<PAGE> 1
THE ARCH FUND(R), INC.
INVESTOR A SHARES AND INVESTOR B SHARES
OF THE
ARCH MONEY MARKET, TREASURY MONEY MARKET,
TAX-EXEMPT MONEY MARKET, GROWTH & INCOME
EQUITY, EMERGING GROWTH, GOVERNMENT &
CORPORATE BOND, U.S. GOVERNMENT
SECURITIES, BALANCED, INTERNATIONAL EQUITY,
SHORT-INTERMEDIATE MUNICIPAL, MISSOURI
TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT
BOND PORTFOLIOS
SUPPLEMENT DATE APRIL 8, 1996 TO
PROSPECTUS DATED MARCH 28, 1996
The following should be inserted after "How To Purchase and Redeem
Shares -- Automatic Investment Program (AIP)" on page 52 of the Prospectus:
"SPECIAL OFFERING
For the period beginning April 15, 1996 and ending July 31,
1996, the Fund's distributor, BISYS Fund Services ("BISYS"), will pay
$100 to the ARCH Asset Adviser account of each person who initially
becomes a shareholder of the Fund during this period through
participation in the ARCH Asset Adviser Program and maintains at least a
$5,000 balance ($1,000 for IRAs) in such account for at least 180 days
from the initial purchase. The payment will be made at the end of the
180-day holding period by the purchase of additional Shares of the same
Portfolios of the Fund (and in the same proportion) then held in the
shareholder's ARCH Asset Adviser account. The purchase will consist of
$100 in Investor A Shares or Investor B Shares, whichever the
shareholder owns, at their current public offering price which is net
asset value plus, in the case of Investor A Shares, any applicable
front-end sales charge. A shareholder will not be disqualified if his or
her balance falls below the required minimum solely due to changes in
the net asset values of the Portfolios in (as opposed to withdrawals
from) his or her ARCH Asset Adviser account.
This offer is subject to the following additional conditions:
(i) it is limited to one payment per household, and to one payment in
the case of a joint account; (ii) employees of BISYS and its affiliates
and Mississippi Valley Advisors, Inc. and its affiliates and members of
their immediate families will not be eligible to participate in the
offer; and (iii) the offer may be terminated (as to persons that have
not yet purchased Shares at the time of termination) at any time by
BISYS without prior notice. BISYS will not be reimbursed by the Fund for
any payments made pursuant to this offer.
The Fund's administrator plans to report the $100 payment as
ordinary income to shareholders."
<PAGE> 2
MARCH 28, 1996
THE ARCH FUND(R), INC.
INVESTOR A SHARES AND INVESTOR B SHARES
<TABLE>
<S> <C>
For information, write: Or call your investment representative
P.O. Box 78069 or the ARCH Funds' Service Center
St. Louis, Missouri 63178 at 1-800-551-3731
</TABLE>
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company authorized to issue Shares in twelve investment portfolios. This
Prospectus describes the Investor A Shares in each of those portfolios and the
Investor B Shares in nine of those portfolios. Except as provided below,
Investor A Shares and Investor B Shares are sold through selected broker/dealers
and other financial intermediaries to individual or institutional customers.
Investor A Shares (with the exception of Investor A Shares in the money market
portfolios) are sold with a front-end sales charge. Investor B Shares are sold
with a contingent deferred sales charge.
THE ARCH MONEY MARKET PORTFOLIO'S investment objective is to seek current
income with liquidity and stability of principal. Features of the Portfolio
include:
-- Money Market Returns
-- Active Professional Portfolio Management
THE ARCH TREASURY MONEY MARKET PORTFOLIO'S investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal. Features of the Portfolio include:
-- High Degree of Credit Safety
-- Income Generally Exempt From State Income Tax
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO'S investment objective is to seek
as high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. Features of the Portfolio
include:
-- Tax-Free Money Market Returns
-- Active Professional Portfolio Management
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO'S investment objective is to
provide long-term capital growth, with income a secondary consideration.
Features of the Portfolio include:
-- Objective of Capital Growth Over the Long-Term
-- Equity Investments Providing Some Dividend Income
THE ARCH EMERGING GROWTH PORTFOLIO'S investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. Features of the Portfolio include:
-- Objective of Long-Term Capital Appreciation
-- Emphasis on Small to Medium-Sized Companies With Above-Average Potential
for Price Appreciation
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO'S investment objective is to
seek the highest level of current income consistent with conservation of
capital. Features of the Portfolio include:
-- Objective of Current Income From Government and Corporate Securities
-- At Least 65% of Assets Rated "A" or Higher or Deemed Comparable In
Quality
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO'S investment objective is to
seek a high rate of current income that is consistent with relative stability of
principal. Features of the Portfolio include:
-- Objective of Current Income From Government Securities
-- High Degree of Credit Safety
<PAGE> 3
THE ARCH BALANCED PORTFOLIO'S investment objective is to maximize total
return through a combination of growth of capital and current income consistent
with the preservation of capital. Features of the Portfolio include:
-- Professional Asset Allocation Among Equity Securities, Fixed Income
Securities and Cash Equivalents
-- Potential for Maximizing Total Return
THE ARCH INTERNATIONAL EQUITY PORTFOLIO'S investment objective is to provide
capital growth consistent with reasonable investment risk by investing
principally in foreign equity securities, most of which will be denominated in
foreign currencies. Features of the Portfolio include:
-- Objective of Capital Growth
-- Diversified Portfolio of Foreign Equity Securities
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO'S investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital. Features of the Portfolio
include:
-- Tax-Free Current Income
-- Potential Yield That is Higher Than a Municipal Money Market Fund but a
Lower Potential Yield With Less Price Volatility Than a Long-Term
Municipal Bond Fund
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO'S investment objective is to
seek as high a level of interest income exempt from federal income tax as is
consistent with conservation of capital. Features of the Portfolio include:
-- Interest Income Exempt From Federal Income Tax and Missouri Income Tax
-- Objective of Conservation of Capital
THE ARCH KANSAS TAX-EXEMPT BOND PORTFOLIO'S investment objective is to seek
as a high level of current income exempt from federal income tax as is
consistent with conservation of capital. Features of the Portfolio include:
-- Interest Income Exempt From Federal Income Tax and Kansas Income Tax and
Local Intangibles Tax
-- Objective of Conservation of Capital
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank of St. Louis National Association ("Mercantile"),
acts as investment adviser for the Portfolios; Mercantile serves as custodian;
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as administrator;
and BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
In addition, Clay Finlay, Inc. ("Clay Finlay" or the "Sub-Adviser") serves as
sub-investment adviser for the International Equity Portfolio.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated March 28, 1996, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. An investor may obtain the Statement of Additional Information
without charge by writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178
or by calling 1-800-551-3731.
An investment in the Money Market Portfolio, Treasury Money Market Portfolio
or Tax-Exempt Money Market Portfolio is neither insured nor guaranteed by the
U.S. Government. THERE CAN BE NO ASSURANCE THAT ANY OF THESE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolios involves investment risk, including possible loss of
principal.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
<PAGE> 4
HIGHLIGHTS
The ARCH Fund, Inc. is an open-end, management investment company (commonly
known as a mutual fund) registered under the Investment Company Act of 1940, as
amended. The Fund offers investment opportunities in twelve investment
portfolios: the ARCH MONEY MARKET, TREASURY MONEY MARKET AND TAX-EXEMPT MONEY
MARKET PORTFOLIOS (the "Money Market Portfolios") and the ARCH GROWTH & INCOME
EQUITY, EMERGING GROWTH, GOVERNMENT & CORPORATE BOND, U.S. GOVERNMENT
SECURITIES, BALANCED, INTERNATIONAL EQUITY, SHORT-INTERMEDIATE MUNICIPAL,
MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND PORTFOLIOS (the "Equity and
Bond Portfolios" and, together with the Money Market Portfolios, the
"Portfolios"). Each Portfolio represents a separate pool of assets with
different investment objectives and policies (as described below under
"Investment Objectives, Policies and Risk Considerations"). MVA serves as
Adviser, Mercantile as Custodian, BISYS Fund Services Ohio, Inc. as
Administrator, and BISYS Fund Services as sponsor and Distributor. In addition,
Clay Finlay serves as Sub-Adviser for the International Equity Portfolio. (For
information on expenses, fee waivers, and services, see "Certain Financial
Information," Financial Highlights" and "Management of the Fund.")
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Money Market Portfolios each seek to maintain a net asset value of
$1.00 per Share. Each Money Market Portfolio's assets are invested in
dollar-denominated debt securities with remaining maturities of 397 days (13
months) or less as defined by the Securities and Exchange Commission, and each
Money Market Portfolio's dollar-weighted average portfolio maturity will not
exceed 90 days. All securities acquired by these Money Market Portfolios will be
determined by MVA, under guidelines approved by the Fund's Board of Directors,
to present minimal credit risks and to be rated in the highest category (or
deemed comparable in quality) at the time of purchase. There can be no assurance
that the Money Market Portfolios will be able to achieve a stable net asset
value on a continuous basis.
The Government & Corporate Bond and U.S. Government Securities Portfolios
are designed for investors who seek higher current income than is typically
offered by money market funds and who are willing to accept a variable Share
value to achieve that objective.
The Growth & Income Equity, Emerging Growth and Balanced Portfolios are
designed for investors who seek capital growth, and who are prepared to accept
the risks associated with equity securities.
The International Equity Portfolio is designed for investors who seek
capital growth, wish to diversify their investments beyond the United States,
and are prepared to accept the risks entailed in such investments. These risks
may be greater than those associated with equity securities of companies located
in the United States.
The Short-Intermediate Municipal Portfolio is designed for investors who
seek a yield that is higher than a municipal money market fund with less
principal volatility than is normally associated with a long-term municipal bond
fund.
3
<PAGE> 5
The Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios are
designed for investors who seek a higher rate of return than that typically
offered by tax-exempt money market funds and who are willing to accept a
variable Share value to achieve that objective.
The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios seek to provide income
exempt from federal income tax. In addition, the Missouri Tax-Exempt Bond
Portfolio seeks to provide income that is also exempt from Missouri income tax
and the Kansas Tax-Exempt Bond Portfolio seeks to provide income that is also
exempt from Kansas income tax and the local intangibles tax.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, purchase variable and floating rate
instruments, revenue bonds, private activity bonds and municipal lease
obligations, enter into repurchase agreements and reverse repurchase agreements,
make securities loans, acquire the securities of foreign issuers, invest in
options and futures, and make limited investments in illiquid securities and
securities issued by other investment companies. These investment practices
involve investment risks of varying degrees. The Equity and Bond Portfolios may
also engage in short-term trading, which may also involve greater risk and
increase such Portfolios' expenses. The International Equity Portfolio will
invest principally in foreign equity securities, most of which will be
denominated in foreign currencies. The other Portfolios do not invest in
instruments denominated in foreign currency (except that the Growth & Income
Equity, Emerging Growth, and Balanced Portfolios may invest in certain Canadian
securities). The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios may, under certain
conditions, make limited investments in securities the income on which may be
subject to federal income tax. See "Investment Objectives, Policies and Risk
Considerations" below and the Statement of Additional Information under
"Investment Objectives and Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Portfolios also offer the economic
advantages of block trading in securities and the availability of a family of
twelve mutual funds should your investment goals change.
This Prospectus describes the Investor A Shares of each Portfolio and the
Investor B Shares of the Money Market, Growth & Income Equity, Emerging Growth,
Government & Corporate Bond, U.S. Government Securities, Balanced, International
Equity, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios (the
"CDSC Portfolios"). Investor A Shares of each Portfolio are sold with a
front-end sales charge, except for Investor A Shares of the Money Market
Portfolios which are sold without a sales charge. Investor B Shares of the CDSC
Portfolios are sold with a contingent deferred sales charge. For information on
purchasing, exchanging or redeeming Investor A Shares and/or Investor B Shares
of the Portfolios, please see "How to Purchase and Redeem Shares" below. For a
discussion comparing Investor A Shares and Investor B Shares, please see
"Characteristics of Investor A Shares and Investor B Shares," and "Factors to
Consider When Selecting Investor A Shares or Investor B Shares" on pages 57 and
58, respectively.
4
<PAGE> 6
CERTAIN FINANCIAL INFORMATION
Shares of the Money Market, Growth & Income Equity, Emerging Growth,
Government & Corporate Bond, U.S. Government Securities, Balanced and
International Equity Portfolios have been classified into four classes of
Shares--Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of the Treasury Money Market Portfolio have been classified into
three classes of Shares--Trust Shares, Institutional Shares and Investor A
Shares. Shares of the Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond
Portfolios have been classified into three classes of Shares--Trust Shares,
Investor A Shares and Investor B Shares. Shares of the Tax-Exempt Money Market
and Short-Intermediate Municipal Portfolios have been classified into two
classes of Shares--Trust Shares and Investor A Shares. Shares of each class in a
Portfolio represent equal, pro rata interests in the investments held by that
Portfolio and are identical in all respects, except that Shares of each class
bear separate distribution and/or shareholder administrative servicing fees and
certain other operating expenses, and enjoy certain exclusive voting rights on
matters relating to these fees. (See "Other Information Concerning the Fund and
Its Shares," "Management of the Fund--Distribution and Services Plans" and
"Management of the Fund--Custodian, Sub-Custodian and Transfer Agent" below.) As
a result of payments for distribution and/or shareholder administrative
servicing fees and certain other operating expenses that may be made in
differing amounts, the net investment income of Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares in a Portfolio can be
expected, at any given time, to be different.
The Tax-Exempt Money Market Portfolio and Missouri Tax-Exempt Bond
Portfolio commenced operations on July 10, 1986 and July 15, 1988, respectively,
as separate investment portfolios (the "Predecessor Tax-Exempt Money Market
Portfolio" and the "Predecessor Missouri Tax-Exempt Bond Portfolio,"
respectively) of The ARCH Tax-Exempt Trust (the "Trust"), which was organized as
a Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest that
were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares.
5
<PAGE> 7
EXPENSE SUMMARY FOR
INVESTOR A AND INVESTOR B SHARES
<TABLE>
<CAPTION>
TREASURY TAX-EXEMPT
MONEY MONEY
MONEY MARKET MARKET MARKET GROWTH & INCOME EQUITY EMERGING
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO GROWTH PORTFOLIO
---------------------- ---------- ---------- ---------------------- ----------------------
INVESTOR A INVESTOR B INVESTOR A INVESTOR A INVESTOR A INVESTOR B INVESTOR A INVESTOR B
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases
(as a percentage of offering
price)............................. None None None None 4.5%(1) None 4.5%(1) None
DEFERRED SALES CHARGE
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower)................ None 5.0%(2) None None None 5.0%(2) None 5.0%(2)
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Investment Advisory Fees (net of fee
waivers)........................... .35%(3) .35%(3) .35%(3) .35%(3) .55% .55% .75% .75%
12b-1 Fees, including distribution
and service fees................... .25% 1.00% .25% .25% .30% 1.00% .30% 1.00%
Other Expenses, including
administration fees and other
expenses (net of fee waivers and
expense reimbursements)(4,5)....... .17% .17% .18% .16% .20% .20% .21% .21%
--- --- --- --- --- --- --- ---
TOTAL PORTFOLIO OPERATING EXPENSES
(net of fee waivers and expense
reimbursements)(5)................. .77% 1.52% .78% .76% 1.05% 1.75% 1.26% 1.96%
========= ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
GOVERNMENT & CORPORATE
BOND PORTFOLIO
----------------------
INVESTOR A INVESTOR B
---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases
(as a percentage of offering
price)............................. 4.5%(1) None
DEFERRED SALES CHARGE
(as a percentage of original purchase
price or redemption proceeds,
whichever is lower)................ None 5.0%(2)
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Investment Advisory Fees (net of fee
waivers)........................... .45% .45%
12b-1 Fees, including distribution
and service fees................... .30% 1.00%
Other Expenses, including
administration fees and other
expenses (net of fee waivers and
expense reimbursements)(4,5)....... .20% .20%
--- ---
TOTAL PORTFOLIO OPERATING EXPENSES
(net of fee waivers and expense
reimbursements)(5)................. .95% 1.65%
========== ==========
</TABLE>
- ------------
(1) Reduced sales charges may be available. See "How to Purchase and Redeem
Shares--Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios."
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares--Applicable Sales Charge--Investor B Shares of the CDSC Portfolios."
(3) Without fee waivers, advisory fees for the Money Market, Treasury Money
Market and Tax-Exempt Money Market Portfolios would be .40%, .40% and .40%,
respectively.
(4) Without fee waivers, administration fees for a Portfolio would be .20% (.10%
for the Tax-Exempt Money Market Portfolio).
(5) Without fee waivers and/or expense reimbursements, Other Expenses would be
.27%, .28%, .16%, .30%, .31% and .30% for Investor A Shares of the Money
Market, Treasury Money Market, Tax-Exempt Money Market, Growth & Income
Equity, Emerging Growth and Government & Corporate Bond Portfolios,
respectively, and .27%, .30%, .31% and .30% for Investor B Shares of the
Money Market, Growth & Income Equity, Emerging Growth and Government &
Corporate Bond Portfolios, respectively, and Total Portfolio Operating
Expenses would be .92%, .93%, .81%, 1.15%, 1.36% and 1.05% for Investor A
Shares of the Money Market, Treasury Money Market, Tax-Exempt Money Market,
Growth & Income Equity, Emerging Growth and Government & Corporate Bond
Portfolios, respectively, and 1.67%, 1.85%, 2.06% and 1.75% for Investor B
Shares of the Money Market, Growth & Income Equity, Emerging Growth and
Government & Corporate Bond Portfolios, respectively.
6
<PAGE> 8
<TABLE>
<CAPTION>
SHORT-
INTERMEDIATE
U.S. GOVERNMENT INTERNATIONAL EQUITY MUNICIPAL
SECURITIES PORTFOLIO BALANCED PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- ---------------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
---------- ---------- ---------- ---------- ---------- ---------- ------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 4.5%(1) None 4.5%(1) None 4.5%(1) None 2.5%(1)
DEFERRED SALES CHARGE
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)..... None 5.0%(2) None 5.0%(2) None 5.0%(2) None
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of
average net assets)
Investment Advisory Fees
(net of fee waivers).... .45% .45% .75% .75% .75%(3) .75%(3) 0.00%(3)
12b-1 Fees, including
distribution and service
fees.................... .30% 1.00% .30% 1.00% .30% 1.00% .20%(4)
Other Expenses, including
administration fees and
other expenses (net of
fee waivers and expense
reimbursements)(5,6).... .22% .23% .22% .18% .40% .27% .30%
--- --- --- --- --- --- ---
TOTAL PORTFOLIO OPERATING
EXPENSES
(net of fee waivers
and expense
reimbursements)(6)...... .97% 1.68% 1.27% 1.93% 1.45% 2.02% .50%
========== ========== ========== ========== ========== ========== ============
<CAPTION>
MISSOURI TAX-EXEMPT BOND KANSAS TAX-EXEMPT BOND
PORTFOLIO PORTFOLIO
------------------------ ----------------------
<S> <C> <C> <C> <C>
INVESTOR A INVESTOR B INVESTOR A INVESTOR B
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Front-End Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 4.5%(1) None 4.5%(1) None
DEFERRED SALES CHARGE
(as a percentage of
original purchase price
or redemption proceeds,
whichever is lower)..... None 5.0%(2) None 5.0%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of
average net assets)
Investment Advisory Fees
(net of fee waivers).... .45% .45% 0.00%(3) 0.00%(3)
12b-1 Fees, including
distribution and service
fees.................... .20%(4) 1.00% .20%(4) 1.00%
Other Expenses, including
administration fees and
other expenses (net of
fee waivers and expense
reimbursements)(5,6).... .19% .18% .43% .43%
--- --- --- ---
TOTAL PORTFOLIO OPERATING
EXPENSES
(net of fee waivers
and expense
reimbursements)(6)...... .84% 1.63% .63% 1.43%
========== ========== ========== ==========
</TABLE>
- ------------
(1) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares--Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios."
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares--Applicable Sales Charge--Investor B Shares of the CDSC Portfolios."
(3) Without fee waivers, investment advisory fees for the International Equity,
Short-Intermediate Municipal and Kansas Tax-Exempt Bond Portfolios would be
1.00%, .55% and .45%, respectively.
(4) Without fee waivers, 12b-1 fees would be .30% for Investor A Shares of the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios.
(5) Without fee waivers, administration fees for a Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.32%, .32%, .46%, .40%, .29% and .53% for Investor A Shares of the U.S.
Government Securities, Balanced, International Equity, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios,
respectively, and .33%, .28%, .44%, .28% and .53% for Investor B Shares of
the U.S. Government Securities, Balanced, International Equity, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios, respectively, and
Total Portfolio Operating Expenses would be 1.07%, 1.37%, 1.76%, 1.25%,
1.04% and 1.28% for Investor A Shares of the U.S. Government Securities,
Balanced, International Equity, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios, respectively, and 1.78%, 2.03%, 2.44%, 1.73% and
1.98% for Investor B Shares of the U.S. Government Securities, Balanced,
International Equity, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond
Portfolios, respectively.
7
<PAGE> 9
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end
of each period:
Money Market Portfolio
Investor A Shares............................................ $ 8 $25 $ 43 $ 95
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 65 $78 $ 93 $161(3)
Assuming no redemption..................................... $ 15 $48 $ 83 $161(3)
Treasury Money Market Portfolio
Investor A Shares............................................ $ 8 $25 $ 43 $ 97
Tax-Exempt Money Market Portfolio
Investor A Shares............................................ $ 8 $24 $ 42 $ 94
Growth & Income Equity Portfolio
Investor A Shares(2)......................................... $ 55 $77 $ 100 $167
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 68 $85 $ 105 $188(3)
Assuming no redemption..................................... $ 18 $55 $ 95 $188(3)
Emerging Growth Portfolio
Investor A Shares(2)......................................... $ 57 $83 $ 111 $190
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 70 $92 $ 116 $210(3)
Assuming no redemption..................................... $ 20 $62 $ 106 $210(3)
Government & Corporate Bond Portfolio
Investor A Shares(2)......................................... $ 54 $74 $ 95 $156
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 67 $82 $ 100 $177(3)
Assuming no redemption..................................... $ 17 $52 $ 90 $177(3)
U.S. Government Securities Portfolio
Investor A Shares(2)......................................... $ 54 $75 $ 96 $159
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 67 $83 $ 101 $180(3)
Assuming no redemption..................................... $ 17 $53 $ 91 $180(3)
Balanced Portfolio
Investor A Shares(2)......................................... $ 57 $83 $ 112 $191
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 70 $91 $ 114 $208(3)
Assuming no redemption..................................... $ 20 $61 $ 104 $208(3)
International Equity Portfolio
Investor A Shares(2)......................................... $ 59 $89 $ 121 $211
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 71 $93 $ 119 $220(3)
Assuming no redemption..................................... $ 21 $63 $ 109 $220(3)
Short-Intermediate Municipal Portfolio
Investor A Shares(2)......................................... $ 30 $41 $ 52 $ 86
Missouri Tax-Exempt Bond Portfolio
Investor A Shares(2)......................................... $ 53 $71 $ 89 $144
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 67 $81 $ 99 $172(3)
Assuming no redemption..................................... $ 17 $51 $ 89 $172(3)
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Kansas Tax-Exempt Bond Portfolio
Investor A Shares(2)......................................... $ 51 $64 $ N/A $N/A
Investor B Shares
Assuming complete redemption at end of period(1)........... $ 65 $75 $ N/A $N/A
Assuming no Redemption..................................... $ 15 $45 $ N/A $N/A
</TABLE>
- ------------
(1) Assumes deduction of maximum applicable contingent deferred sales charge.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(3) Based on conversion of Investor B Shares into Investor A Shares after eight
years.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. Information about the actual performance of all of the
Portfolios is contained in the Fund's Annual Report to Shareholders dated
November 30, 1995 which may be obtained without charge by contacting the Fund at
the address or telephone number provided on the cover page of this Prospectus.
The purpose of the foregoing tables is to assist in understanding the
various costs and expenses that an investor in a Portfolio's Investor A or
Investor B Shares will bear directly or indirectly. The information contained in
such tables for the Money Market, Treasury Money Market, Growth & Income Equity,
Emerging Growth, Government & Corporate Bond, U.S. Government Securities,
Balanced and International Equity Portfolios is based on the expenses incurred
by each of these Portfolios during the last fiscal year with respect to its
Investor A and/or Investor B Shares. The information contained in such tables
for the Tax-Exempt Money Market, Short-Intermediate Municipal and Missouri
Tax-Exempt Bond Portfolios is based on expenses incurred by each of these
Portfolios during the last fiscal year, restated to reflect the expenses which
each such Portfolio expects to incur during the current fiscal year with respect
to its Investor A and/or Investor B Shares. Such information with respect to the
Kansas Bond Portfolio is based on expenses the Portfolio expects to incur during
the current fiscal year. (For more complete descriptions of the various costs
and expenses, see "Condensed Financial Information" and "Management of the Fund"
in this Prospectus and the Statement of Additional Information.) The Table and
Examples have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
Because of the payments for distribution services (12b-1 fees) under the
Distribution and Services Plans as shown in the above table, long-term
shareholders of Investor A Shares of the Equity and Bond Portfolios and Investor
B Shares of the CDSC Portfolios may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of Securities
Dealers, Inc.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following tables supplement the Fund's
financial statements, which are contained in the Fund's Annual Report to
Shareholders dated November 30, 1995 and incorporated by reference into the
Statement of Additional Information, and set forth certain historic results for
Investor A Shares of each Portfolio and Investor B Shares of the Growth & Income
Equity, Emerging Growth, Government & Corporate Bond, U.S. Government
Securities, Balanced, International Equity and Missouri Bond Portfolios. The
data for the years or periods ended November 30, 1989 through 1995 and with
respect to the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios
(and their Predecessor Portfolios), for the six-month period ended November 30,
1995 and each of the years or periods ended May 31, 1990 through 1995, has been
audited by KPMG Peat Marwick LLP, independent auditors, whose unqualified report
insofar as it relates to each of the years or periods in the five-year period
ended November 30, 1995 (the six-month period ended November 30, 1995 and each
of the years or periods in the five-year period ended May 31, 1995 with respect
to the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios (and
their Predecessor Portfolios)) on the financial statements containing such
information is incorporated by reference into the Statement of Additional
Information. The data for years ended November 30, 1986 through 1988 and with
respect to the Predecessor Tax-Exempt Money Market and Predecessor Missouri
Tax-Exempt Bond Portfolios, for the years ended May 31, 1989 and 1988 and the
period ended May 31, 1987 were derived from financial statements audited by the
Fund's and the Trust's prior auditors.
During the periods shown, Investor B Shares were not offered by the Money
Market Portfolio and Investor A Shares were not offered by the
Short-Intermediate Municipal Portfolio. Information in the financial highlights
for the Short-Intermediate Municipal Portfolio sets forth certain historic
investment results for Trust Shares of the Portfolio and is intended to provide
investors with a perspective as to that Portfolio's financial history (Trust
Shares are offered without a sales charge and are subject to administrative
servicing fees at an annual rate of up to .30% of the Portfolio's outstanding
Trust Shares).
Further information about the performance of the Portfolios is available in
the Annual Report. Both the Statement of Additional Information and the Annual
Report may be obtained free of charge by contacting the Fund at the address or
telephone number on the front cover page of this Prospectus.
10
<PAGE> 12
MONEY MARKET PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991(a) 1990 1989 1988 1987 1986
---------- ---------- -------- -------- -------- -------- -------- -------- -------- --------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR
SHARES SHARES SHARES SHARES SHARES
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Investment Activities:
Net investment income.... 0.052 0.033 0.025 0.032 0.056 0.078 0.088 0.071 0.062 0.065
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Distributions:
Net investment income.... (0.052) (0.033) (0.025) (0.032) (0.056) (0.078) (0.088) 0.071 0.062 0.065
------- ------- ------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======== ======== ======== ======== ========
Total return.............. 5.33% 3.37% 2.52% 3.21% 5.75% 8.08% 9.21% 7.33(b) 6.40(b) 6.70%(b)
Ratios/Supplemental Data:
Net assets at end of
period (000)........... $ 64,865 $ 48,384 $ 46,920 $ 52,224 $ 60,436 $896,903 $661,145 $289,764 $220,944 $179,224
Ratio of expenses to
average net assets
(including waivers).... 0.77% 0.78% 0.79% 0.80% 0.72% 0.55% 0.45% 0.45% 0.45% 0.45%
Ratio of net investment
income to average net
assets (including
waivers)............... 5.20% 3.35% 2.50% 3.21% 5.69% 7.77% 8.82% 7.12% 6.22% 6.49%
Ratio of expenses to
average net assets
(before waivers)*...... 0.92% 0.93% 0.93% 0.94% 0.80% 0.60% 0.60% 0.58% 0.68% 0.68%
Ratio of net investment
income to average net
assets (before
waivers)*.............. 5.05% 3.20% 2.36% 3.07% 5.61% 7.72% 8.67% 6.99% 5.99% 6.26%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated existing Shares as
"Investor" Shares. On September 27, 1994 the Portfolio redesignated
Investor Shares as "Investor A" Shares.
(b) Unaudited.
11
<PAGE> 13
TREASURY MONEY MARKET PORTFOLIO
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
DEC. 2, 1991
TO
YEAR ENDED YEAR ENDED YEAR ENDED NOV. 30,
NOV. 30, 1995 NOV. 30, 1994 NOV. 30, 1993 1992(a,b)
------------- ------------- ------------- ------------
INVESTOR A INVESTOR A INVESTOR INVESTOR
SHARES SHARES SHARES SHARES
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Investment Activities:
Net investment income.............. 0.048 0.31 0.024 0.017
------- ------- ------- -------
Distributions:
Net investment income.............. (0.048) (0.031) (0.024) (0.017)
------- ------- ------- -------
Net asset value, end of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return......................... 4.93% 3.16% 2.43% 1.79%(c)
Ratios/Supplemental Data:
Net assets at end of period
(000)........................... $ 2,776 $ 1,713 $ 1,411 $ 3,257
Ratio of expenses to average net
assets (including waivers)...... 0.78% 0.71% 0.64% 0.58%(d)
Ratio of net investment income to
average net assets (including
waivers)........................ 4.84% 3.14% 2.41% 2.88%(d)
Ratio of expenses to average net
assets (before waivers)*........ 0.93% 0.94% 0.97% 1.02%(d)
Ratio of net investment income to
average net assets (before
waivers)*....................... 4.69% 2.90% 2.08% 2.44%(d)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On December 2, 1991, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on April 20, 1992, the Portfolio
issued a second series of Shares which were designated as "Investor"
Shares. The financial highlights presented for the period prior to April
20, 1992 represent financial highlights applicable to Trust Shares. On
September 27, 1994 the Portfolio redesignated Investor Shares as "Investor
A" Shares.
(c) Not Annualized.
(d) Annualized.
12
<PAGE> 14
TAX-EXEMPT MONEY MARKET PORTFOLIO(a)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
NOV. 30 YEAR ENDED MAY 31, MAY 31,
---------- ------------------------------------------------------------------------------- ---------
1995(f) 1995 1994(b) 1993 1992 1991 1990(b) 1989(b) 1988(b) 1987(a)
---------- ---------- ---------- -------- -------- -------- ------- ------- ------- ---------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR INVESTOR DOLLAR DOLLAR DOLLAR PORTFOLIO
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
---------- ---------- ---------- -------- -------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- -------- -------- -------- ------- ------- ------- ---------
Investment Activities:
Net investment income.... 0.014 0.027 0.017 0.019 0.031 0.047 0.041 0.042 0.025 0.036
---------- ---------- ---------- -------- -------- -------- ------- ------- ------- ---------
Distributions:
Net investment income.... (0.014) (0.027) (0.017) (0.019) (0.031) (0.047) (0.041) (0.042) (0.025) (0.036)
---------- ---------- ---------- -------- -------- -------- ------- ------- ------- ---------
Net asset value, end of
period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========= ========= ======== ======== ======== ======== ======== ======== =========
Total return.............. 1.45%(d) 2.70% 1.73% 1.90% 3.16% 4.82% 5.73% 5.72% 1.81% 3.80%(d)
Ratios/Supplemental Data:
Net assets at end of
period (000)........... $ 5,403 $ 5,138 $ 8,631 $ 6,837 $ 10,956 $ 8,286 $ 0 $ 3,083 $ 0 $147,799
Ratio of expenses to
average net assets
(including waivers).... 0.94%(e) 0.84% 0.76% 0.80% 0.87% 0.58% 0.78% 0.65% 0.65% 0.37%(c,e)
Ratio of net investment
income to average net
assets (including
waivers)............... 2.87%(e) 2.63% 1.72% 1.88% 3.10% 5.09% 5.30% 5.38% 4.05% 4.02%(c,e)
Ratio of expenses to
average net assets
(before waivers)*...... 0.99%(e) 0.93% 0.86% 0.90% 0.97% 0.68% 0.87% 0.83% 0.80% 0.62%(c,e)
Ratio of net investment
income to average net
assets (before
waivers)*.............. 2.82%(e) 2.54% 1.62% 1.78% 3.00% 4.99% 5.21% 5.20% 3.90% 3.77%(c,e)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as an investment
portfolio of The ARCH Tax-Exempt Trust. On October 27, 1995, it was
reorganized as a new portfolio of the Fund.
(b) "Investor A" Shares were originally issued as "Dollar" Shares in June of
1987. As of September 28, 1990, the Portfolio redesignated its existing
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares.
(c) Includes waiver of sub-advisory fees for the period ended May 31, 1987.
(d) Not Annualized.
(e) Annualized.
(f) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
13
<PAGE> 15
GROWTH & INCOME EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, JUNE 2, 1988 MARCH 1, 1995
TO TO
---------------------------------------------------------------------------- NOV. 30, NOV. 30,
1995 1994(a) 1993 1992 1991(a) 1990 1989 1988(b) 1995(c)
---------- ---------- -------- -------- -------- ---------- ---------- ------------- -------------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR INVESTOR B
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ---------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.. $ 12.70 $ 14.74 $ 14.49 $12.33 $11.22 $ 12.41 $ 10.25 $ 10.00 $ 13.43
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Investment Activities:
Net investment
income............. 0.23 0.20 0.25 0.25 0.39 0.39 0.41 0.28 0.14
Net realized and
unrealized gains
(losses) from
investments........ 3.74 (0.17) 1.06 2.24 1.47 (0.56) 2.29 0.06 2.81
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total from investment
activities......... 3.97 0.03 1.31 2.49 1.86 (0.17) 2.70 0.34 2.95
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Distributions:
Net investment
income............. (0.23) (0.21) (0.25) (0.26) (0.39) (0.39) (0.51) (0.09) (0.15)
Net realized gain.... (0.14) (0.18) (0.81) (0.07) (0.36) (0.63) (0.03)
In excess of net
realized gains..... (1.68)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total
distributions...... (0.37) (2.07) (1.06) (0.33) (0.75) (1.02) (0.54) (0.09) (0.15)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Net asset value, end
of period............ $ 16.30 $ 12.70 $ 14.74 $14.49 $12.33 $ 11.22 $ 12.41 $ 10.25 $ 16.23
========== ========== ======== ======== ======== ========== ========== ============== ==============
Total return (excludes
sales charges)....... 31.95% 0.20% 9.65% 20.59% 17.39% (1.36)% 27.11% 3.46%(d,f) 31.20%(e)
Ratios/Supplemental
Data:
Net assets at end of
period (000)....... $ 25,082 $ 18,343 $ 11,157 $6,044 $3,254 $ 20,116 $ 17,892 $10,890 $ 781
Ratio of expenses to
average net assets
(including
waivers)........... 1.05% 1.05% 0.74% 0.71% 0.34% 0.35% 0.42% 0.41%(g) 1.75%(g)
Ratio of net
investment income
to average net
assets (including
waivers)........... 1.59% 1.45% 1.74% 1.94% 3.50% 3.42% 3.69% 5.62%(g) 0.87%(g)
Ratio of expenses to
average net assets
(before
waivers)*.......... 1.15% 1.15% 0.96% 0.85% 1.05% 1.00% 1.07% 1.12%(g) 1.85%(g)
Ratio of net
investment income
to average net
assets (before
waivers)*.......... 1.49% 1.35% 1.52% 1.80% 2.79% 2.77% 3.04% 4.91%(g) 0.77%(g)
Portfolio turnover... 58.50% 65% 41% 79% 78% 227% 133% 30% 58.50%(g)
</TABLE>
- ------------
* During the period, fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 to November 30, 1995.
(f) Not Annualized.
(g) Annualized
14
<PAGE> 16
GOVERNMENT & CORPORATE BOND PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
JUNE 15, 1988 MARCH 1, 1995
YEAR ENDED NOVEMBER 30, TO TO
---------------------------------------------------------------------------- NOV. 30, NOV. 30,
1995 1994(a) 1993 1992 1991(a) 1990 1989 1988(b) 1995(c)
---------- ---------- -------- -------- -------- ---------- ---------- ------------- -------------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR INVESTOR B
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ---------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 9.64 $10.65 $10.26 $10.15 $ 9.71 $ 10.12 $ 9.91 $ 10.00 $ 9.92
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Investment
Activities:
Net investment
income.......... 0.61 0.60 0.64 0.66 0.75 0.84 0.89 0.39 0.38
Net realized and
unrealized gains
(losses) from
investments..... 0.89 (0.94) 0.39 0.11 0.48 (0.41) 0.22 (0.13) 0.61
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total from
investment
activities...... 1.50 (0.34) 1.03 0.77 1.23 (0.43) 1.11 0.26 0.99
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Distributions:
Net investment
income.......... (0.61) (0.60) (0.64) (0.66) (0.79) (0.84) (0.90) (0.35) (0.38)
In excess of net
realized gains.. (0.07)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total
distributions... (0.61) (0.67) (0.64) (0.66) (0.79) (0.84) (0.90) (0.35) (0.38)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Net asset value,
end of period..... $10.53 $ 9.64 $10.65 $10.26 $10.15 $ 9.71 $ 10.12 $ 9.91 $ 10.53
========== ========== ======== ======== ======== ========== ========== ============== ==============
Total return
(excludes sales
charges).......... 15.98% (3.32)% 10.23% 7.81% 12.79% (4.96)% 11.79% 2.66%(d,f) 15.27%(e)
Ratios/Supplemental
Data:
Net assets at end
of period
(000)........... $5,496 $5,167 $3,737 $2,490 $2,010 $ 11,005 $ 10,327 $ 7,483 $ 106
Ratio of expenses
to average net
assets
(including
waivers)........ 0.95% 0.95% 0.95% 0.93% 0.59% 0.53% 0.44% 0.56%(g) 1.65%(g)
Ratio of net
investment
income to
average net
assets
(including
waivers)........ 6.03% 6.00% 6.00% 6.45% 7.77% 8.69% 8.97% 8.47%(g) 5.19%(g)
Ratio of expenses
to average net
assets (before
waivers)*....... 1.05% 1.05% 1.05% 1.06% 1.14% 1.08% 0.99% 1.17%(g) 1.75%(g)
Ratio of net
investment
income to
average net
assets (before
waivers)*....... 5.93% 5.90% 5.90% 6.32% 7.22% 8.14% 8.42% 7.86%(g) 5.09%(g)
Portfolio
turnover........ 59.32% 50% 31% 52% 105% 75% 148% 22% 59.32%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 to November 30, 1995.
