the Plan must be approved by the Directors in the manner described above.
In approving the Plan, the Rule 12b-1 Directors determined, in the exercise of their business judgment and in light of their fiduciary duties as Directors, that there is a reasonable likelihood that the Plan will benefit the Low Priced Stock Fund and its shareholders. The Board of Directors believes that expenditure of the Low Priced Stock Fund’s assets for distribution expenses under the Plan should assist in the growth of the Fund which will benefit the Fund and its shareholders through increased economies of scale, greater investment flexibility, greater portfolio diversification and less chance of disruption of planned investment strategies. Although approved, the Board of Directors has not authorized payments under the 12b-1 Plan.
The Plan will be renewed only if the Directors make a similar determination for each subsequent year of the Plan. There can be no assurance that the benefits anticipated from the expenditure of the Low Priced Stock Fund’s assets for distribution pursuant to the Plan would be realized, if the Plan is implemented. While the Plan would be in effect, all amounts spent by the Low Priced Stock Fund pursuant to the Plan and the purposes for which such expenditures were made would be reported quarterly to the Board for its review. In addition, if the Plan is implemented, the selection and nomination of those Directors who are not interested persons of the Funds are committed to the discretion of the Rule 12b-1 Trustees during such period as the Plan is in effect.
By reason of his controlling interest in the Adviser, Mr. Corbett may be deemed to have a financial interest in the operation of the Plan.
The NAV of a Fund is determined as of the close of trading on each day the New York Stock Exchange (“NYSE”) is open for trading. The Funds do not determine NAV on days the NYSE is closed and at other times described in the Prospectus. The NYSE is closed on New Year’s Day, Dr. Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned holidays falls on a Sunday, the NYSE will not be open for trading on the succeeding Monday, unless unusual business conditions exist, such as the ending of a monthly or the yearly accounting period. If any of the aforementioned holidays falls on a Saturday, the NYSE will not be open for trading on the preceding Friday. The NYSE also may be closed on national days of mourning or due to natural disaster or other extraordinary events or emergency.
The NAV per share is calculated by adding the value of all securities, cash or other assets, subtracting liabilities, and dividing the remainder by the number of shares outstanding. Each security traded on a national stock exchange (other than on The NASDAQ OMX Group, Inc. (NASDAQ
®
)) is valued at its last sale price on that exchange on the day of valuation. Each security traded on NASDAQ
®
is valued at the NASDAQ
®
Official Closing Price. If there are no sales on the applicable stock exchange on the day in question, then a security is valued at the mean between the then current closing bid and asked prices, unless the spread between the bid and ask is so large that the Adviser believes using the mean would overstate the value of the security, in which case in which case the security will be “fair valued” as described below. OTC Bulletin Board securities are valued at the mean of the latest bid and ask prices unless the spread between the bid and ask is so large that the Adviser believes using the mean would overstate the value of the security, in which case the security will be “fair valued” as described below.
When market quotations are not readily available or are deemed unreliable, the Adviser values securities and other assets by appraisal at their fair value as determined in good faith by the Adviser under procedures established by and under the general supervision and responsibility of the Board. Demand notes, commercial paper, U. S. Treasury Bills and warrants are valued at amortized cost, which approximates fair value. Each Fund values money market instruments that it holds with remaining maturities of less than sixty (60) days at their amortized cost. Other types of securities that the Funds may hold for which fair value pricing might be required include, but are not limited to: (a) illiquid securities, including “restricted” securities and private placements for which there is no public market; (b) securities of an issuer that has entered into a restructuring; (c) securities whose trading has been halted or suspended; and (d) fixed income securities that have gone into default and for which there is not a current market value quotation. Further, if events occur that materially affect the value of a security between the time trading ends on that particular security and the close of the normal trading session of the NYSE, a Fund may value the security at its fair value. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. There can be no assurance that a Fund could obtain the fair value assigned to a security if it were to sell the security at approximately the time at which the Fund determines its NAV per share.
