FIRST CHOICE FUNDS TRUST
4400 COMPUTER DRIVE, WESTBOROUGH, MA 01581
GENERAL AND ACCOUNT INFORMATION: 1-888-FIRST16
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (the "SAI") describes the
three existing series of First Choice Funds Trust (each a "Fund," collectively,
the "Funds"). The Funds are:
o First Choice U.S. Treasury Reserve Fund
o First Choice Cash Reserve Fund
o First Choice Equity Fund
Each Fund constitutes a separate investment portfolio of First Choice
Funds Trust (the "Trust"), a Delaware business trust and open-end, investment
management company. Each portfolio has distinct investment objectives and
policies.
First Choice U.S. Treasury Reserve Fund and First Choice Cash Reserve
Fund (collectively, the "Money Market Funds") are money market funds managed by
First American Capital Management Inc. ("First American" or the "Adviser"). Each
of the Money Market Funds offers three classes of shares -- the Investment
Class, the Institutional Class and the Service Class. Investment Class shares
are available through authorized financial services companies which provide to
investors various administrative services including shareholder servicing,
sub-accounting and sub-transfer agency services. The Service Class shares are
available to customers who require shareholder servicing. The Institutional
Class shares are available to institutional investors. The Investment Class
shares impose shareholder servicing, administrative and Rule 12b-1 fees. The
Service Class shares impose shareholder servicing and Rule 12b-1 fees. The
Institutional Class shares are subject to a minimum investment of $50,000 and do
not impose any administrative, shareholder servicing or Rule 12b-1 fees.
First Choice Equity Fund (the "Equity Fund") is an equity fund managed
by First American. The Equity Fund offers two classes of shares -- the
Institutional Class and the Retail Class. The Retail Class shares are available
to customers through authorized banks, trust companies, broker-dealers or other
financial organizations at a sales charge of 4.5% (4.71% of the amount
invested). The Institutional Class shares are subject to a minimum investment of
$50,000 and are available to institutional investors without a sales charge. The
Retail Class shares and the Institutional Class shares are identical in all
other respects, with the exception that the Institutional Class shares do not
impose any shareholder servicing or Rule 12b-1 fees. See "Other Information --
Capitalization" herein.
This SAI is not a prospectus and is only authorized for distribution
when preceded or accompanied by the respective prospectuses for the Funds each
dated December 15, 1998 (the "Prospectus"). This SAI contains additional and
more detailed information than that set forth in the Prospectus and should be
read in conjunction with the Prospectus. The Prospectus may be obtained without
charge by writing or calling the Funds at the address or information number
printed above.
December 15, 1998 as revised on February 10, 1999
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TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES........................................................ 3
INVESTMENT RESTRICTIONS.................................................... 9
MANAGEMENT................................................................. 11
Trustees and Officers...................................................... 11
Investment Adviser......................................................... 12
Distribution of Fund Shares................................................ 13
Distribution Plan.......................................................... 13
Administrative Services.................................................... 14
Service Organizations...................................................... 14
DETERMINATION OF NET ASSET VALUE........................................... 15
PORTFOLIO TRANSACTIONS..................................................... 17
TAXATION................................................................... 18
OTHER INFORMATION.......................................................... 20
Capitalization............................................................. 20
Voting Rights.............................................................. 21
Custodian, Transfer Agent and Dividend Disbursing Agent.................... 22
Experts.................................................................... 22
Counsel to the Trust....................................................... 22
Performance Information.................................................... 22
FINANCIAL STATEMENTS....................................................... 25
APPENDIX A - RATINGS OF DEBT SECURITIES.................................... A-1
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain types of securities and other
instruments in which the Funds may invest, the investment policies and portfolio
strategies that the Funds may utilize, and certain risks attendant to such
investments, policies and strategies.
U.S. Treasury Obligations (All Funds). Each Fund may invest, and the U.S.
Treasury Reserve Fund invests exclusively (except due to emergency causing
disruption of business at the Adviser in which case, in accordance with the
procedures adopted by the Board of Trustees, the Fund may temporarily invest in
repurchase agreements), in direct obligations of the United States Treasury that
have remaining maturities not exceeding thirteen months (397 days). The United
States Treasury issues various types of marketable securities consisting of
bills, notes and bonds. They are direct obligations of the United States
Government and differ primarily in the length of their maturity. Treasury bills,
the most frequently issued marketable United States Government security, have a
maturity of up to one year and are issued on a discount basis.
U.S. Government Agency Obligations (Cash Reserve Fund and Equity Fund
Only). Each Fund may invest in obligations of agencies of the United States
Government. Such agencies include, among others, Farmers Home Administration,
Federal Farm Credit System, Federal Housing Administration, Government National
Mortgage Association, Maritime Administration, Small Business Administration,
and The Tennessee Valley Authority. Each Fund may purchase securities issued or
guaranteed by the Government National Mortgage Association, which represent
participations in Veterans Administration and Federal Housing Administration
backed mortgage pools. Obligations of instrumentalities of the United States
Government include securities issued by, among others, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, Federal Land Banks, Federal National
Mortgage Association and the United States Postal Service. Some of these
securities are supported by the full faith and credit of the United States
Treasury (e.g., Government National Mortgage Association). Guarantees of
principal by agencies or instrumentalities of the U.S. Government may be a
guarantee of payment at the maturity of the obligation; therefore, in the event
of a default prior to maturity, there might not be a market and thus no means of
realizing the value of the obligation prior to maturity.
Commercial Paper (Cash Reserve Fund and Equity Fund Only). Commercial paper
includes short-term unsecured promissory notes, variable rate demand notes and
variable rate master demand notes issued by domestic and foreign bank holding
companies, corporations and financial institutions and similar taxable
instruments issued by government agencies and instrumentalities. All commercial
paper purchased by a Fund is, at the time of investment: (i) rated within the
highest rating category of at least two of the nationally recognized statistical
rating organizations ("NRSROs") that have rated the security; (ii) if rated by
only one such rating organization, rated within the highest rating category of
that rating organization; or (iii) if unrated, determined by the Adviser to be
of an investment quality comparable to the rated securities in which the Fund
may invest pursuant to guidelines established by the Board of Trustees.
Convertible Securities (Equity Fund Only). Convertible securities are
bonds, notes, debentures, preferred stocks and other securities which may be
converted or exchanged at a stated or determinable exchange ratio into shares of
common stock. Convertible securities rank senior to common stock in an issuer's
capital structure and are consequently of higher quality and entail less risk
than the issuer's common stock. As with all debt securities, the market value of
convertible securities tend to increase when interest rates decline and
conversely, tend to decline when interest rates increase. In addition, the
prices of convertible securities often reflect changes in the value of the
underlying common stock.
Debt Securities (Cash Reserve Fund and Equity Fund Only). Each Fund's
investments in these securities are limited to corporate debt securities
(corporate bonds, debentures, notes and similar corporate debt instruments)
which meet the rating criteria established for the Fund. The Cash Reserve Fund
may invest only in high quality debt securities as described in the Prospectus.
The Equity Fund may invest in investment grade debt securities rated Baa or
better by Moody's Investors Services, Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Group ("S&P", a division of McGray Hill Companies,
Inc.) or, if unrated, judged by the Adviser to be of comparable quality. If the
rating of a security falls below investment grade, management will consider
appropriate action consistent with the Fund's investment objective and policies.
See Appendix A to the SAI for a discussion of rating categories. Investment in
debt securities by the Equity Fund is limited to periods when, in the opinion of
the Adviser, a temporary defensive position is consistent with the best interest
of shareholders. After purchase by a Fund, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase by such Fund.