(f) Not Annualized.
(g) Annualized.
15
<PAGE> 17
U.S. GOVERNMENT SECURITIES PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
MARCH 1,
JUNE 2, 1988 1995
YEAR ENDED NOVEMBER 30, TO TO
---------------------------------------------------------------------------- NOV. 30, NOV. 30,
1995 1994(a) 1993 1992 1991(a) 1990 1989 1988(b) 1995(c)
---------- ---------- -------- -------- -------- ---------- ---------- ------------ ------------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR INVESTOR B
SHARES SHARES SHARES SHARES SHARES SHARES
---------- ---------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $10.05 $11.20 $10.80 $10.68 $10.21 $10.06 $ 9.94 $10.00 $10.34
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Investment Activities:
Net investment
income............... 0.64 0.63 0.59 0.62 0.75 0.76 0.85 0.36 0.31
Net realized and
unrealized gains
(losses) from
investments.......... 0.80 (0.97) 0.47 0.13 0.47 0.16 0.11 (0.06) 0.50
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total from investment
activities........... 1.44 (0.34) 1.06 0.75 1.22 0.92 1.96 0.30 0.81
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Distributions:
Net investment
income............... (0.64) (0.63) (0.59) (0.62) (0.75) (0.77) (0.84) (0.36) (0.31)
Net realized gains..... (0.07) (0.01)
In excess of net
realized gains....... (0.18)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Total distributions.... (0.64) (0.81) (0.66) (0.63) (0.75) (0.77) (0.84) (0.36) (0.31)
---------- ---------- -------- -------- -------- ---------- ---------- ------ ------
Net asset value, end of
period................. $10.85 $10.05 $11.20 $10.80 $10.68 $10.21 $10.06 $ 9.94 $10.84
========== ========== ======== ======== ======== ========== ========== ============== ==============
Total return (excludes
sales charges)......... 14.66% (3.14)% 10.03% 7.20% 12.36% 9.66% 10.40% 3.05%(d,f) 12.85%(e)
Ratios/Supplemental
Data:
Net assets at end of
period (000)......... $8,179 $9,631 $9,567 $7,499 $5,791 $6,856 $5,954 $4,335 $ 41
Ratio of expenses to
average net assets
(including
waivers)............. 0.97% 0.96% 0.97% 0.95% 0.82% 0.73% 0.74% 0.79%(g) 1.68%(g)
Ratio of net investment
income to average net
assets (including
waivers)............. 6.05% 5.98% 5.25% 5.72% 7.12% 7.80% 8.50% 7.26%(g) 5.37%(g)
Ratio of expenses to
average net assets
(before waivers)*.... 1.07% 1.06% 1.08% 1.09% 1.36% 1.28% 1.29% 1.40%(g) 1.78%(g)
Ratio of net investment
income to average net
assets (before
waivers)*............ 5.95% 5.88% 5.14% 5.58% 6.58% 7.25% 7.95% 6.65%(g) 5.27%(g)
Portfolio turnover..... 93.76% 50% 24% 74% 36% 53% 84% 215% 93.76%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 to November 30, 1995.
(f) Not Annualized.
(g) Annualized.
16
<PAGE> 18
EMERGING GROWTH PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
MAY 6, 1992 MARCH 1, 1995
YEAR ENDED TO TO
YEAR ENDED NOV. 30, YEAR ENDED NOV. 30, NOV. 30,
NOV. 30, 1995 1994(a) NOV. 30, 1993 1992(b) 1995(c)
------------- -------------- ------------- -------------- --------------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR B
SHARES SHARES SHARES SHARES SHARES
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 11.99 $ 13.14 $ 11.23 $10.10 $11.83
------------- -------------- ------------- ------- -------
Investment Activities:
Net investment income (loss)...... (0.03) 0.03 0.02 (0.03)
Net realized and unrealized gains
from investments................ 2.36 0.89 2.14 1.13 1.57
------------- -------------- ------------- ------- -------
Total from investment
activities...................... 2.36 0.86 2.17 1.15 1.54
------------- -------------- ------------- ------- -------
Distributions:
Net investment income............. (0.05) (0.02)
Net realized gains................ (0.91) (1.78) (0.21)
In excess of net realized gains... (0.23)
------------- -------------- ------------- ------- -------
Total distributions............... (0.91) (2.01) (0.26) (0.02)
------------- -------------- ------------- ------- -------
Net asset value, end of period...... $ 13.44 $ 11.99 $ 13.14 $11.23 $13.37
============= ============== ============= ============== ==============
Total return (excludes sales
charges).......................... 21.47% 7.38% 19.75% 12.55%(e) 20.83%(d)
Ratios/Supplemental Data:
Net assets at end of period
(000)........................... $15,056 $ 10,899 $ 4,559 $ 753 $ 603
Ratio of expenses to average net
assets (including waivers)...... 1.26% 1.25% 0.61% 0.30%(f) 1.96%(f)
Ratio of net investment income to
average net assets (including
waivers)........................ (0.12)% (0.44)% 0.19% 0.78%(f) (0.78)%(f)
Ratio of expenses to average net
assets (before waivers)*........ 1.36% 1.36% 1.23% 1.12%(f) 2.06%(f)
Ratio of net investment income to
average net assets (before
waivers)*....................... (0.22)% (0.55)% (0.43)% (0.04)%(f) (0.88)%(f)
Portfolio turnover................ 83.13% 85% 65% 56% 83.13%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On May 6, 1992, the Portfolio issued a series of Shares which were
designated as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 through November 30, 1995.
(e) Not annualized.
(f) Annualized.
17
<PAGE> 19
BALANCED PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
APRIL 1, 1993 MARCH 1, 1995
TO TO
YEAR ENDED YEAR ENDED NOV. 30, NOV. 30,
NOV. 30, 1995 NOV. 30, 1994 1993(b) 1995(c)
------------- ------------- ------------- -------------
INVESTOR A INVESTOR A INVESTOR INVESTOR B
SHARES SHARES SHARES SHARES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 9.61 $ 10.22 $ 10.00 $ 10.13
------------- ------------- ------------- -------------
Investment Activities:
Net investment income (loss)............... 0.32 0.28 0.23 (0.22)
Net realized and unrealized gains (losses)
from investments......................... 2.02 (0.47) 0.15 1.44
------------- ------------- ------------- -------------
Total from investment activities........... 2.34 (0.19) 0.38 1.66
------------- ------------- ------------- -------------
Distributions:
Net investment income...................... (0.30) (0.29) (0.16) (0.20)
Net realized gains.........................
In excess of net realized gains............ (0.13)
------------- ------------- ------------- -------------
Total distributions........................ (0.30) (0.42) (0.16) (0.20)
------------- ------------- ------------- -------------
Net asset value, end of period............... $ 11.65 $ 9.61 $ 10.22 $ 11.59
=========== =========== =========== ===========
Total return (excludes sales charges)........ 24.85% (1.91)% 3.86%(e) 23.92%(d)
Ratios/Supplemental Data:
Net assets at end of period (000).......... $ 8,348 $ 7,321 $ 1,978 $ 36
Ratio of expenses to average net assets
(including waivers)...................... 1.27% 1.27% 0.56%(f) 1.93%(f)
Ratio of net investment income to average
net assets (including waivers)........... 2.98% 2.77% 3.42%(f) 2.28%(f)
Ratio of expenses to average net assets
(before waivers)*........................ 1.37% 1.39% 1.21%(f) 2.03%(f)
Ratio of net investment income to average
net assets (before waivers)*............. 2.88% 2.65% 2.77%(f) 2.18%(f)
Portfolio turnover......................... 58.16% 49% 26%(f) 58.16%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 through November 30, 1995.
(e) Not annualized.
(f) Annualized.
18
<PAGE> 20
INTERNATIONAL EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
APRIL 4, 1993 MARCH 1, 1995
TO TO
YEAR ENDED NOV. 30, NOV. 30,
NOV. 30, 1995 1994(a,b,c) 1995(d)
------------- --------------- -------------
INVESTOR A INVESTOR INVESTOR B
SHARES SHARES SHARES
------------- --------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period................... $ 9.90 $ 10.00 $ 9.26
------------- ------- -------------
Investment Activities:
Net investment income (loss)......................... 0.02 (0.01) (0.03)
Net realized and unrealized gains (losses) from
investments and foreign currency................... 0.86 (0.09) 1.48
------------- ------- -------------
Total from investment activities..................... 0.88 (0.10) 1.45
------------- ------- -------------
Distributions:
Net investment income................................ (0.01)
Tax return of capital................................ (0.01)
------------- ------- -------------
Total distributions.................................. (0.02)
------------- ------- -------------
Net asset value, end of period......................... $ 10.76 $ 9.90 $ 10.71
=========== ============= ===========
Total return (excludes sales charges).................. 8.89% (1.00)%(f) 8.38%(e)
Ratios/Supplemental Data:
Net assets at end of period (000).................... $ 1,568 $ 791 $ 102
Ratio of expenses to average net assets (including
waivers)........................................... 1.45% 1.55%(g) 2.02%(g)
Ratio of net investment income to average net assets
(including waivers)................................ 0.07% (0.39)%(g) (0.96)%(g)
Ratio of expenses to average net assets (before
waivers)*.......................................... 1.76% 1.89%(g) 2.44%(g)
Ratio of net investment income to average net assets
(before waivers)*.................................. (0.24)% (0.73)%(g) (1.38)%(g)
Portfolio turnover................................... 62.78% 21% 62.78%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On April 4, 1994, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on May 2, 1994, the Portfolio
issued a new series of Shares which were designated as "Investor" Shares.
The Financial Highlights presented for April 4, 1994 to May 2, 1994
represent Financial Highlights applicable to Trust Shares.
(c) On September 27, 1994, the Portfolio redesignated Investor Shares
as"Investor A" Shares and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
(d) Period from date of initial public offering.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1,
1995 through November 30, 1995.
(f) Not annualized.
(g) Annualized.
19
<PAGE> 21
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
(For a Trust Share outstanding throughout the period)
<TABLE>
<CAPTION>
JULY 10,
1995
TO
NOV. 30,
1995(a)
-----------
TRUST
SHARES
-----------
<S> <C>
Net asset value, beginning of period.......................................... $ 10.00
-----------
Investment Activities:
Net investment income....................................................... 0.14
Net realized and unrealized gains from investments.......................... 0.07
-----------
Total from investment activities............................................ 0.21
-----------
Distributions:
Net investment income....................................................... (0.14)
-----------
Net asset value, end of period................................................ $ 10.07
===========
Total return.................................................................. 2.15%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)........................................... $23,754
Ratio of expenses to average net assets (including waivers)................. 0.47%(c)
Ratio of net investment income to average net assets (including waivers).... 3.81%(c)
Ratio of expenses to average net assets (before waivers)*................... 1.12%(c)
Ratio of net investment income to average net assets (before waivers)*...... 3.16%(c)
Portfolio turnover.......................................................... 0.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not Annualized.
(c) Annualized.
20
<PAGE> 22
MISSOURI TAX-EXEMPT BOND PORTFOLIO(a)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MAY 31,
NOV. 30, ------------------------------------------------------------------
1995(c) 1995(b) 1994 1993 1992 1991(b) 1990(b)
---------- ---------- -------- -------- -------- -------- ---------
INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR INVESTOR PORTFOLIO
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
---------- ---------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 11.52 $ 11.13 $ 11.54 $ 10.97 $ 10.62 $10.35 $10.56
------- ------- ------- ------- ------- ------ ------
Investment Activities:
Net investment income....................... 0.27 0.55 0.55 0.58 0.63 0.44 0.68
Net realized and unrealized gains (losses)
on investments............................. 0.22 0.40 (0.37) 0.64 0.43 0.36 (0.09)
------- ------- ------- ------- ------- ------ ------
Total from investment activities............ 0.49 0.95 0.18 1.22 1.06 0.80 0.59
------- ------- ------- ------- ------- ------ ------
Distributions:
Net investment income....................... (0.27) (0.55) (0.55) (0.58) (0.63) (0.44) (0.65)
Net realized gains.......................... (0.01) (0.04) (0.07) (0.08) (0.09)
------- ------- ------- ------- ------- ------ ------
Total distributions......................... (0.27) (0.56) (0.59) (0.65) (0.71) (0.53) (0.65)
------- ------- ------- ------- ------- ------ ------
Net asset value, end of period............... $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97 $10.62 $10.50
======= ======= ======= ======= ======= ====== ======
Total return (excludes sales charges)........ 4.32%(g) 8.91% 1.53% 11.47% 10.24% 8.72% 5.50%
Ratios/Supplemental Data:
Net assets at end of period (000)........... $24,726 $24,318 $27,919 $23,223 $12,635 $6,211 $4,572
Ratio of expenses to average net assets
(including waivers)........................ 0.95%(h) 0.84% 0.65% 0.63% 0.85% 0.85%(h) 0.70%
Ratio of net investment income to average
net assets (including waivers)............. 4.64%(h) 5.02% 4.75% 5.11% 5.75% 6.12%(h) 6.38%
Ratio of expenses to average net assets
(before waivers)*.......................... 1.18%(h) 1.18% 1.12% 1.18% 1.49% 1.63%(h) 1.70%
Ratio of net investment income to average
net assets (before waivers)*............... 4.44%(h) 4.68% 4.28% 4.56% 5.11% 5.34%(h) 5.38%
Portfolio turnover rate..................... 1.55% 0% 20% 15% 21% 71% 41%
</TABLE>
<TABLE>
<CAPTION>
MARCH 1,
PERIOD SIX MONTHS 1995
ENDED ENDED TO
MAY 31, NOV. 30, MAY 31,
1989(a,b) 1995(c) 1995(d)
--------- ---------- ----------
PORTFOLIO INVESTOR B INVESTOR B
SHARES SHARES SHARES
--------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period......... $10.00 $11.52 $11.19
------ ------ ------
Investment Activities:
Net investment income....................... 0.58 0.22 0.11
Net realized and unrealized gains (losses)
on investments............................. 0.58 0.22 0.33
------ ------ ------
Total from investment activities............ 1.16 0.44 0.44
------ ------ ------
Distributions:
Net investment income....................... (0.60) (0.22) (0.11)
Net realized gains..........................
------ ------ ------
Total distributions......................... (0.60) (0.22) (0.11)
------ ------ ------
Net asset value, end of period............... $10.56 $11.74 $11.52
====== ====== ======
Total return (excludes sales charges)........ 12.08%(f) 3.88%(g) 8.61%(e)
Ratios/Supplemental Data:
Net assets at end of period (000)........... $4,053 $ 433 $ 94
Ratio of expenses to average net assets
(including waivers)........................ 0.81%(h) 1.77%(h) 1.76%(h)
Ratio of net investment income to average
net assets (including waivers)............. 6.36%(h) 3.82%(h) 4.00%(h)
Ratio of expenses to average net assets
(before waivers)*.......................... 1.38%(h) 1.87%(h) 1.88%(h)
Ratio of net investment income to average
net assets (before waivers)*............... 5.79%(h) 3.72%(h) 3.89%(h)
Portfolio turnover rate..................... 73% 1.55% 0.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as an investment portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new portfolio
of the Fund.
(b) The Portfolio had one series of Shares outstanding ("Portfolio Shares")
through September 27, 1990. On September 28, 1990, the Portfolio issued a
second series of Shares that were designated as "Investor" Shares. On
September 27, 1994, the Portfolio redesignated Investor Shares as "Investor
A" Shares and authorized the issuance of a series of Shares designated as
"Investor B" Shares.
(c) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
(d) For period from date of initial public offering.
(e) Represents total return for Investor A Shares from June 1, 1994 to February
28, 1995 plus total return for Investor B Shares from March 1, 1995 to May
31, 1995.
(f) Aggregate.
(g) Not Annualized.
(h) Annualized.
21
<PAGE> 23
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The investment objective of a Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Although management will use its best efforts to achieve the investment
objective of each Portfolio, there can be no assurance that it will be able to
do so. The Money Market, Treasury Money Market and Tax-Exempt Money Market
Portfolios are "money market" funds that invest in instruments with remaining
maturities of 397 days or less (with certain exceptions) and with
dollar-weighted average portfolio maturities of 90 days or less, subject to the
quality, diversification and other requirements of Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act") and other rules of
the Securities and Exchange Commission (the "SEC").
THE MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objective is to seek current income
with liquidity and stability of principal. In pursuing its investment objective,
the Money Market Portfolio invests substantially all of its assets in a broad
range of money market instruments. These instruments include obligations of the
U.S. Government, U.S. dollar-denominated foreign securities, obligations of U.S.
and foreign banks and savings and loan institutions and commercial obligations
that meet the applicable quality requirements described below.
The Money Market Portfolio will purchase only "First Tier Eligible
Securities" (as defined by the SEC) that present minimal credit risks as
determined by the Adviser pursuant to guidelines approved by the Fund's Board of
Directors. First Tier Eligible Securities consist of (i) securities that either
(a) have short-term debt ratings at the time of purchase in the highest rating
category by at least two unaffiliated nationally recognized statistical rating
organizations ("Rating Agencies") (or one Rating Agency if the security was
rated by only one Rating Agency), or (b) are issued by issuers with such
ratings, and (ii) certain securities that are unrated (including securities of
issuers that have long-term but not short-term ratings) but are of comparable
quality as determined in accordance with guidelines approved by the Board of
Directors. The applicable ratings by Rating Agencies are described in Appendix A
to the Statement of Additional Information. The following descriptions
illustrate the types of instruments in which the Portfolio invests.
BANKING OBLIGATIONS. The Money Market Portfolio may purchase obligations
of issuers in the banking industry, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Money Market Portfolio may invest in
obligations of foreign banks or foreign branches of U.S. banks in amounts not in
excess of 25% of its assets where the Adviser deems the instrument to present
minimal credit risks. (See "Risk Factors--Risks Associated with Foreign
Securities and Currencies" below.) The Money Market Portfolio may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 5% of the value of its total assets.
COMMERCIAL PAPER AND VARIABLE AND FLOATING RATE INSTRUMENTS. The Money
Market Portfolio may invest in commercial paper, including asset-backed
commercial paper representing interests in a pool of corporate receivables,
dollar-denominated obligations issued by domestic and foreign bank holding
companies, and corporate bonds that meet the quality and maturity requirements
22
<PAGE> 24
described above. The Money Market Portfolio may also invest in variable or
floating rate notes that may have a stated maturity in excess of thirteen months
but will, in any event, permit the Portfolio to demand payment of the principal
of the instrument at least once every thirteen months upon no more than 30 days'
notice (unless the instrument is guaranteed by the U.S. Government or an agency
or instrumentality thereof). Such instruments may include variable amount master
demand notes, which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated variable and floating rate instruments will be determined
by the Adviser (under the supervision of the Board of Directors) to be of
comparable quality at the time of purchase to First Tier Eligible Securities.
There may be no active secondary market in the instruments, which could make it
difficult for the Portfolio to dispose of an instrument in the event the issuer
were to default on its payment obligation or during periods that the Portfolio
could not exercise its demand rights. The Money Market Portfolio could, for
these or other reasons, suffer a loss with respect to such instruments. Variable
and floating rate instruments held by the Portfolio will be subject to the
Portfolio's 10% limitation on illiquid investments when the Portfolio may not
demand payment of the principal amount within seven days and a liquid trading
market is absent.
GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the Portfolio may, when deemed appropriate by
the Adviser, invest in short-term obligations issued by state and local
governmental issuers that meet the quality requirements described above and, as
a result of the Tax Reform Act of 1986, carry yields that are competitive with
those of other types of money market instruments of comparable quality.
THE TREASURY MONEY MARKET PORTFOLIO
The Treasury Money Market Portfolio's investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal. In pursuing its investment objective, the
Portfolio invests in selected money market obligations issued by the U.S.
Government (or its agencies and instrumentalities) that are guaranteed as to
principal and interest by the U.S. Government, the interest on which is
generally exempt from state income tax. Securities that are generally eligible
for this exemption include those issued by the U.S. Treasury (bills,
certificates of indebtedness, notes and certain bonds) and certain U.S.
Government agencies and instrumentalities, including the General Services
Administration and Small Business Administration. Each investor should consult
his or her tax advisor to determine whether distributions from the Portfolio are
exempt from state income tax in the investor's home state. Under normal market
conditions, the Portfolio intends to invest substantially all (but not less than
65%) of its total assets in securities with the above characteristics and
(except to the extent discussed below) will not enter into repurchase agreements
or purchase any U.S. Government security that the Adviser believes is subject to
state income tax.
Under extraordinary circumstances, such as when appropriate exempt
securities are unavailable or pending investment, the Treasury Money Market
Portfolio may temporarily hold cash or invest in repurchase agreements
collateralized by U.S. Government securities, other U.S. Government agency or
instrumentality securities, securities of other investment companies that invest
in securities in which the Portfolio is permitted to invest, or cash
equivalents.
23
<PAGE> 25
THE TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Money Market Portfolio's investment objective is to seek as
high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Portfolio seeks to
achieve its objective by investing substantially all of its assets in short-term
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their respective political
subdivisions, agencies, instrumentalities and authorities the interest on which,
in the opinion of bond counsel or counsel to the issuer, is exempt from regular
federal income tax (collectively, "Municipal Obligations"). The Portfolio may
also hold tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The Tax-Exempt Money Market Portfolio will purchase only "First Tier
Eligible Securities" (as defined by the SEC) that present minimal credit risks
as determined by the Adviser pursuant to guidelines approved by the Board of
Directors. See "The Money Market Portfolio" above for a description of "First
Tier Eligible Securities."
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from interest attributable to tax-exempt obligations of a particular state and
its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands may be exempt from federal
and state income tax. Dividends derived from interest on obligations of other
governmental issuers are exempt from federal income tax but may be subject to
state income tax.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Tax-Exempt Money Market Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to its
quality standards described above, the Tax-Exempt Money Market Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. Such instruments may include obligations
of the U.S. Government, its agencies or instrumentalities; debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the highest rating category by a Rating Agency;
certificates of deposit or bankers' acceptances of domestic branches of U.S.
banks with total assets at the time of purchase of $1 billion or more; or
repurchase agreements with respect to such obligations.
THE GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income a secondary consideration. In pursuing its
investment objective, the Portfolio normally invests substantially all of its
assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Adviser selects stocks based on a number of
factors, including historical and projected earnings, growth and asset value,
earnings compared to stock
24
<PAGE> 26
prices generally (as measured by the S&P 500 Index), and consistency of earnings
growth and earnings quality. Stocks purchased for the Portfolio generally will
be listed on a national securities exchange or will be unlisted securities with
an established over-the-counter market. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price and yield of the
convertible security is favorable compared to the price and yield of the common
stock. The stocks or securities in which the Portfolio invests may be expected
to produce some income but income is not a major criterion in their selection.
In general, the Portfolio's stocks and securities will be diversified over a
number of industry groups in an effort to reduce the risks inherent in such
investments.
The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of American Depository Receipts ("ADRs") and
European Depository Receipts ("EDRs") but will not do so if, immediately after
and as a result of the purchase, the value of ADRs and EDRs would exceed 15% of
the Portfolio's total assets. (For further information, see "Other Applicable
Policies--Foreign Securities" below and the Statement of Additional Information
under "Investment Objectives and Policies--ADRs and EDRs.") The Portfolio may
also invest in Canadian securities listed on a national securities exchange.
The Growth & Income Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. Short-term obligations include, but are
not limited to, commercial paper, bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations, repurchase agreements, and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities.
THE EMERGING GROWTH PORTFOLIO
The Emerging Growth Portfolio's investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. In pursuing its investment objective, the Portfolio
normally invests primarily in common stock of emerging or established small-to
medium-sized companies with above-average potential for price appreciation. The
Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Adviser, offer improved
growth possibilities because of rejuvenated management, product changes, or
other developments that might stimulate earnings or asset growth, or in
companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.
The Emerging Growth Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The securities
of such smaller companies may have limited marketability, may be subject to more
abrupt or erratic market movements than securities of larger companies or the
market averages in general, and may involve greater risk than is customarily
associated with more established companies. To qualify for investment by the
Portfolio, however, a company will be expected to have, in the opinion of the
Adviser, above-average possibilities for capital appreciation
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(when compared with the average appreciation of companies whose securities are
included in the S&P 500 Index).
The Emerging Growth Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth, and
quality of products manufactured and/or services offered. Stocks purchased for
the Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market. The Portfolio
may also invest in initial public offerings of new companies that demonstrate
the potential for price appreciation. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price of the convertible
security is favorable compared to the price of the common stock. In general, the
Portfolio's stocks and other securities will be diversified over a number of
industry groups in an effort to reduce the risks inherent in such investments.
The Emerging Growth Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. (For further information, see
"The Growth & Income Equity Portfolio" above, "Other Applicable
Policies--Foreign Securities" below, and the Statement of Additional Information
under "Investment Objectives and Policies--ADRs and EDRs.") The Portfolio may
also invest in securities issued by Canadian corporations and Canadian
counterparts of U.S. corporations, which may or may not be listed on a national
securities exchange or traded in over-the-counter markets.
The Emerging Growth Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. See "The Growth & Income Equity Portfolio" above
for a description of the types of short-term obligations in which the Portfolio
may invest.
THE GOVERNMENT & CORPORATE BOND PORTFOLIO
The Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital. In
pursuing its investment objective, the Portfolio intends to invest at least 65%
of its assets in fixed-income and related debt securities rated in one of the
three highest rating categories assigned by a Rating Agency at the time of
purchase or in unrated investments deemed by the Adviser to be of comparable
quality pursuant to guidelines approved by the Fund's Board of Directors. Debt
securities may include a broad range of fixed and variable rate bonds,
debentures, notes, and securities convertible into or exchangeable for common
stock; dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and first mortgage loans, income participation
loans, participation certificates in pools of mortgages, including mortgages
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
collateralized mortgage obligations and other mortgage-related securities, and
other asset-backed securities. The Portfolio may invest up to 10% of its total
assets at the time of purchase in dollar-denominated debt obligations of foreign
issuers, either directly or through ADRs and EDRs, and up to 25% of its total
assets at the time of purchase in non-mortgage asset-backed securities,
respectively. (See "Other Applicable Policies--Foreign Securities" below and the
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Statement of Additional Information under "Investment Objectives and
Policies--ADRs and EDRs.")
The Government & Corporate Bond Portfolio may purchase debt securities
which are rated at the time of purchase within the four highest rating
categories assigned by Rating Agencies or unrated debt securities (including
convertible securities) which the Adviser believes present attractive
opportunities and are of at least comparable quality to instruments so rated.
The Portfolio's dollar-weighted average portfolio quality is expected to be at
least "A" or higher. Securities rated in the lowest of the above four rating
categories have speculative characteristics, even though they are of
investment-grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Such
securities will be purchased (and retained) only when the Adviser believes the
issuers have an adequate capacity to pay interest and repay principal. (For a
description of the rating categories of Rating Agencies, see Appendix A to the
Statement of Additional Information.) In making investment decisions, the
Adviser will consider a number of factors including current yield, maturity,
yield to maturity, anticipated changes in interest rates, and the overall
quality of the investment. The Portfolio seeks to provide a current yield
greater than that generally available from money market instruments.
The Government & Corporate Bond Portfolio may purchase asset-backed
securities (i.e., securities backed by mortgages, installment sale contracts,
corporate receivables, credit card receivables or other assets) that are issued
by entities such as the Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and private issuers such as commercial banks, financial
companies, finance subsidiaries of industrial companies, savings and loan
associations, mortgage banks, and investment banks. To the extent that the
Portfolio invests in asset-backed securities issued by companies that are
investment companies under the 1940 Act, such acquisitions will be subject to
the percentage limitations prescribed by the 1940 Act. (See "Other Applicable
Policies-- Securities of Other Investment Companies" below.)
Presently there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and collateralized mortgage
obligations ("CMOs"), which provide the holder with a specified interest in the
cash flow of a pool of underlying mortgages or other mortgage-backed securities.
CMOs are issued in multiple classes, each with a specified fixed or floating
interest rate and a final distribution date. The relative payment rights of the
various CMO classes may be subject to greater volatility and interest-rate risk
than other types of mortgage-backed securities. The average life of asset-backed
securities varies with the underlying instruments or assets and market
conditions, which in the case of mortgages have maximum maturities of forty
years. The average life of a mortgage-backed instrument, in particular, is
likely to be substantially less than the original maturity of the mortgages
underlying the securities as the result of unscheduled principal payments and
mortgage prepayments. The relationship between mortgage prepayment and interest
rates may give some high-yielding mortgage-backed securities less potential for
growth in value than conventional bonds with comparable maturities. In addition,
in periods of falling interest rates, the rate of mortgage prepayments tends to
increase. During such periods, the reinvestment of prepayment proceeds by the
Government & Corporate Bond Portfolio
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will generally be at lower rates than the rates that were carried by the
obligations that have been prepaid. When interest rates rise, the value of an
asset-backed security generally will decline; however, when interest rates
decline, the value of an asset-backed security with prepayment features may not
increase as much as that of other fixed-income securities. Because of these and
other reasons, an asset-backed security's total return may be difficult to
predict precisely.
In general, the collateral supporting non-mortgage asset-backed securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Non-mortgage asset-backed securities involve certain
risks that are not presented by mortgage-backed securities arising primarily
from the nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and the repossession of automobiles and
other personal property upon the default of the debtor may be difficult or
impracticable in some cases.
The Government & Corporate Bond Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. See "The Growth & Income Equity
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.
THE U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio's investment objective is to seek
a high rate of current income that is consistent with relative stability of
principal. In pursuing its investment objective, the Portfolio invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities normally having remaining maturities of 1 to 30 years and
repurchase agreements relating to such obligations. (For further information,
see "Other Applicable Policies-- U.S. Government Obligations" below.)
Consistent with its investment policies, the U.S. Government Securities
Portfolio may invest in mortgage-backed securities, including those representing
an undivided ownership interest in a pool of mortgage loans, such as
certificates issued by GNMA, FNMA, and FHLMC and CMOs. (For further information
regarding these instruments, see "The Government & Corporate Bond Portfolio"
above.)
THE BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed-income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the
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statistical impact of the Adviser's economic outlook upon the future returns of
each asset group. The models are especially sensitive to the forecasts for
inflation, interest rates and long-term corporate earnings growth. Investment
returns are normally heavily impacted by such variables and their expected
changes over time. Therefore, the Adviser's method attempts to take advantage of
changing economic conditions by increasing or decreasing the ratio of stocks to
bonds in the Portfolio. For example, if the Adviser expected more rapid economic
growth leading to better corporate earnings, it would increase the Portfolio's
holdings of equity securities and reduce its holdings of fixed income securities
and cash equivalents.
Under normal market conditions, the Balanced Portfolio's policy is
generally to invest at least 25% of the value of its total assets in
fixed-income securities and no more than 75% in equity securities. The actual
percentage of assets invested in equity securities, fixed-income securities and
cash equivalents will vary from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
The equity securities in which the Balanced Portfolio normally invests
include common stock, preferred stock, rights, warrants and securities
convertible into common or preferred stock. (For further information regarding
these instruments, see "The Growth & Income Equity Portfolio" above.)
The fixed-income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed-income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Adviser to be of
comparable quality pursuant to guidelines approved by the Fund's Board of
Directors. (For further information regarding these instruments, see "The
Government & Corporate Bond Portfolio" above.)
The Balanced Portfolio may purchase asset-backed securities. (For further
information regarding these instruments, see "The Government & Corporate Bond
Portfolio" above and "Other Applicable Policies--Securities of Other Investment
Companies" below.)
The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. See "The Growth & Income Equity Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.
THE INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to provide
capital growth consistent with reasonable investment risk. The Portfolio seeks
to achieve this objective by investing principally in foreign equity securities,
most of which will be denominated in foreign currencies. During normal market
conditions, the Portfolio will invest substantially all of its assets in
securities of companies which derive more than 50% of their gross revenues from,
or have more than 50% of their assets outside, the United States. Additionally,
under normal market conditions, the Portfolio will invest in equity securities
from at least three different countries (excluding the United States). However,
the Portfolio may invest all its assets in a single country during temporary
defensive periods.
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The International Equity Portfolio expects to invest at least half of its
assets in securities of companies located either in developed countries in
Western Europe or in Japan, although it may also purchase securities of
companies located in other developed countries and developing countries. (For
further information, see "Risk Factors--Risks Associated with Foreign Securities
and Currencies" below.)
By investing in foreign securities, the International Equity Portfolio will
attempt to take advantage of differences between economic trends and the
performance of securities markets in various countries, regions and geographic
areas. The Portfolio will achieve diversification by investing in securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The multinational
character of the Portfolio's investments should reduce the effect that events in
any one country or geographic area will have on its investment holdings. Of
course, negative movement by one of the Portfolio's investments in one foreign
market may offset gains from the Portfolio's investments in another market.
Equity securities in which the International Equity Portfolio may invest
include common stock, preferred stock, rights, warrants and securities
convertible into common stock. A convertible security may be purchased for the
Portfolio when, in the Adviser's or Sub-Adviser's opinion, the price and yield
of the convertible security is favorable compared to the price and yield of the
common stock.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Equity Portfolio may invest up to 100% of its
assets in U.S. Government obligations or debt obligations of companies
incorporated and having their principal business activities in the United
States. The Portfolio does not intend to invest in such securities for the
purpose of meeting its investment objective.
The International Equity Portfolio may also invest, without limitation, in
foreign securities through the purchase of ADRs and EDRs. (For further
information, see "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below and the Statement of Additional Information under "Investment
Objectives and Policies--ADRs and EDRs.")
The International Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser or Sub-
Adviser, prevailing market or economic conditions warrant. See "The Growth &
Income Equity Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest.
Although investing in any mutual fund has certain inherent risks, an
investment in the International Equity Portfolio may have even greater risks
than investments in most other types of mutual funds. The Portfolio is not a
complete investment program, and it may not be appropriate for investors who
cannot financially bear the loss of at least a significant portion of their
investment. The Portfolio's net asset value per Share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Portfolio's
objective. See "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below.
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THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Short-Intermediate Municipal Portfolio's investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital. The Portfolio seeks to achieve
its objective by investing substantially all of its assets in investment-grade
Municipal Obligations. As a matter of fundamental policy, under normal market
conditions at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations, primarily bonds (at least 65% under normal market
conditions).
The Short-Intermediate Municipal Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper, and
variable and floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes they have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. Municipal Obligations
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories of a Rating Agency will be disposed of in an
orderly manner, normally within 30-60 days. The applicable ratings issued by the
Rating Agencies are described in the Appendix to the Statement of Additional
Information.
In addition, the Short-Intermediate Municipal Portfolio may from time to
time during temporary defensive periods, invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a Rating Agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
The Short-Intermediate Municipal Portfolio's average dollar-weighted
maturity will be between two and five years and will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Missouri Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Missouri
Municipal Obligations (which, to the extent possible, are also exempt from
Missouri income tax).
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Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are derived
from interest attributable to tax-exempt obligations of the State of Missouri
and its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands ("Missouri Municipal
Obligations") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Missouri Tax-Exempt Bond Portfolio's total assets will be invested in
Missouri Municipal Obligations. The Portfolio will seek to maximize the
proportion of its dividends which are exempt from both federal and Missouri
income tax and presently expects to invest substantially all of its total assets
in Missouri Municipal Obligations.
The Missouri Tax-Exempt Bond Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to its
quality standards described above, the Missouri Tax-Exempt Bond Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. Such instruments may include obligations
of the U.S. Government, its agencies or instrumentalities; debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the two highest rating categories by a Rating Agency;
certificates of deposit or bankers' acceptances of domestic branches of U.S.
banks with total assets at the time of purchase of $1 billion or more; or
repurchase agreements with respect to such obligations.
The Missouri Tax-Exempt Bond Portfolio's average weighted maturity will
vary in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
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THE KANSAS TAX-EXEMPT BOND PORTFOLIO
The Kansas Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of current income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Kansas
Municipal Obligations (which, to the extent possible, are also exempt from
Kansas income tax and the local intangibles tax).
Dividends paid by the Kansas Bond Portfolio that are derived from interest
attributable to tax-exempt obligations issued after December 31, 1987 by the
State of Kansas or its political subdivisions, or on certain specific
obligations issued before January 1, 1988 by such entities, as well as certain
tax-exempt obligations of any authority, commission or instrumentality of the
United States or its possessions ("Kansas Municipal Obligations") are exempt
from federal and Kansas income tax and are not subject to the local intangibles
tax imposed by various counties, cities and townships in Kansas. Dividends
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Kansas income tax and the local
intangibles tax. The foregoing exemption from Kansas income tax does not apply
to banks or certain other individuals or entities who are in the banking
business.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Kansas Tax-Exempt Bond Portfolio's total assets will be invested in
Kansas Municipal Obligations. The Portfolio will seek to maximize the proportion
of its dividends which are exempt from both federal and Kansas income tax and
presently expects to invest substantially all of its total assets in Kansas
Municipal Obligations.
The Kansas Tax-Exempt Bond Portfolio invests in Municipal Obligations that
are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Kansas Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to its
quality standards described above, the
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Kansas Tax-Exempt Bond Portfolio may invest up to 20% of its assets in money
market instruments, the income from which is subject to federal income tax. See
"The Missouri Tax-Exempt Bond Portfolio" above for a description of the types of
taxable money market instruments in which the Portfolio may invest.
The Kansas Tax-Exempt Bond Portfolio's average weighted maturity will vary
in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
RISK FACTORS
MARKET RISK. The Growth & Income Equity, Emerging Growth and International
Equity Portfolios invest primarily, and the Balanced Portfolio invests to a
significant degree, in equity securities. As with other mutual funds that invest
primarily or to a significant degree in equity securities, these Portfolios are
subject to market risks. That is, the possibility exists that common stocks will
decline over short or even extended periods of time and both the U.S. and
certain foreign equity markets tend to be cyclical, experiencing both periods
when stock prices generally increase and periods when stock prices generally
decrease.
INTEREST RATE RISK. Generally, the market value of fixed-income
securities, including Municipal Obligations, held by the Money Market, Treasury
Money Market, Tax-Exempt Money Market, Government & Corporate Bond, U.S.