Set forth below is a summary of certain United States federal income tax considerations applicable to the Funds and the purchase, ownership and disposition of shares. This discussion does not purport to be a complete description of the income tax considerations that may be applicable to an investment in the Funds. For example, this summary does not discuss certain tax considerations that may be relevant to non U.S. holders or holders who are subject to special rules under the Internal Revenue Code (the “Code”), including shareholders subject to the alternative minimum tax, tax-exempt organizations, certain financial institutions, dealers in securities, and pension plans and trusts. In addition, this summary does not discuss any aspect of U.S. estate or gift tax or foreign, state, or local taxes.
Taxation of the Funds
The Funds have elected to be treated, have qualified, and intend to qualify as a regulated investment company under Subchapter M of the Code. To qualify as a regulated investment company, the Funds must comply with certain requirements of the Code relating to, among other things, the sources of its income and the diversification of its assets. If a Fund so qualifies as a regulated investment company and distributes to its shareholders at least 90% of its investment company taxable income (generally including ordinary income and net short-term capital gain), it will not be subject to U.S. federal income tax on its investment company taxable income (including net short-term capital gain, if any), realized during any fiscal year, or on its net capital gain realized during any fiscal year, to the extent that it distributes such income and gain to the Fund’s shareholders. If a Fund failed to qualify as a regulated investment company under Subchapter M in any fiscal year, it would be treated as a corporation for federal income tax purposes and, as such, the Fund (but not its shareholders) would be required to pay income taxes on the Fund’s net investment income and net realized capital gains, if any, at the rates generally applicable to corporations, whether or not the Fund distributed such income or gains. In addition, distributions to a Fund’s shareholders, whether from the Fund’s net investment income or net realized capital gains, would be treated as taxable dividends to the extent of current or accumulated earnings and profits of the Fund.
As a regulated investment company, a Fund is generally not allowed to utilize any net operating loss realized in a taxable year in computing investment company taxable income in any prior or subsequent taxable year. A Fund may, however, carry forward capital losses in excess of capital gains (“net capital losses”) from a taxable year to offset capital gains, if any, realized in a subsequent taxable year, subject to certain limitations. Net capital losses incurred in taxable years beginning after December 22, 2010 may be carried forward for an unlimited period and retain their character as either short-term or long-term capital losses.
A Fund will be subject to income tax at regular corporate rates on any taxable income or gains that it does not distribute to its shareholders. The Funds intend to distribute substantially all of their investment company taxable income and net capital gain each fiscal year.
The Code imposes a 4% nondeductible excise tax on a Fund to the extent the Fund does not distribute by the end of any calendar year at least the sum of (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98.2% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. While each Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% nondeductible excise tax, there can be no assurance that sufficient amounts of the Fund’s taxable income and capital gain will be distributed to avoid entirely the imposition of the excise tax. In that event, a Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
A Fund may use “equalization accounting” (in lieu of making some cash distributions) in determining the portion of its income and gains that has been distributed. If a Fund uses equalization accounting, it will allocate a portion of its undistributed investment company taxable income and net capital gain to redemptions of Fund shares and will correspondingly reduce the amount of such income and gains that it distributes in cash. If the IRS determines that a Fund’s allocation is improper and that the Fund has under-distributed its income and gain for any taxable year, the Fund may be liable for federal income and/or excise tax. If, as a result of such adjustment, a Fund fails to satisfy the distribution requirements for maintaining its status as a regulated investment company, the Fund will not qualify that year as a regulated investment company.
Taxation of Shareholders
Dividends from net investment income and short-term capital gains are taxable to shareholders as ordinary income (although a portion of such dividends may be taxable to shareholders at the lower rate applicable to dividend income), while distributions of net long-term capital gains are taxable as long-term capital gain regardless of the shareholder’s holding period for the shares. Distributions from a Fund are taxable to shareholders, whether received in cash or in additional shares of the Fund. In the case of domestic corporate shareholders, a portion of a Fund’s income distributions may be eligible for the 70% dividends-received deduction.
Any dividend or capital gain distribution paid shortly after a purchase of shares of a Fund will have the effect of reducing the per share net asset value of such shares by the amount of the dividend or distribution. Even if the net asset value of the shares of a Fund immediately after a dividend or distribution is less than the cost of such shares to the shareholder so that the dividend or distribution is the economic equivalent of a return of capital to the shareholder, the dividend or distribution will be taxable to the shareholder.