Neither event will require a sale of such security by a Fund. However, the
Fund's Adviser will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent the ratings given by a NRSRO
may change as a result of changes in such organizations or their rating systems,
the Fund will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
Bank Obligations (Cash Reserve Fund and Equity Fund Only). These
obligations include, but are not limited to the following domestic, Eurodollar
and Yankeedollar obligations: certificates of deposits, time deposits, bankers'
acceptances, commercial paper, bank deposit notes and other promissory notes,
including floating or variable rate obligations issued by U.S. or foreign bank
holding companies and their bank subsidiaries, branches and agencies.
Certificates of deposit are issued against funds deposited in an eligible bank
(including its domestic and foreign branches, subsidiaries and agencies), are
for a definite period of time, earn a specified rate of return and are normally
negotiable. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with a commercial transaction. The
borrower is liable for payment, as is the bank, which unconditionally guarantees
to pay the draft at its face amount on the maturity date. Eurodollar obligations
are U.S. Dollar obligations issued outside the United States by domestic or
foreign entities. Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. Bearer deposit notes are
obligations of a bank, rather than a bank holding company. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt, except certificates
of deposit.
Variable and Floating Rate Demand and Master Demand Obligations (Cash
Reserve Fund and Equity Fund Only). Each Fund may, consistent with its permitted
investment policies, buy variable rate demand obligations issued by
corporations, bank holding companies and financial institutions, and similar
taxable and tax-exempt instruments issued by government agencies and
instrumentalities. These securities will typically have a maturity of 397 days
or less, but carry with them the right of the holder to put the securities to a
remarketing agent or other entity on short notice, typically seven days or less.
The obligation of the issuer of the put to repurchase the securities may or may
not be backed by a letter of credit or other obligation issued by a financial
institution. The purchase price is ordinarily par plus accrued and unpaid
interest.
Each Fund may also buy variable rate master demand obligations. The terms
of these obligations permit the investment of fluctuating amounts by a Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. They permit weekly, and in some instances daily,
changes in the amounts borrowed. A Fund has the right to increase the amount
under the obligation at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may prepay up to the full
amount of the obligation without penalty. The obligations may or may not be
backed by bank letters of credit. Because the obligations are direct lending
arrangements between the lender and the borrower, it is not generally
contemplated that they will be traded, and there is no secondary market for
them, although they are redeemable (and thus, immediately repayable by the
borrower) at principal amount, plus accrued interest, upon demand. Each Fund has
no limitations on the types of issuers from whom such obligations may be
purchased. The Funds will invest in unrated variable rate master demand
obligations only when such obligations are determined by the Adviser or,
pursuant to guidelines established by the Board of Trustees, to be of comparable
quality to rated issuers or instruments eligible for investment by a Fund.
When-Issued and Delayed-Delivery Securities (All Funds). The Funds may
purchase securities on a when-issued or delayed-delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the transaction. The securities so purchased are subject to
market fluctuation during this period and no income accrues to the Fund until
settlement takes place. To facilitate such acquisitions, the Funds will maintain
with the custodian a separate account with a segregated portfolio of securities
in an amount at least equal to the value of such commitments. On the delivery
dates for such transactions, each Fund will meet obligations from maturities or
sales of the securities held in the separate account and/or from cash flow.
While the Funds normally enter into these transactions with the intention of
actually receiving or delivering the securities, they may sell these securities
before the settlement date or enter into new commitments to extend the delivery
date into the future, if the Adviser considers such action advisable as a matter
of investment strategy. Such transactions have the effect of leverage on the
Funds and may increase the volatility of a Fund's net asset value.
Investment in Other Mutual Funds (Cash Reserve Fund and Equity Fund Only).
Each Fund may invest in shares of other open-end management investment
companies, subject to the limitations of the Investment Company Act of 1940, as
amended (the "1940 Act") and subject to such investments being consistent with
the overall objective and policies of such Fund, provided that any such
purchases will be limited to short-term investments in shares of investment
companies, and will not, in the aggregate, exceed 10% of a Fund's net assets.
The purchase of securities of other mutual funds results in duplication of
expenses such that investors indirectly bear a proportionate share of the
expenses of such mutual funds including operating costs and investment advisory
and administrative fees.
Loans of Portfolio Securities (All Funds). The Funds may lend their
portfolio securities to brokers, dealers and financial institutions, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities or cash or approved bank letters of credit maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (2) the Funds may at any time call the loan and obtain
the return of the securities loaned within five business days; (3) the Funds
will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities loaned will not at any time exceed 33
1/3% of the total assets of a particular Fund. The Funds will earn income for
lending their securities because cash collateral pursuant to these loans will be
invested in short-term money market instruments. A portion of the proceeds from
investing cash collateral may be rebated to the borrower. In connection with
lending securities, the Funds may pay reasonable finders, administrative and
custodial fees. Loans of securities involve a risk that the borrower may fail to
return the securities or may fail to provide additional collateral.
Repurchase Agreements (Cash Reserve Fund and Equity Fund Only). The Cash
Reserve Fund may invest up to 100% of its net assets in repurchase agreements
maturing in seven days or less, however, the Fund may not invest more than 10%
of its net assets in repurchase agreements maturing in more than seven business
days and in securities for which market quotations are not readily available.
The Equity Fund may invest in repurchase agreements for cash reserves or for
temporary defensive or emergency purposes. The Equity Fund may not invest more
than 15% of its net assets in repurchase agreements maturing in more than seven
business days and in securities for which market quotations are not readily
available. The Funds may enter into agreements with any bank or registered
broker-dealer who, in the opinion of the Trustees, present a minimal risk of
bankruptcy. Such agreements may be considered to be loans by a Fund for purposes
of the 1940 Act. A repurchase agreement is a transaction in which the seller of
a security commits itself at the time of the sale to repurchase that security
from the buyer at a mutually agreed-upon time and price. The repurchase price
exceeds the sale price, reflecting an agreed-upon interest rate effective for
the period the buyer owns the security subject to repurchase. The agreed-upon
rate is unrelated to the interest rate on that security. The Adviser will
monitor the value of the underlying security at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
insure that the value of the security always equals or exceeds the repurchase
price. In the event of default by the seller under the repurchase agreement, the
Fund may have problems in exercising its rights to the underlying securities and
may incur costs and experience time delays in connection with the disposition of
such securities.
Reverse Repurchase Agreements (All Funds). The Funds may enter into reverse
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse repurchase
agreement, it will establish a segregated account in which it will maintain
liquid assets in an amount at least equal to the repurchase price marked to
market daily (including accrued interest), and will subsequently monitor the
account to ensure that such equivalent value is maintained. The Funds pay
interest on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by a Fund under the 1940
Act.
Illiquid Securities (All Funds). Each Fund has adopted a nonfundamental
policy with respect to investments in illiquid securities. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended ("Securities Act"), securities that are
otherwise not readily marketable and repurchase agreements having a maturity
longer than seven days. Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on
either an efficient institutional market in which the unregistered security can
be readily resold or on the issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Each Fund may invest in restricted securities issued under Section 4(2) of
the Securities Act, which exempts from registration "transactions by an issuer
not involving any public offering." Section 4(2) instruments are restricted in
the sense that they can only be resold through the issuing dealer and only to
institutional investors; they cannot be resold to the general public without
registration. Restricted securities issued under Section 4(2) of the Securities
Act will be treated as illiquid and subject to the Funds' investment restriction
on illiquid securities.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restrictions on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act
applicable to resales of certain securities to qualified institutional buyers.
It is the intent of the Funds to invest, pursuant to procedures established by
the Board of Trustees and subject to applicable investment restrictions, in
securities eligible for resale under Rule 144A which are determined to be liquid
based upon the trading markets for such securities.