Government Securities, Balanced, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios can be expected to vary
inversely to changes in prevailing interest rates. During periods of declining
interest rates, the market value of investment portfolios comprised primarily of
fixed income securities will tend to increase, and during periods of rising
interest rates, the market value will tend to decrease. Fixed income securities
with longer maturities, which tend to produce higher yields, are subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities. Changes in the financial strength of an issuer or changes in
the ratings of any particular security may also offset the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not offset cash income from such securities
but will be reflected in a Portfolio's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is
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generally less government supervision and regulation of foreign exchanges,
brokers and issuers than there is in the United States. In the event of a
default by the issuer of a foreign security, it may be more difficult to obtain
or enforce a judgment against such issuer than it would be against a domestic
issuer. In addition, foreign banks and foreign branches of U.S. banks are
subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors may limit the
investment opportunities available to the International Equity Portfolio and
result in a lack of liquidity and a high price volatility with respect to
securities of issuers from developing countries.
Certain countries may also impose restrictions on the International Equity
Portfolio's ability to repatriate investment income or capital. Even when there
is no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of the
International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected to
be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or
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deductions allowed to investors under U.S. federal income tax provisions, they
may reduce the net return to the Portfolio's shareholders. (For further
information, see "Taxes.")
In addition to the International Equity Portfolio, other Portfolios may be
subject to certain of the risks described above in connection with investment in
foreign securities. As stated above, the Money Market Portfolio may acquire U.S.
dollar-denominated securities of foreign corporations and certain types of bank
instruments issued or supported by the credit of foreign banks or foreign
branches of domestic banks where the Adviser deems the investment to present
minimal credit risks. The Government & Corporate Bond Portfolio may acquire
dollar-denominated debt obligations of foreign issuers and the Growth & Income
Equity, Emerging Growth, Government & Corporate Bond, Balanced and International
Equity Portfolios may acquire ADRs and EDRs.
MUNICIPAL OBLIGATIONS. The ability of the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios (collectively, the "Tax-Exempt Portfolios") to achieve their
respective investment objectives are dependent upon the ability of issuers of
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. There will be additional risks associated with
investment in a Tax-Exempt Portfolio to the extent it invests its assets
predominantly in Missouri Municipal Obligations or Kansas Municipal Obligations.
With respect to the Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond
Portfolios, investors should be aware that certain provisions of, and amendments
to, the Missouri Constitution or Kansas Constitution limit tax increases which
could result in certain adverse consequences affecting Missouri Municipal
Obligations or Kansas Municipal Obligations. Some of the significant financial
considerations relating to a Portfolio's investments in Missouri Municipal
Obligations or Kansas Municipal Obligations are summarized in the Statement of
Additional Information.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt Money
Market and Short-Intermediate Municipal Portfolios may invest 25% or more of
their respective net assets in (i) Municipal Obligations whose issuers are in
the same state, (ii) Municipal Obligations the interest on which is paid solely
from revenues of similar projects, and (iii) private activity bonds, neither
Portfolio presently intends to do so unless in the opinion of the Adviser the
investment is warranted.
Although neither the Missouri Tax-Exempt Bond Portfolio nor the Kansas
Tax-Exempt Bond Portfolio presently intends to do so on a regular basis, each
may invest more than 25% of their respective assets in industrial development
bonds issued before August 7, 1986, the interest on which is not treated as a
specific tax preference item under the federal alternative minimum tax, and in
Municipal Obligations, the interest on which is paid solely from revenues of
similar projects, if such investments are deemed necessary or appropriate by the
Adviser. To the extent that a Portfolio's assets are invested in Municipal
Obligations that are payable from the revenues of similar projects or in private
activity bonds, a Portfolio will be subject to the peculiar risks presented by
the laws and economic conditions relating to such projects and bonds to a
greater extent that it would be if its assets were not so invested. (See
"Investment Objectives and Policies--Municipal Obligations" in the Statement on
Additional Information.)
Each of the Tax-Exempt Money Market, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios is classified as non-diversified under the 1940 Act.
Investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities
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relative to the number held in a diversified portfolio. Consequently, the change
in value of any one security may affect the overall value of a non-diversified
portfolio more than it would a diversified portfolio. In addition, a
non-diversified portfolio may be more susceptible to economic, political, and
regulatory developments than a diversified investment portfolio with similar
objectives. The value of a Portfolio's securities can be expected to vary
inversely with changes in prevailing interest rates.
Investors in the Missouri Tax-Exempt Bond and Kansas Tax- Exempt Bond
Portfolios should consider the risk inherent in such Portfolios' respective
concentrations in Missouri Municipal Obligations and Kansas Municipal
Obligations, respectively, versus the safety that comes with a less
geographically concentrated investment portfolio, and should compare the yields
and tax-equivalent yields available on portfolios of Missouri Municipal
Obligations and Kansas Municipal Obligations with the yields and tax-equivalent
yields of more diversified portfolios with securities of comparable quality,
including non-Missouri and non-Kansas securities, respectively, before making an
investment decision.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri Municipal Obligations and Kansas Municipal Obligations, to the
exemption from Missouri income tax or Kansas income tax and local intangible
tax, respectively) are rendered by bond counsel to the respective issuers at the
time of issuance, and opinions relating to the validity and the tax-exempt
status of payments received by a Portfolio from tax-exempt derivative securities
are rendered by counsel to the respective sponsors of such securities. The
Tax-Exempt Portfolios and their Adviser will rely on such opinions and will not
review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative security, or
the bases for such opinions.
OTHER APPLICABLE POLICIES
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of a Portfolio. Certain U.S. Government securities held
by the Money Market, Treasury Money Market or Tax-Exempt Money Market Portfolio
may have remaining maturities exceeding thirteen months if such securities
provide for adjustments in their interest rates no less frequently than every
thirteen months. Examples of the types of U.S. Government obligations that may
be held by the Portfolios, subject to their respective investment objectives and
policies, include, in addition to U.S. Treasury bonds, notes and bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, GNMA,
FNMA, FHLMC, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Resolution Trust Corporation, and Maritime Administration. Obligations of
certain agencies and instrumentalities of the U.S. Government, such as those of
GNMA, are supported by the full faith and credit of the U.S. Treasury; others,
such as the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others such as those of the Student Loan Marketing
Association, are
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supported only by the credit of the instrumentality. There is no assurance that
the U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Portfolios) may also invest in "stripped"
U.S. Treasury obligations offered under the Separate Trading of Registered
Interest and Principal Securities ("STRIPS") program or Coupon Under Bank-Entry
Safekeeping ("CUBES") program or other stripped securities issued directly by
agencies or instrumentalities of the U.S. Government (and, with respect to the
Treasury Money Market Portfolio only, that are also guaranteed as to principal
and interest by the U.S. Government). STRIPS and CUBES represent either future
interest or principal payments and are direct obligations of the U.S. Government
that clear through the Federal Reserve System. The Money Market, Growth & Income
Equity, Emerging Growth, Government & Corporate Bond, and Balanced Portfolios
may also purchase U.S. Treasury and agency securities that are stripped by
brokerage firms and custodian banks and sold under proprietary names. These
stripped securities are resold in custodial receipt programs with a number of
different names (such as TIGRs and CATS) and are not considered U.S. Government
securities for purposes of the 1940 Act.
Stripped securities are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, each Portfolio may agree to
purchase U.S. Government securities from financial institutions such as banks
and broker-dealers, subject to the seller's agreement to repurchase them at a
mutually agreed-upon date and price ("repurchase agreements"). A Portfolio will
enter into repurchase agreements only with financial institutions such as banks
and broker-dealers that the Adviser or Sub-Adviser believes to be creditworthy.
During the term of any repurchase agreement, the Adviser or Sub-Adviser will
continue to monitor the creditworthiness of the seller and will require the
seller to maintain the value of the securities subject to the agreement at not
less than 102% of the repurchase price (including accrued interest). Default by
a seller could expose a Portfolio to possible loss because of adverse market
action or possible delay in disposing of the underlying obligations. Because of
the seller's repurchase obligations, the securities subject to repurchase
agreements do not have maturity limitations. Although no Portfolio presently
intends to enter into repurchase agreements providing for settlement in more
than seven days, each Portfolio does have the authority to do so subject to its
limitation on the purchase of illiquid securities described below. Repurchase
agreements are considered to be loans under the 1940 Act. The income on
repurchase agreements is taxable. (See "Taxes" below.)
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies, each
Portfolio except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers and agree to
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repurchase them at an agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price which the Portfolio is obligated to pay.
Reverse repurchase agreements are considered to be borrowings by a Portfolio
under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, each Portfolio
(except the Money Market, Treasury Money Market, Tax-Exempt Money Market,
Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) may, from time
to time, lend its portfolio securities to broker-dealers, banks or institutional
borrowers pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. Collateral for such loans may include cash, securities
of the U.S. Government, or its agencies or instrumentalities, or an irrevocable
letter of credit issued by a bank that has at least $1.5 billion in total
assets, or any combination thereof. The collateral must be valued daily and,
should the market value of the loaned securities increase, the borrower must
furnish additional collateral to the lending Portfolio. By lending its
securities, a Portfolio can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term instruments or obtaining yield in the form of interest
paid by the borrower when U.S. Government securities are used as collateral. In
accordance with current SEC policies, each Portfolio is currently limiting its
securities lending to 33 1/3% of the aggregate net assets of such Portfolio.
Loans are subject to termination by a Portfolio or a borrower at any time.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies which invest in securities in which the Portfolio is permitted to
invest and which determine their net asset value per Share based on the
amortized cost or penny-rounding method. Each Portfolio may invest in securities
of other investment companies within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition on a Portfolio
investing more than 10% of the value of its total assets in such securities.
Investment companies in which a Portfolio may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
Shares as well as other types of commissions or charges (no sales charge will be
paid by the Tax-Exempt Money Market, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios in connection with such investments). Such charges
will be payable by a Portfolio and, therefore, will be borne indirectly by its
shareholders. To the extent that a Portfolio may invest in securities of other
investment companies, the Fund and the Adviser will ensure that there will be no
duplication of advisory fees. If necessary to accomplish this, the Adviser will
rebate its advisory fee to the Fund. (See the Statement of Additional
Information under "Investment Objectives and Policies--Securities of Other
Investment Companies.") The income on securities of other investment companies
may be taxable to investors at the state or local level. (See "Taxes" below.)
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate Municipal
Portfolio may purchase or sell
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securities on a "delayed settlement" basis. This refers to a transaction in the
secondary market that will settle some time in the future. When issued
purchases, forward commitments and delayed settlement transactions involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, or if the value of the security to be sold increases prior to
the settlement date. Each Portfolio expects that these transactions will not
exceed 25% of the value of its total assets (at the time of purchase) under
normal market conditions. No Portfolio intends to engage in such transactions
for speculative purposes but only for the purpose of acquiring portfolio
securities.
OPTIONS. Each of the Equity and Bond Portfolios (except the Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) may purchase put and call
options listed on a national securities exchange and issued by the Options
Clearing Corporation in an amount not exceeding 10% of its net assets. Such
options may relate to particular securities or to various stock or bond indices.
Purchasing options is a specialized investment technique which entails a
substantial risk of a complete loss of the amounts paid as premiums to the
option writer. Such transactions will be entered into only as a hedge against
fluctuations in the value of securities which a Portfolio holds or intends to
purchase.
These Portfolios may also write covered call options. A covered call option
is an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Such options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
The International Equity Portfolio may write covered call options, buy put
options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction"--the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options will not be a primary investment technique of any
Portfolio. (For additional information relating to option trading practices,
including particular risks, see the Statement of Additional Information and
Appendix B thereof.)
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FOREIGN CURRENCY PUT OPTIONS. The International Equity Portfolio may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the Portfolio, upon payment of a premium, the right
to sell a currency at the exercise price until the expiration of the option and
serves to insure against adverse currency price movements in the underlying
portfolio assets denominated in that currency.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may purchase
unlisted currency options. A number of major investment firms trade unlisted
options which are more flexible than exchange listed options with respect to
strike price and maturity date. These unlisted options generally are available
on a wider range of currencies. Unlisted foreign currency options are generally
less liquid than listed options and involve the credit risk associated with the
individual issuer. They will be deemed to be illiquid for purposes of the
limitation on investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Equity
Portfolio may buy and sell securities denominated in currencies other than the
U.S. dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolio may from time to time enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolio may enter into currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward currency contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by the International
Equity Portfolio to purchase or sell a specific currency at a future date at a
price set at the time of the contract. In this respect, forward currency
contracts are similar to foreign currency futures contracts described below;
however, unlike futures contracts, which are traded on recognized commodities
exchanges, forward currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Also, forward currency contracts usually involve delivery of
the currency involved instead of cash payment as in the case of futures
contracts.
The International Equity Portfolio may use forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. The use of such forward contracts is limited to
hedging against movements in the value of foreign currencies relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
foreign currency exchange transactions. Transaction and position hedging will
not be limited to an overall percentage of the Portfolio's assets but will be
employed as necessary to correspond to particular transactions or positions. The
Portfolio may not hedge its currency positions to an extent greater than the
aggregate market value (at the time of entering into the forward contract) of
the securities held in its
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portfolio denominated in, quoted in, or currently convertible into that
particular currency. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of the Portfolio's
portfolio securities or in foreign exchange rates, or prevent loss if the prices
of these securities decline, but forward foreign currency exchange contracts do
allow the Portfolio to establish a rate of exchange for a future point in time.
FUTURES CONTRACTS AND RELATED OPTIONS. The Growth & Income Equity,
Emerging Growth, Government & Corporate Bond, U.S. Government Securities and
Balanced Portfolios may invest in futures contracts and options on futures
contracts to the extent permitted by the Commodity Futures Trading Commission
("CFTC") and the SEC. The International Equity Portfolio may invest in interest
rate futures contracts, options on futures contracts and other types of
financial futures contracts (such as foreign currency contracts), as well as any
index or foreign market futures which are available in recognized exchanges or
in other established financial markets to the extent permitted by the CFTC and
the SEC. Such transactions, including stock or bond index futures contracts, or
options thereon, act as a hedge to protect a Portfolio from fluctuations in the
value of its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities. Hedging is a
specialized investment technique that entails skills different from other
investment management. The Adviser (or Sub-Adviser) may also consider such
transactions to be economically appropriate for the reduction of risk inherent
in the ongoing management of a Portfolio. A stock or bond index futures contract
is an agreement in which one party agrees to take or make delivery of an amount
of cash equal to a specified dollar amount times the difference between the
index value (which assigns relative values to the common stock or bonds included
in the index) at the close of the last trading day of the contract and the price
at which the agreement is originally made. No physical delivery of the
underlying stock or bond in the index is contemplated. Similarly, it may be in
the best interest of a Portfolio to purchase or sell interest rate futures
contracts, or options thereon, which provide for the future delivery of
specified fixed income securities.
The purchase and sale of futures contracts or related options will not be a
primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. (For a more detailed description of
futures contracts and related options, see the Statement of Additional
Information and Appendix B thereof.)
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the Tax-Exempt Portfolios are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenues securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal
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Obligations may also include "moral obligation" bonds, which are normally issued
by special purpose public authorities. If the issuer of a moral obligation bond
is unable to meet its debt service obligations from current revenues, it may
draw on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds issued by or on behalf of
public authorities to finance various privately operated facilities are
considered Municipal Obligations. Interest on private activity bonds, although
free of regular federal income tax, may be an item of tax preference for
purposes of the federal alternative minimum tax.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Also included within the
general category of Municipal Obligations are participation certificates in
leases, installment purchase contracts, or conditional sales contracts ("lease
obligations") entered into by state or political subdivisions to finance the
acquisition or construction of equipment, land, or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, certain lease obligations are backed
by the lessee's covenant to appropriate money to make the lease obligation
payments. However, under certain lease obligations, the lessee has no obligation
to make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing and may
not be as marketable as more conventional securities. To the extent these
securities are illiquid, they are subject to each Portfolio's applicable
limitation on illiquid securities described below. The Portfolios do not intend
to invest in such lease obligations during the current year. (See "Investment
Objectives and Policies" in the Statement of Additional Information for a
description of other investment policies.)
Municipal Obligations purchased by the Tax-Exempt Portfolios may be backed
by letters of credit or guarantees issued by domestic or foreign banks and other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or a guarantee with
respect to a Municipal Obligation held by a Tax-Exempt Portfolio could have an
adverse effect on the Portfolio's investment portfolio and the value of its
Shares. Foreign letters of credit and guarantees involve certain risks in
addition to those of domestic obligations, including less stringent reserve
requirements and different accounting, auditing and recordkeeping requirements.
VARIABLE AND FLOATING RATE MUNICIPAL OBLIGATIONS. Municipal Obligations
purchased by the Tax-Exempt Portfolios may include rated or unrated variable and
floating rate instruments, including variable rate master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Unrated instruments purchased by a Portfolio
will be determined by the Adviser to be of comparable quality at the time of
purchase to rated instruments that may be purchased. The absence of an active
secondary market for a particular variable or floating rate instrument, however,
could make it difficult for a Portfolio to dispose of an
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instrument if the issuer were to default on its payment obligation. A Portfolio
could, for these or other reasons, suffer a loss with respect to such
instruments.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to Municipal Obligations held by it. Under a
stand-by commitment, a dealer agrees to purchase, at the Portfolio's option,
specified Municipal Obligations at a specified price. The Portfolio will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The Portfolio
expects that stand-by commitments will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, the Portfolio may pay for a stand-by commitment either separately in
cash or by paying a higher price for portfolio securities which are acquired
subject to the commitment (thus reducing the yield otherwise available for the
same securities). Stand-by commitments acquired by the Portfolio will be valued
at zero in determining the Portfolio's net asset value.
TAX-EXEMPT DERIVATIVES. Each of the Tax-Exempt Portfolios may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of each Tax-Exempt Portfolio's
assets will be invested in such securities during the current year. (See the
Statement of Additional Information under "Investment Objectives and
Policies--Tax-Exempt Derivatives.")
ILLIQUID SECURITIES. A Portfolio will not knowingly invest more than 15%
(10% for each of the Money Market Portfolios) of the value of its net assets in
illiquid securities. Repurchase agreements that do not provide for settlement
within seven days, time deposits maturing in more than seven days, and
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act") but that may be purchased by institutional buyers pursuant to
SEC Rule 144A are subject to the applicable limit (unless the Adviser or
Sub-Adviser, pursuant to guidelines established by the Board of Directors,
determines that a liquid market exists).
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Equity and Bond
Portfolios will not normally engage in short-term trading, each Portfolio
reserves the right to do so if the Adviser (or Sub-Adviser) believes that
selling a particular security is appropriate in light of the Portfolio's
investment objective. Investments may be sold for a variety of reasons, such as
a more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses and
other transaction costs, which must be borne directly by the Portfolio involved
and ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains; distributions derived from such
gains may be treated as ordinary income for federal income tax purposes. (See
"Taxes" in this Prospectus and the "Statement of Additional Information.")
Although the Kansas Tax-Exempt Bond Portfolio cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the Adviser (or Sub-Adviser) with broker-dealers that
it selects. To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Distributor or one or
more of its affiliates as a broker in connection with the purchase or sale of
securities when
44
<PAGE> 46
the Adviser believes the charge for the transaction does not exceed the usual
and customary broker's commission.
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and may
be changed only by a vote of a majority of the outstanding Shares of a
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objectives and Policies."
THE MONEY MARKET AND TREASURY MONEY MARKET PORTFOLIOS
A PORTFOLIO MAY NOT:
1. Make loans, except that a Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies and
may enter into repurchase agreements with respect to securities (together
with any cash collateral) that are consistent with the Portfolio's
permitted investments and that equal at all times at least 100% of the
value of the repurchase price.
2. Borrow money or issue senior securities, except that a Portfolio
may borrow from banks, and the Money Market Portfolio may enter into
reverse repurchase agreements, for temporary purposes in amounts up to 10%
of the value of its total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets, except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of a Portfolio's total assets at the
time of such borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are outstanding.
3. With respect to the Treasury Money Market Portfolio, purchase
securities other than obligations of the U.S. Government, its agencies and
instrumentalities, some of which may be subject to repurchase agreements,
except that the Portfolio may purchase securities of other investment
companies that seek to maintain a constant net asset value per Share and
that are permitted themselves only to invest in securities which may be
acquired by the Portfolio.
4. With respect to the Money Market Portfolio, purchase any securities
which would cause more than 25% of the value of the Portfolio's total
assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by domestic bank instruments
or obligations of the U.S. Government, its agencies or instrumentalities;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a separate
industry.
In accordance with current regulations of the SEC, the Money Market
Portfolio intends to limit investments in the securities of any single issuer
(other than securities issued or guaranteed by the
45
<PAGE> 47
U.S. Government, its agencies or instrumentalities) to not more than 5% of the
Portfolio's total assets at the time of purchase, provided that the Portfolio
may invest up to 25% of its total assets in the securities of any one issuer for
a period of up to three business days. This intention is not, however, a
fundamental policy of the Money Market Portfolio. The Portfolio would have the
ability to invest more than five percent of its assets in any one issuer in
accordance with its fundamental policy only in the event that Rule 2a-7 of the
1940 Act is amended in the future.
THE GROWTH & INCOME EQUITY, EMERGING GROWTH, GOVERNMENT & CORPORATE BONDS, U.S.
GOVERNMENT SECURITIES, BALANCED, INTERNATIONAL EQUITY AND SHORT-INTERMEDIATE
MUNICIPAL PORTFOLIOS
A PORTFOLIO MAY NOT:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities), if, immediately after and as a result of such
investments, more than 5% of the Portfolio's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) with respect
to each Portfolio except the Short-Intermediate Municipal Portfolio, (i)
there is no limitation with respect to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, and repurchase
agreements secured by obligations of the U.S. Government or its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered
to be in the industries of their parents if their activities are primarily
related to financing the activities of their parents; and (iii) utilities
will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be
considered a separate industry); and (b) with respect to the
Short-Intermediate Municipal Portfolio, there is no limitation with respect
to obligations issued or guaranteed by the U.S. Government, any state,
territory or possession of the U.S. Government, the District of Columbia,
or any of their authorities, agencies, instrumentalities or political
subdivisions.
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of the
Portfolio's total assets at the time of such borrowing; or mortgage,
pledge, or hypothecate any assets, except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the Portfolio's total assets at the time of such
borrowing; or purchase securities while its borrowings exceed 5% of its
total assets. A Portfolio's transactions in futures and related options
(including the margin posted by a Portfolio in connection with such
transactions), and securities held in escrow or separate accounts in
connection with a Portfolio's investment practices described in this
Prospectus or the Statement of Additional Information are not subject to
this limitation.
46
<PAGE> 48
4. Make loans, except that each Portfolio may purchase or hold debt
instruments, lend portfolio securities, enter into repurchase agreements
and make other investments in accordance with its investment objective and
policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts
and related options, and (b) a Portfolio may obtain short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities.
THE TAX-EXEMPT MONEY MARKET, MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND
PORTFOLIOS
A PORTFOLIO MAY NOT:
1. Purchase securities of any one issuer if, immediately after and as
a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to
50% of the Portfolio's total assets may be invested without regard to this
5% limitation provided that no more than 25% of the Portfolio's total
assets are invested in the securities of any one issuer and (b) this 5%
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. For purposes of this
limitation, a security is considered to be issued by the governmental
entity (or entities) whose assets and revenues back the security, or, with
respect to an industrial development bond (in the case of the Tax-Exempt
Money Market Portfolio) or a private activity bond (in the case of the
Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) that is
backed only by the assets and revenues of a non-governmental user, a
security is considered to be issued by such non-governmental user. In
certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee, except that a
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the
Portfolio's total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks, and the Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios may enter into reverse repurchase agreements,
for temporary defensive purposes in amounts not in excess of 10% of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of its total assets at the time of such borrowing (including any reverse
repurchase agreements); or purchase securities while borrowings exceed 5%
of Tax-Exempt Money Market Portfolio's net assets or 5% of the Missouri
Tax-Exempt Bond or Kansas Tax-Exempt Bond Portfolios' respective total
assets. Securities held in escrow or separate accounts in connection with
the Portfolios' investment practices described in this Prospectus or the
Statement of Additional Information are not subject to this limitation.
47
<PAGE> 49
THE MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND PORTFOLIOS
A PORTFOLIO MAY NOT:
1. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 1 above with respect to the Tax-Exempt Money
Market, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions, which would cause
more than 25% of the Portfolio's net assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry.
2. Make loans except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, under normal market conditions or when the Adviser deems that
suitable tax-exempt obligations are available, at least 80% of the Tax-Exempt
Money Market Portfolio's assets must be invested in obligations the interest on
which is exempt from federal income tax and stand-by commitments with respect to
such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph, the
Tax-Exempt Money Market Portfolio may invest in securities of other investment
companies that (a) invest in securities that are substantially similar to those
the Portfolio may acquire, and (b) distribute income that is exempt from regular
federal income tax.
THE FOLLOWING ADDITIONAL INVESTMENT POLICIES WITH RESPECT TO THE TAX-EXEMPT
MONEY MARKET, MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND PORTFOLIOS ARE
NOT FUNDAMENTAL AND MAY BE CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER
APPROVAL:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in more
than seven days after notice, or purchase other illiquid securities if, as a
result of such purchase, illiquid securities would exceed 15% (10% with respect
to the Tax-Exempt Money Market Portfolio) of the Portfolios' respective total
assets.
The Tax-Exempt Money Market Portfolio has an operating policy to comply
with the requirements of Rule 2a-7 of the 1940 Act. To the extent that Rule 2a-7
is more restrictive than the Portfolio's fundamental limitations, the Portfolio
will operate in accordance with Rule 2a-7.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
In order to permit the sale of Portfolio Shares in certain states, each
Portfolio may make commitments more restrictive than the investment policies and
limitations described above. Should the Board of Directors determine that any
such commitment is no longer in a Portfolio's best interest, the Board may
revoke the commitment by terminating the sale of such Portfolio's Shares to
investors residing in the state involved.
48
<PAGE> 50
PRICING OF SHARES
THE MONEY MARKET PORTFOLIOS
The Money Market Portfolios' respective net asset values per Share are
determined by the Administrator as of 12:00 noon (Eastern Time) and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern Time) on each weekday, with the exception of those
holidays on which the New York Stock Exchange or the Federal Reserve Bank of St.
Louis are closed (a "Business Day"). Currently one or both of these institutions
are closed on the customary national business holidays of New Year's Day, Martin
Luther King, Jr. Day (observed), Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day (observed).
Each Portfolio's assets are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain its net asset value per Share at
$1.00, there can be no assurance that the net asset value per Share will not
vary. (See the Statement of Additional Information under "Net Asset Value" for
further information.)
THE EQUITY AND BOND PORTFOLIOS
The Equity and Bond Portfolios' respective net asset values per Share are
determined by the Administrator as of the close of regular trading hours on the
Exchange on each Business Day (currently 4:00 p.m. Eastern Time).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. (For further information about valuation of
investments, see "Net Asset Value" in the Statement of Additional Information.)
OTHER INFORMATION
The public offering price for each class of Shares of a Portfolio is based
upon net asset value per Share plus, in the case of Investor A Shares of each
Portfolio except the Money Market Portfolios, a front-end sales charge. A class
will calculate its net asset value per Share by adding the value of a
Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of a Portfolio which declares its net investment income
quarterly will generally be lower than the net asset value per Share of Trust,
Institutional or Investor A Shares of the same Portfolio.
49
<PAGE> 51
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of each Portfolio are sold subject to a front-end sales
charge, except for Investor A Shares of the Money Market Portfolios which are
sold without any sales charge. Investor B Shares of each Portfolio except for
the Treasury Money Market, Tax-Exempt Money Market and Short-Intermediate
Municipal Portfolios which do not offer Investor B Shares, are sold subject to a
back-end sales charge. This back-end sales charge declines over time and is
known as a "contingent deferred sales charge." Before choosing between Investor
A Shares or Investor B Shares of a Portfolio, investors should read
"Characteristics of Investor A Shares and Investor B Shares" and "Factors to
Consider When Selecting Investor A Shares or Investor B Shares" below.
Except as provided below with respect to Investor B Shares of the Money
Market Portfolio, Investor A Shares and Investor B Shares are sold through
broker-dealers or other organizations acting on behalf of their customers.
Generally, investors purchase Investor A Shares or Investor B Shares through a
broker-dealer organization which has a sales agreement with the Distributor or
through an organization which has entered into a servicing agreement with the
Fund with respect to Investor A Shares and/or Investor B Shares. The
organization is responsible for transmitting purchase orders directly to the
Fund. Investors purchasing Shares of a Portfolio which offers both Investor A
and Investor B Shares must specify at the time of investment whether they are
purchasing Investor A Shares or Investor B Shares.
Investor B Shares of the Money Market Portfolio are available for purchase
only by those investors participating in the ARCH Asset Adviser Program.
Otherwise, Investor B Shares of the Money Market Portfolio are available only to
the holders of Investor B Shares of another Portfolio who wish to exchange their
Investor B Shares of such other Portfolio for Investor B Shares of the Money
Market Portfolio. For further information on the ARCH Asset Adviser Program,
investors should, contact their investment representatives or the ARCH Funds'
Service Center at 1-800-551-3731.
In general, the minimum initial investment in each Portfolio is $1,000 and
the minimum for each subsequent investment is $100. In the case of investments
made through (a) the Automatic Investment Program, in which case the initial
minimum and subsequent minimum investments are $50, (b) a sweep program
available through an investor's financial institution, in which case there are
no minimum investments, (c) a payroll deduction program, in which case there is
no minimum initial investment and minimum subsequent investments are $25 per
month, or (d) a wrap fee program, in which case there are no minimum
investments. The minimum initial investment to participate in the Automatic
Exchange program is $5,000. (See "How to Purchase and Redeem Shares--Exchange
Privileges--Automatic Exchange Program" below for additional requirements.)
Purchases may be effected on Business Days when the Adviser, Distributor,
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks. All orders for new IRAs or other retirement plan
accounts placed through the transfer agent must be accompanied by an account
application. Account applications may be obtained from your investment
representative or the Fund at 1-800-551-3731.
50
<PAGE> 52
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-551-3731. Investors may also call the Fund for
information on how to purchase Shares.
EFFECTIVE TIME OF PURCHASE. A purchase order for the Money Market
Portfolios received and accepted by the Fund by 12:00 noon (Eastern time) on a
Business Day, is effected at the net asset value per Share next determined after
receipt of the order in good form if the Fund's Custodian has received payment
in federal funds or other immediately available funds by 4:00 p.m. (Eastern
time) on that day. If such funds are not available for investment by 4:00 p.m.
(Eastern time), the order will be cancelled. Purchase orders received after
12:00 noon (Eastern time) will be placed the following Business Day.
If purchase orders for the Equity and Bond Portfolios are received in good
form and accepted by the Fund prior to 4:00 p.m. (Eastern time) on any Business
Day, Shares will be priced according to the net asset value per Share next
determined on that day after receipt of the order. Immediately available funds
must be received by the Custodian prior to 4:00 p.m. within three Business Days
following the receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the person or
organization placing the order.
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of a Portfolio by mail, complete an
account application and send it to the Fund along with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, made payable to the appropriate Portfolio. Investors purchasing Shares
of a Portfolio which offers both Investor A Shares and Investor B Shares by mail
must indicate whether they wish to buy Investor A Shares or Investor B Shares.
Subsequent purchases of Shares of a Portfolio may be made at any time in at
least the minimum subsequent purchase amount by mailing a check payable to the
Portfolio.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of an
organization, such organization is responsible for transmitting purchase,
exchange, and redemption orders to the Fund on a timely basis, recording all
purchase, exchange, and redemption transactions, and providing regular account
statements which confirm such transactions to beneficial owners (or arranging
for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a monthly
basis in a minimum amount of $50, on the 20th day (or the next Business Day
after the 20th) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A or Investor B Shares, as appropriate, at the net asset value plus any
applicable front-end sales charge next determined on the day an order is
effected by the transfer agent, BISYS Fund Services Ohio, Inc. (the "Transfer
Agent"). An investor may apply for participation in the AIP
51
<PAGE> 53
through the organization servicing his or her Fund account and by completing the
supplementary AIP authorization form. The AIP may be modified or terminated by a
shareholder on 30 days' written notice to his or her investment representative
or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging" in
making investments. Dollar Cost Averaging can be useful in investing in
portfolios such as the Equity and Bond Portfolios whose price per Share
fluctuates. Instead of trying to time market performance, a fixed dollar amount
is invested in Portfolio Shares at predetermined intervals. This may help
investors to reduce their average cost per Share because the agreed upon fixed
investment amount allows more Shares to be purchased during periods of lower
Share prices and fewer Shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his or her Shares at a price which is lower than their
purchase price.
APPLICABLE SALES CHARGES--INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
The public offering price for Investor A Shares of the Equity and Bond
Portfolios is the sum of the net asset value of the Shares being purchased plus
any applicable sales charge. No sales charge is assessed on the reinvestment of
distributions.
The sales charge is assessed as follows:
THE ARCH GROWTH & INCOME EQUITY, EMERGING GROWTH,
GOVERNMENT & CORPORATE BOND, U.S. GOVERNMENT SECURITIES,
BALANCED, INTERNATIONAL EQUITY, MISSOURI TAX-EXEMPT BOND
AND KANSAS TAX-EXEMPT BOND PORTFOLIOS
<TABLE>
<CAPTION>
DEALERS'
AS A % OF AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
------------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000.......................... 4.50% 4.71% 4.00%
$ 50,000 but less than $100,000.......... 3.50 3.63 3.00
$ 100,000 but less than $250,000.......... 2.50 2.56 2.00
$ 250,000 but less than $500,000.......... 1.50 1.52 1.00
$ 500,000 but less than $1,000,000........ 1.00 1.01 0.50
$1,000,000 and over........................ 0.50 0.50 0.40
</TABLE>
52
<PAGE> 54
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
DEALERS'
AS A % OF AS A % OF REALLOWANCE
AMOUNT OF OFFERING PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
------------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $250,000......................... 2.50% 2.56% 2.00%
$ 250,000 but less than $500,000.......... 1.50 1.52 1.30
$ 500,000 but less than $1,000,000........ 1.00 1.01 0.85
$1,000,000 and over........................ 0.50 0.50 0.40
</TABLE>
The Distributor will pay the appropriate Dealers' Reallowance to
broker-dealer organizations which have entered into an agreement with the
Distributor. The Dealers' Reallowance may be changed from time to time. Upon
notice to the Fund's shareholders, the Distributor, at its sole discretion, may
reallow up to the full applicable sales charge as shown on the above schedule
during periods specified in such notice. Dealers who receive 90% or more of a
sales load may be deemed to be "underwriters" under the Securities Act of 1933,
as amended.
No sales charge is assessed on purchases of Investor A Shares of the Equity
and Bond Portfolios by: (a) directors and officers of the Fund and the immediate
family members of such individuals; (b) directors, current and retired employees
and participants in employee benefit/ retirement plans (future and current
annuitants) of Mercantile Bancorporation Inc. or any of its affiliates or the
Distributor or its affiliates and the immediate family members of such
individuals; (c) brokers, dealers, and agents who have a sales agreement with
the Distributor, and their employees (and the immediate family members of such
individuals); (d) customers who purchase pursuant to a wrap fee program offered
by any broker-dealer or other financial institution or financial planning
organization; (e) individuals who purchase Investor A Shares with the proceeds
of Trust Shares or Institutional Shares redeemed in connection with a rollover
of benefits paid by a qualified retirement or employee benefit plan or
distribution on behalf of any other qualified account administered by Mercantile
or its affiliates or correspondent banks, within 60 days of receipt of such
payment; (f) investors who purchase Investor A Shares through a payroll
deduction program; (g) employees of any sub-adviser to the Fund; (h) holders of
Southwestern Bell Visa cards issued by Mercantile Bank of Illinois, N.A. who
participate in the Automatic Investment Program (credit cards may not be used
for the purchase of Fund Shares); (i) investors exchanging Trust Shares of a
Portfolio received from the distribution of assets held in a qualified trust,
agency or custodian account with the trust department of Mercantile or any of
its affiliated or correspondent banks; or (j) other investment companies
distributed by the Distributor or its affiliates. Investors who believe that
they may qualify under any of the exemptions listed above should contact the
Fund at 1-800-551-3731 prior to making a purchase.
REDUCED SALES CHARGES--INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
The sales charge on purchases of Investor A Shares of the Equity and Bond
Portfolios may be reduced through:
-- rights of accumulation
-- quantity discounts
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-- letter of intent
-- reinvestment privilege
To qualify for a reduced sales load, an investor must so notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
RIGHTS OF ACCUMULATION--INVESTOR A SHARES. An investor who has previously
purchased Investor A Shares of a Portfolio and has paid a sales charge ("load")
may be eligible for reduced sales charges when purchasing additional Investor A
Shares of a Portfolio with a sales charge. An investor's aggregate investment in
Shares of such load Portfolios is the total value (based on the higher of
current net asset value or the public offering price originally paid) of: (a)
current purchases, and (b) Shares that are already beneficially owned by the
investor on which a sales charge has already been paid. If, for example, an
investor beneficially owns Investor A Shares of a load Portfolio with an
aggregate current value of $240,000 and subsequently purchases additional
Investor A Shares of a load Portfolio having a current value of $10,000, the
sales charge applicable to the subsequent purchase would be reduced to 1.50% of
the offering price.
QUANTITY DISCOUNTS--INVESTOR A SHARES. As shown in the table under
"Applicable Sales Charges--Investor A Shares of the Equity and Bond Portfolios,"
larger purchases reduce the sales charge paid. The Fund will combine purchases
made in a load Portfolio on the same day by the investor and immediate family
members when calculating the applicable sales charge.
LETTER OF INTENT--INVESTOR A SHARES. By checking the Letter of Intent box
on the account application, a shareholder becomes eligible for reduced sales
charges applicable to the total amount invested in Investor A Shares in a load
Portfolio over a 13-month period (beginning up to 90 days prior to the date
indicated on the account application). The Transfer Agent will hold in escrow 5%
of the amount indicated for payment of a higher sales load if a shareholder does
not purchase the full amount indicated on the account application. Upon
completion of the total minimum investment specified on the account application,
the escrow will be released, and an adjustment will be made to reflect any
reduced sales charge applicable to Shares purchased during the 90-day period
prior to submission of the account application. Additionally, if total purchases
within the 13-month period exceed the amount specified, an adjustment will be
made to reflect further reduced sales charges applicable to such purchases. All
such adjustments will be made at the conclusion of the 13-month period and in
the form of additional Shares credited to the shareholder's account at the then
current public offering price applicable to a single purchase of the total
amount of the total purchases. If total purchases are less than the amount
specified, escrowed Shares may be involuntarily redeemed to pay the additional
sales charge. Checking a Letter of Intent box does not bind an investor to
purchase, or the Fund to sell, the full amount indicated at the sales load in
effect at the time of signing, but an investor must complete the intended
purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE--INVESTOR A SHARES. Upon redemption of Investor A
Shares on which a sales charge was paid, a shareholder has a one-time right, to
be exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
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<PAGE> 56
MISCELLANEOUS--INVESTOR A SHARES. Reduced sales charges may be modified or
terminated at any time and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, an investor should
contact his or her investment representative or the Distributor.