Redemption of shares will generally result in a capital gain or loss for income tax purposes for shareholders who hold such shares for investment. Such capital gain or loss will be long-term or short-term, depending on the shareholder’s holding period in the redeemed shares. However, if a loss is realized on shares held for six months or less, and the investor received a capital gain distribution during that period, then such loss is treated as a long-term capital loss to the extent of the capital gain distribution received. Any loss realized on a sale or exchange of Fund shares will be disallowed to the extent that shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after disposition of the original shares. In that case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
In addition to reporting gross proceeds from redemptions, exchanges or other sales of mutual fund shares, federal law requires mutual funds, such as the Funds, to report to the IRS and shareholders the “cost basis” of shares acquired by shareholders on or after January 1, 2012 (“covered shares”) that are redeemed, exchanged or otherwise sold on or after such date. These requirements generally do not apply to investments through a tax-deferred arrangement or to certain types of entities (such as C corporations). S corporations, however, are not exempt from these new rules.
Please note that if a shareholder is a C corporation, unless the shareholder has previously notified the Funds in writing that it is a C corporation, the shareholder must complete a new Form W−9 exemption certificate informing the Funds of such C corporation status or the Funds will be obligated to presume that the shareholder is an S corporation and to report the cost basis of covered shares that are redeemed, exchanged or otherwise sold after January 1, 2012 to the IRS and to the shareholder pursuant to these rules. Also, if a shareholder holds Fund shares through a broker (or another nominee), the shareholder should contact that broker (nominee) with respect to the reporting of cost basis and available elections for the shareholder’s account.
If a shareholder holds Fund shares directly, the shareholder may request that the shareholder’s cost basis be calculated and reported using any one of a number of IRS approved alternative methods. A shareholder should contact the Funds to make, revoke or change the shareholder’s election. If a shareholder does not affirmatively elect a cost basis method, the Funds will use the average cost basis method as their default method for determining the shareholder’s cost basis.
Shareholders should note that they will continue to be responsible for calculating and reporting the tax basis, as well as any corresponding gains or losses, of Fund shares purchased prior to January 1, 2012 and subsequently redeemed, exchanged or sold. Shareholders are encouraged to consult with their tax advisors regarding the application of the new cost basis reporting rules to them and, in particular, which cost basis calculation method they should elect. In addition, because the Funds are not required to, and in many cases do not possess the information to, take into account all possible basis, holding period or other adjustments into account in reporting cost basis information to shareholders, shareholders also should carefully review the cost basis information provided to them by the Funds and make any additional basis, holding period or other adjustments that are required when reporting these amounts on their federal income tax return.
The Funds may be required to withhold Federal income tax at a current rate of 28% (“backup withholding”) from dividend payments and redemption proceeds if a shareholder fails to furnish the Funds with a correct social security or other tax identification number and certify under penalty of perjury that such number is correct and that he or she is not subject to backup withholding due to the underreporting of income. The certification form is included as part of the share purchase application and should be completed when the account is opened.
Fund shareholders may be subject to state, local and foreign taxes on their Fund distributions.
This section is not intended to be a complete discussion of present or proposed federal income tax laws and the effect of such laws on an investor. Investors are urged to consult with their respective tax advisers for a complete review of the tax ramifications of an investment in the Funds.
The Maryland General Corporation Law permits registered investment companies, such as the Company, to operate without an annual meeting of shareholders under specified circumstances if an annual meeting is not required by the 1940 Act. The Company has adopted the appropriate provisions in its Bylaws and may, at its discretion, not hold an annual meeting in any year in which the election of directors is not required to be acted upon by the shareholders under the 1940 Act.