Pursuant to guidelines established by, and under the supervision of, the
Board of Trustees, the Adviser will monitor the liquidity of restricted
securities in a Fund's portfolio. In reaching liquidity decisions, the Adviser
will consider, among other things, the following factors: (1) the frequency of
trades and quotes for the security over the course of six months or as
determined in the discretion of the Adviser; (2) the number of dealers wishing
to purchase or sell the security and the number of other potential purchasers
over the course of six months or as determined in the discretion of the Adviser;
(3) dealer undertakings to make a market in the security; (4) the nature of the
security and the marketplace in which it trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer); and (5) other factors, if any, which the Adviser deems relevant.
The Adviser will also monitor the purchase of Rule 144A securities to assure
that the total of all Rule 144A securities held by a Fund does not exceed 10% of
the Fund's average daily net assets (except that the Equity Fund may not exceed
15% of its average daily net assets). Rule 144A securities which are determined
to be liquid based upon their trading markets will not, however, be required to
be included among the securities considered to be illiquid for purposes of
nonfundamental Investment Restriction No. 1 set forth below. Investments in Rule
144A securities could have the effect of increasing Fund illiquidity.
Options on Securities Indices (Equity Fund only). The Fund may purchase and
sell call and put options on securities indices and in so doing can achieve many
of the same objectives it would achieve through the sale or purchase of options
on individual securities or other instruments. Options on securities indices
settle by cash settlement, i.e., an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.
A European style put or call option may be exercised only upon expiration
or during a fixed period prior thereto while an American style put or call
option may be exercised at any time during the option period. The Fund is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below regarding exchange listed options uses the OCC as a paradigm,
but is also applicable to other financial intermediaries.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund may lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers," or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other NRSRO.
If the Fund sells (i.e., issues) a call option, the premium that it
receives may serve as a partial hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or instruments in
its portfolio, or will increase the Fund's income. The sale of put options can
also provide income.
All calls sold by the Fund must be "covered" (i.e., the Fund must own the
futures contract subject to the calls) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes it during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying or
instrument and may require the Fund to hold a security or instrument which it
might otherwise have sold.
General Characteristics of Futures (Equity Fund only). The Fund may enter
into financial futures contracts or purchase or sell put and call options on
such futures as a hedge against anticipated market changes and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts give the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such position.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the CFTC and will be entered into only for bona fide
hedging, risk management or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the purchaser. If the Fund exercises an option on a futures contract, it will
be obligated to post initial margin (and potential subsequent variation margin)
for the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of that Fund's total assets (taken at current value); however,
in the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Short Sales Against the Box (Equity Fund only). The Fund may sell
securities "short against the box." While a short sale is the sale of a security
that the Fund does not own, it is "against the box" if at all times when the
short position is open the Fund owns an equal amount of securities or securities
convertible into, or exchangeable without further consideration for, securities
of the same issuer as the securities sold short.
To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with the Fund's custodian an amount
at least equal to the securities sold short or securities convertible into, or
exchangeable for, the securities sold short. The Fund may close out a short
position by purchasing and delivering an equal amount of securities sold short,
rather than by delivering securities already held by the Fund, because the Fund
may want to continue to receive interest and dividend payments on securities in
its portfolio that are convertible into the securities sold short.
Use of Segregated and Other Special Accounts (Equity Fund only). Many
Strategic Transactions, in addition to other requirements, require that the Fund
segregate liquid assets with its custodian to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security or
financial instrument. Liquid assets include equity and debt securities so long
as they are readily marketable. The Adviser, subject to oversight by the Board
of Trustees, is responsible for determining and monitoring the liquidity of
securities in segregated accounts on a daily basis. In general, either the full
amount of any obligation by the Fund to pay or deliver securities or assets must
be covered at all times by the securities, instruments or currency required to
be delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated account may consist of notations
on the books of the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a Fund
requires the Fund to segregate liquid assets equal to the exercise price.
OTC options entered into by the Fund and OCC issued and exchange listed
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments, the Fund will only segregate an amount of assets equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. When the Fund sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, the Fund will segregate, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Fund other than those above generally settle with
physical delivery, and the Seller will segregate an amount of assets equal to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. In the case of portfolio securities which
are loaned, collateral values of the loaned securities will be continuously
maintained at not less than 100% by "marking to market" daily. The Fund may also
enter into offsetting transactions so that its combined position, coupled with
any segregated assets, equals its net outstanding obligation in related options
and Strategic Transactions. For example, the Fund could purchase a put option if
the strike price of that option is the same or higher than the strike price of a
put option sold by the Fund. Moreover, instead of segregating assets if the Fund
held a futures contract, it could purchase a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held. Other Strategic Transactions may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company (see "TAXATION").
INVESTMENT RESTRICTIONS
The following restrictions restate or are in addition to those
described under "Investment Restrictions" in the Prospectus. The following
Investment Restrictions are fundamental policies of the Funds, which can be
changed only when permitted by law and approved by a majority of the Funds'
outstanding voting securities. A "majority of the outstanding voting securities"
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented in person or by proxy, or
(ii) more than 50% of the outstanding shares.
The Equity Fund will invest at least 65% of its total assets in equity
securities.
Each Fund, except as indicated, may not:
(1) Borrow money or pledge, mortgage or hypothecate its assets, except
that a Fund may enter into reverse repurchase agreements or borrow from banks up
to 10% (33% with respect to the Equity Fund) of the current value of its net
assets for temporary or emergency purposes, and such borrowings may be secured
by the pledge the Fund's assets (limited with respect to the Money Market Funds
to not more than 15% of the current value of total net assets) (but investments
may not be purchased by the Fund while any such borrowings exist);
(2) Issue senior securities, except insofar as a Fund may be deemed to
have issued a senior security in connection with any reverse repurchase
agreement or any permitted borrowing;
(3) Make loans, except loans of portfolio securities and except that a
Fund may enter into repurchase agreements with respect to its portfolio
securities and may purchase the types of debt instruments described in its
Prospectus or the SAI;
(4) Invest in real property (including limited partnership interests,
but excluding real estate investment trusts and master limited partnerships),
commodities, commodity contracts, or oil, gas and other mineral resource,
exploration, development, lease or arbitrage transactions (except with respect
to the Equity Fund to the extent permitted with regard to its nonfundamental
policy #7 below);
(5) Engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may technically
cause it to be considered an underwriter as that term is defined under the
Securities Act;
(6) Purchase a security if, as a result, more than 25% of the value of
its total assets would be invested in securities of one or more issuers
conducting their principal business activities in the same industry (except for
the Cash Reserve Fund, which will concentrate its investments in obligations
issued by the banking industry, both domestic and foreign), provided that this
limitation shall not apply to obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities;
(7) Purchase a security if, as a result, (1) more than 5% of its total
assets would be invested in any one issuer other than the U.S. Government or its
agencies or instrumentalities (except that the Cash Reserve Fund may invest up
to 25% of its total assets in the first tier securities of a single issuer for
up to three business days), or (2) the Fund would own more than 10% of the
outstanding voting securities of such issuer (except that with respect to the
Equity Fund, this restriction shall apply only with respect to 75% of its total
assets); or
(8) Invest more than 5% of its net assets in warrants which are
unattached to securities, nor more than 2% of the value of the Fund's net assets
in warrants which are not listed on the New York or American Stock Exchanges.