APPLICABLE SALES CHARGES--INVESTOR B SHARES OF THE CDSC PORTFOLIOS
Investor B Shares of the CDSC Portfolios are sold at their net asset value
next determined after a purchase order is received in good form by the Fund's
Distributor. Although investors pay no front-end sales charge on purchases of
Investor B Shares, such Shares are subject to a deferred sales charge at the
rates set forth in the chart below if they are redeemed within six years of
purchase. Service Organizations will receive commissions from the Distributor in
connection with sales of Investor B Shares. These commissions may be different
than the reallowances or placement fees, if any, paid to dealers in connection
with sales of Investor A Shares. The deferred sales charge on Investor B Shares
is based on the lesser of the net asset value of the Shares on the redemption
date or the original cost of the Shares being redeemed. As a result, no sales
charge is charged on any increase in the principal value of an investor's
Shares. In addition, a contingent deferred sales charge will not be assessed on
Investor B Shares purchased through reinvestment of dividends or capital gains
distributions.
The amount of any contingent deferred sales charge an investor must pay on
Investor B Shares depends on the number of years that elapse between the
purchase date and the date such Investor B Shares are redeemed. Solely for
purposes of determining the number of years from the time of payment for an
investor's Share purchase, all payments during a month will be aggregated and
deemed to have been made on the first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
PERCENTAGE OF DOLLAR
NUMBER OF YEARS AMOUNT SUBJECT TO
ELAPSED SINCE PURCHASE THE CHARGE)
----------------------------------------------------------- ---------------------------
<S> <C>
One or less................................................ 5.0%
More than one, but less than two........................... 4.0%
Two, but less than three................................... 3.0%
Three, but less than four.................................. 3.0%
Four, but less than five................................... 2.0%
Five, and up to and including six.......................... 1.0%
After six years............................................ None
</TABLE>
When an investor redeems his or her Investor B Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Investor B Shares are redeemed first from those Investor B
Shares that are not subject to the deferred sales load (i.e., Investor B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) and after that from the Investor B Shares that have been held the
longest.
For example, assume an investor purchased 100 Investor B Shares at $10 a
Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then
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<PAGE> 57
makes one redemption of 50 Shares (resulting in proceeds of $600, 50 Shares X
$12 per share), the first 10 Shares redeemed will not be subject to the
contingent deferred sales charge because they were acquired through reinvestment
of dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value of $12 per
share). Therefore, only $400 of the $600 such investor received from selling his
or her Shares will be subject to the contingent deferred sales charge, at a rate
of 3.0% (the applicable rate in the third year after purchase). The proceeds
from the contingent deferred sales charge that the investor may pay upon
redemption go to the Distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to Investor B Shares, enables those Shares
to be purchased without the imposition of a front-end sales charge.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The following types
of redemptions qualify for an exemption from the contingent deferred sales
charge: (i) exchanges described under "Exchange Privileges" below; (ii)
redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension,
profit-sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code due to death, disability or the attainment of a
specified age; (iii) redemptions effected pursuant to a Portfolio's right to
liquidate a shareholder's account if the aggregate net asset value of Shares
held in the account is less than the minimum account size; (iv) redemptions in
connection with the death or disability of a shareholder; or (v) redemptions
resulting from a tax-free return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares lies
in their sales charge structures and distribution arrangements. An investor
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Investor A Shares and Investor B Shares
are the same.
Investor A Shares are sold at their net asset value plus, in the case of
the Equity and Bond Portfolios, a front-end sales charge of up to 4.50% (2.50%
with respect to the Short-Intermediate Municipal Portfolio). (See "Pricing of
Shares.") This front-end sales charge may be reduced or waived in some cases.
(See "Applicable Sales Charges--Investor A Shares of the Equity and Bond
Portfolios.") Investor A Shares are subject to ongoing distribution and service
fees at an annual rate of up to 0.30% (0.25% with respect to the Money Market
Portfolios) of a Portfolio's average daily net assets attributable to its
Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. (See "Applicable Sales
Charges--Investor B Shares of the CDSC Portfolios.") Investor B Shares are
subject to ongoing distribution and service fees at an annual rate of up to
1.00% of a Portfolio's average daily net assets attributable to its Investor B
Shares. These ongoing fees, which are higher than those charged on Investor A
Shares, will cause Investor B Shares to have a higher expense ratio and pay
lower dividends than Investor A Shares.
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<PAGE> 58
Eight years after purchase, Investor B Shares will convert automatically to
Investor A Shares. The purpose of the conversion is to relieve a holder of
Investor B Shares of the higher ongoing expenses charged to those Shares, after
enough time has passed to allow the Distributor to recover approximately the
amount it would have received if a front-end sales charge had been charged. The
conversion from Investor B Shares to Investor A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Investor A Shares as he or she had of Investor B Shares. The conversion
occurs eight years after the beginning of the calendar month in which the Shares
are purchased. As a result of the conversion, the converted Shares are relieved
of the distribution and service fees and borne by Investor B Shares, although
they are subject to the distribution and service fees borne by Investor A
Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates--eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/ or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both Investor A Shares
and Investor B Shares, investors should consider whether, during the anticipated
life of their investment in the Portfolio, the accumulated distribution fees and
potential contingent deferred sales charges on Investor B Shares prior to
conversion would be less than the initial sales charge and accumulated
distribution fees on Investor A Shares purchased at the same time (note that
Investor A Shares of the Money Market Portfolio are sold without a sales
charge), and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that there is no sales
charge for Investor A Shares, in the case of the Money Market Portfolio, or the
sales charge for Investor A Shares is waived or reduced by one of the methods
described above, in the case of the Equity and Bond Portfolios, investments in
Investor A Shares become more desirable. The Fund will refuse all purchase
orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares of
the Equity and Bond Portfolios that do not qualify for waivers of or reductions
in the initial sales charge would have less of their purchase price initially
invested in a Portfolio than purchasers of Investor B Shares of the same
Portfolio.
As described above, purchasers of Investor B Shares of the Equity and Bond
Portfolios will have more of their initial purchase price invested. Any positive
investment return on this additional invested amount would partially or wholly
offset the expected higher annual expenses borne by Investor B Shares of those
Portfolios. Because the Portfolios' future returns cannot be predicted, there
can be no assurance that this will be the case. Holders of Investor B Shares
would, however,
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<PAGE> 59
own Shares that are subject to higher annual expenses and, for a six-year
period, such Shares would be subject to a contingent deferred sales charge of up
to 5.0% upon redemption, depending upon the year of redemption. Investors
expecting to redeem during this six-year period should compare the cost of the
contingent deferred sales charge plus the aggregate annual Investor B Shares'
distribution and service fees to the cost of the initial sales charge and
distribution and service fees on the Investor A Shares (note that Investor A
Shares of the Money Market Portfolio are sold without a sales charge). Over
time, the expense of the annual distribution and service fees on the Investor B
Shares may equal or exceed the initial sales charge, if any, and annual
distribution and service fees applicable to Investor A Shares. For example, if
net asset value remains constant, the aggregate distribution and service fees
with respect to Investor B Shares of the Equity and Bond Portfolios would equal
or exceed the initial sales charge and aggregate distribution fees of Investor A
Shares of those Portfolios approximately eight years after the purchase. In
order to reduce such fees of investors that hold Investor B Shares for more than
eight years, Investor B Shares will be automatically converted to Investor A
Shares as described above at the end of such eight-year period.
EXCHANGE PRIVILEGES
The exchange privilege enables shareholders to exchange (i) Investor A
Shares of a Portfolio for Investor A Shares of another Portfolio offered by the
Fund or, under certain circumstances described below, for Trust Shares or
Institutional Shares of the same Portfolio, and (ii) Investor B Shares of a
Portfolio for Investor B Shares of another Portfolio offered by the Fund. The
exchange privilege may be exercised only in those states where the class of
Shares of such other Portfolios may be legally sold.
EXCHANGES--INVESTOR A SHARES. Shareholders who have purchased Investor A
Shares of a Portfolio and who have paid any applicable sales charge ("load")
(including Shares acquired through reinvestment of dividends or distributions on
such Shares) may exchange those Shares for Investor A Shares of another load
Portfolio without paying an additional sales load. Shareholders who have
purchased Investor A Shares of a Portfolio (other than through a previous
exchange from another load Portfolio on which any applicable sales load has been
paid) with a lower sales load may be charged an additional sales load on
exchanges of Shares of such Portfolio for Shares of a Portfolio with a higher
sales load. Shareholders may also exchange Investor A Shares of a no-load
Portfolio for Investor A Shares of another no-load Portfolio without paying a
sales load. When Investor A Shares of a no-load Portfolio are exchanged for
Investor A Shares of a load Portfolio, the applicable sales load (if any) will
be assessed. However, shareholders exchanging Investor A Shares of a no-load
Portfolio that were acquired through a previous exchange involving Shares on
which a load was paid will not be required to pay an additional sales load upon
the reinvestment of the equivalent investment into a load Portfolio within a
twelve month period. Under such circumstances, the shareholder must notify the
Distributor that a sales load was originally paid and provide the Distributor
with sufficient information to permit confirmation of the shareholder's right
not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks, and whose Shares are to
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<PAGE> 60
be held in that account, may also exchange Investor A Shares of a Portfolio for
Trust Shares or Institutional Shares in the same Portfolio.
EXCHANGES--INVESTOR B SHARES. Shareholders who have purchased Investor B
Shares of a Portfolio (including Shares acquired through reinvestment of
dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
The Shares exchanged must have a current value at least equal to the
minimum initial or subsequent investment required by the particular Portfolio
into which the exchange is being made. The Fund reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time upon 60 days' written notice to shareholders. An investor may telephone an
exchange request by calling his or her investment representative, which is
responsible for transmitting such exchange request to the Fund. (See "Other
Exchange or Redemption Information" below.) Investors who want to telephone an
exchange request directly to the Fund, and, have elected this privilege on the
account application may follow the procedures described below under "Redemption
by Telephone." An investor should consult his or her investment representative
or the Fund for further information regarding procedures for exchanging Shares.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from the service organization servicing
their Fund accounts. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written request to their investment representative or to the Fund. The Automatic
Exchange Program may be amended or terminated without notice at any time by the
Distributor.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. Proceeds from the redemptions of Investor B
Shares will be reduced by the amount of any applicable contingent deferred sales
charge. The organization through which the investor placed the order is
responsible for transmitting redemption orders to the Fund on a timely basis. No
charge for sending redemption payments
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electronically is currently imposed by the Fund, although a charge may be
imposed in the future. The Fund reserves the right to send redemption proceeds
electronically within seven days after receiving a redemption order if, in the
judgment of the Adviser, an earlier payment could adversely affect a Portfolio.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on the account application. It is not necessary for shareholders to
confirm telephone redemption requests in writing. If a shareholder did not
originally select the telephone redemption privilege, the shareholder must
provide written instructions to the Transfer Agent to add this feature. Neither
the Fund nor its service contractors will be liable for any loss, damage,
expense or cost arising out of any telephone redemption effected in accordance
with the Fund's telephone redemption procedures, acting upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed the Fund or its service contractors may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, investors are
encouraged to follow the procedures described in "Other Exchange or Redemption
Information" below.
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the MONEY MARKET PORTFOLIOS with respect to redemption orders received by the
Distributor before 12:00 noon (Eastern time) on a Business Day normally will be
sent electronically the same day (or mailed by check the next Business Day) to
the organization that placed the redemption order in good form.
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Proceeds for redemption orders that are received after 12:00 noon (Eastern time)
or on a non-business Day normally will be sent electronically on the next
Business Day (or mailed by check on the second Business Day thereafter).
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the EQUITY AND BOND PORTFOLIOS with respect to redemption orders received by the
Fund before 4:00 p.m. (Eastern time) on a Business Day normally are sent
electronically or mailed by check to the organization that placed the redemption
order within three Business Days after the Distributor's receipt of the order in
good form.
CHECKWRITING--MONEY MARKET PORTFOLIOS
Checkwriting is available from certain institutions with respect to each of
the Money Market Portfolios. No charge for use of the checkwriting privilege is
currently imposed by the Fund, although a charge may be imposed in the future.
With this service, a shareholder may write up to six checks per month in an
amount per check of $250 or more. To obtain checks, a shareholder must complete
the signature card that accompanies the account application. To establish this
checkwriting service after opening an account in a Money Market Portfolio, the
shareholder must contact his or her investment representative by telephone or
mail to obtain an account application. A signature guarantee may be required. A
SHAREHOLDER WILL RECEIVE THE DAILY DIVIDENDS DECLARED ON THE SHARES TO BE
REDEEMED UP TO THE DAY THAT A CHECK IS PRESENTED TO THE CUSTODIAN FOR PAYMENT.
Upon 30 days' written notice to shareholders, the checkwriting privilege may be
modified or terminated. An investor cannot close an account in a Money Market
Portfolio by writing a check.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be reduced by any applicable contingent deferred sales charge.
Portfolio Shares will be redeemed as necessary to meet withdrawal payments.
Withdrawals may reduce principal and eventually deplete the shareholder's
account. The maintenance of an AWP may be disadvantageous for holders of
Investor B Shares due to the effect of the contingent deferred sales charge. A
shareholder who desires to establish an AWP after opening an account should
complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Distributor for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time.
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of the Equity and Bond Portfolios
offered by the Fund at net asset value without payment of a front-end sales
charge. To qualify for a net asset value purchase, the investor must pay for
such purchase with the proceeds from the redemption of shares of a
non-affiliated mutual
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fund on which a front-end sales charge was paid. A qualifying purchase of
Investor A Shares must occur within 30 days of the prior redemption and must be
evidenced by a confirmation of the redemption transaction. At the time of
purchase, the investment representative must notify the Distributor that the
purchase qualifies for a purchase at net asset value. Proceeds from the
redemption of Shares on which no front-end sales charge was paid do not qualify
for a purchase at net asset value.
OTHER EXCHANGE OR REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A PORTFOLIO THAT OFFERS BOTH INVESTOR A SHARES AND
INVESTOR B SHARES, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING
INVESTOR A SHARES OR INVESTOR B SHARES. In the event a redeeming shareholder
owns both Investor A Shares and Investor B Shares in a Portfolio, the Investor A
Shares will be redeemed first unless the shareholder indicates otherwise.
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and/or Investor B Shares of a Portfolio.
TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
each Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
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THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as total return, "yield,"
and "effective yield" for the Money Market Portfolios' Investor A Shares and/or
Investor B Shares may be quoted in advertisements or in communications to
shareholders. The "yield" quoted in advertisements refers to the income
generated by an investment in a particular class of Shares of a Portfolio over a
specified period (such as a seven-day period) identified in connection with the
particular yield quotation. This income is then "annualized." That is, the
amount of income generated by the investment during that period is assumed to be
generated for each such period over a 52-week or one-year period and is shown as
a percentage of the investment. The "effective yield" is calculated similarly
but, when annualized, the income earned by an investment in a particular class
of Shares of a Portfolio is assumed to be reinvested. The "effective yield" will
be slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.
In addition, the Treasury Money Market Portfolio's "state tax-equivalent
yield" may also be quoted. The "state tax-equivalent yield" shows the level of
taxable yield needed to produce an after-tax yield that is equivalent to a
particular state's tax-exempt yield achieved by the Portfolio. The "state
tax-equivalent yield" refers to the portion of income that is derived from
interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities that qualifies for exemption from state income tax. The yield
calculation assumes that 100% of the interest income is exempt from state income
tax. The "state tax-equivalent yield" is computed by dividing the tax-exempt
portion of the Portfolio's yield by a denominator consisting of one minus a
stated income tax rate.
The Tax-Exempt Money Market Portfolio may also quote its "tax-equivalent
yield" and "tax-equivalent effective yield", which demonstrate the level of
taxable yield need to produce an after-tax yield that is equivalent to the
Portfolio's yield and effective yield. Each are calculated by increasing the
Portfolio's yield and effective yield by the amount necessary to reflect the
payment of federal (and/or state) tax at a stated tax rate. The "tax equivalent
yield" and "tax-equivalent effective yield" will always be higher than the
Portfolio's yield and effective yield, respectively. The Tax-Exempt Money Market
Portfolio may also compute its "tax-equivalent yield" and "tax-equivalent
effective yield" with respect to certain states, which shows the level of
taxable yield and effective yield, respectively, needed to produce an after-tax
equivalent to the federal and state tax-exempt yield of the Portfolio's
particular class of Shares, assuming payment of federal income tax and state
personal income tax each at a stated rate and based upon a specified percentage
of the Portfolio's income which is exempt from state income tax as well as
federal income tax.
THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return and yield
data for the Equity and Bond Portfolios' Investor A Shares and/or Investor B
Shares may be quoted in advertisements, sales literature or in communications to
shareholders. The yield is computed based on the net income of a particular
class of Shares in the particular Portfolio during a 30-day (or one-month)
period identified in connection with the particular yield quotation. More
specifically, the yield is computed by dividing the Portfolio's net income per
Share during a 30-day (or one-month) period by the maximum Public Offering Price
per Share on the last day of the period and annualizing the result. The
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
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Bond Portfolios' "tax equivalent" yields, which show the level of taxable yield
needed to produce an after-tax equivalent to each Portfolio's tax-free yield,
may also be quoted from time to time. This is done by increasing a Portfolio's
yield (calculated as above) by the amount necessary to reflect the payment of
federal income tax at a stated tax rate. The Missouri Tax-Exempt Bond Portfolio
may also compute its "Missouri tax-equivalent" yield and the Kansas Tax-Exempt
Bond Portfolio may also compute its "Kansas tax-equivalent" yield, which shows
the amount of taxable yield needed to produce an after-tax equivalent to the
federal and Missouri or Kansas tax-exempt yield of the Portfolio's Shares,
assuming payment of federal income tax and Missouri or Kansas income tax each at
a stated rate.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to a particular class
of Shares reflect the average annual percentage change in value of an investment
in such Shares of a Portfolio over the particular measuring period. Aggregate
total returns reflect the cumulative percentage change in value over the
measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by a Portfolio during the period
are reinvested in the same class of Shares of the Portfolio and that the maximum
sales load in effect during the period has been charged by the Portfolio. The
Portfolios' total return figures may also be calculated without the deduction of
the maximum sales charge in effect during the period. The effect of not
deducting the sales charge will be to increase the total return reflected. When
considering average annual total return figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any one
year in the period might have been more or less than the average for the entire
period.
INFORMATION APPLICABLE TO ALL PORTFOLIOS
Performance data of the Portfolios' Investor A Shares and/or Investor B
Shares may be compared to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and data such as that provided by Lehman Brothers, Inc. or any of its
affiliates, Ibbotson Associates, Inc., Lipper Analytical Services, Inc., Mutual
Fund Forecaster and IBC/Donoghue's MONEY FUND REPORT(R) published by
IBC/Donoghue. References may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Institutional Investor, Pensions and
Investments, U.S.A. Today, Fortune, CDA/Wiesenberger, Morningstar, Inc. and
publications of a local or regional nature. In addition to performance
information, general information about the Portfolios that appears in a
publication such as those mentioned above may be included in advertisements and
in reports to Shareholders.
Performance quotations of a class of Shares in a Portfolio represent that
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by an investment representative will
not be included in the calculations of the Portfolios' yields and total returns.
Such fees, if any, will reduce the investor's net return on an investment in a
Portfolio. Investors may call 1-800-452-ARCH to obtain current yield and total
return information.
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DIVIDENDS AND DISTRIBUTIONS
THE MONEY MARKET, TREASURY MONEY MARKET, TAX-EXEMPT MONEY MARKET,
GOVERNMENT & CORPORATE BOND, U.S. GOVERNMENT SECURITIES, SHORT-INTERMEDIATE
MUNICIPAL,
MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND PORTFOLIOS
Dividends from investment income of the Money Market, Treasury Money
Market, Tax-Exempt Money Market, Government & Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios are declared daily and paid monthly not later than
five Business Days after the end of each month. Investor A Shares and/or
Investor B Shares of the Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios earn dividends from the day the purchase order is
received by the Fund through the day before the redemption order for such Shares
is received. Investor A Shares and/or Investor B Shares of the Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios earn dividends
from the day after the purchase order is received by the Transfer Agent through
the day the redemption order for such Shares is received. Shares of a Portfolio
purchased by check begin earning dividends when payment for Shares purchased are
converted into federal funds and are available for investment. For purchases by
check, this normally will be the second Business Day following receipt of the
check.
Dividends on each Share of such Portfolios are determined in the same
manner and are paid in the same amounts, irrespective of class, except that a
Portfolio's Trust Shares and Institutional Shares (other than the Tax-Exempt
Portfolios which do not offer Institutional Shares) bear all expenses of the
respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares (other than the Treasury
Money Market, Tax-Exempt Money Market and Short-Intermediate Municipal
Portfolios which do not offer Investor B Shares) bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain sub-transfer
agency fees. (See "Management of the Fund" and "Other Information Concerning the
Fund and Its Shares" below.)
THE GROWTH & INCOME EQUITY, EMERGING GROWTH, BALANCED AND INTERNATIONAL EQUITY
PORTFOLIOS
Net investment income for the Growth & Income Equity, Emerging Growth,
Balanced and International Equity Portfolios is declared and paid quarterly as a
dividend to shareholders of record. Dividends on each Share of each of these
Portfolios are determined in the same manner and are paid in the same amount,
irrespective of class, except that a Portfolio's Trust Shares and Institutional
Shares bear all expenses of the respective Administrative Services Plans adopted
for such Shares and a Portfolio's Investor A Shares and Investor B Shares bear
all expenses of the respective Distribution and Services Plans adopted for such
Shares. In addition, a Portfolio's Institutional Shares bear the expense of
certain sub-transfer agency fees. (See "Management of the Fund" and "Other
Information Concerning the Fund and Its Shares.")
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OTHER DIVIDEND AND DISTRIBUTION INFORMATION
The Money Market Portfolios do not expect to realize capital gains. Net
realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested (without a sales load) in additional Shares of the same
class unless the investor has (i) otherwise indicated in the account
application, or (ii) redeemed all the Shares held in a Portfolio, in which case
a distribution will be paid in cash. Reinvested dividends and distributions will
be taxed in the same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio of the Fund intends to qualify as a "regulated investment
company" for the current taxable year. It is intended that each Portfolio will
continue to so qualify as long as such qualification is in the best interests of
shareholders. A regulated investment company is generally exempt from federal
income tax on amounts distributed to shareholders.
Qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"), for a taxable year requires, among other
things, that each Portfolio distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its net
exempt-interest income (if any). In general, a Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain over net short-term capital loss, if any, for
such taxable year. The Money Market, Treasury Money Market, Growth & Income
Equity, Emerging Growth, Government & Corporate Bond, U.S. Government
Securities, Balanced and International Equity Portfolios intend to distribute as
dividends substantially all of their respective investment company taxable
income and any net tax-exempt interest income each year. Such dividends will be
taxable as ordinary income to a Portfolio's shareholders who are not currently
exempt from federal income taxes, whether such income is received in cash or
reinvested in additional Shares. (Federal income taxes for distributions to an
IRA are deferred under the Code.) In the case of the Growth & Income Equity,
Emerging Growth, Balanced and International Equity Portfolios, such dividends
will qualify for the dividends received deduction for corporations to the extent
of the total qualifying dividends received by the Portfolios from domestic
corporations for the taxable year. Because all of the Money Market, Treasury
Money Market, Government & Corporate Bond and U.S. Government Securities
Portfolios' net investment income is expected to be derived from earned
interest, it is not expected that any distributions from such Portfolios will be
eligible for the dividends received deduction.
It is the policy of each Tax-Exempt Portfolio to distribute as dividends
substantially all of its net tax-exempt interest income and any investment
company taxable income each year. Dividends derived from interest on Municipal
Obligations (known as exempt-interest dividends) may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code, unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. (See the Statement of Additional
Information under
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"Additional Information Concerning Taxes.") Distributions of net income may be
taxable to investors under state or local law as dividend income even though a
substantial portion of such distributions may be derived from interest on
tax-exempt obligations which, if realized directly, would be exempt from such
income tax.
If a Tax-Exempt Portfolio should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Portfolio that is attributable to interest
on such bonds in their federal alternative minimum taxable income for purposes
of determining liability (if any) for the 26-28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders also must
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum and environmental tax purposes. The
environmental tax applicable to corporations is imposed at the rate of .12% on
the excess of the corporation's modified federal alternative minimum taxable
income over $2,000,000.
Substantially all of each Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. A Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such gains are received in cash or
reinvested in additional Shares.
To the extent dividends paid to shareholders of a Tax-Exempt Portfolio are
derived from taxable income or from long-term or short-term capital gains, such
dividends will be subject to federal income tax, whether such dividends are paid
in the form of cash or additional Shares.
An investor considering purchasing Shares of a Money Market Portfolio on or
just before the record date of any capital gains distribution (or in the case of
the Equity and Bond Portfolios, the record date of any dividend or capital gains
distribution) should be aware that the amount of the forthcoming distribution,
although in effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on December
31 of such year, if such dividends are actually paid during January of the
following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares of the Equity and Bond Portfolios, depending upon
the tax basis of such Shares and their price at the time of redemption, transfer
or exchange. If an investor holds Shares for six months or less and during that
time receives an exempt-interest dividend on those Shares, any loss realized on
the sale or exchange of those Shares will be disallowed to the extent of the
exempt-interest dividend.
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Certain interest income and dividends earned by the International Equity
Portfolio from foreign securities is expected to be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it, including
generally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio may make this election. As a consequence, the amount
of these foreign taxes paid by the Portfolio will be included in its
shareholders' taxable income pro rata (in addition to taxable distributions
actually received by them), and each shareholder may elect either (a) to credit
his proportionate amount of such taxes against his U.S. federal income tax
liabilities (subject to certain limitations), or (b) if he itemizes his
deductions, to deduct such proportionate amounts from his U.S. taxable income.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio qualifies
as a regulated investment company for federal income tax purposes, shareholders
of such Portfolio who are Missouri resident individuals, trusts or estates
resident in Missouri, or corporations subject to Missouri taxing jurisdiction
(collectively, "Missouri Taxpayers") will not be subject to Missouri income
taxation on dividends distributed to them to the extent that such dividends (a)
qualify as exempt-interest dividends of a regulated investment company under
Code section 852(b)(5), (b) are the subject of the written notice to
shareholders required by 12 C.S.R. section 10-2.155(2), (c) are attributable to
interest on (1) obligations issued by the State of Missouri or any of its
political subdivisions or authorities, or (2) certain obligations of the United
States, any territory or possession of the United States, or any authority,
commission, or instrumentality of the United States, to the extent exempted from
Missouri income tax under Federal Law, and (d) are properly reported on the
Missouri income tax returns of the shareholder in the respective Portfolio.
To the extent possible, the Missouri Tax-Exempt Bond Portfolio intends to
invest in obligations which will permit distributions attributable to interest
to be excludable by Missouri Taxpayers. Despite this intention, Missouri
Taxpayers generally will be subject to Missouri income tax on other types of
distributions received from the Missouri Tax-Exempt Bond Portfolio, including
distributions of interest on obligations of other issuers and all long-term and
short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distribution were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri bank tax or other comparable forms of
specialized Missouri taxation.
All shareholders of the Portfolios should consult with their tax advisors
with respect to the state and local tax consequences of the purchase, ownership,
and disposition of Shares in the Portfolios, the receipt of distributions from
the Portfolios, and the proper method in which to report Portfolio-related items
on a shareholder's Missouri tax returns.
KANSAS TAX CONSIDERATIONS. In each year that a Portfolio qualifies as a
regulated investment company for federal income tax purposes, dividends
distributed to shareholders of the Portfolio who are Kansas resident
individuals, or estates or trusts resident in Kansas, will be excluded from the
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computation of Kansas adjusted gross income to the extent that such dividends
(a)(i) qualify as exempt-interest dividends of a regulated investment company
under section 852(b)(5) of the Code and (ii) are attributable to interest on
obligations issued after December 31, 1987 by the State of Kansas or its
political subdivisions or on certain specific obligations issued before January
1, 1988 by such entities, or (b) are derived from interest on certain
obligations of any authority, commission or instrumentality of the United States
or its possessions, to the extent exempted from state income taxes under Federal
law. The Kansas Tax-Exempt Bond Portfolio intends to invest only in obligations
which will permit distributions attributable to interest to be excludable from
Kansas adjusted gross income on resident individuals, estates and trusts.
Resident individuals, estates and trusts will generally be subject to Kansas
income tax on other types of distributions received from the Kansas Tax-Exempt
Bond Portfolio, including distributions attributable to interest on certain
obligations issued before January 1, 1988, by the State of Kansas or its
political subdivisions, to interest on obligations of other issuers and to all
long-term and short-term capital gains, if any, to the extent such capital gains
distributions are included in federal taxable income. Corporations within
Kansas' tax jurisdiction are subject to the same rules as Kansas individuals in
computing such corporation's net income before apportionment.
The foregoing discussion of Kansas law does not apply to shareholders which
are banks or to certain other individuals or entities who are in the banking
business. Banks and others in the banking business are subject to the Kansas
privilege tax on net income for which distributions from the Kansas Bond
Portfolio are not exempt.
Except as noted above with respect to Kansas income taxation, distributions
from a Portfolio may be taxable to investors under other state and local laws
imposing taxes on or measured by net income, even though all or a portion of
such distributions are derived from tax-exempt obligations which, if realized
directly by the investor, would be nontaxable. The Kansas Tax-Exempt Bond
Portfolio will notify its shareholders within 60 days after the close of each
year as to the amount of exempt interest dividends from Kansas obligations which
is exempt from Kansas individual income taxation.
Earnings derived from the Kansas Bond Portfolio will not be subject to the
local intangibles tax imposed by various counties, cities and townships in
Kansas.
Shareholders of the Kansas Tax-Exempt Bond Portfolio should consult their
tax advisors with respect to the state and local tax consequences of the
purchase, ownership and disposition of Shares in the Portfolio.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may be taxable
to investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide investors, to
the extent permissible by federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Shareholders should note
that many, but not all, states permit all or a portion of a regulated investment
company's dividends which are derived from interest on U.S. Treasury obligations
(and obligations of certain U.S. Government agencies)("Treasury Obligations") to
be
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exempt or excluded from state and local taxation. In addition, only certain
states allow dividends of a regulated investment company that are derived from
dividends of other regulated investment companies investing directly in Treasury
Obligations to be exempt or excluded from state and local taxation. Some states
reduce a shareholder's allowable deductions by interest on debt incurred to
carry obligations producing state tax-exempt interest and by other expenses
related to such obligations. Income earned by the Portfolio from repurchase
agreements generally is not exempt from state or local income tax. Shareholders
should consult their own tax advisors about the status of distributions from the
Treasury Money Market Portfolio under state and local law.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal and, for the Treasury Money Market Portfolio, the
state income tax consequences, and for the Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios, the Missouri or Kansas state income tax
consequences, of distributions made each year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER AND SUB-ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to each Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1995, MVA had approximately $7
billion in assets under investment management, including the assets of the Fund,
which were approximately $2.1 billion.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolios,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolios' securities and other investments, and directs the
maintenance of each Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, with respect to the Money Market and Treasury Money Market Portfolios,
at the annual rates of .40% of the first $1.5 billion of each such Portfolio's
average daily net assets, .35% of the next $1.0 billion of net assets and .25%
of net assets in excess of $2.5 billion, and with respect to the Tax-Exempt
Money Market, Growth & Income Equity, Emerging Growth, Government & Corporate
Bond, U.S. Government Securities, Balanced, International Equity,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios, at the annual rates of .40%, .55%, .75%, .45%, .45%, .75%,
1.00%, .55%, .45% and .45% of the average daily net assets of each Portfolio,
respectively. For the fiscal year/period ended November 30, 1995, MVA received
advisory
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fees (net of waivers) at the effective annual rates of .35%, .35%, .35%, .55%,
.75%, .45%, .45%, .75%, .75%, 0% and .45% of the respective average daily net
assets of the Money Market, Treasury Money Market, Tax-Exempt Money Market,
Growth & Income Equity, Emerging Growth, Government & Corporate Bond, U.S.
Government Securities, Balanced, International Equity, Short-Intermediate
Municipal and Missouri Tax-Exempt Bond Portfolios. For the fiscal year ended May
31, 1995, MVA received advisory fees (net of waivers) at the effective annual
rates of .31% and .32% of the average daily net assets of the Predecessor
Tax-Exempt Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios,
respectively. Without fee waivers, MVA would have been entitled to receive
advisory fees at the annual rate of .40% and .45% of the average daily net
assets of the Predecessor Tax-Exempt Money Market Portfolio and Predecessor
Missouri Tax-Exempt Bond Portfolios, respectively. The Kansas Tax-Exempt Bond
Portfolio had not commenced operations as of the date of this Prospectus. MVA
has informed the Fund that, upon commencement of operations of the Kansas
Tax-Exempt Bond Portfolio, it intends to waive its fee with respect to that
Portfolio through November 30, 1996.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of one or more Portfolios available for
distributions as dividends. The voluntary fee reduction will cause the return of
any such Portfolio to be higher than it would otherwise be in the absence of
such reduction.
Gene E. Gillespie, CFA, is the person primarily responsible for the
day-to-day management of the Growth & Income Equity and Balanced Portfolios. Mr.
Gillespie, Director of Research, has been with MVA for 23 years.
Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Emerging Growth Portfolio. Mr. Anthony, Senior Associate, has
been with MVA for 21 years.
David A. Bethke, CFA, is the person primarily responsible for the
day-to-day management of the U.S. Government Securities and Government &
Corporate Bond Portfolios. Mr. Bethke, Senior Associate, joined MVA in 1987 and
has six years of prior investment experience.
Peter Merzian is the person primarily responsible for the day-to-day
management of the Short-Intermediate Municipal, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios' investments. Mr. Merzian, a Senior Associate
of MVA, is assisted by several research analysts who utilize a wide range of
technological resources in selecting portfolio investments. Mr. Merzian served
as portfolio manager of the Predecessor Missouri Tax-Exempt Bond Portfolio since
1993 and prior thereto was employed as a portfolio manager by another financial
institution.
MVA has entered into a sub-investment advisory agreement with Clay Finlay,
Inc. Pursuant to the terms of such sub-investment advisory agreement, Clay
Finlay has been retained by MVA to manage the investment and reinvestment of the
assets of the International Equity Portfolio and to provide analytical and
investment research services to it, subject to the supervision of MVA and to the
direction and control of the Fund's Board of Directors.
Under this arrangement, Clay Finlay is responsible for the day-to-day
management of the International Equity Portfolio's assets. MVA reviews
investment performance policies and guidelines, maintains certain books and
records, is responsible for selecting and monitoring the
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performance of Clay Finlay, and for reporting the activities of Clay Finlay in
managing the Portfolio to the Fund's Board of Directors.
Clay Finlay is registered as an investment adviser with the SEC and is
entirely owned by its investment professionals. Clay Finlay's principal office
is located at 200 Park Avenue, 56th Floor, New York, New York 10166. As of
December 31, 1995, Clay Finlay had approximately $6.0 billion in assets under
management. Clay Finlay, founded in 1982, has eight senior investment
professionals with extensive experience in international investments. Each of
the eight senior investment professionals has been with the firm since its
inception.
Frances Dakers is the person primarily responsible for the day-to-day
management of the International Equity Portfolio's investments. Ms. Dakers, a
Principal of Clay Finlay, has been associated with Clay Finlay since January,
1982.
For the services provided and expenses assumed pursuant to its
sub-investment advisory agreement with MVA, Clay Finlay receives from MVA a fee,
computed daily and payable monthly, at the annual rate of .75% of the
International Equity Portfolio's average daily net assets. For the fiscal year
ended November 30, 1995, Clay Finlay received sub-advisory fees at the effective
annual rate of .75% of the International Equity Portfolios's average daily net
assets. Clay Finlay bears all expenses incurred by it in connection with its
services under the sub- investment advisory agreement.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolios' Administrator.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolios' arrangements with Service Organizations (see
"Service Organizations" below). For its services, the Administrator is entitled
to receive a fee, computed daily and payable monthly, at the annual rate of .20%
(.10% for the Tax-Exempt Money Market Portfolio) of each Portfolio's average
daily net assets. For the fiscal year ended November 30, 1995, the Administrator
received administration fees (net of waivers) at the effective rate of .10% of
the average daily net assets of the Money Market, Treasury Money Market, Growth
& Income Equity, Emerging Growth, Government & Corporate Bond, U.S. Government
Securities, Balanced, Short-Intermediate Municipal and Missouri Tax-Exempt Bond
Portfolios, at the effective rate of .10% of the average daily net assets of the
Tax-Exempt Money Market Portfolio, and at the effective rate of .15% of the
average daily net assets of the International Equity Portfolio. From time to
time, the Administrator may voluntarily waive all or a portion of the
administration fees otherwise payable by a Portfolio in order to increase the
net income available for distribution to shareholders. The Administrator has
advised the Fund that, upon commencement of operations of the Kansas Tax-Exempt
Bond Portfolio, it intends to waive .10% of the administration fee payable to it
by that Portfolio through the Fund's 1997 fiscal year.
DISTRIBUTOR
Investor A Shares and/or Investor B Shares in each Portfolio are sold
continuously by the Distributor, BISYS Fund Services, an affiliate of the
Administrator. The Distributor also monitors the
72
<PAGE> 74
Fund's arrangements under the Distribution and Services Plans described below.
The Distributor is a registered broker-dealer with principal offices at 3435
Stelzer Road, Columbus, Ohio 43219.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of any of the Portfolios. Such compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Portfolios, and/or other dealer-sponsored
special events. In some instances, this compensation will be made available only
to certain dealers whose representatives have sold a significant amount of such
Shares. Compensation will include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) business and vacation trips, including the provision of
travel arrangements and lodging at resorts, (2) tickets for entertainment events
(such as concerts, cruises and sporting events) and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of a Portfolio's
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Portfolios or their shareholders.