The Company’s Bylaws also contain procedures for the removal of directors by its shareholders. At any meeting of shareholders, duly called and at which a quorum is present, the shareholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast thereon, remove any director or directors from office and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less than ten percent (10%) of all the votes entitled to be cast at such meeting, the Secretary of the Company shall promptly call a special meeting of shareholders for the purpose of voting upon the question of removal of any director. Whenever ten (10) or more shareholders of record who have been such for at least six (6) months preceding the date of application, and who hold in the aggregate either shares having a NAV of at least Twenty-Five Thousand Dollars ($25,000) or at least one percent (1%) of the total outstanding shares, whichever is less, shall apply to the Company’s Secretary in writing, stating that they wish to communicate with other shareholders with a view to obtaining signatures to a request for a meeting as described above and accompanied by a form of communication and request which they wish to transmit, the Secretary shall within five (5) business days after such application either: (1) afford to such applicants access to a list of the names and addresses of all shareholders as recorded on the books of the Company; or (2) inform such applicants as to the approximate number of shareholders of record and the approximate cost of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the last sentence of the preceding paragraph, the Secretary, upon the written request of such applicants, accompanied by a tender of the material to be mailed and of the reasonable expenses of mailing, shall, with reasonable promptness, mail such material to all shareholders of record at their addresses as recorded on the books unless within five (5) business days after such tender the Secretary shall mail to such applicants and file with the SEC, together with a copy of the material to be mailed, a written statement signed by at least a majority of the Board of Directors to the effect that in their opinion either such material contains untrue statements of fact or omits to state facts necessary to make the statements contained therein not misleading, or would be in violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the written statement so filed, the SEC may, and if demanded by the Board of Directors or by such applicants shall, enter an order either sustaining one or more of such objections or refusing to sustain any of them. If the SEC shall enter an order refusing to sustain any of such objections, or if, after the entry of an order sustaining one or more of such objections, the SEC shall find, after notice and opportunity for hearing, that all objections so sustained have been met, and shall enter an order so declaring, the Secretary shall mail copies of such material to all shareholders with reasonable promptness after the entry of such order and the renewal of such tender.
The Company’s Articles of Incorporation permit the Board of Directors to issue One Billion (1,000,000,000) shares of common stock. The Board of Directors has the power to designate one or more classes (“series”) of shares of common stock and to classify or reclassify any unissued shares with respect to such series. Currently the shares of the MicroCap Fund, the Ultra MicroCap Fund and the Low Priced Stock Fund are the only class of shares being offered by the Company. Shareholders are entitled: (i) to one vote per full share; (ii) to such distributions as may be declared by the Company’s Board of Directors out of funds legally available; and (iii) upon liquidation, to participate ratably in the assets available for distribution. Fractional shares have the same rights proportionately as do full shares. There are no conversion or sinking fund provisions applicable to the shares, and the holders have no preemptive rights and may not cumulate their votes in the election of directors. Consequently the holders of more than fifty percent (50%) of the shares of the Funds voting for the election of directors can elect the entire Board of Directors and in such event the holders of the remaining shares voting for the election of directors will not be able to elect any person or persons to the Board of Directors.
The shares are redeemable and are transferable. All shares issued and sold by the Funds will be fully paid and non-assessable. Fractional shares entitle the holder to the same rights as whole shares. The Funds will not issue certificates evidencing shares. Instead the shareholder’s account will be credited with the number of shares purchased, relieving shareholders of responsibility for safekeeping of certificates and the need to deliver them upon redemption. Written confirmations are issued for all purchases of shares.
Cohen Fund Audit Services, Ltd. serves as the Funds’ independent registered public accounting firm.
The Funds may invest in commercial paper and commercial paper master notes assigned ratings of A-1 or A-2 by Standard & Poor’s Corporation (“Standard & Poor’s”) or Prime-1 or Prime-2 by Moody’s Investors Service, Inc. (“Moody’s”). A brief description of the ratings symbols and their meanings follows:
Standard & Poor’s Commercial Paper Ratings
. A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. The categories rated A-3 or higher are as follows:
A-1. This highest category indicates that the degree of safety regarding timely payment is strong. Those issuers determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is satisfactory. However the relative degree of safety is not as high as for issuers designed “A-1.”
A-3. Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designation.
Moody’s Short-Term Debt Ratings
. Moody’s short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations which have an original maturity not exceeding one year. Obligations relying upon support mechanisms such as letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics:
|
·
|
Leading market positions in well-established industries.
|
|
·
|
High rates of return on funds employed.
|
|
·
|
Conservative capitalization structure with moderate reliance on debt and ample asset protection.
|
|
·
|
Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
|
|
·
|
Well-established access to a range of financial markets and assured sources of alternate liquidity.
|
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
-39-