The following investment restrictions are nonfundamental policies which
may be changed by approval of a majority of the Board of Trustees:
Each Fund, except as indicated, may not:
(1) Invest more than 10% (15% with respect to the Equity Fund) of the
value of its net assets in investments which are illiquid (including repurchase
agreements having maturities of more than seven calendar days, and variable and
floating rate demand and master demand notes not requiring receipt of the
principal note amount within seven days notice);
(2) Invest in companies for the purpose of exercising control or
management;
(3) Invest more than 10% of its net assets in shares of other
investment companies;
(4) Sell securities short, except to the extent that a Fund
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short;
(5) Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities;
(6) Purchase or retain the securities of any issuer, if those
individual officers and Trustees of the Trust, the Adviser or the Distributor,
each owning beneficially more than 1/2 of 1% of the securities of such issuer,
together own more than 5% of the securities of such Issuer; or
(7) Write, purchase or sell puts, calls or combinations thereof except
the Equity Fund may purchase or sell financial futures contracts, options on
financial futures contracts and options on securities indices, as permitted by
applicable law.
MANAGEMENT
TRUSTEES AND OFFICERS
The names, ages and the principal occupations for the past five years
of the Trustees and executive officers of the Trust, are listed below. All of
the Trustees are deemed to be "non-interested persons" of the Trust for purposes
of the 1940 Act.
<TABLE>
<CAPTION>
Principal Occupation
Name and Address, Age Position Held with the Trust
(during past 5 years)
- --------------------- ----------------------------
- ---------------------
<S> <C>
<C>
JOHN J. PILEGGI Chairman of
President and Chief Executive Officer
ING Mutual Funds Management Co. LLC the Board of Trustees of
ING Mutual Funds Management Co.
18 Campus Boulevard, Suite 200
LLC (since August 1998); Director,
Newtown Square, PA 19073
Furman Selz LLC (since 1994); Senior
Age 39
Managing Director, Furman Selz LLC
(1992-1994).
DENNIS W. DRAPER Trustee
Associate Professor of Finance at
University of Southern California
University of Southern California
School of Business,
since 1978; Director of Data
Hoffman, 701F
Analysis, Inc. (financial services);
Los Angeles, CA 90089
and Editorial Board of Chicago Board
Age 48 of
Trade.
JOSEPH N. HANKIN Trustee
President, Westchester Community
75 Grasslands Road
College since 1971; Adjunct Professor
Valhalla, NY 10595 of
Columbia University Teachers
Age 58
College since 1976.
RICHARD WEDEMEYER Trustee
Vice President, The Channel
5 High Ridge Park
Corporation since July 1996; Vice
Stamford, CT 06878
President of Performance Advantage,
Age 62
Inc. 1992 to July 1996; Vice
President of Jim Henson Productions
from 1979 to 1992; Author of In Transition
(Harper Collins); co-founder and co-conductor
of
Harvard Business School Club of New
York Career Seminar; Trustee of Jim
Henson Legacy trust.
JYLANNE DUNNE President of the Trust
Vice President of Client Services of
First Data Investor Services Group, Inc.
First Data Investor Services Group,
4400 Computer Drive
Inc. since 1994.
Westborough, MA 01581
Age 38
DIANA TARNOW Treasurer of the Trust
Vice President, Fund Administration,
First Data Investor Services Group, Inc.
First Data Investor Services Group,
4400 Computer Drive
Inc. since 1997; Vice President of
Westborough, MA 01581
Financial Reporting and Tax
Age 36
(1994-1997); Assistant Vice President
of
Financial Reporting, The Boston
Company, Inc. (1989-1994).
COLEEN DOWNS DINNEEN, ESQ. Secretary of the Trust
Counsel, Mutual Fund Legal Division,
First Data Investor Services Group, Inc.
First Data Investor Services Group,
One Exchange Place
Inc. since 1997. Vice President,
Boston, MA 02109
Scudder, Stevens & Clark, Inc.
Age 37
(1989-1996).
</TABLE>
The following table sets forth certain information regarding the
compensation paid to the Trustees for the fiscal year ended September 30, 1998.
No officer of the Trust receives compensation from the Funds. No Trustee
receives pension or retirement benefits from the Funds.
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION FROM THE THE FUND
TRUST COMPLEX
John J. Pileggi, Trustee $7,000 $7,000
Dennis W. Draper, Trustee $8,000 $8,000
Joseph N. Hankin, Trustee $8,000 $8,000
Richard Wedemeyer, Trustee $8,000 $8,000
Trustees of the Trust receive from the Trust an annual retainer of
$1,000 and a fee of $1,000 for each Board of Trustees meeting attended and $
1,000 for each Board committee meeting of the Trust attended and are reimbursed
for all out-of-pocket expenses relating to attendance at such meetings.
Officers and Trustees of the Trust, as a group, own less than 1% of the
outstanding shares of the Funds.
INVESTMENT ADVISER
First American has provided investment advisory services to the Funds
since inception pursuant to an advisory agreement with the Trust (the "Advisory
Agreement"). Subject to such policies as the Trust's Board of Trustees may
determine, First American makes investment decisions for the Funds. The Advisory
Agreement provides that, as compensation for its services thereunder, First
American is entitled to receive from each Fund a monthly fee at an annual rate
based upon average daily net assets of the Fund as set forth in the table of
Fund Expenses in the Prospectus. For the fiscal year ended September 30, 1998,
First American earned $225,778 from the U. S. Treasury Reserve Fund, $269,075
from the Cash Reserve Fund and for the period June 2, 1998 through September 30,
1998 First American received $49,754 from the Equity Fund, of those amounts
$188,149, $207,365 and $49,754 were waived. In addition, First American Capital
Management, Inc. reimbursed the Equity Fund $4,172. For the fiscal year ended
September 30, 1997, First American received $168,045 from the U.S. Treasury
Reserve Fund and $113,162 from the Cash Reserve Fund, of those amounts $146,252
and $100,521 were waived and $72,732 and $74,316 were reimbursed.
With respect to the Equity Fund, the Adviser utilizes, as part of the
investment process, a quantitative model developed by Haugen Custom Financial
Systems, a registered investment adviser with offices at 4199 Campus Drive,
Suite 350, Irvine, CA 92612. Under the 1940 Act, Haugen Custom Financial Systems
may be deemed to be a sub-adviser to the Equity Fund. The Adviser has entered
into an agreement with Haugen Custom Financial Systems for the use of its model.
The Adviser pays Haugen Custom Financial Systems a monthly fee at the annual
rate of .065% of the Equity Fund's average daily net assets on the first $100
million; .125% of the Equity Fund's average daily net assets on the next $100
million and .03% of the Equity Fund's average daily net assets exceeding $200
million. For the period June 2, 1998 through September 30, 1998, Haugen Custom
Financial Systems received fees of $6,666.67.
First American has agreed voluntarily to waive or reimburse all or a
portion of the advisory fee and/or to assume voluntarily certain expenses of the
Funds to the extent necessary to maintain the total expense ratio of each Fund
at no more than as set forth in the table of Fund Expenses in the Prospectus.
First American is located at 567 San Nicolas Drive, Suite 101, Newport
Beach, California 92660 and is a wholly-owned subsidiary of The First American
Financial Corporation. First American was organized on December 1, 1995, to
provide business management, advisory, administrative and asset management
consulting services and is a registered investment adviser.
The Advisory Agreements for the Funds will continue in effect for a
period beyond two years from the date of their execution only as long as such
continuance is approved annually (i) by the holders of a majority of the
outstanding voting securities of the Funds or by the Board of Trustees and (ii)
by a majority of the Trustees who are not parties to such agreement or
"interested persons" (as defined in the 1940 Act) of any such party. The
Advisory Agreements may be terminated without penalty by vote of the Trustees or
the shareholders of the Funds, or by the Adviser, on 60 days written notice by
either party to the Contract and will terminate automatically if assigned.