DISTRIBUTION AND SERVICES PLANS
The Fund has adopted separate Distribution and Services Plans pursuant to
Rule 12b-1 under the 1940 Act with respect to Investor A Shares of the
Portfolios and Investor B Shares of the CDSC Portfolios. Under the Distribution
and Services Plans, the Fund may pay (i) the Distributor or another person for
distribution services provided and expenses assumed and (ii) Service
Organizations for shareholder administrative services provided pursuant to
servicing agreements in connection with Investor A Shares or Investor B Shares
of a Portfolio. Payments to the Distributor are to compensate it for
distribution assistance and expenses assumed and activities primarily intended
to result in the sale of Investor A Shares or Investor B Shares, including
compensating dealers and other sales personnel (which may include affiliates of
the Fund's Adviser), direct advertising and marketing expenses and expenses
incurred in connection with preparing, printing, mailing and distributing or
publishing advertisements and sales literature, for printing and mailing
Prospectuses and Statements of Additional Information (except those used for
regulatory purposes or for distribution to existing shareholders), and costs
associated with implementing and operating the Distribution and Services Plan.
In addition, payments under the Distribution and Services Plan for Investor B
Shares will be used to pay for or finance sales commissions and other fees
payable to Service Organizations and other broker-dealers who sell Investor B
Shares. (See "Management of the Fund--Service Organizations" below for a
description of the servicing agreements and the services provided by Service
Organizations.)
Under the Distribution and Services Plan for Investor A Shares, payments by
the Fund for distribution expenses may not exceed .10% (annualized) of the
average daily net asset value of a Portfolio's outstanding Investor A Shares and
payments for shareholder administrative servicing expenses may not exceed .20%
(.15% with respect to the Money Market Portfolios) (annualized) of the average
daily net asset value of a Portfolio's outstanding Investor A Shares.
73
<PAGE> 75
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not exceed .75% (annualized) of the
average daily net asset value of a Portfolio's outstanding Investor B Shares and
payments for shareholder administrative servicing expenses may not exceed .25%
(annualized) of the average daily net asset value of a Portfolio's outstanding
Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A Shares or Investor B Shares of a Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such a Service Organization
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Bank of St. Louis National Association, an affiliate of the Fund
and a wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of each Portfolio's assets. In addition,
Bankers Trust Company of New York, with principal offices at 16 Wall Street, New
York, New York 10005, serves as the Sub-Custodian for the International Equity
Portfolio. BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent. Its address is 3435 Stelzer Road, Columbus,
Ohio 43219.
74
<PAGE> 76
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolios. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing Shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolios contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by a Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all expenses in connection with the
performance of their services, except that the Distributor is compensated
pursuant to the Distribution and Services Plans (as described under
"Distribution and Services Plans" above). Expenses are deducted from the total
income of each Portfolio before dividends and distributions are paid. These
expenses include, but are not limited to, fees paid to the Adviser and
Administrator, transfer agency fees, fees and expenses of officers and directors
who are not affiliated with the Adviser or the Distributor, taxes, interest,
legal fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain
fees and expenses in registering
75
<PAGE> 77
and qualifying a Portfolio and its Shares for distribution under Federal and
state securities laws, costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular Portfolio will be allocated among all Portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable. Any expenses relating only to a particular
class of Shares within a Portfolio will be borne solely by such class. (See
"Certain Financial Information" and "Management of the Fund" above for
additional information regarding expenses of each Portfolio.)
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation, and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional Shares of common stock, and to classify and
reclassify any unauthorized and unissued Shares into one or more classes of
Shares. The Board of Directors may similarly classify or reclassify any class of
Shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of Shares representing interests in the
Portfolios, each of which (except the Tax-Exempt Money Market, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) is classified as a
diversified company under the 1940 Act: 1.8 billion Trust Shares, 300 million
Institutional Shares, 550 million Investor A Shares and 50 million Investor B
Shares, representing interests in the Money Market Portfolio; 1 billion Trust
Shares, 300 million Institutional Shares and 100 million Investor A Shares,
representing interests in the Treasury Money Market Portfolio; 300 million Trust
Shares and 50 million Investor A Shares, representing interests in the
Tax-Exempt Money Market Portfolio; 50 million Trust Shares, 20 million
Institutional Shares, 5 million Investor A Shares and 50 million Investor B
Shares, representing interests in the Growth & Income Equity Portfolio; 50
million Trust Shares, 20 million Institutional Shares, 5 million Investor A
Shares and 50 million Investor B Shares, representing interests in the
Government & Corporate Bond Portfolio; 15 million Trust Shares, 20 million
Institutional Shares, 5 million Investor A Shares and 50 million Investor B
Shares, representing interests in the U.S. Government Securities Portfolio; 15
million Trust Shares, 20 million Institutional Shares, 5 million Investor A
Shares and 50 million Investor B Shares and 50 million Investor B Shares,
representing interests in the Emerging Growth Portfolio; 15 million Trust
Shares, 20 million Institutional Shares, 5 million Investor A Shares and 50
million Investor B
76
<PAGE> 78
Shares, representing interests in the Balanced Portfolio; 10 million Trust
Shares, 10 million Institutional Shares, 10 million Investor A Shares and 50
million Investor B Shares, representing interests in the International Equity
Portfolio; 25 million Trust Shares and 25 million Investor A Shares,
representing interests in the Short-Intermediate Municipal Portfolio; 25 million
Trust Shares, 25 million Investor A Shares and 25 million Investor B Shares,
representing interests in the Missouri Tax-Exempt Bond Portfolio; and 25 million
Trust Shares, 25 million Investor A Shares and 10 million Investor B Shares,
representing interests in the Kansas Tax-Exempt Bond Portfolio. Institutional,
Investor A and/or Investor B Shares of the Portfolios are described in separate
prospectuses which are available from the Distributor at the telephone number on
the cover of this Prospectus. Shares in the Fund's Portfolios will be issued
without Share certificates.
The Investor A Shares and/or Investor B Shares of the Portfolios are
described in this Prospectus. The Portfolios also offer Trust Shares and, in
addition, each Portfolio except the Tax-Exempt Portfolios offers Institutional
Shares. Institutional Shares, which are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion, and
Trust Shares, which are offered to financial institutions acting on their own
behalf or on behalf of certain qualified accounts, are sold without a sales
charge. Trust, Institutional, Investor A and/or Investor B Shares bear their pro
rata portion of all operating expenses paid by a Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective Administrative Services Plans adopted for such Shares and Investor A
Shares and Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of a Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust Shares or Institutional Shares. Payments
under the Administrative Services Plans may not exceed .25% (on an annual basis)
of the average daily net asset value of outstanding Trust or Institutional
Shares of the Money Market Portfolios or .30% (on an annual basis) of the
average daily net asset value of outstanding Trust or Institutional Shares of
the Equity and Bond Portfolios.
The Fund offers various services and privileges in connection with its
Investor A Shares and Investor B Shares that are not offered in connection with
its Trust or Institutional Shares, including an automatic investment program and
automatic withdrawal plan. In addition, each class of Shares offers different
exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
Portfolios will vote together and not by class unless otherwise required by law
or permitted by the Board of Directors. All shareholders of a particular
Portfolio will vote together as a single class on matters relating to the
Portfolio's investment advisory (or sub-advisory) agreement and investment
objective and fundamental policies. Only holders of Trust Shares, however, will
vote on matters relating to the Administrative Services Plan for Trust Shares
and only holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares and only
77
<PAGE> 79
holders of Investor B Shares will vote on matters pertaining to the Distribution
and Services Plan for Investor B Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding Shares (irrespective of
Portfolio or class) may elect all of the Directors. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Shares
will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of a Portfolio or a particular class of Shares means, with respect to
the approval of an investment advisory agreement or distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
such Portfolio or class of Shares, or (b) 67% or more of the Shares of such
Portfolio or class of Shares present at a meeting if more than 50% of the
outstanding Shares of such Portfolio or class of Shares are represented at the
meeting in person or by proxy.
As of January 1, 1996, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolios may be directed to the Fund at
1-800-551-3731.
78
<PAGE> 80
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIOS'
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIOS, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIOS, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights................................ 3
Certain Financial Information............. 5
Expense Summary for Investor A and
Investor B Shares....................... 6
Financial Highlights...................... 10
Investment Objectives, Policies and Risk
Considerations.......................... 22
Pricing of Shares......................... 49
How to Purchase and Redeem Shares......... 50
Purchase of Shares...................... 50
Automatic Investment Program (AIP)...... 51
Applicable Sales Charges--Investor A
Shares of the Equity and Bond
Portfolios............................ 52
Reduced Sales Charges--Investor A Shares
of the Equity and Bond Portfolios..... 54
Applicable Sales Charges--Investor B
Shares of the CDSC Portfolios......... 55
Exchange Privileges..................... 58
Redemption of Shares.................... 60
Redemption by Mail...................... 60
Redemption by Telephone................. 61
Automatic Withdrawal Plan (AWP)......... 62
Purchase of Investor A Shares at Net
Asset Value........................... 62
Other Exchange or Redemption
Information........................... 62
Yields and Total Returns.................. 63
Dividends and Distributions............... 65
Taxes..................................... 66
Management of the Fund.................... 71
Other Information Concerning the Fund
and its Shares.......................... 77
Miscellaneous........................... 78
</TABLE>
Investment Adviser:
Mississippi Valley Advisors Inc.
a wholly-owned subsidiary of
Mercantile Bank of
St. Louis National Association
Distributor:
BISYS Fund Services
THE ARCH FUND(R), INC.
MONEY MARKET PORTFOLIO
TREASURY MONEY MARKET PORTFOLIO
TAX-EXEMPT MONEY MARKET PORTFOLIO
GROWTH & INCOME EQUITY PORTFOLIO
EMERGING GROWTH PORTFOLIO
GOVERNMENT & CORPORATE BOND PORTFOLIO
U.S. GOVERNMENT SECURITIES PORTFOLIO
BALANCED PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
MISSOURI TAX-EXEMPT BOND PORTFOLIO
KANSAS TAX-EXEMPT BOND PORTFOLIO
INVESTOR A SHARES
AND
INVESTOR B SHARES
PROSPECTUS
MARCH 28, 1996
<PAGE> 81
[This Page Intentionally Left Blank]
<PAGE> 82
[This Page Intentionally Left Blank]
<PAGE> 83
<TABLE>
<S> <C>
Please mail Application to: Class of Shares
The ARCH Mutual Funds (Please check one)
P.O. Box 78069 / / Investor A-Shares
St. Louis, MO 63178 / / Investor B-Shares
/ / New Account If a share class is not
/ / New Account--Employee indicated, registrant will be
/ / Additional Investment placed in Investor A.
/ / Change of Account
Information
</TABLE>
<TABLE>
<S> <C>
LOGO ACCOUNT APPLICATION
1 ACCOUNT INFORMATION (Please Print or Type)
Existing ARCH Mutual Funds Account Number, if any
- ---------------------------------------------------------------------------------------------------------------------------------
Account Name
- ---------------------------------------------------------------------------------------------------------------------------------
Social Security or Taxpayer ID Number Date of Birth
- ---------------------------------------------------------------------------------------------------------------------------------
/ / Joint Tenant Name
/ / Minor Name
- ---------------------------------------------------------------------------------------------------------------------------------
Social Security or Taxpayer ID Number Date of Birth
- ---------------------------------------------------------------------------------------------------------------------------------
Mailing Address
- ---------------------------------------------------------------------------------------------------------------------------------
Permanent Residence if Different (P.O. Box is not sufficient)
- ---------------------------------------------------------------------------------------------------------------------------------
Home Phone ( ) Office Phone ( )
- ---------------------------------------------------------------------------------------------------------------------------------
Please contact me at / / Home / / Office / / Other ( )
- ---------------------------------------------------------------------------------------------------------------------------------
2 PERSONAL INFORMATION Joint Tenant
Employed By Occupation Employed By Occupation
- ---------------------------------------------------------------------------------------------------------------------------------
Business Address Business Address
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholder Co-Shareholder
Citizenship (Check One) / / U.S. / / Resident Alien Citizenship (Check One) / / U.S. / / Resident Alien
/ / Non-Resident Alien Other (Please Specify) / / Non-Resident Alien Other (Please Specify)
------------------- -------------
If spouse or minor child is an investor in the ARCH Mutual Funds, please indicate account number(s).
----------------------------
Is either party or immediate family member affiliated with or employed by any securities firm? / / Yes / / No
If yes, what firm & position?
---------------------------------------------------------------------------------------------------
Is either party or immediate family member a director, a 10% or greater shareholder or policy making executive officer of a
publicly traded company? / /Yes / / No
If yes, what company and position?
-----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3 ACCOUNT INSTRUCTIONS Type of Registration (Check One)
<TABLE>
<S> <C>
/ / Individual / / Custodian for Minor
/ / Joint Tenants with Right of / / Partnership (attach Partnership Agreement)
Survivorship / / Corporation (attach Corporate Resolution)
/ / Transfer on Death (TOD Form required)
/ / Trust (attach Trust document)
/ / Estate*
/ / Other (Specify)*
-------------------------
*Additional forms required, please call
1-800-551-3731
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4 INITIAL INVESTMENT INFORMATION Minimum initial investment in any Portfolio is
$1,000 (except as otherwise noted in the prospectus)
Select one of the following payment methods:
/ / By check: Make check payable to Arch Mutual Funds.
/ / By wire: Complete this form and call 1-800-452-ARCH for wire instructions.
<TABLE>
<S> <C>
ARCH Money Market Portfolio $ -----------
ARCH Treasury Money Market Portfolio $ -----------
ARCH Tax-Exempt Money Market Portfolio $ -----------
ARCH Growth & Income Equity Portfolio $ -----------
ARCH Emerging Growth Portfolio $ -----------
ARCH Government & Corporate Bond Portfolio $ -----------
ARCH U.S. Government Securities Portfolio $ -----------
ARCH Balanced Portfolio $ -----------
ARCH International Equity Portfolio $ -----------
ARCH Short-Intermediate Municipal Portfolio $ -----------
ARCH Missouri Tax-Exempt Bond Portfolio $ -----------
ARCH Kansas Tax-Exempt Bond Portfolio $ -----------
Other $ -----------
- ------------------------------------------------------------------------------------------
</TABLE>
5 DIVIDEND & CAPITAL GAIN DISTRIBUTION OPTIONS Check one. If none checked,
Option A will be assigned.
/ / A. All dividends and capital gains reinvested in the same Portfolio.
/ / B. All dividends and capital gains paid in cash.
/ / C. All dividends paid in cash; capital gains reinvested in the same
Portfolio.
/ / D. All dividends reinvested in same Portfolio; Capital gains paid in cash.
This is not part of prospectus
i
<PAGE> 84
- --------------------------------------------------------------------------------
6 BANK ADDRESS AND ELECTRONIC FUNDS TRANSFER INFORMATION* Attach a Voided Check
for Verification.
/ / Check if telephone and written redemption proceeds are to be sent
electronically as indicated below unless otherwise specified at the time of the
request.
/ / Check if cash dividends are to be sent electronically.
<TABLE>
<S> <C>
- ------------------------------------------------------------------
Name(s) on Bank Account
- ------------------------------------------------------------------------------------------------------------------------
Bank Name Branch Office (if applicable) Bank Telephone Number
- ------------------------------------------------------------------------------------------------------------------------
Bank Street Address (DO NOT use P.O. Box) City State Zip
/ / Checking / / Savings
- ------------------------------------------------------------------------------------------------------------------------
Bank ABA (Routing) Number (if unknown, call your bank) Bank Account Number
*To add or change bank account information, the request must be in writing and accompanied by a signature guarantee.
</TABLE>
- --------------------------------------------------------------------------------
7 LETTER OF INTENT
I understand that through accumulated investments I can reduce my sales charges.
I plan to invest over a 13-month period in shares of one or more of the
Portfolios in the ARCH Mutual Funds sold with a sales charge in an aggregate
amount of at least:
/ / $50,000 / / $100,000 / / $150,000 / / $250,000 / / $500,000
/ / $1,000,000
If the amount indicated is not invested within 13 months, reduced sales charges
do not apply.
/ / Begin the 13-month period with my purchase on the following date
- ---------------------------
- --------------------------------------------------------------------------------
8 RIGHT OF ACCUMULATION (Class A Shares only. See the prospectus for
qualifications.)
/ / I own shares of more than one fund in the Arch Mutual Funds Group, which may
entitle me to a reduced sales charge. My shareholder account numbers are:
<TABLE>
<S> <C>
Fund Name Fund Name
- -------------------------- --------------------------
Account # Account #
- -------------------------- --------------------------
<CAPTION>
Fund Name Fund Name
<S> <C>
- -------------------------- --------------------------
Account # Account #
- -------------------------- --------------------------
</TABLE>
- --------------------------------------------------------------------------------
9 ELECTION OF TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES
I elect the telephone redemption privilege as described in the prospectus.
/ / Yes / / No
I elect the telephone exchange privilege as described in the prospectus.
/ / Yes / / No
- --------------------------------------------------------------------------------
10 AIP/AWP
/ / Enroll me in the AIP/AWP--MY AIP/AWP APPLICATION IS ALSO ENCLOSED.
If you have any questions about this Application or any of our services, please
feel free to call Monday to Friday 1-800-551-3731 from 7:00 a.m. to 8:00 p.m.
(Central Time), and one of our representatives will gladly assist you.
- --------------------------------------------------------------------------------
11 CHECKWRITING *Checkwriting signature card must accompany form.
/ / I elect to have checkwriting privileges for my Arch money market account
(Investor A Only)
- --------------------------------------------------------------------------------
12 YOUR SIGNATURE All registered shareholders must sign.
I have received and read the current prospectus of the Fund(s) selected and this
Account Application Form and agree to be bound by their terms. I also authorize
the instructions in this application.
I certify, under penalties of perjury:
A. that the Social Security or taxpayer identification number shown in Section 1
is correct and
B. unless I have checked the appropriate box below, that (1) the IRS has never
notified me that I am subject to backup withholding or (2) has notified me that
I am no longer subject to backup withholding.
/ / The IRS has notified me that I am subject to backup withholding.
Non-resident aliens may be subject to a separate IRS withholding of 30%.
The signature(s) below certifies that I (we) have read the Customer Agreement on
page iv and agree to the terms therein.
<TABLE>
<S> <C> <C> <C>
X X
- ------------------------------------------- ------------------- ------------------------------------------- -----------------
Signature of shareholder Date Signature of co-shareholder (if any) Date
-------------------------------------------
Capacity of signator
</TABLE>
- --------------------------------------------------------------------------------
FOR DAILY PRICE AND YIELD UPDATES CALL 1-800-452-ARCH.
For Broker/Dealer purposes only:
Rep. Name:
<TABLE>
<S> <C>
Rep.
Signature: --------------------------------------------------------------------- Date: ----------------------------------------
Rep.
Broker/Dealer: ----------------------------------------------------------------- No.: -----------------------------------------
Phone
Location: ---------------------------------------------------------------------- No.: -----------------------------------------
Approved by
Principal: --------------------------------------------------------------------- Date: ----------------------------------------
</TABLE>
This is not part of prospectus
ii
<PAGE> 85
AUTOMATIC INVESTMENT/WITHDRAWAL PLAN APPLICATION
<TABLE>
<S> <C> <C>
For assistance in A R C H M U T U A L F U N D S Send completed application to:
completing this ------------------------------------------- The ARCH Mutual Funds
Application, call the This form must be accompanied by P.O. Box 78069
ARCH Mutual Funds an ARCH Account Application St. Louis, MO 63178
(800) 551-3731
</TABLE>
AUTOMATIC INVESTMENT PLAN--Investment Minimum--$50
- --------------------------------------------------------------------------------
This plan permits you to regularly purchase shares automatically* (processed on
or about the 20th of the month) by electronically transferring a specified
dollar amount from your regular checking account to your ARCH Mutual Fund
account. If you use this Plan to purchase shares in your ARCH Mutual Funds IRA,
the participation will be for the current year only.
*Frequency: / / Monthly / / Quarterly / / Semi-Annually / / Annually
Share class: / / Investor A / / Investor B
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
ARCH Money Market Portfolio $
-------------
ARCH Treasury Money Market Portfolio $
-------------
ARCH Tax-Exempt Money Market Portfolio $
-------------
ARCH Growth & Income Equity Portfolio $
-------------
ARCH Emerging Growth Portfolio $
-------------
ARCH Government & Corporate Bond Portfolio $
-------------
ARCH U.S. Government Securities Portfolio $
-------------
<CAPTION>
AMOUNT
-------------
<S> <C>
ARCH Balanced Portfolio $
-------------
ARCH International Equity Portfolio $
-------------
ARCH Short-Intermediate Portfolio $
-------------
ARCH Missouri Tax-Exempt Bond Portfolio $
-------------
ARCH Kansas Tax-Exempt Bond Portfoliio $
-------------
Other $
-------------
</TABLE>
/ / Please check if investments will be made into an existing account.
Please attach a blank check marked "VOID."
Please include a check for a minimum of $50 if you are establishing a new
account.
Please allow approximately thirty (30) days from the date we receive before it
is effective.
You must verify that your bank participates in the Automated Clearing House
system before you enroll. Most banks are ACH participants. We will not be
responsible if a transaction is rejected because your bank is not an ACH
participant. Your bank may charge a service fee for those transactions.
The ACH service options may only be established between your ARCH Mutual Fund
account and one bank account.
AUTOMATIC WITHDRAWAL PLAN--Withdrawal Minimum--$50
- --------------------------------------------------------------------------------
To elect this option you must have a minimum $10,000 balance in the Portfolio
from which you wish to withdraw. Payments are made by redeeming shares*
(processed on or about the 25th of the month).
*Frequency: / / Monthly / / Quarterly / / Semi-Annually / / Annually
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
ARCH Money Market Portfolio $
-------------
ARCH Treasury Money Market Portfolio $
-------------
ARCH Tax-Exempt Money Market Portfolio $
-------------
ARCH Growth & Income Equity Portfolio $
-------------
ARCH Emerging Growth Portfolio $
-------------
ARCH Government & Corporate Bond Portfolio $
-------------
ARCH U.S. Government Securities Portfolio $
-------------
<CAPTION>
AMOUNT
-------------
<S> <C>
ARCH Balanced Portfolio $
-------------
ARCH International Equity Portfolio $
-------------
ARCH Short-Intermediate Portfolio $
-------------
ARCH Missouri Tax-Exempt Bond Portfolio $
-------------
ARCH Kansas Tax-Exempt Bond Portfolio $
-------------
Other $
-------------
</TABLE>
Please provide the following information if (1) you prefer your withdrawals
sent to your bank, AND/OR (2) your Portfolio and bank registration do not match
exactly, AND/OR (3) this form is not completed when the account is established
you must obtain a signature guarantee from a bank.
- --------------------------------------------------------------------------------
Name(s) on Bank Account
- --------------------------------------------------------------------------------
Bank Name Branch Office (if applicable)
- --------------------------------------------------------------------------------
Bank Telephone Number
- --------------------------------------------------------------------------------
Bank Street Address City State Zip
(DO NOT use P.O. Box)
/ / Checking / / Savings
- --------------------------------------------------------------------------------
Bank ABA (Routing) Number (if unknown, call your bank) Bank Account
Number
To add or change bank account information, the request must be in writing and
accompanied by a signature guarantee.
- --------------------------------------------------------------------------------
This is not part of prospectus
iii
<PAGE> 86
AUTO EXCHANGE (From one ARCH Fund to another ARCH Fund.)
- --------------------------------------------------------------------------------
You may make regular, automatic withdrawals from an ARCH Fund to benefit from
dollar-cost-averaging by automatically making purchases into another ARCH Mutual
Fund. You must have a minimum initial purchase of $5,000 or a minimum of $5,000
available in your existing ARCH Fund. The Auto Exchange feature is only
available within the same Class of Shares.
Please select how often you would like to have the amount(s) shown below
withdrawn from your ARCH Fund and invested into the selected Fund(s).
/ / Once each month on the 20th
/ / Once each quarter on the 20th beginning in (Jan/Apr/Jul/Oct).
------------
<TABLE>
<S> <C> <C> <C>
FROM: Fund Name Account Number (or New) Amount ($50.00 min.)
--------------- ----------------- ----------------------------
TO: Fund Name Account Number (or New) Amount ($50.00 min.)
--------------- ----------------- ----------------------------
TO: Fund Name Account Number (or New) Amount ($50.00 min.)
--------------- ----------------- ----------------------------
</TABLE>
BY MAKING THE ABOVE SELECTION, I AUTHORIZE THE ARCH MUTUAL FUNDS' TRANSFER AGENT
AND BISYS FUND SERVICES, TO REDEEM FROM THE AFOREMENTIONED ARCH FUND AND
PURCHASE THE MONIES INTO THE ARCH MUTUAL FUNDS CHOSEN ON THE ABOVE STATED
DATE(S). Please allow fifteen business days after written receipt of the request
to add, change or discontinue the Auto Exchange feature. Please complete an
appropriate Letter of Intent (if applicable).
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Signature of
Registrant: ------------------------------------------------------------------------------ Date: -------------------------
Signature of Joint
Registrant: ------------------------------------------------------------------------------ Date: -------------------------
Guarantor: -----------------------------------------------------------------------------------------------------------------------
* If you do not indicate the frequency, the program will be implemented on a monthly basis.
</TABLE>
<TABLE>
<S> <C>
ACCOUNT INFORMATION
- -------------------------------------------------------------------------------------------------------------
Name: Account No.:
----------------------------------------------------------- ------------------------------
Address:
----------------------------------------------------------------------------------------------------
Street City State Zip Code
Daytime Telephone: ( ) Social Security No.:
---------------------------------------------- ----------------------
</TABLE>
This is not part of prospectus
iv
<PAGE> 87
CUSTOMER AGREEMENT
- --------------------------------------------------------------------------------
I (we) have full right, power, authority and legal capacity, and am (are) of
legal age in my (our) state of residence to purchase shares of the Portfolio(s).
I (we) affirm that I (we) have received and read the current prospectus of the
Portfolio(s) selected and agree to be bound by its terms.
a. Representations. I understand that the Funds, BISYS Fund Services (the
Distributor) or BISYS Fund Services Ohio, Inc. (the Transfer Agent) provide no
investment, tax or legal advice and I have not relied on their judgment with
respect to the suitability or potential value of any security or order.
b. Force Majeure. You shall not be liable for loss or delay caused directly or
indirectly by war, natural disaster, government restrictions, exchange or market
rulings or other conditions beyond the control of the Distributor and the
Transfer Agent.
c. Governing Laws. The Agreement shall be governed by the laws of the State of
Ohio as applicable.
d. Reliance on Representations. I understand that the Distributor and the
Transfer Agent shall rely on the information which I have set forth in this
Agreement until the Distributor or the Transfer Agent receive changes to it by
subsequent written notice. Any changes made to Sections 1 & 5 must be made in
writing to the Distributor and accompanied by a Signature guarantee from an
eligible guarantor institution as outlined in the Funds prospectus.
e. Indemnification. As additional consideration for the services of the
Distributor and the Transfer Agent with regard to this Account, I agree to
indemnify and hold the Distributor and the Transfer Agent, its officers,
directors, employees and agents harmless from and against any and all losses,
liabilities, demands, claims, actions, expenses, and attorney's fees arising out
of or in connection with this Agreement, which are not caused by the negligence
or willful misconduct of the Distributor and the Transfer Agent. The provisions
of this Section shall survive termination of this Agreement. The provisions of
this Section shall be binding on my successors and assigns.
f. It is agreed that any controversy between me and all or any of the Portfolios
and its service providers, arising out of this Agreement or my business with
you, shall be settled by arbitration conducted in accordance with the rules of
the National Association of Securities Dealers, Inc. or the American Arbitration
Association, as I may elect. Failure to notify you of such election in writing
within five (5) days after receipt from you of a request for arbitration shall
be deemed to be authorization to make such election on my behalf. Judgment upon
the award of the arbitrators may be entered by any court having jurisdiction. No
person shall bring a putative or certified class action to arbitration, nor seek
to enforce any pre-dispute arbitration agreement against any person who has
initiated in court a putative class action; or who is a member of a putative
class who has not opted out of the class with respect to any claims encompassed
by the putative class action until; (i) the class certification is denied; (ii)
the class is decertified; or (iii) the person against whom the arbitration
agreement would be enforced is excluded from the class by the court. Such
forbearance to enforce an agreement to arbitrate shall not constitute a waiver
of any rights under this agreement except to the extent stated herein.
g. I understand that mutual fund shares are not bank deposits, are not insured
by the FDIC, are not obligations of ARCH Mutual Funds or the U.S. Government and
are not endorsed or guaranteed in any way by ARCH Mutual Funds or any bank or
financial institution.
h. Neither the Distributor nor the Fund will be liable for any loss, damages,
expense or cost arising out of any telephone redemption effected in accordance
with the Fund's telephone redemption procedures, upon instructions reasonably
believed to be genuine. The Fund will employ procedures designed to provide
reasonable assurance that instructions by telephone are genuine; if these
procedures are not followed, the Fund or its service contractors may be liable
for any losses due to unauthorized or fraudulent instructions. These procedures
include recording all phone conversations, sending confirmations to shareholders
within 48 hours of the telephone transactions, verification of account name and
account number or tax identification number, and sending redemption proceeds
only to the address of record or to a previously authorized bank account.
This is not part of prospectus
v
<PAGE> 88
THE ARCH FUND(R), INC.
THE ARCH MONEY MARKET PORTFOLIO
THE ARCH TREASURY MONEY MARKET PORTFOLIO
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO
THE ARCH EMERGING GROWTH PORTFOLIO
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO
THE ARCH BALANCED PORTFOLIO
THE ARCH INTERNATIONAL EQUITY PORTFOLIO
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO
THE ARCH KANSAS TAX-EXEMPT BOND PORTFOLIO
Statement of Additional Information
Part B
March 28, 1996
<PAGE> 89
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Money Market Portfolio
The ARCH Treasury Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Emerging Growth Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Balanced Portfolio
The ARCH International Equity Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH Kansas Tax-Exempt Bond Portfolio
March 28, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies..............................
Net Asset Value.................................................
Additional Purchase and Redemption Information..................
Additional Yield and Total Return Information...................
Description of Shares...........................................
Additional Information Concerning Taxes.........................
Management of the Fund..........................................
Independent Auditors............................................
Counsel.........................................................
Miscellaneous...................................................
Financial Statements............................................
Appendix A...................................................... A-1
Appendix B...................................................... B-1
</TABLE>
This Statement of Additional Information, which provides supplemental
information applicable to the Money Market, Treasury Money Market, Tax-Exempt
Money Market, Growth & Income Equity, Emerging Growth, Government & Corporate
Bond, U.S. Government Securities, Balanced, International Equity,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios (the "Portfolios"), is not a prospectus. It should be read only
in conjunction with the Portfolios' Prospectuses dated March 28, 1996 and is
incorporated by reference in its entirety into the Prospectuses. No investment
in shares of any Portfolio should be made without reading the applicable
Prospectus. A copy of the applicable Prospectus may be obtained by writing the
Fund at P.O. Box 78069, St. Louis Missouri 63178 or by calling 1-800-551-3731.
Capitalized terms used but not defined herein have the same meanings as in each
Prospectus.
-i-
<PAGE> 90
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end
investment company currently offering forty-one classes of shares
in twelve investment portfolios.
The Fund was organized on September 9, 1982 as a Maryland
corporation. The ARCH Tax-Exempt Money Market Portfolio (the "Predecessor
Tax-Exempt Money Market Portfolio") and the ARCH Missouri Tax Exempt Bond
Portfolio (the "Predecessor Missouri Tax-Exempt Bond Portfolio") commenced
operations on July 10, 1986 and July 15, 1988, respectively, as separate
investment portfolios of The ARCH Tax-Exempt Trust, which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest that
were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares. As of the date of this Statement of Additional Information, the Kansas
Tax-Exempt Bond Portfolio had not commenced operations.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the description of the
investment objectives and policies of the Money Market, Treasury Money Market
and Tax-Exempt Money Market Portfolios (the "Money Market Portfolios") and the
Growth & Income Equity, Emerging Growth, Government & Corporate Bond, U.S.
Government Securities, Balanced, International Equity, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios (the
"Equity and Bond Portfolios") described in the Prospectuses.
MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Money Market Portfolio in accordance with the SEC's rules and regulations for
money market funds.
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF
DEPOSIT AND TIME DEPOSITS. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank
<PAGE> 91
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits.
As stated in the Prospectuses, the Money Market Portfolio may
invest a portion of its assets in the obligations of foreign banks and foreign
branches of domestic banks. Such obligations may include Eurodollar Certificates
of Deposit ("ECDs") which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs") which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs") which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs") which are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the United States; and
Yankee Bankers' Acceptances ("Yankee BAs") which are U.S. dollar-denominated
bankers' acceptances issued by a U.S. branch of a foreign bank and held in the
United States.
TREASURY MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Treasury Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
STATE EXEMPTIONS AND U.S. GOVERNMENT OBLIGATIONS. As stated in
the Prospectuses, the Treasury Money Market Portfolio invests primarily in
selected U.S. Government (and certain agency and instrumentality) obligations,
the income from which is generally exempt from state income tax. In addition,
investments in certain of these obligations are, or may be, exempt from your
State's income tax. For a current list of the types of investments that are and
are not exempt from your State's income tax, please consult your tax adviser or
write to your State's Department of Revenue.
TAX-EXEMPT MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Tax-Exempt Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
-2-
<PAGE> 92
GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio will not normally invest
in securities of issuers having a record, together with predecessors, of less
than three years of continuous operations.
RIGHTS AND WARRANTS. As stated in the Prospectuses, the Growth
& Income Equity Portfolio may participate in rights offerings and purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. The purchase of rights or warrants
involves the risk that the Portfolio could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not exercised prior to
the rights' or warrants' expiration. Also, the purchase of rights or warrants
involves the risk that the effective price paid for the right or warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. The Portfolio will not invest more than 5% of
its total assets, taken at market value, in warrants, or more than 2% of its
total assets, taken at market value, in warrants not listed on the New York,
American or Canadian Stock Exchanges. Warrants acquired by the Portfolio in
units or attached to other securities are not subject to this restriction.
EMERGING GROWTH PORTFOLIO
As stated in the Prospectuses, the Emerging Growth Portfolio
may participate in rights offerings and purchase warrants. (See "Investment
Objectives and Policies -- Growth & Income Equity Portfolio" above for a
discussion of rights and warrants). The Portfolio will not invest more than 5%
of its total assets, taken at market value, in warrants.
GOVERNMENT & CORPORATE BOND PORTFOLIO
An increase in interest rates will generally reduce the value
of the investments in the Government & Corporate Bond Portfolio, and a decline
in interest rates will generally increase the value of those investments.
Depending upon the prevailing market conditions, the Adviser may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at a premium over
face value, the yield will be lower than the coupon rate. In response to
changing conditions in fixed-income markets, the Portfolio may make modest
shifts in terms of anticipated interest rate and sector spread changes.
-3-
<PAGE> 93
U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio may invest in
certificates issued by government-backed trusts. Such certificates represent an
undivided fractional interest in the respective government-backed trust's
assets. The assets of each government-backed trust consist of (i) a promissory
note issued by a foreign government (the "Note"), (ii) a guaranty by the U.S.
Government, acting through the Defense Security Assistance Agency of the
Department of Defense, of the due and punctual payment of 90% of all principal
and interest due on such Note, and (iii) a beneficial interest in a government
securities trust holding U.S. Treasury bills, notes and other direct obligations
of the U.S. Treasury sufficient to provide the Portfolio with funds in an amount
equal to at least 10% of all principal and interest payments due on the Note.
BALANCED PORTFOLIO
The fixed-income securities in which the Balanced Portfolio
may invest are rated "investment grade" (e.g, fixed income securities rated at
the time of purchase in the four highest categories by Rating Agencies or deemed
comparable). The Portfolio will not normally invest in securities of issuers
having a record, together with predecessors, of less than three years of
continuous operations.
The value of the fixed income investments of the Balanced
Portfolio is generally sensitive to change in interest rates. (See "Investment
Objectives and Policies -- Government & Corporate Bond Portfolio" above for a
discussion of the effects of interest rate changes). The Portfolio may also
participate in rights offerings and purchase warrants. (See "Investment
Objectives and Policies -- Growth & Income Equity Portfolio" above for a
discussion of rights and warrants).
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio will not normally invest in
securities of issuers having a record, together with predecessors, of less than
three years of continuous operations.
As stated in the Prospectuses, the Portfolio may participate
in rights offerings and purchase warrants. (See "Investment Objectives and
Policies -- Growth & Income Equity Portfolio" above for a discussion of rights
and warrants). The Portfolio will not invest more than 5% of its total assets,
taken at market value, in warrants. Warrants acquired by the Portfolio in units
or attached to other securities are not subject to this restriction.
-4-
<PAGE> 94
CONVERTIBLE SECURITIES. Convertible securities entitle the
holder to receive interest paid or accrued on debt until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities for the International
Equity Portfolio, the Adviser or Sub-Adviser will consider, among other factors,
its evaluation of the creditworthiness of the issuers of the securities; the
interest or dividend income generated by the securities; the potential for
capital appreciation of the securities and the underlying stocks; the prices of
the securities relative to other comparable securities and to the benefits of
sinking funds or other protective conditions; diversification of the Portfolio
as to issuers; and whether the securities are rated by Ratings Agencies and, if
so, the ratings assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion value
of convertible securities is determined by the market price of the underlying
stock. If the conversion value is low relative to the investment value, the
price of the convertible securities is governed principally by their investment
value. To the extent the market price of the underlying stock approaches or
exceeds the conversion price, the price of the convertible securities will be
increasingly influenced by their conversion value. In addition, convertible
securities generally sell at a premium over their conversion value determined by
the extent to which investors place value on the right to acquire the underlying
stock while holding fixed income securities.
The other Equity Portfolios may also invest in convertible securities,
subject to their investment objectives and policies.
-5-
<PAGE> 95
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Municipal Obligations in which the Short-Intermediate
Municipal Portfolio may invest are rated "investment grade". (See "Investment
Objectives and Policies -- Balanced Portfolio" above for a description of
investment grade securities). The value of the Municipal Obligations held by the
Portfolio is generally sensitive to change in interest rates. (See "Investment
Objectives and Policies -- Government & Corporate Bond Portfolio" above for a
discussion of the effects of interest rate changes.)
MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Municipal Obligations in which the Missouri Tax-Exempt
Bond Portfolio may invest are rated "investment grade". (See "Investment
Objectives and Policies -- Balanced Portfolio" above for a description of
investment grade securities.) The value of the Municipal Obligations held by the
Portfolio is generally sensitive to change in interest rates. (See "Investment
Objectives and Policies -- Government & Corporate Bond Portfolio" above for a
discussion of the effects of interest rate changes.)
KANSAS TAX-EXEMPT BOND PORTFOLIO
The Municipal Obligations in which the Kansas Tax-Exempt Bond
Portfolio may invest are rated "investment grade". (See "Investment Objectives
and Policies -- Balanced Portfolio" above for a description of investment grade
securities.) The value of the Municipal Obligations held by the Portfolio is
generally sensitive to change in interest rates. (See "Investment Objectives and
Policies -- Government & Corporate Bond Portfolio" above for a discussion of the
effects of interest rate changes.)