DISTRIBUTION OF FUND SHARES
The Trust retains First Data Distributors Inc. to serve as principal
underwriter for the shares of the Funds pursuant to a Distribution Agreement.
The Distribution Agreement provides that the Distributor will use efforts it
deems appropriate to solicit orders for the sale of shares and may enter into
sales or servicing agreements with securities dealers, financial institutions
and other industry professionals as well as sell the Funds' shares to individual
investors. The Distributor is not obligated to sell any specific amount of
shares.
DISTRIBUTION PLAN
The Trustees of the Trust have voted to adopt a Master Distribution
Plan (the "Plan") pursuant to Rule 12b-1 of the 1940 Act for the Investment
Class and the Service Class shares of the Money Market Funds and the Retail
Class shares of the Equity Fund after having concluded that there is a
reasonable likelihood that the Plan will benefit the Investment Class, Service
Class and Retail Class shares of the respective Funds and their shareholders.
The Plan provides for a monthly payment by the Investment Class, Service Class
and Retail Class shares of the respective Funds to the Distributor in such
amounts that the Distributor may request, or for direct payment by the Fund, for
certain costs incurred under the Plan, subject to periodic Board approval,
provided that each such payment is based on the average daily value of the net
assets of the Investment Class, Service Class and the Retail Class shares during
the preceding month and is calculated at an annual rate not to exceed 0.25%. The
Distributor will use all amounts received under the Plan for payments to
broker-dealers or financial institutions (not including banks) for their
assistance in distributing shares of the Investment Class, Service Class and the
Retail Class and otherwise promoting the sale of Investment Class, Service Class
and Retail Class shares, including payments in amounts based on the average
daily value of Investment Class, Service Class and Retail Class shares owned by
shareholders in respect of which the broker-dealer or financial institution has
a distributing relationship. The Distributor may also use all or any portion of
such fees to pay Fund expenses such as the printing and distribution of
prospectuses sent to prospective investors or the preparation, printing and
distribution of sales literature and expenses associated with media
advertisements.
The Plan provides for the Distributor to prepare and submit to the
Board of Trustees on a quarterly basis written reports of all amounts expended
pursuant to the Plan and the purpose for which such expenditures were made. The
Plan provides that it may not be amended to increase materially the costs which
the Fund may bear pursuant to the Plan without shareholder approval and that
other material amendments of the Plan must be approved by the Board of Trustees,
and by the Trustees who neither are "interested persons" (as defined in the 1940
Act) of the Trust nor have any direct or indirect financial interest in the
operation of the Plan or in any related agreement, by vote cast in person at a
meeting called for the purpose of considering such amendments. The selection and
nomination of the Trustees of the Trust has been committed to the discretion of
the Trustees who are not "interested persons" of the Trust. The Plan has been
approved, and is subject to annual approval, by the Board of Trustees and by the
Trustees who neither are "interested persons" nor have any direct or indirect
financial interest in the operation of the Plan, by vote cast in person at a
meeting called for the purpose of voting on the Plan. The Board of Trustees and
the Trustees who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Plan voted to approve the Plan at a
meeting held on August 28, 1997. The Plan was submitted to the shareholders of
the Investment Class, the Service Class and the Retail Class and approved at a
special meeting of shareholders held on August 23, 1996 with respect to the
Service Class shares and a consent of sole shareholder dated April 20, 1998 with
respect to the Investment Class shares and the Retail Class shares. The Plan is
terminable with respect to each Class at any time by a vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in the
Administration Agreement or by vote of the holders of a majority of the shares
of the Funds.
For the fiscal year ended September 30, 1998, no 12b-1 fees were paid
to the Distributor pursuant to the 12b-1 plan.
ADMINISTRATIVE SERVICES
On September 22, 1997, First Data Investor Services Group, Inc. (the
"Administrator") replaced BISYS Fund Services ("BISYS") as administrator of the
Trust. The Administrator provides management and administrative services
necessary for the operation of the Funds, including, among other things: (i)
preparation of shareholder reports and communications; (ii) regulatory
compliance, such as reports to and filings with the SEC and state securities
commissions; and (iii) general supervision of the operation of the Funds. In
addition, the Administrator furnishes office space and facilities required for
conducting the business of the Funds and pays the compensation of the Funds'
officers, employees and Trustees affiliated with the Administrator. For these
services, the Administrator receives from each Fund a fee, payable monthly, at
the annual rate of 0.15% of each Fund's average daily net assets. The
Administrator receives a separate fee for providing fund accounting services
pursuant to the Administration Agreement.
The Administration Agreement is for a three-year term and renewal
thereof is subject to approval by a majority of the Trustees who are not
"interested persons" of the Trust and who have no direct or indirect financial
interest in the operation of the Administration Agreement. The Administration
Agreement may be terminated in the event the Administrator has failed to meet
the performance standards set forth therein or pursuant to a breach of
performance under the Transfer Agency and Service Agreement.
For the period October 1, 1996 through September 21, 1997, BISYS earned
$81,351 and $54,419 for the U.S. Treasury Reserve Fund and Cash Reserve Fund of
which $70,042 and $42,564 were waived. For the period September 22, 1997 through
September 30, 1997, the Administrator earned $890 and $721 for the U.S. Treasury
Reserve Fund and Cash Reserve Fund. For the fiscal year ended September 30,
1998, the Administrator earned $112,889 and $134,538 for the U.S. Treasury
Reserve Fund and Cash Reserve Fund and for the period June 2, 1998 through
September 30, 1998, the Administrator earned $7,463 for the Equity Fund, of
those amounts $68,757, $52,753 and $4,975 were waived.
SERVICE ORGANIZATIONS
The Trust also contracts with banks, trust companies, broker-dealers or
other financial organizations ("Service Organizations") to provide certain
services for the Investment Class, the Service Class and the Retail Class.
Services provided by Service Organizations may include, among other things:
providing necessary personnel and facilities to establish and maintain certain
shareholder accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with shareholders' orders to purchase or redeem
shares; verifying and guaranteeing client signatures in connection with
redemption orders, transfers among and changes in shareholders' designating
accounts; providing periodic statements showing a shareholder's account balance
and, to the extent practicable, integrating such information with other client
transactions; furnishing periodic and annual statements and confirmations of all
purchases and redemptions of shares in a shareholder's account; transmitting
proxy statements, annual reports, and updating prospectuses and other
communications from the Investment Class, the Service Class or the Retail Class
to the respective shareholders; and providing such other services as the
Investment Class, the Service Class or the Retail Class or a shareholder
reasonably may request, to the extent permitted by applicable statute, rule or
regulation. In addition, with respect to the Investment Class and Service Class
shares, a Service Organization may provide recordkeeping, sub-accounting,
sub-transfer agency, communicating with and education of shareholders, fiduciary
services (excluding investment management) and asset allocation services.
Neither the Administrator nor the Distributor will be a Service Organization or
receive additional fees for administration or servicing.
Some Service Organizations may impose additional or different
conditions on their clients, such as requiring their clients to invest more than
the minimum initial or subsequent investments specified by the Funds or charging
a direct fee for servicing. If imposed, these fees would be in addition to any
amounts which might be paid to the Service Organization by the Funds. Each
Service Organization has agreed to transmit to its clients a schedule of any
such fees. Shareholders using Service Organizations are urged to consult them
regarding any such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting, selling or
distributing securities. There currently is no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either Federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, could prevent a bank from continuing to perform all
or a part of its servicing activities. In addition, state securities laws on
this issue may differ from the interpretations of federal law expressed herein
and banks and financial institutions may be required to register as dealers
pursuant to state law.