* * *
The following policies supplement the description of the
Portfolios' investment objectives and policies in the Prospectuses.
OTHER APPLICABLE INVESTMENT POLICIES
MUNICIPAL OBLIGATIONS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios (the "Tax-Exempt Portfolios") may invest in Municipal
Obligations. Municipal Obligations include debt obligations issued by
governmental entities which obtain funds for various
-6-
<PAGE> 96
public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities.
As described in the Prospectuses, the two principal
classifications of Municipal Obligations consist of "general obligation" and
"revenue" issues. In addition, the Portfolios may purchase "moral obligation"
issues, which are normally issued by special purpose authorities. There are, of
course, variations in the quality of Municipal Obligations both within a
particular classification and between classifications, and the yields on
Municipal Obligations depend upon a variety of factors, including general
conditions of the money market and/or the municipal bond market, the financial
condition of the issuer, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Rating Agencies, such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("S&P"), represent their opinions as to the quality of Municipal Obligations. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Obligations with the same maturity, interest
rate and rating may have different yields while Municipal Obligations of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Portfolio, an issue of Municipal Obligations may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by such Portfolio. The Adviser will consider such an event in
determining whether the Portfolio involved should continue to hold the
obligation.
The Tax-Exempt Portfolios may also purchase Municipal
Obligations in the form of certificates of participation which represent
undivided interests in lease payments by a governmental or nonprofit entity. A
lease may provide that the certificate trustee cannot accelerate lease
obligations upon default. The trustee would only be able to enforce lease
payments as they become due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations. To alleviate potential liquidity
problems with respect to these investments, a Portfolio may enter into
remarketing agreements which may provide that the seller or a third party will
repurchase the obligation within seven days after demand by the Portfolio and
upon certain conditions such as the Portfolio's payment of a fee.
The payment of principal and interest on most securities
purchased by a Tax-Exempt Portfolio will depend upon
-7-
<PAGE> 97
the ability of the issuers to meet their obligations. An issuer's obligations
under its Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the federal bankruptcy code, and laws, if any, which may be enacted by
federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Obligations may be materially adversely affected by
litigation or other conditions. The District of Columbia, each state, each of
their political subdivisions, agencies, instrumentalities and authorities and
each multi-state agency of which a state is a member is a separate "issuer" as
that term is used in this Statement of Additional Information and the
Prospectuses. The non-governmental user of facilities financed by private
activity bonds is also considered to be an "issuer."
Each Tax-Exempt Portfolio may also purchase General Obligation
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and other tax-exempt
loans. Such instruments are issued in anticipation of the receipt of tax funds,
the proceeds of bond placements, or other revenues.
Certain types of Municipal Obligations (private activity
bonds) have been or are issued to obtain funds to provide, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Private activity bonds are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. The principal and interest on these obligations
may be payable from the general revenues of the users of such facilities.
Furthermore, payment of principal and interest on Municipal Obligations of
certain projects may be secured by mortgages or deeds of trust. In the event of
a default, enforcement of the mortgages or deeds of trust will be subject to
statutory enforcement procedures and limitations, including rights of redemption
and limitations on obtaining deficiency judgments. In the event of a
foreclosure, collection of the proceeds of the foreclosure may be delayed, and
the amount of proceeds from the foreclosure may not be sufficient to pay the
principal of and accrued interest on the defaulted Municipal Obligations.
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From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. For example, the Tax Reform Act
of 1986 (the "Act"), adopted in October 1986, substantially revised provisions
of prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. The Act made a new definition of private activity bonds applicable
to many types of bonds, including those which were industrial development bonds
under prior law. Interest on private activity bonds is exempt from regular
federal income tax only if the bonds fall within and meet the requirements of
certain defined categories of qualified private activity bonds. The Act also
extended to all Municipal Obligations issued after August 16, 1986 (August 31,
1986 in the case of certain bonds) certain rules formerly applicable only to
industrial development bonds. If the issuer fails to observe such rules, the
interest on the Municipal Obligations may become taxable retroactive to the date
of issue. In addition, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the applicable Prospectus under "Taxes
- - Federal Taxes.") Moreover, with respect to Missouri and Kansas Obligations,
the Fund cannot predict what legislation, if any, may be proposed in the
Missouri or Kansas Legislatures relating to the status of the Missouri or Kansas
income tax on interest on such obligations, or which proposals, if any, might be
enacted. Such proposals, while pending or if enacted, might adversely affect the
availability of Municipal Obligations generally, or Missouri or Kansas
Obligations specifically, for investment by a Portfolio and the liquidity and
value of a Portfolio's assets. In such an event, each Portfolio would reevaluate
its investment objective and policies and consider possible changes in its
structure or possible dissolution.
As stated in the Prospectuses and subject to its investment
policies, the Money Market Portfolio may also invest in Municipal Obligations.
Dividends paid by the Money Market Portfolio that are derived from interest on
Municipal Obligations would be taxable to its shareholders for federal income
tax purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their
respective investment limitations, each Portfolio may purchase variable and
floating rate obligations as described in the Prospectuses. The Adviser will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such obligations and, for obligations subject to a demand
feature, will monitor their financial status to meet payment on demand. The
Money Market Portfolios and the
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International Equity Portfolio will invest in such instruments only when the
Adviser believes that any risk of loss due to issuer default is minimal. In
determining average weighted portfolio maturity, a variable or floating rate
instrument issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, or a variable or floating rate instrument scheduled on its
face to be paid in 397 days or less, will be deemed to have a maturity equal to
the period remaining until the obligation's next interest rate adjustment. Other
variable or floating rate notes will be deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the time
the Portfolio can recover payment of principal as specified in the instrument.
Variable or floating rate obligations held by the Money Market
Portfolios may have maturities of more than 397 days provided that: (i) the
Portfolio is entitled to payment of principal at any time upon not more than 30
days' notice or at specified intervals not exceeding 397 days (upon not more
than 30 days' notice); (ii) the rate of interest on a variable rate instrument
is adjusted automatically on set dates not exceeding 397 days, and the
instrument, upon adjustment, can reasonably be expected to have a market value
that approximates its par value; and (iii) the rate of interest on a floating
rate instrument is adjusted automatically whenever a specified interest rate
changes and the instrument, at any time, can reasonably be expected to have a
market value that approximates its par value.
The variable and floating rate demand instruments that the
Tax-Exempt Portfolios may purchase include participations in Municipal
Obligations purchased from and owned by financial institutions, primarily banks.
Participation interests provide a Portfolio with a specified undivided interest
(up to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Portfolio. The bank typically retains fees
out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
RESTRICTED SECURITIES. The SEC has adopted Rule 144A which
allows for 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 of 1933
for the resale of certain securities to qualified institutional buyers. The
purchase of securities which can be sold under Rule 144A
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could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities. The International Equity
Portfolio will not invest more than 10% of its total assets in the securities of
issuers which are restricted as to disposition, other than restricted securities
eligible for resale pursuant to Rule 144A.
The Adviser or Sub-Adviser monitors the liquidity of
restricted securities in the Fund's Portfolios under the supervision of the
Board of Directors. In reaching liquidity decisions, the Adviser and Sub-Adviser
may consider the following factors, although such factors may not necessarily be
determinative: (1) the unregistered nature of a security; (2) the frequency of
trades and quotes for the security; (3) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (4)
the trading markets for the security; (5) dealer undertakings to make a market
in the security; and (6) the nature of the security and the nature of the
marketplace trades (including the time needed to dispose of the security,
methods of soliciting offers, and mechanics of transfer).
STAND-BY COMMITMENTS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may acquire "stand-by commitments" with respect to Municipal Obligations held by
a Portfolio. Under a stand-by commitment, a dealer or bank agrees to purchase
from a Portfolio, at the Portfolio's option, specified Municipal Obligations at
their amortized cost value to the Portfolio plus accrued interest, if any.
Standby commitments acquired by a Portfolio must meet the quality standards
described in the Prospectuses (be rated in the two highest categories as
determined by a Rating Agency, or, if not rated, must be of comparable quality
as determined by the Adviser pursuant to guidelines approved by the Fund's Board
of Directors). Stand-by commitments are exercisable by a Portfolio at any time
before the maturity of the underlying Municipal Obligations and may be sold,
transferred or assigned by the Portfolio only with the underlying instruments.
Each of the Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios
expects that its investments in stand-by commitments will not exceed 5% of the
value of its total assets under normal market conditions.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Tax-Exempt Portfolio may pay for a stand-by
commitment either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus
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reducing the yield to maturity otherwise available for the same
securities).
The Tax-Exempt Portfolios intend to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in the Adviser's
opinion, present minimal credit risks. A Portfolio's reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Obligations that are subject to the commitment. In
evaluating the creditworthiness of the issuer of a stand-by commitment, the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. Stand-by commitments acquired by a
Portfolio would be valued at zero in determining net asset value. The
acquisition of a "stand-by commitment" by the Tax-Exempt Money Market Portfolio
would thus not affect the valuation or assumed maturity of the underlying
Municipal Obligations, which would continue to be valued in accordance with the
amortized cost method. Where a Portfolio paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. If a stand-by commitment is exercised, its cost will reduce the
amount realized on the sale of the Municipal Obligations for purposes of
determining the amount of gain or loss. If a stand-by commitment expires
unexercised, its cost is added to the basis of the security to which it relates
in those instances where the stand-by commitment was acquired on the same day as
the bond, and in other cases will be treated as a capital loss at the time of
expiration. Stand-by commitments would not affect the average weighted maturity
of a Portfolio.
TAX-EXEMPT DERIVATIVES. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may hold tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. A number of different structures have been used. For example, interests
in long-term fixed-rate Municipal Obligations, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the
tax-exempt derivatives are created. Together, these features entitle the holder
of the interest to tender (or put), the underlying Municipal Obligation to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, Municipal Obligations are represented by custodial receipts
evidencing rights to receive specific future interest
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payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying Municipal Obligation at its face
value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a rate adjustment. The
Portfolios may hold tax-exempt derivatives, such as participation interests and
custodial receipts, for Municipal Obligations which give the holder the right to
receive payment of principal subject to the conditions described above. The
Internal Revenue Service has not ruled on whether the interest received on
tax-exempt derivatives in the form of participation interests or custodial
receipts is tax-exempt, and accordingly, purchases of any such interests or
receipts are based on the opinion of counsel to the sponsors of such derivative
securities. Neither the Fund nor its investment adviser will review the
proceedings related to the creation of any tax-exempt derivatives or the basis
for such opinions.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be held by the Portfolios, subject to their
respective investment policies, include, in addition to U.S. Treasury bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust
Corporation, and International Bank for Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the
U.S. Government, such as the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in
the Prospectuses and subject to their respective investment
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policies, each Portfolio, except the International Equity Portfolio and the
Tax-Exempt Portfolios, may hold stripped U.S. Treasury securities, including (1)
coupons that have been stripped from U.S. Treasury bonds, which are held through
the Federal Reserve Bank's book-entry system called "Separate Trading of
Registered Interest and Principal of Securities" ("STRIPS") or (2) through a
program entitled "Coupon Under Book-Entry Safekeeping" ("CUBES"). Each Portfolio
(except the Treasury Money Market and U.S. Government Securities Portfolios) may
also acquire U.S. Government obligations and their unmatured interest coupons
that have been stripped by a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and "Certificates of Accrual on Treasury
Securities" ("CATS"). Such securities may not be as liquid as STRIPS and CUBES
and are not viewed by the staff of the SEC as U.S. Government securities for
purposes of the 1940 Act.
The stripped coupons are sold separately from the underlying
principal, which is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. Purchasers of stripped
principal-only securities acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury
Department sells itself. In the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder, the underlying
U.S. Treasury bonds and notes themselves are held in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities, such as the Portfolios, most likely will
be deemed the beneficial holders of the underlying U.S. Government obligations
for federal tax and security purposes.
The U.S. Government does not issue stripped Treasury
securities directly. The STRIPS program, which is ongoing, is designed to
facilitate the secondary market in the stripping of selected U.S. Treasury notes
and bonds into separate interest and principal components. Under the program,
the U.S. Treasury continues to sell its notes and bonds through its customary
auction process. A purchaser of those specified notes and bonds who has access
to a book-entry account at a Federal Reserve bank, however, may separate the
Treasury notes and bonds into interest and principal components. The selected
Treasury securities thereafter may be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and ownership of the interest and principal payments.
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For custodial receipts, the underlying debt obligations are
held separate from the general assets of the custodian and nominal holder of
such securities, and are not subject to any right, charge, security interest,
lien or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for applying
all payments received on those underlying debt obligations to the related
receipts or certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
SECURITIES LENDING. As described in the Prospectuses, each
Portfolio (except the Money Market, Treasury Money Market, Tax-Exempt Money
Market, Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios) may lend
its portfolio securities to broker-dealers, banks or institutional borrowers.
While these Portfolios would not have the right to vote securities on loan, each
Portfolio intends to terminate the loan and regain the right to vote should this
be considered important with respect to the investment. When the Portfolios lend
their securities, they continue to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral which will be invested in readily marketable, high quality,
short-term obligations. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Securities lending arrangements with broker/dealers require
that the loans be secured by the collateral equal in value to at least the
market value of the securities loaned. During the term of such arrangements, the
Portfolios will maintain such value by the daily marking-to-market of the
collateral.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the
applicable Prospectuses, the Portfolios intend to limit investments in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Portfolio currently intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more
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than 5% of the value of its total assets will be invested in the securities of
any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio; and (d) not more than 10% of
the outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
ASSET-BACKED SECURITIES. Subject to their respective
investment policies, the Portfolios (except the Treasury Money Market and
International Equity Portfolios) may purchase asset-backed securities, as
described in the Prospectuses. Asset-backed securities represent interests in
"pools" of assets in which payments of both interest and principal on the
securities are made monthly, thus in effect "passing through" monthly payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of asset-backed securities varies with the maturities of the underlying
instruments, and for this and other reasons, an asset-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
predict precisely.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-backed
securities and among the securities that they issue. Mortgage-backed securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation with the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the FNMA
include FNMA Guaranteed Mortgage Pass-through Certificates (also known as
"Fannie Maes") which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "Pcs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank. Freddie
Macs entitle the
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holder to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured, and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, many of which have given debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a
Portfolio agrees to purchase securities on a when-issued or forward commitment
basis, the Custodian (or sub-custodian) will maintain in a segregated account
cash, U.S. Government securities, liquid portfolio securities or other
high-grade debt obligations having a value (determined daily) at least equal to
the amount of the Portfolio's commitments. In the case of a forward commitment
to sell portfolio securities, the Custodian (or sub-custodian) will hold the
portfolio securities themselves in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that a Portfolio will
maintain sufficient assets at all times to cover is obligations under
when-issued purchases and forward commitments.
A Portfolio will make commitments to purchase securities on a
when-issued basis or to purchase or sell securities on a forward commitment
basis only with the intention of completing the transaction and actually
purchasing or selling the securities. If deemed advisable as a matter of
investment strategy, however, a Portfolio may dispose of or renegotiate a
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commitment after it is entered into and may sell securities it has committed to
purchase before those securities are delivered to the Portfolio on the
settlement date. In these cases, the Portfolio may realize a capital gain or
loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their value, is taken into account when determining a Portfolio's net asset
value starting on the day the Portfolio agrees to purchase the securities. The
Portfolio does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date. When a Portfolio
makes a forward commitment to sell securities it owns, the proceeds to be
received upon settlement are included in the Portfolio's assets, and
fluctuations in the value of the underlying securities are not reflected in the
Portfolio's net asset value as long as the commitment remains in effect.
Because the Portfolios will each set aside cash or liquid
assets to satisfy its purchase commitments in the manner described, a
Portfolio's liquidity and ability to manage its portfolio might be affected in
the event its commitments to purchase securities on a when-issued or forward
commitment basis ever exceeded 25% of the value of its total assets.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The International
Equity Portfolio is authorized to enter into forward foreign currency exchange
contracts. These contracts involve an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Forward
currency contracts do not eliminate fluctuations in the values of portfolio
securities but rather allow the Portfolio to establish a rate of exchange for a
future point in time. The Portfolio may enter into forward foreign currency
exchange contracts when deemed advisable by their investment adviser under two
circumstances.
When entering into a contract for the purchase or sale of a
security, the International Equity Portfolio may enter into a forward foreign
currency exchange contract for the amount of the purchase or sale price to
protect against variations in the value of the foreign currency relative to the
U.S. dollar or other foreign currency between the date the security is purchased
or sold and the date on which payment is made or received.
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When the Sub-Adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the International Equity Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. The Portfolio does not intend to enter
into forward contracts under this second circumstance on a regular or continuing
basis. The Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency.
While forward contracts may offer protection from losses resulting from declines
in the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. Furthermore,
forward foreign currency exchange contracts do not eliminate fluctuations in the
underlying prices of securities. In addition, the Portfolio will incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
The International Equity Portfolio's Custodian will place in a
separate account of the Portfolio cash or liquid securities in an amount equal
to the value of the Portfolio's assets that could be required to consummate
forward contracts entered into under the second circumstance, as set forth
above. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines, additional cash or securities
will be placed in the account daily so that the value of the account will equal
the amount of such commitments by the Portfolio.
At the maturity of a forward contract, the International
Equity Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of the contract.
Accordingly, it may be necessary for the International Equity Portfolio to
purchase additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Portfolio is obligated to deliver and if a decision is made
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to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds the
amount of foreign currency the Portfolio is obligated to deliver.
If the International Equity Portfolio retains the portfolio
security and engages in an offsetting transaction, it will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Portfolio engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline between the date the Fund enters into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, it will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell. For
a discussion of the Federal tax treatment of forward contracts, see "Additional
Information Concerning Taxes -- Taxation of Certain Financial Instruments."
OPTIONS TRADING. As described in the Prospectuses, each of the
Growth & Income Equity, Emerging Growth, Government & Corporate Bond, U.S.
Government Securities, Balanced and International Equity Portfolios may purchase
put and call options listed on a national securities exchange and issued by the
Options Clearing Corporation in an amount not exceeding 10% of that Portfolio's
net assets. The International Equity Portfolio will not invest more than 5% of
its total assets in initial margin deposits and premiums (including without
limitation, puts, calls, straddles and spreads) and any combination thereof.
Options trading is a specialized activity which entails greater than ordinary
investment risks. Regardless of how much the market price of the underlying
security or index increases or decreases, the option buyer's risk is limited to
the amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to
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sell to a clearing corporation the underlying security at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price of the security. In contrast to an option on a particular security,
an option on a stock or bond index provides the holder with the right to make or
receive a cash settlement upon the exercise of the option. The amount of this
settlement will be equal to the difference between the closing price of the
index at the time of exercise and the exercise price of the option expressed in
dollars, times a specified multiple.
A Portfolio's obligation to sell a security subject to a
covered call option written by it may be terminated prior to the expiration date
of the option by the Portfolio's executing a closing purchase transaction, which
is effected by purchasing on an exchange an option of the same series (i.e.,
same underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The cost
of such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Portfolio will
have incurred a loss in the transaction. An option position may be closed out
only on an exchange which provides a secondary market for an option of the same
series. There is no assurance that a liquid secondary market on an exchange will
exist for any particular option. A covered call option writer, unable to effect
a closing purchase transaction, would not be able to sell the underlying
security until the option expires or the underlying security is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline in the underlying security during such period. A
Portfolio will write an option on a particular security only if the Adviser or
Sub-Adviser believes that a liquid secondary market will exist on an exchange
for options of the same series which will permit the Portfolio to make a closing
purchase transaction in order to close out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of the deferred credit is
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated
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expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. Any gain on a covered call
option may be offset by a decline in the market price of the underlying security
during the option period. If a covered call option is exercised, the Portfolio
may deliver the underlying security held by it or purchase the underlying
security in the open market. In either event, the proceeds of the sale will be
increased by the net premium originally received, and the Portfolio will realize
a gain or loss. Premiums from expired options written by a Portfolio and net
gains from closing purchase transactions are treated as short-term capital gains
for federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an Exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The
International Equity Portfolio may purchase foreign currency put
options on U.S. exchanges or U.S. over-the-counter markets. (See
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"Other Applicable Investment Policies -- Options Trading" above for a discussion
of options trading). A put option gives the Portfolio, upon payment of a
premium, the right to sell a currency at the exercise price until the expiration
of the option and serves to insure against adverse currency price movements in
the underlying portfolio assets denominated in that currency. Exchange listed
options markets in the United States include seven major currencies, and trading
may be thin and illiquid. The seven major currencies are Australian dollars,
British pounds, Canadian dollars, German marks, French francs, Japanese yen and
Swiss francs.
FUTURES CONTRACTS. As discussed in the Prospectuses, the
Growth & Income Equity, Emerging Growth, Government & Corporate Bond, U.S.
Government Securities and Balanced Portfolios may invest in futures contracts
(and with respect to the International Equity Portfolio -- interest rate,
foreign currency and other types of financial futures contracts) and options
thereon (stock or bond index futures contracts or interest rate futures or
options) to hedge or manage risks associated with a Portfolio's securities
investments.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited in
a segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged. Positions in futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. However, there
can be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio had insufficient cash, it might have
to sell portfolio securities to meet daily margin requirements at a time when it
would be disadvantageous to do so. In addition, a Portfolio might be required to
make delivery of the instruments underlying futures contracts that it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to hedge effectively.
Successful use of futures by a Portfolio is also subject to
the Adviser's or Sub-Adviser's ability to predict movements correctly in the
direction of the market. There is an imperfect correlation between movements in
the price of futures and movements in the price of the securities which are the
subject of the hedge. In addition, the price of futures may not correlate
perfectly with movement in the cash market due to certain market distortions.
Due to the possibility of price
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distortion in the futures market and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
Adviser or Sub-Adviser may still not result in a successful hedging transaction
over a short time frame.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves
the risk of loss by the Portfolio of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond the limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
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ADRS AND EDRS. The Growth & Income Equity, Emerging Growth,
Government & Corporate Bond, Balanced and International Equity Portfolios may
invest their assets in securities such as ADRs and EDRs, which are receipts
issued by a U.S. bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs and EDRs may be listed on a national
securities exchange or may trade in the over-the-counter market. ADR and EDR
prices are denominated in U.S. dollars, even though the underlying security may
be denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
Investments in such instruments involve risks similar to those of investing
directly in foreign securities. Such risks include political or economic
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities may also be subject to greater fluctuations in price
than securities of domestic corporations. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
CASH EQUIVALENTS. As stated in the Prospectuses and subject to
their respective investment policies, the Equity and Bond Portfolios may invest
in the following taxable investments for temporary defensive or other purposes:
commercial paper, bankers' acceptances, certificates of deposit, time deposits
and floating rate notes. (See "Investment Objectives and Policies --Money Market
Portfolio" above for a discussion of cash equivalents and "Investment Objectives
and Policies -- Other Applicable Investment Policies -- Variable and Floating
Rate Instruments" above for a discussion of variable and floating rate
instruments.)
Commercial paper represents short-term unsecured promissory
notes issued in bearer form by banks or bank holding companies, corporations and
finance companies. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be
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withdrawn on demand by the investor but may be subject to early withdrawal
penalties that vary depending upon market conditions and the remaining maturity
of the obligation. There are no contractual restrictions on the right to
transfer a beneficial interest in a fixed time deposit to a third party,
although there is no market for such deposits.
The International Equity Portfolio may invest a portion of its
assets in the obligations of foreign banks and foreign branches of domestic
banks. Such obligations may include ECDs; ETDs; CTDs; Schedule Bs, which are
obligations issued by Canadian branches of foreign or domestic banks; Yankee
CDs; and Yankee BAs. (See "Investment Objectives and Policies -- Money Market
Portfolio" above for a description of certain of these obligations.)
REPURCHASE AGREEMENTS. The repurchase price under the
repurchase agreements described in the Prospectuses generally equals 102% of the
price paid by a Portfolio plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio securities). Securities subject to repurchase agreements are held by
the Portfolios' Custodian in segregated accounts or in the Federal
Reserve/Treasury book-entry system.
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, the Portfolios (except for the Treasury Money Market Portfolio and
the Tax-Exempt Portfolios) may enter into reverse repurchase agreements. At the
time a Portfolio enters into such an arrangement, it will place, in a segregated
custodial account, liquid assets having a value at least equal to the repurchase
price (including accrued interest) and will subsequently monitor the account to
ensure that such equivalent value is maintained.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of
Directors, the Adviser (and with respect to the International Equity Portfolio,
the Sub-Adviser) is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Portfolios.
In the case of the Equity and Bond Portfolios, portfolio
turnover may vary greatly from year to year as well as within a particular year.
Portfolio turnover may also be affected by cash requirements for redemptions of
shares and by requirements which enable a Portfolio to receive certain favorable
tax treatment. Portfolio turnover will not be a limiting factor in making
investment decisions.
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The Fund is required to identify any securities of its
"regular brokers or dealers" or their parents which the Fund acquired during its
most recent fiscal year. As of May 31, 1995, the Predecessor Tax-Exempt Money
Market Portfolio held commercial paper of J.P. Morgan in the aggregate principal
amount of $28,000,000 and commercial paper of Merrill Lynch in the aggregate
principal amount of $25,000,000.
Transactions on United States stock exchanges involve the
payment of negotiated brokerage commissions. On the exchanges on which
commissions are negotiated, the cost of the transactions may vary among
different brokers. During the fiscal years ended November 30, 1995, 1994 and
1993, the Growth & Income Equity Portfolio paid $461,078, $504,330 and $534,491,
respectively, in brokerage commissions. During the fiscal years ended November
30, 1995, 1994 and 1993, the Emerging Growth Portfolio paid $307,607, $174,206
and $143,805, respectively, in brokerage commissions. During the fiscal year
ended November 30, 1995, 1994 and the period April 1, 1993 (commencement of
operations) through November 30, 1993, the Balanced Portfolio paid $96,090,
$115,913 and $75,773, respectively, in brokerage commissions. During the fiscal
year ended November 30, 1995 and the period April 4, 1994 (commencement of
operations) through November 30, 1994, the International Equity Portfolio paid
$129,568 and $98,911 in brokerage commissions. No commissions were paid by the
Fund to any "affiliated" persons (as defined in the 1940 Act) of the Fund.
Securities purchased and sold by the Portfolios which are
traded in the over-the-counter market are generally done so on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price of those securities includes an undisclosed commission or mark-up. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Portfolios will engage in this practice, however, only when
the Adviser (or Sub-Adviser in the case of the International Equity Portfolio),
in its sole discretion, believes such practice to be otherwise in a Portfolio's
interests.
While the Adviser (or Sub-Adviser in the case of the
International Equity Portfolio) generally seeks competitive
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spreads or commissions, it may not necessarily allocate each transaction to the
underwriter or dealer charging the lowest spread or commission available on the
transaction. Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser or Sub-Adviser in its best judgment and in
a manner deemed fair and reasonable to shareholders. The primary consideration
is prompt execution of orders in an effective manner at the most favorable
price.
Subject to this consideration, dealers who provide
supplemental investment research to the Adviser (or Sub-Adviser) may receive
orders for transactions by a Portfolio. Information so received is in addition
to and not in lieu of services required to be performed by the Adviser (or
Sub-Adviser) and does not reduce the advisory fees payable to it by a Portfolio.
Such information may be useful to the Adviser (or Sub-Adviser) in serving both
the Portfolios and other clients, and conversely, supplemental information
obtained by the placement of business of other clients may be useful to the
Adviser (or Sub-Adviser) in carrying out its obligations to the Portfolios.
Portfolio securities will not be purchased from or sold to the Adviser, the
Sub-Adviser, the Distributor, the Administrator or any "affiliated person" (as
such term is defined under the 1940 Act) or any of them acting as principal,
except to the extent permitted by the SEC. In addition, the Portfolios will not
give preference to the Adviser's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements and reverse
repurchase agreements.
Investment decisions for the Portfolios are made independently
from those for other investment companies and accounts advised or managed by the
Adviser (or Sub-Adviser). Such other investment companies and accounts may also
invest in the same securities as the Portfolios. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Portfolio
and another investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser (or Sub-Adviser) believes to be equitable to the Portfolio and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Portfolio or
the size of the position obtained by the Portfolio. To the extent permitted by
law, the Adviser (or Sub-Adviser) may aggregate the securities to be sold or
purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in order to obtain best execution.
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SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI
OBLIGATIONS
The following highlights some of the more important economic
and financial trends and considerations and is based on information from
official statements, prospectuses and other publicly available documents
relating to securities offerings of the State of Missouri, its agencies and
instrumentalities, as available on the date of this Statement of Additional
Information. The Fund has not independently verified any of the information
contained in such statements or other documents.
Missouri's population was 5,117,073 according to the
1990 decennial census of the United States Bureau of Census, which represented
an increase of 4.1% from the 1980 decennial census of 4,916,686 inhabitants.
Based on July, 1992 U.S. Census Bureau estimates, St. Louis and the surrounding
metropolitan area constituted the 17th largest Metropolitan Statistical Area
("MSA") in the nation with approximately 2.52 million inhabitants, of which 1.92
million are Missouri residents. St. Louis is located on the eastern boundary of
the state on the Mississippi River and is a distribution center and an important
site for banking and manufacturing activity, Anchoring the western boundary is
Kansas City, which is Missouri's second largest metropolitan area. Based on
July, 1992 U.S. Census Bureau estimates, Kansas City was the 25th largest MSA
nationally with approximately 1.62 million inhabitants, nearly one million of
which were Missouri residents. Kansas City is a major agri-business center for
the United States and is an important center for finance and industry.
Springfield, St. Joseph, Joplin and Columbia are also important population and
industrial centers in the State. [Source: U.S. Department of Commerce, Bureau
of the Census.] Per capita personal income in Missouri grew 3.1% between 1992
and 1993 while during the same period per capita personal income nationally grew
3.2%. [Source: U.S. Department of Commerce, Bureau of Economic Analysis.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the State's economy contributing between $15 billion and $17
billion annually. Although the concentration in farming remains above the
national average, with increasing urbanization, significant income-generating
activity has shifted from agriculture to the manufacturing and services sectors.
Earnings and employment are distributed among the manufacturing, trade and
service sectors in a close approximation of the average national distribution,
thus lessening the State's cyclical sensitivity to impact by any single sector.
In 1990, services represented the single most significant economic activity,
with wholesale and retail trade ranking second and manufacturing ranking third.
In 1990, these
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three economic sectors accounted for 66% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 15.4% of employment,
is concentrated in defense, transportation equipment and other durable goods.
Defense-related business plays an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards. Over
the past decade, Missouri has annually ranked among the top six states in total
military contract awards. Although declining defense appropriations by the U.S.
Congress have had and will continue to have an impact on the State, Missouri's
defense related industries have rebounded and shown significant strength over
the past year. Nonetheless, McDonnell-Douglas remains the state's largest
employer with over 29,000 employees and analysts expect the long term effects of
federal downsizing in defense to be negligible. [Source: Missouri's Economic
Forecast: 1994; Mo. Dept. of Economic Development].
Limitations on State debt and bond issues are contained in
Article III, Section 37 of the Constitution of Missouri. Pursuant to this
section, the General Assembly may issue general obligation bonds solely (1) to
refund outstanding bonds (provided that the refunding bonds must mature within
25 years of issuance) or (2) upon the recommendation of the Governor, to incur a
temporary liability by reason of unforeseen emergency or of deficiency in
revenue, in an amount not to exceed $1,000,000 for any one year and to be paid
in not more than five years. When the liability exceeds $1,000,000, the General
Assembly, or the people by initiative, may submit the proposition to incur
indebtedness to the voters of the State, and the bonds may be issued if approved
by a majority of those voting. Such bonds must be retired serially and by
installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the payment
of principal and interest and may provide for an annual tax on all taxable
property in an amount sufficient for that purpose. Certain water pollution bonds
and state building bonds are also authorized pursuant to Sections 37(b)-(e),
inclusive, of Article III.
In 1971, Missouri voters approved a constitutional amendment
providing for the issuance of $150,000,000 of general obligation bonds for the
protection of the environment through the control of water pollution. The bonds
were subsequently issued over a period of years. In 1979, voters approved a
constitutional amendment authorizing an additional $200,000,000 State Water
Pollution Control Bonds. In 1982 State voters approved a constitutional
amendment authorizing the issuance of
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$600,000,000 Third State Building Bonds. Proceeds from the Third State Building
Bonds are used to provide funds for improvement of State buildings and property,
including education, mental health, parks, corrections and other State
facilities, and for water, sewer, transportation, soil conservation and other
economic development projects. In 1988, Missouri voters approved a
constitutional amendment authorizing the issuance of bonds in the aggregate sum
of $275,000,000 for controlling water pollution and making improvements to
drinking water systems.
Article III, Section 36 of the Constitution of Missouri
requires that the General Assembly appropriate the annual principal and interest
requirements for outstanding general obligation bonds before any other
appropriations are made. Such amounts must be transferred from the General
Revenue Fund to bond interest and sinking funds. Authorization for these
transfers, as well as the actual payments of principal and interest, are
provided in the first appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri
legislature has established numerous entities as bodies corporate and politic
which are authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the
"Tax Limitation Amendment"), imposes a limit on the amount of taxes and other
revenue enhancement charges such as user fees which may be imposed by the State
or a political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit for any fiscal
year equals the product of the ratio of total state revenues in fiscal year
1980-1981 divided by the aggregate personal income received by persons in
Missouri from all sources ("Personal Income of Missouri") in calendar year 1979
multiplied by the Personal Income of Missouri in either the calendar year prior
to the calendar year in which appropriations for the fiscal year for which the
calculation is being made, or the average of Personal Income of Missouri in the
previous three calendar years, whichever is greater. If the revenue limit is
exceeded by 1% or more in any fiscal year, a refund of the excess revenues
collected by the State is required. If the excess revenues collected are less
than 1%, then they are not refunded but are transferred to the General Revenue
Fund. Since passage of the legislation, no refund to taxpayers has ever
occurred.
The details of the Tax Limitation Amendment are complex. The
revenue limit can be exceeded only if the General Assembly approves by a
two-thirds vote of each house an emergency
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declaration as requested by the Governor. As previously noted, however, Article
III, Section 36 of the Constitution of Missouri requires the General Assembly to
appropriate the annual principal and interest requirements for outstanding
general obligation bonds before any other appropriations are made. The revenue
limitation also does not apply to taxes imposed for payment of principal and
interest on bonds that have been approved by the voters, as authorized by the
Missouri Constitution. The Tax Limitation Amendment could adversely affect the
repayment capabilities of certain non-general obligation issues if payment is
dependent upon increases in taxes or appropriations by the State's General
Assembly.
In the spring of 1993, the Missouri legislature passed into
law a $310,000,000 tax increase, with most of the increase being allocated for
state-wide education needs. This tax increase was approved by the citizens of
the state in November, 1994.
Revenue collections for the fiscal year ended June 30, 1995
("Fiscal Year 1995") were $5,390.3 million, excluding $48 million from the state
lottery and other transfers, representing an increase of 15.7 percent over
revenue collections from the fiscal year ended June 30, 1994. These revenues
supplement a carry-over balance from the previous year of $173.7 million.
Expenditures for Fiscal Year 1995 are estimated at $5,326.1 million including
$155.7 million and $203.2 million, respectively, for the St. Louis and Kansas
City school desegregation cases.
For the fiscal year ending June 30, 1996 ("Fiscal Year 1996")
revenues are projected to be $5,455.6 million. This projection does not include
an estimated $26.4 million in proceeds from other transfers or a carry-over
balance of approximately $238.1 million. Expenditures are projected at $5,762
million, including $143.5 million and $200.9 million respectively for the St.
Louis and Kansas City desegregation cases. Projected expenditures also include
$62.2 million for supplemental appropriations for Fiscal Year 1996.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN KANSAS OBLIGATIONS
The following highlights some of the more important economic
and financial trends and considerations relating to the State of Kansas and is
based on information contained in publicly available documents prepared by
agencies of the federal government and the State of Kansas and in official
statements relating to securities offerings of political subdivisions of the
State of Kansas. The Fund has not independently verified any of the information
contained in such documents or official statements.
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According to revised data released by the United States Bureau
of the Census during 1994, the population of Kansas increased from 2,478,099 in
1990 to 2,515,320 in 1992. The population growth rate from 1990 to 1992 was
1.5%, while the national population growth rate was 2.6% for the same period.
The population growth rate from 1980 to 1990 was 4.8%, while the national
population growth rate was 9.8% for the same period. The majority of Kansas
counties lost population during that decade. Johnson County, which is adjacent
to Kansas City, Missouri and is included in the Kansas City Standard
Metropolitan Statistical Area, experienced the most dramatic growth during that
decade, with an increase in population of approximately 85,000 representing a
growth rate in excess of 31%. The population of Sedgwick County, which includes
the City of Wichita, the largest city in the State, increased 10% to 403,662. By
1994, the populations of Johnson and Sedgwick Counties were 375,147 and 416,690,
respectively.
Employment growth in Kansas, as measured by household survey
data, did not exceed the national rate in 1993. National employment based on
household survey data increased 1.4 percent in 1993. As measured by
place-of-residence data, Kansas employment increased from 1,270,000 to
1,275,000, or 0.4 percent in 1993. [Source: Kansas Department of Human
Resources, Labor Market Information Services.] The weakly growing economy
contributed to the reduction in manufacturing employment in Kansas in 1993 of
2,500 workers, or 1.4 percent. Nationally manufacturing employment fell 1.8
percent. Retail trade employed 2.7 percent more persons, and wholesale trade
added 1.9 percent to its employment base in Kansas in 1993. Nationally,
employment in wholesale and retail trade rose 0.9 percent for the same year.
Employment increases in Kansas were concentrated in service industries, with an
increase in 1993 of 7,100 service sector jobs, or 22.0 percent. The most
important service industries in Kansas, in terms of employment, are health
services and business services. Nationally, service sector employment rose at a
slower rate 2.9 percent for this same period. Since 1987, the Kansas
unemployment rate has been 4.9 percent or below, in contrast to the national
unemployment rate of 7.4 percent in 1992. The Kansas unemployment rate was 4.0
percent in 1992, and rose to 4.9 percent in 1993 but was still below the
national average. According to The Governor's Economic and Demographic Report,
1994-1995 the growth of Kansas personal income was improved in 1994 with an
estimated growth rate of 5.3% compared with 4.0% in 1993. The 1995 forecast for
personal income growth in Kansas is 5.2%, slightly below an anticipated U.S.
growth rate of 5.4%.