If a bank were prohibited from so acting, its shareholder clients would
be permitted to remain shareholders of the Trust and alternative means for
continuing the servicing of such shareholders would be sought. In that event,
changes in the operation of the Trust might occur and a shareholder serviced by
such a bank might no longer be able to avail itself of any services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
DETERMINATION OF NET ASSET VALUE
Money Market Funds
The Money Market Funds will use the amortized cost method to determine
the value of their portfolio securities pursuant to Rule 2a-7 under the 1940
Act. The amortized cost method involves valuing a security at its cost and
amortizing any discount or premium over the period until maturity regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which the value, as determined by amortized cost, is higher or lower than
the price which the Funds would receive if the security were sold. During these
periods, the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund which utilizes a method of valuation based upon
market prices. Thus, during periods of declining interest rates, if the use of
the amortized cost method resulted in lower value of a Fund's portfolio on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values and existing Fund shareholders would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolio using the
amortized cost method, each Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase securities having remaining
maturities of 397 days or less and invest only in U.S. dollar denominated
eligible securities determined by the Trust's Board of Trustees to be of minimal
credit risks and which: (1) have received one of the two highest short-term
ratings by at least two NRSROs, such as "A-l" by S&P and "P-1" by Moody's; (2)
are single rated and have received the highest short-term rating by a NRSRO; or
(3) are unrated, but are determined to be of comparable quality by the Adviser
pursuant to guidelines approved by the Board.
In addition, a Fund will not invest more than 5% of its total assets in
the securities (including the securities collateralizing a repurchase agreement)
of a single issuer, except that a Fund may invest in U.S. Government securities
or repurchase agreements that are collateralized by U.S. Government securities
without any such limitation and except that the Cash Reserve Fund may invest up
to 25% of its total assets in the first tier securities of a single issuer for
up to three business days pursuant to the safe harbor available in Rule 2a-7.
Furthermore, the limitation does not apply with respect to conditional and
unconditional puts issued by a single issuer, provided that no more than 10% of
a Fund's total assets are invested in securities issued or guaranteed by the
issuer of the put. Investments in rated securities not rated in the highest
category by at least two rating organizations (or one rating organization if the
instrument was rated by only one such organization), and unrated securities not
determined by the Board of Trustees to be comparable to those rated in the
highest rating category, will be limited to 5% of a Fund's total assets, with
investment in any one such issuer being limited to no more than the greater of
1% of a Fund's total assets or $ 1,000,000.
Pursuant to Rule 2a-7, the Board of Trustees is also required to
establish procedures designed to stabilize, to the extent reasonably possible,
the price per share of the Funds, as computed for the purpose of sales and
redemptions, at $ 1.00. Such procedures include review of the Fund's portfolio
holdings by the Board of Trustees, at such intervals as it may deem appropriate,
to determine whether the net asset value of the Funds calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Board of Trustees. If
such deviation exceeds 1/2 of 1%, the Board of Trustees will promptly consider
what action, if any, will be initiated. In the event the Board of Trustees
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, the Board of Trustees will
take such corrective action as it regards as necessary and appropriate, which
may include selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, withholding dividends
or establishing a net asset value per share by using available market
quotations.
Equity Fund
In valuing the Equity Fund's assets, a security listed on an exchange
or through any system providing for daily publication of actual prices (and not
subject to restrictions against sale by the Fund on such exchange or system)
will be valued at its last sale price prior to the close of regular trading.
Lacking any sales, the security will be valued at the mean between the last
asked price and the last bid price prior to the close of regular trading.
Securities for which daily publication of actual prices is not
available and for which bid and asked quotations are readily available will be
valued at the mean between the current bid and asked prices for such securities
in the over-the-counter market. Other securities will be valued at their fair
value as determined in good faith by or under the direction of the Trustees.
Open futures contracts are valued at the most recent settlement price, unless
such price does not reflect the fair value of the contract, in which case such
positions will be valued by or under the direction of the Trustees.
The value of a security which is not readily marketable and which
accordingly is valued by or under the direction of the Trustees is valued
periodically on the basis of all relevant factors which may include the cost of
such security to the Fund, the market price of unrestricted securities of the
same class at the time of purchase and subsequent changes in such market price,
potential expiration or release of the restrictions affecting such security, the
existence of any registration rights, the fact that the Fund may have to bear
part or all of the expense of registering such security, any potential sale of
such security by or to another investor as well as traditional methods of
private security analysis.
Following the calculation of security values in terms of the currency
in which the market quotation used is expressed ("local currency"), the valuing
agent will calculate these values in terms of United States dollars on the basis
of the conversion of the local currencies (if other than U.S.) into U.S. dollars
at the rates of exchange prevailing at the value time as determined by the
valuing agent.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the Exchange is
open). In addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which the Equity Fund's net asset value is not calculated. The Equity
Fund generally calculates net asset value per share, and therefore effects
sales, redemptions and repurchases of its shares, as of the regular close of the
Exchange on each day on which the Exchange is open. Such calculation does not
take place contemporaneously with the determination of the prices of some of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when the Equity Fund's net asset value is calculated,
such securities will be valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment
advisory clients of the Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Adviser's
opinion is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.
The Funds have no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Funds' Boards of Trustees, the Adviser is primarily
responsible for portfolio decisions and the placing of portfolio transactions.
In placing orders, it is the policy of the Funds to obtain the best results
taking into account the broker-dealer's general execution and operational
facilities, the type of transaction involved and other factors such as the
dealer's risk in positioning the securities. While the Adviser generally seeks
reasonably competitive spreads or commissions, the Funds will not necessarily be
paying the lowest spread or commission available. The reasonableness of such
spreads or brokerage commissions will be evaluated by comparing spreads or
commissions among brokers or dealers in consideration of the factors listed
immediately above and research services described below.
Money Market Funds
Purchases and sales of securities will usually be principal
transactions. Portfolio securities normally will be purchased or sold from or to
issuers directly or to dealers serving as market makers for the securities at a
net price. Generally, money market securities are traded on a net basis and do
not involve brokerage commissions. The cost of executing portfolio securities
transactions for the Funds primarily consists of dealer spreads and underwriting
commissions. Under the 1940 Act, persons affiliated with the Trust or First
American are prohibited from dealing with the Trust as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the SEC. The policy of each Money Market Fund of
investing in securities with short maturities may result in high portfolio
turnover. For the fiscal year ended September 30, 1998, the Money Market Funds
did not pay any brokerage commissions.
First American may, in circumstances in which two or more dealers are
in a position to offer comparable results, give preference to a dealer which has
provided statistical or other research services to First American. By allocating
transactions in this manner, First American is able to supplement its research
and analysis with the views and information of securities firms.
Equity Fund
First American conducts all of the trading operations for the Equity
Fund. First American places portfolio transactions with or through issuers,
underwriters and other brokers and dealers and expects to use its affiliated
broker-dealer, Pacific American Securities LLC, for a significant portion of
the Equity Fund's brokerage transactions. First American owns a minority
interest in Pacific American Securities. Pacific American Securities
receives commissions and it reserves the right to receive a ticket charge
from the Fund although it currently does not engage in this practice. A
ticket charge involves the pass-through by Pacific American of any costs
incurred to complete a trade.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Equity Fund's portfolio is to obtain the most
favorable net results, taking into account such factors as price, commission,
where applicable, (which is negotiable in the case of U.S. national securities
exchange transactions but which is generally fixed in the case of foreign
exchange transactions), size of order, difficulty of execution and skill
required of the executing broker/dealer. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser may, in circumstances in which two or more broker-dealers
are in a position to offer comparable results, give preference to a dealer which
has provided statistical or other research services to the Adviser. By
allocating transactions in this manner, the Adviser is able to supplement its
research and analysis with the views and information of securities firms. These
items, which in some cases may also be purchased for cash, include such matters
as general economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services are of value to the Adviser in advising
various of its clients (including the Funds), although not all of these services
are necessarily useful and of value in managing the Funds. The management fee
paid by the Funds is not reduced because the Sub-Adviser and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "Act"), the Adviser may cause the Funds to pay a broker-dealer which
provides "brokerage and research services" (as defined in the Act) to the
Adviser an amount of disclosed commission for effecting a securities
transaction for the Funds in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Funds. For
the period June 2, 1998 through September 30, 1998, the Equity Fund paid $19,840
for brokerage commissions, of which $13,245 was indirectly paid to Pacific
American Securities LLC.
Annual portfolio turnover rate is the ratio of the lesser of sales or
purchases to the monthly average value of the portfolio securities owned during
the year, excluding from both the numerator and the denominator all securities
with maturities at the time of acquisition of one year or less. The Equity
Fund's portfolio turnover rate for the period ended September 30, 1998 was 47%.
TAXATION
Each Money Market Fund has qualified and elected to be treated for its
most recent fiscal year and the Equity Fund intends to so qualify and elect and
each Fund intends to continue to qualify and elect to be treated, as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, an electing
Fund must: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, except that such other securities of any one issuer must
be limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer), and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies), or of two or more issuers which the taxpayer controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
The Funds generally will not be subject to Federal income tax on their
investment company taxable income and net capital gains which are distributed to
shareholders provided that they distribute to their shareholders at least 90% of
their net investment income and tax-exempt income earned in each year. If the
Funds do not meet all of these Code requirements, they will be taxed as ordinary
corporations and their distributions will be taxed to shareholders as ordinary
income.
Amounts, other than tax-exempt interest, not distributed on a timely
basis in accordance with a calendar year distribution requirement are subject to
a nondeductible 4% excise tax. To prevent imposition of the excise tax, each
Fund must distribute for each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gains net
income (adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of a calendar year if it is
declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Distributions of investment company taxable income generally are
taxable to shareholders as ordinary income. Distributions of net long-term
capital gains, if any, designated by the Funds as long-term capital gain
dividends are taxable to shareholders as long-term capital gain, regardless of
the length of time the Funds' shares have been held by a shareholder. All
distributions are taxable to the shareholder in the same manner, whether
reinvested in additional shares or received in cash. Shareholders will be
notified annually as to the Federal tax status of distributions.
Upon the taxable disposition (including a sale or redemption) of shares
of a Fund, a shareholder may realize a gain or loss depending upon his basis in
his shares. Such gain or loss generally will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands. Such gain or loss
will be long-term or short-term, generally depending upon whether the
shareholder's holding period for the shares is more than one year. However, a
loss realized by a shareholder on the disposition of Fund shares with respect to
which capital gain dividends have been paid will, to the extent of such capital
gain dividends, be treated as long-term capital loss if such shares have been
held by the shareholder for six months or less. A loss realized on the
redemption, sale or exchange of Fund shares will be disallowed to the extent an
exempt-interest dividend was received with respect to those shares if the shares
have been held by the shareholder for six months or less. Further, a loss
realized on a disposition will be disallowed to the extent the shares disposed
of are replaced (whether by reinvestment of distributions or otherwise) within a
period beginning 30 days before and ending 30 days after the disposal of the
shares. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Shareholders receiving distributions in the form of
additional shares will have a cost basis for Federal income tax purposes in each
share received equal to the net asset value of a share of the Funds on the
reinvestment date.
The Funds are required to report to the Internal Revenue Service
("IRS") all distributions except in the case of certain exempt shareholders. All
such distributions generally are subject to withholding of Federal income tax at
a rate of 31% ("backup withholding") in the case of nonexempt shareholders if
(1) the shareholder fails to furnish the Funds with and to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the Funds or a shareholder that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions, whether
reinvested in additional shares or taken in cash, will be reduced by the amounts
required to be withheld. Backup withholding is not an additional tax. Any amount
withheld may be credited against the shareholder's U.S. Federal income tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Distributions of a Fund which are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities may be exempt
from state and local taxes in certain states. Shareholders should consult their
tax advisers with respect to particular questions of Federal, state and local
taxation. Shareholders who are not U.S. persons should consult their tax
advisers regarding U.S. and foreign tax consequences of ownership of shares of
the Funds, including the likelihood that distributions to them would be subject
to withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
OTHER INFORMATION
CAPITALIZATION
The Trust is a Delaware business trust established under a Declaration
of Trust dated June 5, 1996 and currently consists of three separately managed
portfolios. The capitalization of the Trust consists solely of an unlimited
number of shares of beneficial interest with a par value of $0.001 each. The
Board of Trustees may establish additional Funds (with different investment
objectives and fundamental policies) at any time in the future. Establishment
and offering of additional Funds will not alter the rights of the Trust's
shareholders. When issued, shares are fully paid, non-assessable, redeemable and
freely transferable. Shares do not have preemptive rights or subscription
rights. In any liquidation of a Fund, each shareholder is entitled to receive
his pro rata share of the net assets of that Fund.
Each of the Money Market Funds offers three classes of shares - the
Investment, the Institutional and the Service classes of shares. The Investment
Class shares are available through authorized financial services companies which
provide to investors various administrative services including shareholder
servicing, sub-accounting and sub-transfer agency services. The Service Class
shares are available to customers who require shareholder servicing. The
Institutional Class shares are subject to a minimum investment of $50,000 and do
not impose any administrative, servicing or Rule 12b-1 fees. The Investment
Class shares are subject to administrative fees and the Investment Class shares
and the Service Class shares are subject to Rule 12b-1 fees and shareholder
service fees.
The Equity Fund offers two classes of shares -- the Institutional Class
and the Retail Class. The Retail Class shares are available to customers through
authorized banks, trust companies, broker-dealers or other financial
organizations at a sales charge of 4.5% (4.71% of the amount invested). The
Institutional Class shares are subject to a minimum investment of $50,000 and
are available to investors without a sales charge. The Retail Class shares and
the Institutional Class shares are identical in all other respects, except that
the Institutional Class shares do not impose any shareholder servicing or Rule
12b-1 fees.
Expenses incurred in connection with each Fund's organization and the
public offering of its shares have been deferred and are being amortized on a
straight-line basis over a period of not more than five years.