The issuance of general obligation debt by the State of Kansas
is significantly limited by Article II of the Constitution of the State of
Kansas. As of the date of this Statement of Additional Information, the State
has no such debt outstanding.
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Statutory authority exists to issue revenue bonds (generally payable from user
fees) for academic and hospital facilities, parking facilities and other
facilities at state universities, for highway construction, for sewage disposal
facilities and certain other revenue producing facilities. The Kansas
Development Finance Authority also issues conduit revenue debt on behalf of
state agencies and other entities. Limitations on bond issues of Kansas cities
and counties are contained in Article 3 of Chapter 10 of the Kansas Statutes
Annotated. In general, the bonded indebtedness of a city may not exceed 30% (35%
for the City of Olathe) of the assessed value of all taxable tangible property
in such city, and the bonded indebtedness of a county may not exceed 3% (30% for
Wyandotte County) of the assessed value of all taxable tangible property in such
county. In connection with a state-wide property reappraisal of taxable tangible
property in Kansas mandated by the legislature in 1988, the statutory debt
limitations of Kansas cities and counties stated in Article 3, Chapter 10 of the
Kansas Statutes were suspended. The currently applicable limitation is
calculated by taking the maximum legal debt available to such city or county
under the applicable limitations in 1988 and dividing that amount by the 1989
assessed valuation of the city or county. The resulting percentage factor is
applied against subsequent years assessed valuations to determine each city or
county limit. The percentage factor which limits each city's or county's general
obligation debt is unique to each city or county. Revenue bonds are not included
in computing the total bonded indebtedness of a city or county for the purpose
of determining such limitations. In addition, certain other bonds (e.g., bonds
issued for a county hospital, courthouse or jail or for a city sewer system or
utility) are not included in such computation. The majority of general
obligation debt issued by Kansas counties is exempt from such limitation.
The Constitution of the State of Kansas has no provision that
limits the amount of taxes and other similar charges that may be imposed by the
State or its political subdivisions. Tax levies on tangible property by cities,
counties and certain other taxing subdivisions in Kansas are subject to the
restrictions of the "Tax Lid Law" of Kansas. Although those restrictions affect
most operating funds of such taxing subdivisions, including the general fund,
they do not apply to or limit the levy of taxes for the payment of principal and
interest on bonds and certain other indebtedness. Kansas cities and counties may
utilize their home rule powers to exempt them from the Tax Lid Law. Such action
is subject to protest by voters.
Since 1992, the Kansas school finance law (K.S.A. 72-
6405 to K.S.A. 72-6440, inclusive) has placed the majority of
responsibility for funding of Kansas public education on the
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State and equalized the per pupil spending the public education across the
State. A school district's authority to issue general obligation bonds and to
levy unlimited ad valorem taxes to pay such bonds was not amended by the 1992
legislation.
In conjunction with the November, 1986 general election,
Kansas voters approved a proposition to modify the Kansas Constitution with
respect to classification of property for ad valorem taxation. In 1985, the
Kansas legislature passed a bill requiring county assessors to reassess property
for tax purposes, with an effective date of January 1, 1989. The 1985
legislation also made provision for a new limitation on taxing authority
effective January 1, 1989. Legislation adopted in 1992 continued this
limitation. Although the limitation affects most operating funds of Kansas
municipalities, it does not affect their ability to levy unlimited taxes to make
principal and interest payment on indebtedness.
On November 3, 1992, Kansas voters approved a proposition to
amend the Kansas Constitution with regard to property classification and
assessment rates for ad valorem tax purposes. Under such amendment, assessment
rates for certain classes of property were increased and assessment rates for
certain other classes of property were decreased. The ability of Kansas
municipalities to levy unlimited taxes to make principal and interest payments
on general obligation indebtedness was not affected by the 1992 constitutional
amendment.
INVESTMENT LIMITATIONS
The following investment limitations may be changed with
respect to a particular Portfolio only by an affirmative vote of a majority of
the outstanding shares of that Portfolio (as defined under "Other Information
Concerning the Fund and Its Shares -- Miscellaneous" in the Portfolios'
Prospectuses). These investment limitations supplement those that appear in the
Prospectuses.
THE MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets, or where otherwise permitted by the 1940 Act.
2. Purchase securities of any one issuer, other than
obligations of the U.S. Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of the Portfolio's
total assets would be invested in such issuer, except that up to 25% of the
value of a
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<PAGE> 125
Portfolio's total assets may be invested without regard to such 5% limitation.
3. Buy common stocks or voting securities, or state,
municipal or industrial revenue bonds.
4. Purchase or sell real estate (the Portfolio may purchase
commercial paper issued by companies which invest in real estate or interests
therein).
5. Purchase securities on margin, make short sales of
securities or maintain a short position.
6. Underwrite the securities of other issuers.
7. Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs.
8. Write or purchase put or call options.
In accordance with Rule 2a-7 of the 1940 Act, the Money Market
Portfolio intends to invest no more than five percent of its total assets in
securities issued by the issuer of the security, provided, however, that the
Portfolio may invest more than five percent of its total assets in the First
Tier Eligible Securities of a single issuer for a period of up to three business
days after the purchase thereof, provided, further that the Portfolio would not
make more than one investment in accordance with the foregoing provision at any
time. This intention is not, however, a fundamental policy of the Portfolio and
may change in the event Rule 2a-7 is amended in the future.
THE TREASURY MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
2. Borrow money except from banks for temporary purposes and
then in an amount not exceeding 10% of the value of the Portfolio's total
assets, or mortgage, pledge or hypothecate its assets except in connection with
any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Portfolio's total assets at the time
of such borrowing. (This borrowing provision is not for investment leverage, but
solely to facilitate management of the Portfolio by enabling the Fund to meet
redemption requests where the liquidation of portfolio securities is deemed to
be inconvenient or disadvantageous). Borrowing may take the form of a sale of
portfolio securities accompanied by a simultaneous
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agreement as to their repurchase. Interest paid on borrowed
funds will not be available for investment.
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or hold
debt obligations in accordance with its investment objective and policies and,
under the certain circumstances described in the Prospectuses, may enter into
repurchase agreements for U.S. Treasury securities.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO MAY NOT:
1. Make loans, except that the Portfolio may purchase or hold
debt instruments in accordance with its investment objective and policies.
2. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization or where
otherwise permitted by the 1940 Act.
3. Purchase securities on margin, make short sales of
securities, or maintain a short position.
4. Act as an underwriter of securities within the meaning of
the Securities Act of 1933, except insofar as the Portfolio might be deemed to
be an underwriter upon purchase of certain portfolio securities acquired subject
to the investment limitation pertaining to purchases of restricted securities.
5. Purchase or sell real estate, except that the Portfolio may
invest in Municipal Obligations which are secured by real estate or interests
therein.
6. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration or development programs.
7. Invest in or sell put options (except as described above
under "Investment Objectives and Policies -- Stand-by Commitments"), call
options, straddles, spreads, or any combination thereof.
8. Purchase foreign securities.
9. Invest in industrial development bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation, or buy common
stock or voting securities.
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<PAGE> 127
With respect to investment limitation number 1 pertaining to the
Tax-Exempt Money Market Portfolio in the Prospectuses, the Fund intends that
guarantees will only be treated as separate securities for diversification
purposes to the extent required by Rule 5b-2 under the 1940 Act. Letters of
credit will not be treated as separate securities with regard to diversification
as the Fund does not consider the latter instruments to be securities.
THE GROWTH & INCOME EQUITY, EMERGING GROWTH, GOVERNMENT &
CORPORATE BOND, U.S. GOVERNMENT SECURITIES, AND BALANCED PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising
control or management.
2. Purchase or sell real estate, provided that each Portfolio
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein, provided further that, as described in the Prospectuses, the Government
& Corporate Bond Portfolio may invest in first mortgage loans, income
participation loans and participation certificates in pools of mortgages,
including mortgages issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities and CMOs; and, as described in the Prospectuses, the U.S.
Government Securities Portfolio may invest in certain mortgage-backed
securities, CMOs and certain other securities.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Portfolio might be deemed to be
an underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that the Balanced
Portfolio may, to the extent appropriate to its investment objective, purchase
publicly traded securities of companies engaging in whole or in part in such
activities and may enter into futures contracts and related options.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in options, and futures
contracts and related options, and (b) a Portfolio may obtain short-term credits
as may
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<PAGE> 128
be necessary for the clearance of purchases and sales of
portfolio securities.
THE INTERNATIONAL EQUITY PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising
control or management.
2. Purchase or sell real estate, provided that the Portfolio
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to be
an underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that: (a) it may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures contracts and
options on futures contracts.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising
control or management.
2. Purchase or sell real estate, except that the Portfolio may
invest in Municipal Obligations which are secured by real estate or interests
therein.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to be
an underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in
oil, gas or mineral exploration or development programs.
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<PAGE> 129
THE MISSOURI TAX-EXEMPT BOND AND KANSAS TAX-EXEMPT BOND
PORTFOLIOS MAY NOT:
1. Purchase or sell real estate, except that the Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Purchase securities of companies for the purpose of
exercising control.
3. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or as otherwise permitted by the 1940 Act.
4. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as it might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that the Portfolio may obtain
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities.
6. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that the Portfolio may,
to the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities.
7. Write or sell put options, call options, straddles,
spreads, or any combination thereof.
NET ASSET VALUE
As stated in the applicable Prospectuses, the net asset value
per share of each class of shares of a Portfolio is calculated separately by
adding the value of all of the portfolio securities and other assets belonging
to a Portfolio that are attributable to such class, subtracting the liabilities
of the Fund that are attributable to such class, and dividing the result by the
number of outstanding shares of such class. Assets attributable to a particular
class of shares of a Portfolio are charged with any direct liabilities that the
Board of Directors
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<PAGE> 130
has allocated to such class pursuant to the Fund's Plan for Operation of a
Multi-Class System adopted pursuant to Rule 18f-3 under the 1940 Act. The
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of general assets, with respect to a
particular Portfolio or class are conclusive.
THE MONEY MARKET PORTFOLIOS
The assets in the Money Market Portfolios are valued according
to the amortized cost method of valuation. Pursuant to this method, an
instrument is valued at its cost initially and, thereafter, a constant
amortization to maturity of any discount or premium is assumed, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
This method may result in periods during which value, as determined by amortized
cost, is higher or lower than the market price a Portfolio would receive if it
sold the instrument. The value of securities in the Portfolios can be expected
to vary inversely with changes in prevailing interest rates.
Each Portfolio invests only in instruments that present
minimal credit risks and meet the ratings criteria described in the
Prospectuses. In addition, each Portfolio maintains a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value per share, provided that no Portfolio will purchase any security
with a remaining maturity of more than thirteen months (397 days) (securities
subject to repurchase agreements and certain other securities may bear longer
maturities) nor maintain a dollar-weighted average portfolio maturity that
exceeds 90 days. The Fund's Board of Directors has approved procedures that are
intended to stabilize the Portfolios' net asset value per share at $1.00 for
purposes of pricing sales and redemptions. These procedures include the
determination, at such intervals as the Board deems appropriate, of the extent,
if any, to which the net asset value per share of a Portfolio calculated by
using available market quotations deviates from $1.00 per share. In the event
such deviation exceeds one-half of one percent, the Board will promptly consider
what action, if any, should be initiated. If the Board believes that the extent
of any deviation from a Portfolio's $1.00 amortized cost price per share may
result in material dilution or other unfair results to new or existing
investors, it will take such steps as it considers appropriate to eliminate or
reduce to the extent reasonably practicable any such dilution or unfair results.
These steps may include, but are not limited to, selling portfolio instruments
prior to maturity; shortening the average portfolio maturity; withholding or
reducing dividends; redeeming shares in kind; or utilizing a net asset value per
share determined by using available market quotations.
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<PAGE> 131
THE EQUITY AND BOND PORTFOLIOS
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the current bid and asked
prices. Restricted securities and other assets for which market quotations are
not readily available are valued at fair value as determined in accordance with
guidelines approved by the Fund's Board of Directors. In computing net asset
value, the current value of a Portfolio's open futures contracts and related
options will be "marked-to-market." Short-term securities are valued at
amortized cost, which approximates fair market value.
Among the factors that ordinarily will be considered in
valuing portfolio securities are the existence of restrictions upon the sale of
the security by the Portfolio, the existence and extent of a market for the
security, the extent of any discount in acquiring the security, the estimated
time during which the security will not be freely marketable, the expenses of
registering or otherwise qualifying the security for public sale, underwriting
commissions if underwriting would be required to effect a sale, the current
yields on comparable securities for debt obligations traded independently of any
equity equivalent, changes in the financial condition and prospects of the
issuer, and any other factors affecting fair value. In making valuations,
opinions of counsel to the issuer may be relied upon as to whether or not
securities are restricted securities and as to the legal requirements for public
sale.
The Administrator may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods of valuation used by the pricing
service will be reviewed by the Administrator under the general supervision of
the Fund's Board of Directors. Several pricing services are available, one or
more of which may be used by the Administrator from time to time. In valuing a
Portfolio's securities, the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances, and other factors which are
deemed relevant in determining valuations for normal institutionalized trading
units of debt securities and would not rely exclusively on quoted prices.
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<PAGE> 132
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the
Distributor. As described in the applicable Prospectuses, Trust shares and
Institutional shares of each Portfolio are sold to certain qualified customers
at their net asset value without a sales charge. Investor A Shares of each
Portfolio (other than Investor A Shares of the Money Market Portfolios which are
sold at their net asset value without a sales charge) are sold to retail
customers at the public offering price based on a Portfolio's net asset value
plus a front-end load or sales charge as described in the applicable
Prospectuses. Investor B Shares of each Portfolio (other than the Treasury Money
Market, Tax-Exempt Money Market and Short-Intermediate Municipal Portfolios
which do not offer Investor B Shares) are sold to retail customers at the net
asset value next determined after a purchase order is received, but are subject
to a contingent deferred sales charge which is payable on redemption of such
shares as described in the applicable Prospectuses.
The Fund may redeem shares involuntarily if the net income
with respect to a Portfolio's shares is negative or such redemption otherwise
appears appropriate in light of the Fund's responsibilities under the 1940 Act.
An illustration of the computation of the public offering
price per share of Investor A Shares of the Equity and Bond Portfolios, based on
the value of each Portfolio's net assets and the number of outstanding Investor
A Shares on November 30, 1995 (with respect to the Kansas Tax-Exempt Bond
Portfolio, based on the projected value of the Portfolio's estimated net assets
and projected number of outstanding shares on the date its shares are first
offered for sale to public investors) and the maximum front-end sales charge of
4.5% (2.5% with respect to the Short-Intermediate Municipal Portfolio) currently
applicable, is as follows:
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<PAGE> 133
<TABLE>
<CAPTION>
Government & U.S. Government
Growth & Income Corporate Bond Emerging Growth Securities
Equity Portfolio Portfolio Portfolio Portfolio
---------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Assets $ 25,081,694 $ 5,496,120 $ 15,056,268 $ 8,178,713
Outstanding Shares 1,538,629 521,953 1,119,927 753,697
Net Asset Value $ 10.53
Per Share $ 16.30 $ 13.44 $ 10.85
Sales Charge, 4.50%
of offering price
(4.70% of net
asset value per
share) $ 0.77 $ 0.50 $ 0.63 $ 0.51
Offering Price
to Public $ 17.07 $ 11.03 $ 14.07 $ 11.36
</TABLE>
<TABLE>
<CAPTION>
Missouri
Balanced International Tax-Exempt Bond Kansas Tax-Exempt
Portfolio Equity Portfolio Portfolio Bond Portfolio
--------- ---------------- --------- --------------
<S> <C> <C> <C> <C>
Net Assets $ 8,347,972 $ 1,567,574 $ 24,725,527 $ 100.00
Outstanding Shares 716,840 145,651 2,106,529 10
Net Asset Value
Per Share $ 11.65 $ 10.76 $ 11.74 $ 10.00
Sales Charge, 4.50%
of offering price
(4.70% of net
asset value per
share) $ 0.55 $ 0.51 $ 0.55 $ .47
Offering Price
to Public $ 12.20 $ 11.27 $ 12.29 $ 10.47
</TABLE>
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<PAGE> 134
<TABLE>
<CAPTION>
Short-Intermediate
Municipal Portfolio
-------------------
<S> <C>
Net Assets $10.00
Outstanding Shares 1
Net Asset Value
Per Share $10.08
Sales Charge, 2.50%
of offering price
(2.56% of net
asset value per
share) $ 0.26
Offering Price
to Public $10.34
</TABLE>
Under the 1940 Act, a Portfolio may suspend the right of
redemption or postpone the date of payment for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. A Portfolio may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
In addition to the situations described in the Prospectuses
under "How to Purchase and Redeem Shares," the Portfolios may redeem shares
involuntarily to reimburse the Portfolios for any loss sustained by reason of
the failure of a shareholder to make full payment for shares purchased by the
shareholder or to collect any charge relating to a transaction effected for the
benefit of a shareholder which is applicable to Portfolio shares as provided in
the applicable Prospectuses from time to time.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
THE MONEY MARKET PORTFOLIOS
A Money Market Portfolio's "yield" and "effective yield," as
described in the Prospectuses, are calculated separately for Trust shares,
Institutional shares, Investor A
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<PAGE> 135
Shares and/or Investor B Shares of the Portfolios according to formulas
prescribed by the SEC. Standardized 7 day "yield" is computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in a Portfolio having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the value of an
account includes the value of additional shares purchased with dividends from
the original share, and dividends declared on both the original share and any
such additional shares, net of all fees, other than nonrecurring account or
sales charges, that are charged by the Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. The capital changes to be excluded from the calculation of the net
change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. "Effective yield" is
computed by compounding the unannualized base period return (calculated as
above) by adding one to the base period return, raising the sum to a power equal
to 365 divided by seven, and subtracting one from the result. Based upon the
same calculations, each Portfolio's 30 day yields and 30 day effective yields
may also be quoted. The Tax-Exempt Money Market Portfolio's "tax-equivalent
yield" is computed by dividing the tax-exempt portion of the yield (calculated
as above) by one minus a stated federal income tax rate and adding the product
to that portion, if any, of the yield that is not tax-exempt. In addition, a
"Missouri" tax-equivalent yield may be calculated by dividing the portion of the
Tax-Exempt Money Market Portfolio's yield (calculated as above) that is exempt
from federal tax and the portion that is exempt from Missouri personal income
tax by one minus a stated tax rate and adding such figure to that portion, if
any, of the Portfolio's yield that is not exempt from federal or state income
tax. Based on the foregoing calculations, for the year ended November 30, 1995,
the 7-day yields, 7-day effective yields and the 30-day yields were as follows:
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<PAGE> 136
<TABLE>
<CAPTION>
7-Day Effective
PORTFOLIO 7-Day Yield Yield 30-Day Yield
--------- ----------- ----- ------------
<S> <C> <C> <C>
Money Market
Trust Shares 5.30% 5.44% 5.30%
Institutional Shares 5.10% 5.23% 5.09%
Investor A Shares 5.10% 5.23% 5.09%
Investor B Shares* N/A N/A N/A
Treasury Money Market
Trust Shares 4.91% 5.04% 4.83%
Institutional Shares 4.74% 4.85% 4.70%
Investor A Shares 4.74% 4.86% 4.70%
Tax-Exempt Money Market
Trust Shares 3.21% 3.26% 3.11%
Investor A Shares 2.97% 3.01% 2.93%
</TABLE>
- ----------------------------
* Public offering had not commenced as of November 30, 1995.
Based on the foregoing calculations, the tax-equivalent yields
and tax-equivalent effective yields of the Tax-Exempt Money Market Portfolio for
the same 7-day and 30-day periods were as follows (assuming payment of federal
income tax at a rate of 39.60%):
<TABLE>
<CAPTION>
7-DAY TAX- 30-DAY TAX-
7-DAY TAX- EQUIVALENT EQUIVALENT
PORTFOLIO EQUIVALENT YIELD EFFECTIVE YIELD YIELD
--------- ---------------- --------------- -----
<S> <C> <C> <C>
Tax-Exempt Money Market
Trust Shares 5.31% 5.40% 5.14%
Investor A Shares 4.92% 4.98% 4.85%
</TABLE>
In addition, as described in the applicable Prospectuses, the
Treasury Money Market Portfolio may calculate a 7 day "state tax-exempt yield,"
which is computed by dividing the portion of the Portfolio's yield (calculated
as above) that is exempt from state income tax by one minus a state income tax
rate. Based upon the same calculations, the Portfolio's 30 day state tax-exempt
yield may also be quoted.
A Portfolio's quoted yield is not indicative of future yields
and depends upon factors such as portfolio maturity, the Portfolio's expenses,
and the types of instruments held by the Portfolio. Any account fees imposed by
financial institutions, Service Organizations, or broker-dealers would reduce a
Portfolio's effective yield.
-47-
<PAGE> 137
THE EQUITY AND BOND PORTFOLIOS
An Equity and Bond Portfolio's 30 day "yield" described in the
Prospectuses is calculated separately for Trust shares, Institutional shares,
Investor A Shares and/or Investor B Shares of a Portfolio by dividing the
Portfolio's net investment income per share earned during a 30-day period by the
maximum offering price per share (the "maximum offering price") with respect to
Investor A Shares and the net asset value per share with respect to Trust
shares, Institutional shares and Investor B Shares on the last day of the period
and annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Portfolio's net investment income per share
(irrespective of series) earned during the period is based on the average daily
number of shares outstanding during the period entitled to receive dividends and
includes income dividends and interest earned during the period minus expenses
accrued for the period, net of reimbursements. This calculation can be expressed
as follows:
a-b
Yield = 2 [(------- + 1) to the power of 6 - 1]
cd
Where: a = dividends and interest earned
during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
that were entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
For the purpose of determining interest earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360 of the stated dividend rate of
the security each day that the security is in that Portfolio. A Portfolio
calculates interest earned on any debt obligation held in its portfolio by
computing the yield to maturity of each obligation held by it based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each 30 day period, or, with respect to
obligations purchased during the 30 day period, the purchase price (plus actual
accrued interest) and dividing the result by 360 and
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<PAGE> 138
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent 30 day period that the obligation is in the
portfolio. The maturity of an obligation with a call provision is the next call
date on which the obligation reasonably may be expected to be called or, if
none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Interest earned on Municipal Obligations of the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios that are issued without original issue discount and have a
current market discount is calculated by using the coupon rate of interest
instead of the yield to maturity. In the case of Municipal Obligations that are
issued with original issue discount but which have discounts based on current
market value that exceed the then-remaining portion of the original issue
discount (market discount), the yield to maturity is the imputed rate based on
the original issue discount calculation. On the other hand, in the case of
Municipal Obligations that are issued with original issue discount but which
have discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. Investor A Shares, Investor B Shares, Institutional shares and
Trust shares each bear separate fees applicable to the particular class of
shares. Undeclared earned income will not be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned income
is net investment income which, at the end of the base period, has not been
declared and paid as a dividend, but is reasonably expected to be and is
declared and paid as a dividend shortly thereafter.
The Short-Intermediate Municipal, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios' "tax-equivalent" yield for each class of
shares is computed by dividing the portion of a Portfolio's yield (calculated as
above) that is exempt from federal income tax by one minus a stated federal
income tax rate and adding that figure to that portion, if any, of the
Portfolio's yield that is not exempt from federal income tax. Similarly, the
Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios' "Missouri
tax-equivalent" or "Kansas tax-
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<PAGE> 139
equivalent" yields for each class of shares is calculated by dividing the
portion of a Portfolio's yield (calculated as above) that is exempt from federal
tax and the portion that is exempt from Missouri or Kansas personal income tax
by one minus a stated tax rate and adding such figure to that portion, if any,
of the Portfolio's yield that is not exempt from federal or state income tax.
The Fund currently calculates 30-day yields for its Bond
Portfolios but not for its Equity Portfolios. For the 30- day period ended
November 30, 1995, the yields on the Bond Portfolios were as follows:
<TABLE>
<CAPTION>
PORTFOLIO 30-DAY YIELD
--------- ------------
<S> <C>
Government & Corporate Bond
Trust Shares 5.87%
Institutional Shares 5.57%
Investor A Shares 5.31%
Investor B Shares 4.89%
U.S. Government Securities
Trust Shares 5.99%
Institutional Shares 5.69%
Investor A Shares 5.43%
Investor B Shares 4.99%
Balanced
Trust Shares 3.02%
Institutional Shares 2.73%
Investor A Shares 2.60%
Investor B Shares 2.04%
Short-Intermediate Municipal
Trust Shares 3.99%
Investor A Shares 0%
Missouri Tax Exempt Bond
Trust Shares 4.48%
Investor A Shares 4.09%
Investor B Shares 3.49%
</TABLE>
For the same 30-day period, the Short-Intermediate Municipal
and Missouri Tax-Exempt Bond Portfolios' tax-equivalent yields (assuming payment
of federal income taxes at a rate of 39.60%) and the Missouri Tax-Exempt Bond
Portfolio's Missouri tax-equivalent yield (assuming Missouri state income taxes
at a rate of 43.20%) were as follows:
-50-
<PAGE> 140
<TABLE>
<CAPTION>
30-DAY TAX- 30-DAY MISSOURI
PORTFOLIO EQUIVALENT YIELD TAX-EQUIVALENT YIELD
--------- ---------------- --------------------
<S> <C> <C>
Short-Intermediate Municipal
Trust Shares 6.61% N/A
Investor A Shares 0% N/A
Missouri Tax-Exempt Bond
Trust Shares 7.42% 7.89%
Investor A Shares 6.77% 7.20%
Investor B Shares 5.78% 6.14%
</TABLE>
A Portfolio computes its "average annual total return" for
each series of that Portfolio by determining the average annual compounded rate
of return during specified periods that would equate the initial amount invested
in a particular series to the ending redeemable value of such investment in the
series by dividing the ending redeemable value of a hypothetical $1,000 payment
by $1,000 (representing a hypothetical initial payment) and raising the quotient
to a power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year (or other) periods at the end
of the 1, 5 or 10 year (or other) periods (or
a fractional portion thereof)
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
A Portfolio computes its aggregate total returns separately
for each series by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
-51-
<PAGE> 141
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a non-money market Portfolio's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Investor A Shares and the deduction of any applicable contingent deferred
sales charge with respect to Investor B Shares.
Based on the foregoing calculations, the average annual total
returns for the year ended November 30, 1995, the average annual total returns
for the 5-year period ended November 30, 1995 and the average annual total
returns for the period from commencement of operations were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 SINCE
FOR THE YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/95 11/30/95 OF OPERATIONS
--------- -------------- -------- -------------
<S> <C> <C> <C>
Growth & Income Equity
Trust Shares(1) 32.27% 15.56% 14.00%
Institutional Shares(2) 31.88% 15.45%(3) 13.93%(3)
Investor A Shares(1) 26.00% 14.44% 13.28%
Investor B Shares(4) 26.20% 15.22% 13.86%
Government & Corporate Bond
Trust Shares(5) 16.31% 8.79% 8.48%
Institutional Shares(2) 15.98% 8.44%(6) 8.27%(6)
Investor A Shares(5) 10.81% 7.42% 7.56%
Investor B Shares(4) 10.27% 8.21% 8.19%
U.S. Government Securities
Trust Shares(1) 15.00% 8.34% 8.60%
Institutional Shares(7) 14.69% 7.97%(8) 8.35%(8)
Investor A Shares(1) 9.54% 6.99% 7.69%
Investor B Shares(4) 7.85% 7.54% 8.16%
</TABLE>
-52-
<PAGE> 142
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 SINCE
FOR THE YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/95 11/30/95 OF OPERATIONS
--------- -------------- -------- -------------
<S> <C> <C> <C>
Emerging Growth
Trust Shares(9) 21.70% N/A 17.22%
Institutional Shares(2) 21.43% N/A 17.01%(11)
Investor A Shares(10) 16.04% N/A 15.61%
Investor B Shares(4) 15.83% N/A 16.37%
Balanced
Trust Shares(12) 24.97% N/A 9.51%
Institutional Shares(12) 24.67% N/A 9.34%(13)
Investor A Shares(12) 19.26% N/A 7.56%
Investor B Shares(4) 18.92% N/A 8.74%
International Equity
Trust Shares(14) 8.97% N/A 4.80%
Institutional Shares(14) 8.78% N/A 4.57%(16)
Investor A Shares(15) 3.95% N/A 1.77%
Investor B Shares(4) 3.38% N/A 1.97%
Short-Intermediate Municipal
Trust Shares(17) N/A N/A 2.15%
Investor A Shares(18) 0 N/A -1.75%
Missouri Tax-Exempt Bond(19)
Trust Shares(20) 18.64% 8.33% 8.64%
Investor A Shares(21) 13.09% 7.15% 7.80%
Investor B Shares(4) 12.60% 7.74% 8.29%
Kansas Tax-Exempt Bond(22)
Trust Shares N/A N/A N/A
Investor A Shares N/A N/A N/A
Investor B Shares N/A N/A N/A
</TABLE>
- ------------------------------
(1) Commenced operations on June 2, 1988.
(2) Initial public offering commenced on January 4, 1994.
(3) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(4) Investor B Shares were initially offered on March 1, 1995.
The performance figures for Investor B Shares for periods
prior to such date represent the performance for Investor A
Shares of the Portfolio which has been restated to reflect
the contingent deferred sales charges payable by holders of
Investor B Shares that redeem within six years of the date of
purchase. Investor B Shares are also subject to distribution
and services fees at a maximum annual rate of 1.00%. Had
those distribution and services fees been reflected,
performance would have been reduced.
(5) Commenced operations on June 15, 1988.
(6) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(7) Commenced operations on June 7, 1994.
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<PAGE> 143
(8) Reflects combined performance of Institutional Shares which
were initially offered to the public on June 7, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(9) Commenced operations on May 1, 1992.
(10) Initial public offering commenced on May 6, 1992.
(11) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period May 1, 1992 through January
3, 1994.
(12) Commenced operations on April 1, 1993.
(13) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period April 1, 1993 through
January 3, 1994.
(14) Commenced operations on April 4, 1994.
(15) Initial public offering commenced on May 2, 1994.
(16) Reflects combined performance of Institutional Shares which
were initially offered to the public on April 24, 1994 and
Investor A Shares for the period April 4, 1994 through April
23, 1994.
(17) Commenced operations on July 10, 1995.
(18) Initial public offering had not commenced as of November 30,
1995.
(19) Commenced operations on July 15, 1988 as a portfolio of The
ARCH Tax-Exempt Trust. On October 2, 1995, the Portfolio was
reorganized as a new Portfolio of the Fund.
(20) Commenced operations on July 15, 1988.
(21) Initial public offering commenced on September 28, 1990.
(22) Portfolio had not commenced operations as of November 30,
1995.
Based on the foregoing calculations, the aggregate total
returns for the Equity and Bond Portfolios from their respective dates of
commencement of operations through November 30, 1995 were as follows:
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
------------------
<S> <C>
Growth & Income Equity
Trust Shares 167.27%
Institutional Shares(1) 166.04%
Investor A Shares 154.73%
Investor B Shares(2) 164.72%
Government & Corporate Bond
Trust Shares 83.59%
Institutional Shares(1) 81.04%
Investor A Shares 72.32%
Investor B Shares(2) 79.94%
U.S. Government Securities
Trust Shares 85.64%
Institutional Shares(1) 82.47%
Investor A Shares 74.34%
Investor B Shares(2) 80.12%
</TABLE>
-54-
<PAGE> 144
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
------------------
<S> <C>
Emerging Growth
Trust Shares 76.42%
Institutional Shares(1) 75.31%
Investor A Shares 67.90%
Investor B Shares(2) 71.87%
Balanced
Trust Shares 27.44%
Institutional Shares(1) 26.90%
Investor A Shares 21.48%
Investor B Shares(2) 25.06%
International Equity
Trust Shares 8.10%
Institutional Shares(1) 7.70%
Investor A Shares 2.96%
Investor B Shares(2) 3.30%
Short-Intermediate Municipal
Trust Shares 2.15%
Investor A Shares -1.75%
Missouri Tax-Exempt Bond
Trust Shares 84.30%
Investor A Shares 74.03%
Investor B Shares(2) 80.07%
Kansas Tax-Exempt Bond(3)
Trust Shares N/A
Investor A Shares N/A
Investor B Shares(2) N/A
</TABLE>
(1) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such
date represent the performance for Investor A Shares of the Portfolio
which has been restated to reflect the contingent deferred sales
charges payable by holders of Investor B Shares that redeem within six
years of the date of purchase. Investor B Shares are also subject to
distribution and services fees at a maximum annual rate of 1.00%. Had
those distribution and services fees been reflected, performance would
have been reduced.
(3) Portfolio had not commenced operations as of November 30, 1995.
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<PAGE> 145
As stated in the Prospectuses relating to Investor A Shares and
Investor B Shares, a Portfolio may also calculate total return figures for that
Portfolio without deducting the maximum sales charge imposed on purchases or
redemptions. The effect of not deducting the sales charge will be to increase
the total return reflected.
Investors may judge the performance of the Portfolios by
comparing them to the performance of other mutual funds or mutual fund
portfolios with comparable investment objectives and policies. Such comparisons
may be made by referring to market indices such as those prepared by Dow Jones &
Co., Inc., Russell, Salomon Brothers, Inc., Lehman or Standard & Poor's Ratings
Group or any of their affiliates, the Consumer Price Index, the EAFE Index, the
NASDAQ Composite, or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
Such comparisons may also be made by referring to data prepared by Lipper
Analytical Services, Inc., (a widely recognized independent service which
monitors the performance of mutual funds) Indata, Frank Russell, CDA, and the
Bank Rate Monitor (which reports average yields for money market accounts
offered by the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas). Other similar yield data, including comparisons
to the performance of Mercantile repurchase agreements, or the average yield
data for similar asset classes including but not limited to Treasury bills,
notes and bonds, may also be used for comparison purposes. Comparisons may also
be made to indices or data published in the following national financial
publications: IBC/Donoghue's Money Fund Report(R) published by IBC/Donoghue,
MorningStar, CDA/Wiesenberger, Money Magazine, Forbes, Fortune, Barron's, The
Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor, U.S.A. Today and publications of Ibbotson
Associates, Inc. and other publications of a local or regional nature. In
addition to performance information, general information about the Portfolios
that appears in a publication such as those mentioned above may be included in
advertisements, supplemental sales literature and in reports to Shareholders.
From time to time, the Fund may include the following types
of information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
Portfolios within the Fund; (5) descriptions of investment strategies for one or
more of such Portfolios; (6) descriptions or comparisons of various investment
products, which
-56-
<PAGE> 146
may or may not include the Portfolios; (7) comparisons of investment products
(including the Portfolios) with relevant market or industry indices or other
appropriate benchmarks; and (8) discussions of rankings or ratings by recognized
rating organizations.
In addition, with respect to the Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios the benefits of tax-free
investments may be communicated in advertisements or communications to
shareholders. For example, the tables below present the approximate yield that a
taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 4.50% to
7.00%. The yields below are for illustration purposes only and are not intended
to represent current or future yields for the Portfolios, which may be higher or
lower than those shown. The tax brackets shown below will be indexed for
inflation for years after 1996. Investors should consult their tax advisor with
specific reference to their own tax situation.
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
SINGLE RETURN
--------Tax-Exempt Yields---------
Sample Taxable Federal
Income Marginal
(1996) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$24,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$24,000 TO
$58,150 28.00% 6.25% 6.64% 7.64% 9.03% 9.72%
FROM
$58,150 TO
$121,300 31.00% 6.52% 7.25% 7.97% 9.42 10.41%
FROM
$121,300 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 147
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY
--------Tax-Exempt Yields---------
Sample Taxable Federal
Income Marginal
(1996) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$40,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$40,000 TO
$96,900 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
FROM
$96,900 TO
$147,700 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
FROM
$147,700 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 148
APPROXIMATE YIELD TABLE: KANSAS TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
SINGLE RETURN Combined
Federal and ---------------Tax-Exempt Yields--------------
Sample Taxable Federal Kansas Kansas
Income Marginal Marginal Marginal Tax
(1996) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$20,000 15.00% 4.40% 18.74% 5.54% 6.15% 6.77% 7.38% 8.00% 8.61%
FROM
$20,000 TO
$24,000 15.00% 7.50% 21.38% 5.72% 6.36% 7.00% 7.63% 8.27% 8.90%
FROM
$24,000 TO
$30,000 28.00% 7.50% 33.40% 6.76% 7.51% 8.26% 9.01% 9.76% 10.51%
FROM
$30,000 TO
$58,150 28.00% 7.75% 34.59% 6.88% 7.64% 8.41% 9.17% 9.94% 10.70%
FROM
$58,150 TO
$121,300 31.00% 7.75% 37.59% 7.21% 8.01% 8.81% 9.61% 10.41% 11.22%
FROM
$121,300 TO
$263,750 36.00% 7.75% 40.96% 7.62% 8.47% 9.32% 10.16% 11.01% 11.86%
OVER
$263,750 39.60% 7.75% 44.28% 8.08% 8.97% 9.87% 10.77% 11.67% 12.56%
</TABLE>
APPROXIMATE YIELD TABLE: KANSAS TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY Combined
Federal and ---------------Tax-Exempt Yields--------------
Sample Taxable Federal Kansas Kansas
Income Marginal Marginal Marginal Tax
(1996) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$30,000 15.00% 3.50% 17.98% 5.49% 6.10% 6.71% 7.31% 7.92% 8.53%
FROM
$30,000 TO
$40,100 15.00% 6.25% 20.31% 5.65% 6.27% 6.90% 7.53% 8.16% 8.78%
FROM
$40,100 TO
$60,000 28.00% 6.25% 32.50% 6.67% 7.41% 8.15% 8.89% 9.63% 10.37%
FROM
$60,000 TO
$96,900 28.00% 6.45% 32.64% 6.68% 7.42% 8.17% 8.91% 9.65% 10.39%
FROM
$96,900 TO
$147,700 31.00% 6.45% 35.45% 6.97% 7.75% 8.52% 9.30% 10.07% 10.84%
FROM
$147,700 TO
$263,750 36.00% 6.45% 40.13% 7.52% 8.35% 9.19% 10.02% 10.86% 11.69%
OVER
$263,750 39.60% 6.45% 43.50% 7.96% 8.85% 9.73% 10.62% 11.50% 12.39%
</TABLE>
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<PAGE> 149
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
SINGLE RETURN Combined
Federal and ---------------Tax-Exempt Yields--------------
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1996) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$24,000 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$24,000 TO
$58,150 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
FROM
$58,150 TO
$121,300 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
FROM
$121,300 TO
$263,750 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
OVER
$263,750 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
</TABLE>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY Combined
Federal and ---------------Tax-Exempt Yields--------------
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1996) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$40,000 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$40,000 TO
$96,900 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
FROM
$96,900 TO
$147,700 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
FROM
$147,700 TO
$263,750 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
OVER
$263,750 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
</TABLE>
Such data are for illustrative purposes only and are not intended to
indicate past or future performance results of a Portfolio. Actual
performance of the Portfolios' may be more or less than that noted in
the hypothetical illustrations.