As of November 20, 1998, the following shareholders owned 5% or more of
the Funds:
U.S. Treasury Reserve Fund - TrustMark National Bank 57.36%
Service Class Trust Dept., Room 1030
P.O. Box 291
Jackson, MS 39205
TrustMark National Bank 39.72%
248 E. Capitol Street, Room 1030
Jackson, MS 39205
U.S. Treasury Reserve Fund First American Trust Company 92.8%
- -Institutional Class 421 North Main Street
Santa Ana, CA 92701
U.S. Treasury Reserve Fund First Data Distributors Inc. 100%
- -Investment Class 4400 Computer Drive
Westborough, MA 01581
Cash Reserve Fund - First American Title Insurance Company 72%
Service Class 114 E. 5th Street
Santa Ana, CA 92701
Maxine S. Haun 16.25%
1630 S. Pomona Avenue, C26
Fullerton, CA 92832
Furman Selz Mutual Funds 11%
3435 Stelzer Road
Columbus, OH 43219
Cash Reserve Fund - First American Trust Company 99.1%
Institutional Class 421 North Main Street
Santa Ana, CA 92701
Cash Reserve Fund - First Data Distributors Inc. 100%
Investment Class 4400 Computer Drive
Westborough, MA 01581
Equity Fund - Retail Class Michael Cardullo 57.32%
402 Madison Avenue
Cresskill, NJ 07626
Josephine Castellani 18%
2070 Arbor Circle
Brea, CA 92821
Semper Trust 9.23%
5315 Brockwood Street
Long Beach, CA 90808
Deborah A. Castellani 7.2%
2070 Arbor Circle
Brea, CA 92821
Equity Fund - Institutional
Class First American Trust Company 99.67%
421 North Main Street
Santa Ana, CA 92701
VOTING RIGHTS
Under the Declaration of Trust, the Trust is not required to hold
annual meetings of each Fund's shareholders to elect Trustees or for other
purposes. It is not anticipated that the Trust will hold shareholder meetings
unless required by law or the Declaration of Trust. In this regard, the Trust
will be required to hold a meeting to elect Trustees to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Trustees
have been elected by the shareholders of the Trust. In addition, the Declaration
of Trust provides that the holders of not less than two-thirds of the
outstanding shares of the Trust may remove persons serving as Trustee either by
declaration in writing or at a meeting called for such purpose. The Trustees are
required to call a meeting for the purpose of considering the removal of persons
serving as Trustee if requested in writing to do so by the holders of not less
than 10% of the outstanding shares of the Trust. To the extent required by
applicable law, the Trustees shall assist shareholders who seek to remove any
person serving as Trustee.
The Trust's shares do not have cumulative voting rights, so that the
holders of more than 50% of the outstanding shares may elect the entire Board of
Trustees, in which case the holders of the remaining shares would not be able to
elect any Trustees.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Fiduciary Trust Company acts as custodian of the Trust's assets.
First Data Investor Services Group, Inc. acts as transfer agent and dividend
disbursing agent for the Funds.
EXPERTS
PricewaterhouseCoopers LLP has been selected as the independent
accountants for the Trust. PricewaterhouseCoopers LLP provides audit and tax
services and assistance in connection with certain SEC filings.
PricewaterhouseCoopers LLP is located at 160 Federal Street, Boston, MA 02110.
COUNSEL TO THE TRUST
Paul, Weiss, Rifkind, Wharton & Garrison serves as counsel to the Trust
and from time to time provides advice to the Adviser.
PERFORMANCE INFORMATION
From time to time each Fund may calculate its performance for inclusion
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures are calculated by the Funds as described
below.
Yield
The Money Market Funds may, from time to time, include their yield and
effective yield in advertisements or reports to shareholders or prospective
investors.
Current yield for the Money Market Funds will be based on the change in
the value of a hypothetical investment (exclusive of capital changes such as
gains or losses from the sale of securities and unrealized appreciation and
depreciation) over a particular seven-day period, less a pro-rata share of each
such Fund's expenses accrued over that period (the "base period"), and stated as
a percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Money Market Funds assumes that all dividends
received during the base period have been reinvested. Calculation of "effective
yield" begins with the same "base period return" used in the calculation of
yield, which is then annualized to reflect weekly compounding pursuant to the
following formula:
Effective Yield = [(Base Period Return + 1)365/7]-1.
Quotations of yield will reflect only the performance of a hypothetical
investment in the Money Market Funds during the particular time period shown.
Yield for the Money Market Funds will vary based on changes in market conditions
and the level of the Fund's expenses, and no reported performance figure should
be considered an indication of performance which may be expected in the future.
For the period ended October 28, 1998, the seven-day yield for U.S.
Treasury Reserve Fund Institutional Class and Service Class were 4.41% and
4.16%, respectively. For the same seven-day period, the effective yield for the
Institutional Class and Service Class were 4.51% and 4.25%, respectively. For
the period ended October 28, 1998, the Investment Class had no investment
activity.
For the period ended October 28, 1998, the seven-day yield for the Cash
Reserve Fund Institutional Class and Service Class were 4.98% and 4.72%,
respectively. For the same seven-day period, the effective yield for the
Institutional Class and Service Class were 5.10% and 4.83%, respectively. For
the period ended October 28, 1998, the Investment Class had no investment
activity.
In connection with communicating its yields to current or prospective
shareholders, the Money Market Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indices, which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year and the life of the Equity Fund, each ended
on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Equity Fund's shares and assume
that all dividends and capital gains distributions during the respective periods
were reinvested in the Equity Fund's shares. Average annual total return is
calculated by computing the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Equity Fund's shares
and assume that all dividends and capital gains distributions during the period
were reinvested in the Equity Fund's shares. Cumulative total return is
calculated by computing the cumulative rates of return of a hypothetical
investment over such periods, according to the following formula (cumulative
total return is then expressed as a percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return. The
total return for the year ended September 30, 1998 for the U.S. Treasury Reserve
Fund Institutional Class and Service Class was 4.97% and 4.88%, respectively.
The total return for the year ended September 30, 1998 for the Cash Reserve Fund
Institutional Class and Service Class was 5.29% and 5.19%, respectively. The
annualized total return for the year ended September 30, 1998 for the Equity
Fund Institutional Class and Retail Class was (5.30) and (5.40), respectively.
Capital Change
Capital Change measures the return from invested capital including
reinvested capital gains distributions. Capital change does not include the
reinvestment of income dividends.
Quotations of the Equity Fund's performance are historical, show the
performance of a hypothetical investment, and are not intended to indicate
future performance. An investor's shares when redeemed may be worth more or less
than their original cost. Performance of the Equity Fund will vary based on
changes in market conditions and the level of the Equity Fund's expenses.
Comparison of Portfolio Performance
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner or the
differences are understood. Investors should consider the methods used to
calculate performance when comparing the performance of a Fund with the
performance of other investment companies or other types of investments.
In connection with communicating performance to current or prospective
shareholders, the Funds also may compare these figures (a) to unmanaged indices
which may assume reinvestment of dividends or interest but generally do not
reflect deductions for operational, administrative and management costs or (b)
to the Consumer Price Index (measure for inflation) to assess the real rate of
return from an investment of dividends but this Index generally does not reflect
deductions for administrative and management costs and expenses.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations. When
these organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk.
Since the assets in funds are always changing, a Fund may be ranked
within one asset-size class at one time and in another asset-size class at some
other time. In addition, the independent organization chosen to rank a Fund in
fund literature may change from time to time depending upon the basis of the
independent organization's categorizations of mutual funds, changes in a Fund's
investment policies and investments, the Fund's asset size and other factors
deemed relevant. Footnotes in advertisements and other marketing literature will
include the organization issuing the ranking, time period and asset-size class,
as applicable, for the ranking in question.
Evaluations of a Fund's performance made by independent sources may
also be used in advertisements concerning that Fund, including reprints of, or
selections from, editorials or articles about the Fund.
Investors who purchase and redeem shares of the Funds through a
customer account maintained at a Service Organization may be charged one or more
of the following types of fees as agreed upon by the Service Organization and
the investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield or average
annual total return of the Funds for those investors. Investors who maintain
accounts with the Trust as transfer agent will not pay these fees.
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the Trust including the notes thereto,
dated September 30, 1998 have been audited by PricewaterhouseCoopers LLP and are
incorporated by reference in their entirety into this Statement of Additional
Information from the Annual Report of the Trust dated September 30, 1998.
<PAGE>
APPENDIX A
The following is a description of the ratings given by Moody's and S&P
to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
S&P:
Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt rated AA
has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree. Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. Debt rated BBB is regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned and actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
A-1
<PAGE>
Moody's:
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class. Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or maintenance of other terms of the contract over any long period of
time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
<PAGE>