Since performance will fluctuate, performance data for the
Portfolios cannot necessarily be used to compare an investment in
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the Portfolios' shares with bank deposits, savings accounts, and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses, and market conditions. The
current yield and performance of the Portfolios may be obtained by calling the
Fund at: INVESTOR A OR INVESTOR B SHARES - 1-800-452-ARCH; OR TRUST OR
INSTITUTIONAL SHARES - 1-800-452-401K.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors
to issue up to seven billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of the Fund into one or more
additional classes or by setting or changing in any one or more respects, their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority the Fund's Board of Directors has
authorized the issuance of forty-one classes of shares representing interests in
one of twelve investment Portfolios: the Money Market, Treasury Money Market,
Tax-Exempt Money Market, Growth & Income Equity, Emerging Growth, Government &
Corporate Bond, U.S. Government Securities, Balanced, International Equity,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas Tax-Exempt
Bond Portfolios. Trust shares, Institutional shares, Investor A Shares and
Investor B Shares in each Portfolio (except the Treasury Money Market Portfolio
which does not offer Investor B Shares, the Tax-Exempt Money Market and
Short-Intermediate Municipal Portfolios which do not offer Institutional or
Investor B Shares and the Missouri Tax-Exempt Bond and Kansas Tax-Exempt Bond
Portfolios which do not offer Institutional Shares) are offered through separate
prospectuses to different categories of investors. Portfolio shares have no
preemptive rights and only such conversion or exchange rights as the Board may
grant in its discretion. When issued for payment as described in the
Prospectuses, the shares will be fully paid and nonassessable.
Except as noted in the Prospectuses with respect to certain
sub-transfer agency expenses borne by Institutional shares and below with
respect to the Administrative Services Plans for Trust shares and Institutional
shares and the Distribution and Services Plans for Investor A Shares and
Investor B Shares, shares of the Portfolios bear the same types of ongoing
expenses with respect to the Portfolio to which they belong. In addition,
Investor A Shares (other than Investor A Shares of the Money Market Portfolios)
are subject to a front-end sales charge and Investor B Shares are subject to a
contingent deferred sales charge as
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<PAGE> 151
described in the Prospectuses. The classes also have different exchange
privileges, and Investor B Shares are subject to conversion as described in the
Prospectus for those shares.
In the event of a liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation, except
that Trust shares of a particular Portfolio will be solely responsible for that
Portfolio's payments pursuant to the Administrative Services Plan for those
shares, Institutional shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative Service
Plan for those shares, Investor A Shares of a particular Portfolio will be
solely responsible for that Portfolio's payments pursuant to the Distribution
and Services Plan for those shares and Investor B Shares of a particular
Portfolio will be solely responsible for that Portfolio's payments pursuant to
the Distribution and Services Plan for those shares. In addition, Institutional
shares will be solely responsible for the payment of certain sub-transfer agency
fees attributable to those shares.
Holders of all outstanding shares of a particular Portfolio
will vote together in the aggregate and not by class, except that only Trust
shares of a Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to a Portfolio's Administrative Services Plan for Trust
shares, only Institutional shares of a Portfolio's will be entitled to vote on
matters submitted to a vote of shareholders pertaining to such Portfolio's
Administrative Services Plan for Institutional shares, only Investor A Shares of
a Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Portfolio's Distribution and Services Plan for
Investor A Shares and only Investor B Shares of a Portfolio will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Distribution and Services Plan for Investor B Shares. Further,
shareholders of all of the Portfolios, irrespective of class, will vote in the
aggregate and not separately on a Portfolio-by-Portfolio basis, except as
otherwise required by law or when the Board of Directors determines that the
matter to be voted upon affects only the interests of the shareholders of a
particular Portfolio or class of shares. Rule 18f-2 under the 1940 Act provides
that any matter required to be submitted to the holders of the outstanding
voting securities of a "series" investment company such as the Fund shall not be
deemed to have been effectively acted upon unless approved by the
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<PAGE> 152
holders of a majority of the outstanding shares of each series (Portfolio)
affected by the matter. A Portfolio is considered to be affected by a matter
unless it is clear that the interests of each Portfolio in the matter are
identical or that the matter does not affect any interest of the Portfolio.
Under the Rule, the approval of an investment advisory agreement or any change
in investment policy would be effectively acted upon with respect to a Portfolio
only if approved by a majority of the outstanding shares of that Portfolio.
However, the Rule also provides that the ratification of the appointment of
independent auditors, the approval of principal underwriting contracts, and the
election of directors may be effectively acted upon by shareholders of the
Fund's Portfolios voting without regard to class or Portfolio.
Shares in the Fund's Portfolios will be issued without
certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses are not intended as a substitute for
careful tax planning. Potential investors should consult their tax advisors with
specific reference to their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate
entity under the Code. Each Portfolio intends to qualify each year as a
regulated investment company. In order to so qualify for a taxable year under
the Code, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain other requirements set forth
below.
At least 90% of the gross income for a taxable year of each
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the
Portfolio's business of investing in such stock, securities or currencies (the
"90% gross income test").
A Portfolio also must derive less than 30% of its gross
income for a taxable year from gains realized on the sale
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<PAGE> 153
or other disposition of securities and certain other investments held for less
than three months (the "30% test"). Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any income that is attributable to
real market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose. With respect to covered call
options, if the call is exercised by the holder, the premium and the price
received on exercise constitute the proceeds of sale, and the difference between
the proceeds and the cost of the securities subject to the call is capital gain
or loss. Premiums from expired call options written by a Portfolio and net gains
from closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses. With respect to forward contracts, futures contracts,
options on futures contracts, and other financial instruments subject to the
mark-to-market rules described below under "Taxation of Certain Financial
Instruments," the Internal Revenue Service has ruled in private letter rulings
that a gain realized from such a contract, option or financial instrument will
be treated as being derived from a security held for three months or more
(regardless of the actual period for which the contract, option or instrument is
held) if the gain arises as a result of a constructive sale under the
mark-to-market rules, and will be treated as being derived from a security held
for less than three months only if the contract, option or instrument is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract, option or instrument is acquired and the termination date. Increases
and decreases in the value of a Portfolio's forward contracts, futures
contracts, options on futures contracts and other investments that qualify as
part of a "designated hedge," as defined in Section 851(g) of the Code, may be
netted for purposes of determining whether the 30% test is met.
Finally, at the close of each quarter of its taxable year, at
least 50% of the value of a Portfolio's assets must consist of cash and cash
items, U.S. government securities, securities of other regulated investment
companies, and securities of other issuers (as to which a Portfolio has not
invested more than 5% of the value of its total assets in securities of such
issuer and as to which that Portfolio does not hold more than 10% of the
outstanding voting securities of such issuer) and no more than 25% of the value
of such Portfolio's total assets may be invested in the securities of any one
issuer (other than U.S. government securities and securities of other
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<PAGE> 154
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each Portfolio will designate any distribution of the excess
of net long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the shareholder has held these
shares. Shareholders should note that, upon the sale or exchange of Portfolio
shares, if the shareholder has not held such shares for more than six months,
any loss on the sale or exchange of those shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
Ordinary income of individuals is taxable at a maximum
nominal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35% (or at a maximum marginal rate of 39% in the case of
corporations having taxable income between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions would be taxable as ordinary income to
shareholders, to the extent of the Portfolio's current and accumulated earnings
and profits and would be eligible for the dividends received deduction allowed
to corporations.
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<PAGE> 155
THE TAX-EXEMPT PORTFOLIOS
The policy of each Tax-Exempt Portfolio is to pay to its
shareholders each year as exempt-interest dividends substantially all of its
Municipal Obligation interest income net of certain deductions. In order for a
Tax-Exempt Portfolio to pay exempt-interest dividends for any taxable year, at
the close of each quarter of its taxable year at least 50% of the aggregate
value of the Portfolio's assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by the shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code. An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by a Tax-Exempt Portfolio and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than forty-five days (with respect to Missouri income tax) and sixty days (with
respect to federal income tax) after the close of the Portfolio's taxable year.
However, the aggregate amount of dividends so designated by the Portfolio cannot
exceed the excess of the amount of interest exempt from tax under Section 103 of
the Code received by the Portfolio during the taxable year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. The
percentage of total dividends paid for any taxable year which qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Portfolio during such year, regardless of the period for
which the Shares were held.
Shareholders who might be treated as a "substantial user" or
a "related person" to such user with respect to facilities financed through any
of the tax-exempt obligations held by a Tax-Exempt Portfolio, are advised to
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a). A "substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person (i) who regularly uses
a part of such facilities in his trade or business and (ii)(A) whose gross
revenues derived with respect to the facilities financed by the issuance of
bonds are more than 5% of the total revenues derived by all users of such
facilities, (B) who occupies more than 5% of the usable area of such facilities
or (C) for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, partnerships and its partners, and S
corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to
purchase or carry shares of the Tax-Exempt Portfolios generally is not
deductible for federal income tax purposes. In addition, if a shareholder holds
Portfolio Shares for six months or less, any loss on the sale or exchange of
those Shares will be
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<PAGE> 156
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the Shares. The Treasury Department, however, is authorized to
issue regulations reducing the six months holding requirement to a period of not
less than the greater of 31 days or the period between regular dividend
distributions where the investment company regularly distributes at least 90% of
its net tax-exempt interest. No such regulations had been issued as of the date
of this Statement of Additional Information.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of
financial instruments that may be held by the Growth & Income Equity, Emerging
Growth, Government & Corporate Bond, U.S. Government, Balanced or International
Equity Portfolios. These rules may have a particular impact on the amount of
income or gain that a Portfolio must distribute to shareholders to comply with
the distribution requirement, on the income or gain qualifying under the 90%
gross income test, and on a Portfolio's ability to comply with the 30% test
described above.
Generally, futures contracts and options on futures contracts
held by a Portfolio at the close of its taxable year are treated for federal
income tax purposes as sold for their fair market value on the last business day
of such year, a process known as "mark-to-market." Forty percent of any gain or
loss resulting from such constructive sales are treated as short-term capital
gain or loss and 60% of such gain or loss are treated as long-term capital gain
or loss without regard to the period the Portfolio holds the futures contract or
related option (the "40%-60% rule"). The amount of any capital gain or loss
actually realized by a Portfolio in a subsequent sale or other disposition of
those futures contracts and related options is adjusted to reflect any capital
gain or loss taken into account by a Portfolio in a prior year as a result of
the constructive sale of the contracts and options. Losses with respect to
futures contracts to sell and related options, which are regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by a Portfolio, are subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts and
related options, deductions for interest and carrying charges may not be
allowed. Notwithstanding the rules
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described above, with respect to futures contracts to sell and related options
which are properly identified as such, a Portfolio may make an election which
will exempt (in whole or in part) those identified futures contracts and options
from being treated for federal income tax purposes as sold on the last business
day of the Portfolio's taxable year, but gains and losses will be subject to
such short sales, wash sales and loss deferral rules and the requirement to
capitalize interest and carrying charges. Under Temporary Regulations, a
Portfolio would be allowed (in lieu of the foregoing) to elect either (1) to
offset gains or losses from positions which are part of a mixed straddle by
separately identifying each mixed straddle to which such treatment applies, or
(2) to establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40%-60% rule will apply to the net gain or loss attributable to
the futures contracts and options, but in the case of a mixed straddle account
election, not more than 50% of any net gain may be treated as long-term and no
more than 40% of any net loss may be treated as short-term.
Certain foreign currency contracts (including forward foreign
currency exchange contracts) entered into by the Growth & Income Equity,
Emerging Growth, Government & Corporate Bond, U.S. Government Securities,
Balanced or International Equity Portfolios may be subject to the mark-to-market
rules described above. To receive such treatment, a foreign currency contract
must meet the following conditions: (1) the contract must require delivery of a
foreign currency of a type in which regulated futures contracts are traded or
upon which the settlement value of the contract depends; (2) the contract must
be entered into at arm's length at a price determined by reference to the price
in the interbank market; and (3) the contract must be traded in the interbank
market. The Treasury Department has broad authority to issue regulations under
these provisions. As of the date of this Statement of Additional Information,
the Treasury Department had not issued any such regulations. Other foreign
currency contracts entered into by a Portfolio may result in the creation of one
or more straddles for federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and the requirement to capitalize
interest and carrying charges may apply.
Some of the non-U.S. dollar denominated investments that the
Growth & Income Equity, Emerging Growth, Government & Corporate Bond, U.S.
Government Securities, Balanced and International Equity Portfolios may make,
such as non-U.S. dollar-denominated debt securities and obligations and
preferred stock, as well as some of the foreign currency contracts a Portfolio
may enter into, may be subject to the provisions of Subpart J of the Code, which
govern the federal income tax
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<PAGE> 158
treatment of certain transactions denominated in terms of a currency other than
the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S dollar. The types of transactions covered by these
provisions include the following: (1) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (2) the accruing of certain
trade receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer also is
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options generally are
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the mark-to-market rules,
unless an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and
normally is taxable as ordinary gain or loss. A Portfolio may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the Portfolio and which are not part of a straddle. In
accordance with Treasury Regulations, certain transactions subject to the
special currency rules that are part of a "Section 988 hedging transaction" (as
defined in the Code and Treasury regulations) will be integrated and treated as
a single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or loss
deferral rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Portfolio which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) is treated as capital gain or loss and is not segregated from
the gain or loss on the underlying transaction.
CONCLUSIONS
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisors
concerning the application of state and local taxes.
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<PAGE> 159
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers1 of the Fund, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Jerry V. Woodham(2) Chairman of Former Treasurer, Washington
745 Stump Road The Board; University, 1981 to 1995.
St. Louis, MO 63131 President and
Age: 52 Director
Robert M. Cox, Jr. Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co. since November
P.O. Box 4100 1990.
St. Louis, MO 63136-8506
Age: 50
Joseph J. Hunt Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and Orna-
3544 Watson Road mental Iron Workers (Interna-
St. Louis, MO 63139 tional Labor Union), January 1994
Age: 53 to present; General Organizer,
International Association
of Bridge, Structural and
Ornamental Iron Workers,
September 1983 to
December 1993.
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company since 1975; Vice Chairman,
600 Kellwood Parkway Kellwood Company since May
Chesterfield, MO 63017 1989.
Age: 60
</TABLE>
- ------------------------
1 Directors and officers of the Fund owned less than 1% of the outstanding
shares of the Fund as of November 30, 1995.
2 Mr. Woodham is an "interested person" of the Fund as defined in the 1940
Act.
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<PAGE> 160
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Donald E. Kiernan Director Senior Vice President -
Southwestern Bell Finance and Treasurer,
Corporation Southwestern Bell
175 E. Houston St. Corporation since
P.O. Box 2933 December 1990.
Room 7-A-50
San Antonio, TX 78299
Age: 55
Lyle L. Meyer Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation, April
Corporation 1989 to present; President,
8182 Maryland Avenue Smurfit Pension & Insurance
St. Louis, MO 63105 Services Company, November
Age: 59 1982 to December 1992.
Ronald D. Winney* Director and Treasurer, Ralston
Ralston Purina Company Treasurer Purina Company
Checkerboard Square Since 1985.
St. Louis, MO 63164
Age: 53
W. Bruce McConnel, III Secretary Partner of the law
Suite 1100 firm of Drinker Biddle
1345 Chestnut Street & Reath, Philadelphia,
Philadelphia, PA 19107 Pennsylvania Since 1977.
Age: 53
Walter B. Grimm* Assistant From June, 1992 to present,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, OH 43219 Services; From 1989 to June, 1992
Age: 50 President of Leigh
Investments Consulting/
Investments (investment
firm).
Stephen G. Mintos* Vice President From April, 1987 to present,
3435 Stelzer Road and Assistant employee of BISYS Fund
Columbus, OH 43219 Treasurer Services.
Age: 42
</TABLE>
- ------------------------
* Messrs. Grimm, Winney, and Mintos are "interested persons" of the Fund as
defined in the 1940 Act.
For the fiscal year ended November 30, 1995, the Directors received the
following compensation:
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<PAGE> 161
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM THE FUND AND
COMPENSATION AS PART OF FUND FUND COMPLEX(1)
NAME OF DIRECTOR FROM THE FUND EXPENSE
<S> <C> <C> <C>
Jerry V. Woodham $ 13,459.70 N/A $ 15,000.00
Robert M. Cox, Jr $ 8,973.13 N/A $ 10.000.00
Joseph J. Hunt $ 8,973.13 N/A $ 10,000.00
James C. Jacobsen $ 8,973.13 N/A $ 10,000.00
Donald E. Kiernan $ 8,973.13 N/A $ 10,000.00
Lyle L. Meyer $ 8,973.13 N/A $ 10,000.00
Ronald D. Winney $ 8,973.13 N/A $ 10,000.00
</TABLE>
1 The "Fund Complex" includes The ARCH Fund, Inc. and The ARCH Tax-Exempt Trust.
Drinker Biddle & Reath, of which Mr. McConnel is a
partner, receives legal fees as counsel to the Fund.
INVESTMENT ADVISORY, SUB-ADVISORY AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to each Portfolio. In
addition, Clay Finlay serves as sub-investment adviser to the International
Equity Portfolio. Pursuant to the advisory and sub-advisory agreements, MVA and
Clay Finlay have agreed to provide investment advisory and sub-investment
advisory services, respectively, as described in the Portfolios' Prospectuses.
MVA and Clay Finlay have agreed to pay all expenses incurred by them in
connection with their activities under their respective agreements other than
the cost of securities, including brokerage commissions, if any, purchased for
the Portfolios.
The investment advisory agreement (and sub-investment advisory
agreement for the International Equity Portfolio) provide that MVA and Clay
Finlay, respectively, shall not be liable for any error of judgment or mistake
of law or for any loss suffered in connection with the performance of their
respective agreements, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith or gross negligence in the performance of
their duties or from reckless disregard by them of their duties and obligations
thereunder.
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<PAGE> 162
Under its administration agreement with the Fund, BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator. The
Administrator has agreed to maintain office facilities for the Portfolios,
furnish the Portfolios with statistical and research data, clerical, accounting,
and certain bookkeeping services, stationery and office supplies, and certain
other services required by the Portfolios, and to compute the net asset value
and net income of the Portfolios. The Administrator prepares annual and
semi-annual reports to the SEC on Form N-SAR, compiles data for and prepares
federal and state tax returns and required tax filings other than those required
to be made by the Fund's custodian and transfer agent, prepares the Fund's
compliance filings with state securities commissions, maintains the registration
or qualification of shares for sale under the securities laws of any state in
which the Fund's shares shall be registered, assists in the preparation of
annual and semi-annual reports to shareholders of record, participates in the
periodic updating of the Fund's Registration Statement, prepares and assists in
the timely filing of notices to the SEC required pursuant to Rule 24f-2 under
the 1940 Act, arranges for and bears the cost of processing share purchase,
exchange and redemption orders, keeps and maintains the Portfolios' financial
accounts and records including calculation of daily expense accruals, monitors
compliance procedures for each of the classes of the Fund's Portfolios with each
Portfolio's investment objective, policies and limitations, tax matters, and
applicable laws and regulations, and generally assists in all aspects of the
Portfolios' operations. The Administrator bears all expenses in connection with
the performance of its services, except that a Portfolio bears any expenses
incurred in connection with any use of a pricing service to value portfolio
securities. (See "Net Asset Value -- Equity and Bond Portfolios" above).
From time to time, MVA and the Administrator may voluntarily
waive a portion or all of their respective fees otherwise payable to them with
respect to the Fund's Portfolios in order to increase the net income available
for distribution to shareholders. For the fiscal year or period ended November
30, 1995, MVA was paid advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $2,202,658 $ 314,865
Treasury Money Market $ 795,911 $ 124,279
Tax-Exempt Money Market1 $ 161,659 $ 23,094
Growth & Income Equity $1,736,792 $ 0
Emerging Growth $ 962,984 $ 0
</TABLE>
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<PAGE> 163
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Government & Corporate Bond $ 660,877 $ 0
U.S. Government Securities $ 208,179 $ 0
Balanced $ 775,992 $ 0
International Equity $ 239,167 $ 78,752
Short-Intermediate Municipal(2) $ 0 $ 38,167
Missouri Tax-Exempt Bond1 $ 156,100 $ 0
Kansas Tax-Exempt Bond(3) N/A N/A
</TABLE>
1 For the six-month period ended November 30, 1995.
2 For the period from commencement of operations (July 10, 1995) through
November 30, 1995.
3 Portfolio had not commenced operations as of November 30, 1995.
For the fiscal year or period ended November 30, 1994 (May 31,
1995 with respect to the Predecessor Tax-Exempt Money Market and Predecessor
Missouri Tax-Exempt Bond Portfolios), MVA was paid advisory fees, after waivers,
as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $2,158,091 $311,198
Treasury Money Market $ 676,057 $353,812
Tax-Exempt Money Market $ 327,584 $ 93,173
Growth & Income Equity $1,441,612 $ 9,612
Emerging Growth $ 577,534 $ 2,815
Government & Corporate Bond $ 668,999 $ 2,128
U.S. Government Securities $ 200,493 $ 209
Balanced $ 685,226 $ 14,157
International Equity(1) $ 73,083 $ 42,943
Short-Intermediate Municipal(2) N/A N/A
</TABLE>
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<PAGE> 164
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Missouri Tax-Exempt Bond $ 230,777 $ 91,762
Kansas Tax-Exempt Bond2 N/A N/A
</TABLE>
1 For the period from commencement of operations (April 4, 1994) through
November 30, 1994.
2 Portfolio had not commenced operations as of November 30, 1994.
For the fiscal year or period ended November 30, 1993 (May 31,
1994 with respect to the Predecessor Tax-Exempt Money Market and Predecessor
Missouri Tax-Exempt Bond Portfolios), MVA was paid advisory fees, after waivers,
as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $2,202,383 $314,626
Treasury Money Market $ 344,642 $450,623
Tax-Exempt Money Market $ 440,267 $146,756
Growth & Income Equity $1,323,589 $ 0
Emerging Growth $ 152,048 $157,368
Government & Corporate Bond $ 661,241 $ 0
U.S. Government Securities $ 197,616 $ 0
Balanced(1) $ 219,850 $120,723
International Equity(2) N/A N/A
Short-Intermediate Municipal(2) N/A N/A
Missouri Tax-Exempt Bond $ 123,192 $193,555
Kansas Tax-Exempt Bond(2) N/A N/A
</TABLE>
1 For the period from commencement of operations (April 1, 1993) through
November 30, 1993.
2 Portfolio had not commenced operations as of November 30, 1993.
For the year ended May 31, 1993, the Predecessor Tax-Exempt
Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios paid MVA
advisory fees, after waivers, as follows:
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<PAGE> 165
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Tax-Exempt Money Market $570,098 $142,782
Missouri Tax-Exempt Bond $ 0 $157,753
</TABLE>
For the fiscal year or period ended November 30, 1995, the
Administrator was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $629,331 $629,431
Treasury Money Market $230,049 $230,045
Tax-Exempt Money Market(1) $ 46,188 $ 0
Growth & Income Equity $315,754 $316,168
Emerging Growth $128,398 $128,825
Government & Corporate Bond $146,859 $147,087
U.S. Government Securities $ 46,262 $ 46,322
Balanced $103,465 $103,589
International Equity $ 47,635 $ 15,949
Short-Intermediate Municipal(2) $ 6,965 $ 6,914
Missouri Tax-Exempt Bond1 $ 34,689 $ 34,808
Kansas Tax-Exempt Bond(3) N/A N/A
</TABLE>
1 For the six-month period ended November 30, 1995.
2 For the period from commencement of operations (July 10, 1995) through
November 30, 1995.
3 Portfolio had not commenced operations as of November 30, 1995.
For the fiscal year or period ended November 30, 1994 (May 31, 1995
with respect to the Predecessor Tax-Exempt Money Market and Predecessor Missouri
Tax-Exempt Bond Portfolios), the Administrator was paid administration fees,
after waivers, as follows:
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<PAGE> 166
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $616,597 $618,047
Treasury Money Market $257,468 $257,467
Tax-Exempt Money Market $105,189 $ 0
Growth & Income Equity $262,112 $265,606
Emerging Growth $ 77,005 $ 77,755
Government & Corporate Bond $148,667 $149,612
U.S. Government Securities $ 44,554 $ 44,647
Balanced $ 91,363 $ 95,139
International Equity(1) $ 17,350 $ 5,855
Short-Intermediate Municipal(2) N/A N/A
Missouri Tax-Exempt Bond $143,351 $ 71,654
Kansas Tax-Exempt Bond(2) N/A N/A
</TABLE>
1 Commenced operations April 4, 1994.
2 Portfolio had not commenced operations as of November 30, 1994.
For the fiscal year or period ended November 30, 1993 (May 31,
1994 with respect to the Predecessor Tax-Exempt Money Market and Predecessor
Missouri Tax-Exempt Bond Portfolios), the Administrator was paid administration
fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Money Market $686,636 $571,868
Treasury Money Market $198,816 $198,816
Tax-Exempt Money Market $146,756 $ 0
Growth & Income Equity $240,652 $240,752
Emerging Growth $ 38,225 $ 44,286
Government & Corporate Bond $146,941 $147,022
U.S. Government Securities $ 40,213 $ 47,622
Balanced(1) $ 45,398 $ 45,422
International Equity(2) N/A N/A
</TABLE>
-77-
<PAGE> 167
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Short-Intermediate Municipal(2) N/A N/A
Missouri Tax-Exempt Bond $ 70,367 $ 70,449
Kansas Tax-Exempt Bond(2) N/A N/A
</TABLE>
- -------------------------------
1 Commenced operations April 1, 1993.
2 Portfolio had not commenced operations as of November 30, 1993.
For the fiscal year ended November 30, 1993 with respect to
the Money Market, Treasury Money Market, Growth & Income Equity, Emerging
Growth, Government & Corporate Bond, U.S. Government Securities and Balanced
Portfolios, administration fees were paid to the former administrator, The
Boston Company Advisors, Inc. ("Boston Advisors") until May 31, 1993 and
thereafter were paid to the Administrator. Therefore, the fees listed above for
such period with respect to these Portfolios represent the combined fees paid to
both administrators after fee waivers and the combined fee waivers of both
administrators. For the fiscal year ended May 31, 1993 the Predecessor
Tax-Exempt Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios paid
administration fees to Boston Advisors pursuant to the administration agreement
then in effect of $142,442 and $70,113, respectively. For the same period,
Boston Advisors voluntarily waived administration fees of $35,056 payable to it
by the Predecessor Missouri Tax-Exempt Bond Portfolio.
In addition, the Portfolios' advisory and administration
agreements provide that if expenses borne by any Portfolio in any fiscal year
exceed expense limitations imposed by applicable state securities regulations,
(i) MVA will reimburse the Fund for 60% of such excess expenses and (ii) the
Administrator will reimburse the Fund for a portion of any such excess expenses
in an amount equal to the proportion that the administration fees otherwise
payable by the Portfolio to the Administrator bears to the total amount of the
investment advisory and administration fees otherwise payable by the Portfolio,
in each case to the extent required by such regulations. To the Fund's
knowledge, it is not presently subject to any expense limitation. The fees that
financial institutions, Service Organizations, and broker-dealers may charge to
customers for services provided in connection with their investments in the
Portfolios are not covered by the state securities expense limitations described
above.
-78-
<PAGE> 168
CUSTODIAN AND TRANSFER AGENT
Mercantile is Custodian of the Portfolios' assets pursuant to
a Custodian Agreement. Under the Custodian Agreement, Mercantile has agreed to
(i) maintain a separate account or accounts in the name of each Portfolio; (ii)
receive and disburse money on behalf of each Portfolio; (iii) collect and
receive all income and other payments and distributions on account of each
Portfolio's portfolio securities; (iv) respond to correspondence relating to its
duties; and (v) make periodic reports to the Fund's Board of Directors
concerning the operations of each Portfolio. Mercantile may, at its own expense,
open and maintain a custody account or accounts on behalf of each Portfolio with
other banks or trust companies, provided that Mercantile shall remain liable for
the performance of all of its custodial duties under the Custodian Agreement,
notwithstanding any delegation. Mercantile is authorized to select one or more
banks or trust companies to serve as sub-custodian on behalf of the Portfolios,
provided that Mercantile shall remain responsible for the performance of all of
its duties under the Custodian Agreement and shall hold the Fund harmless from
the acts and omissions of any bank or trust company servicing as sub-custodian.
In the opinion of the staff of the SEC, since the Custodian is
an affiliate of the investment adviser, the Fund and the Custodian are subject
to the requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and
the Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each
Portfolio pays Mercantile an annual fee. For each Money Market Portfolio this
fee is paid monthly and calculated daily at the rate of $.125 for each $1,000 of
each such Portfolio's average daily net assets plus, in the case of the
Tax-Exempt Money Market Portfolio only, $50 for each interest collection or
claim item. For the Equity and Bond Portfolios (except the International Equity
Portfolio), this fee, which is paid monthly, is calculated as the greater of
$6,000 or $.30. For the International Equity Portfolio, this fee, which is
calculated daily and paid monthly, is .17% of the Portfolio's average daily net
assets for the first $50 million; .155% of the Portfolio's average daily net
assets for the next $50 million; .13% of the Portfolio's average daily net
assets for the next $150 million; and .105% of the Portfolio's average daily net
assets thereafter. Each Equity and Bond Portfolio also pays $15.00 for each
purchase, sale or delivery of a security upon its maturity date, $50.00 for each
interest collection or claim item, $20.00 for each transaction involving GNMA,
tax-free or other non-depository registered items with monthly dividends or
interest, $30.00 for each purchase, sale or expiration of an option contract,
$50.00 for each
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<PAGE> 169
purchase, sale or expiration of a futures contract, and $15.00 for each
repurchase trade with an institution other than Mercantile. In addition, each
Portfolio pays Mercantile's incremental costs in providing foreign custody
services for any foreign-denominated and foreign-held securities and reimburses
Mercantile for out-of-pocket expenses related to such services.
BISYS Fund Services Ohio, Inc. also serves as the Fund's
transfer agent and dividend disbursing agent (in those capacities, the "Transfer
Agent") pursuant to a Transfer Agency Agreement. Under the Agreement, the
Transfer Agent has agreed to (i) process shareholder purchase and redemption
orders; (ii) maintain shareholder records for each of the Portfolios'
shareholders; (iii) process transfers and exchanges of shares of the Portfolios;
(iv) issue periodic statements for each of the Portfolios' shareholders; (v)
process dividend payments and reinvestments; (vi) assist in the mailing of
shareholder reports and proxy solicitation materials; and (vii) make periodic
reports to the Fund's Board of Directors concerning the operations of each
Portfolio.
DISTRIBUTION AND SERVICE ORGANIZATIONS
BISYS Fund Services (the "Distributor"), an affiliate of the
Administrator, serves as the Distributor of the Portfolios' shares pursuant to a
Distribution Agreement. Under the Distribution Agreement, the Distributor, as
agent, sells shares of the Portfolios on a continuous basis. The Distributor has
agreed to use appropriate efforts to solicit orders for the sale of shares. With
respect to each Portfolio's Trust shares and Institutional shares, no
compensation is payable by the Fund to the Distributor for distribution
services. The Distributor is entitled to the payment of a front-end sales charge
on the sale of Investor A Shares of the Equity and Bond Portfolios as described
in the Prospectus for such shares. For the fiscal years ended November 30, 1995,
1994 and the period from June 1, 1993 through November 30, 1993, the Distributor
received front-end sales charges in connection with Investor A share purchases
as follows: Growth & Income Equity Portfolio -- $96,851, $95,623, and $47,729,
respectively; Government & Corporate Bond Portfolio -- $10,250, $12,979 and
$12,037, respectively; U.S. Government Securities Portfolio -- $6,238, $26,300
and $21,460, respectively; Emerging Growth Portfolio -- $60,626, $87,769 and
$27,493, respectively; Balanced Portfolio -- $7,442, $24,483 and $26,433,
respectively; and Missouri Tax-Exempt Bond Portfolio, $45,981, $96,782 and
$148,121, respectively. For the fiscal year ended November 30, 1995 and the
period May 2, 1994 (commencement of operations) through November 30, 1994, the
Distributor received front-end sales charges in connection with Investor A share
purchases of the International Equity Portfolio of $14,251 and $11,880,
respectively. Of these amounts, the Distributor
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<PAGE> 170
retained $11,647, $11,846 and $5,810, respectively, and MVA and affiliates
retained $27,761, $21,021 and $7,635, respectively, with respect to the Growth &
Income Equity Portfolio; the Distributor retained $1,354, $1,720 and $1,454,
respectively, and MVA and its affiliates retained $5,711, $5,834 and $1,792,
respectively, with respect to the Government & Corporate Bond Portfolio; the
Distributor retained $784, $3,318 and $2,759, respectively, and MVA and
affiliates retained $2,101, $10,456 and $4,586, respectively, with respect to
the U.S. Government Securities Portfolio; the Distributor retained $7,085,
$10,476 and $3,425, respectively, and MVA and affiliates retained $15,259,
$22,854 and $5,713, respectively, with respect to the Emerging Growth Portfolio;
the Distributor retained $871, $3,466 and $3,280, respectively, and MVA and
affiliates retained $2,721, $8,755 and $4,571, respectively, with respect to the
Balanced Portfolio; the Distributor retained $6,400, $13,608 and $22,328,
respectively, and MVA and affiliates retained $9,735, $8,954 and $22,350,
respectively, with respect to the Missouri Tax-Exempt Bond Portfolio; and the
Distributor retained $1,626 and $1,441, respectively, and MVA and affiliates
retained $5,431 and $1,952, respectively, with respect to the International
Equity Portfolio.
The Distributor is also entitled to the payment of contingent
deferred sales charges upon the redemption of Investor B Shares of the
Portfolios. For the period from March 1, 1995 (date of their initial public
offering) through November 30, 1995, the Distributor received contingent
deferred sales charge in connection with Investor B share redemptions as
follows: Growth & Income Equity Portfolio -- $209; Emerging Growth Portfolio --
$253; Government & Corporate Bond Portfolio -- $1,246; U.S. Government
Securities Portfolio -- $135; Balanced Portfolio -- $0; International Equity
Portfolio -- $0; and Missouri Tax-Exempt Bond Portfolio -- $7. All such amounts
were assigned to MVA pursuant to the financing arrangement between the
Distributor and MVA described below under "The Plans --Distribution and Services
Plans."
The following table shows all sales charges, commissions and
other compensation received by the Distributor directly or indirectly from the
Fund's existing Portfolios during the fiscal year ended November 30, 1995:
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio Commissions(1) Repurchase(2) Transactions Compensation(3)
- --------- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Money Market $ 0 $ 0 $0 $544,358
</TABLE>
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<PAGE> 171
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio Commissions(1) Repurchase(2) Transactions Compensation(3)
- --------- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Treasury Money $ 0 $ 0 $0 $157,186
Market
Tax-Exempt
Money Market $ 0 $ 0 $0 $13,027
Growth & Income
Income Equity $15,339 $ 209 $0 $148,479
Emerging Growth $10,091 $ 253 $0 $72,904
Government &
Corporate Bond $ 2,037 $ 1,246 $0 $36,484
U.S. Government
Securities $ 1,001 $ 135 $0 $28,279
Balanced $ 1,030 $ 0 $0 $107,537
International
Equity $ 2,122 $ 0 $0 $8,093
Short-Intermediate
Municipal $ 0 $ 0 $0 $ 0
Missouri Tax-
Exempt Bond $ 8,505 $ 7 $0 $37,905
</TABLE>
(1) Represents amounts received from front-end sales charges on Investor A
Shares and commissions received in connection with sales of Investor B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Investor B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Investor B Shares. All such
amounts were assigned to MVA pursuant to the financing arrangements
between the Distributor and MVA described below.
(3) Represents payments made under the Administrative Services Plans and
Distribution and Services Plans that have been adopted by the Fund (see
discussion below).
THE PLANS
DISTRIBUTION AND SERVICES PLANS. As described in the
Prospectuses, the Fund has adopted separate Distribution and Services Plans with
respect to Investor A and Investor B Shares of the Portfolios pursuant to the
1940 Act and Rule 12b-1 thereunder. Any material amendment to either of these
Plans or arrangements with the Distributor or Service Organizations (which
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<PAGE> 172
may include affiliates of the Fund's Adviser) must be approved by a majority of
the Board of Directors, including a majority of the directors who are not
"interested persons" of the Fund as defined in the 1940 Act and have no direct
or indirect financial interest in such arrangements (the "Disinterested
Directors") and by a majority of the Investor A Shares or Investor B Shares,
respectively, of the Portfolio. Pursuant to the Plans, the Fund may enter into
Servicing Agreements with broker-dealers and other organizations ("Servicing
Agreements") that purchase Investor A or Investor B Shares of a Portfolio. The
Servicing Agreements provide that the Servicing Organizations will render
certain shareholder administrative support services to their customers who are
the record or beneficial owners of Investor A or Investor B Shares. Services
provided pursuant to the Servicing Agreements may include such services as
providing information periodically to customers showing their positions in
Investor A or Investor B Shares and monitoring services for their customers who
have invested in Investor A or Investor B Shares, including the operation of
telephone lines for daily quotations of return information.
Service Organizations and other broker/dealers receive
commissions from the Distributor for selling Investor B Shares, which are paid
at the time of the sale. These commissions approximate the commissions payable
with respect to sales of Investor A Shares. The distribution fees payable under
the Distribution and Services Plan for Investor B Shares (at an annual rate of
.75%) are intended to cover the expense to the Distributor of paying such
up-front commissions, and the contingent deferred sales charge is calculated to
charge the investor with any shortfall that would occur if Investor B Shares are
redeemed prior to the expiration of the eight year period, after which Investor
B Shares automatically convert to Investor A Shares. To provide funds for the
payment of up-front sales commissions, the Distributor has entered into an
agreement with MVA pursuant to which MVA provides funds for the payment of
commissions and other fees payable to Service Organizations and broker/dealers
who sell Investor B Shares. Under the terms of that agreement, the Distributor
has assigned to MVA the fees which may be payable from time to time to the
Distributor under the Distribution and Services Plan for Investor B Shares and
the contingent deferred sales charges payable to the Distributor with respect to
Investor B Shares.
ADMINISTRATIVE SERVICES PLANS. As stated in the applicable
Prospectuses, separate Administrative Services Plans have been adopted with
respect to Trust shares and Institutional shares of the Portfolios. Pursuant to
each Plan and the Distribution and Services Plans described above, the Fund may
enter into Servicing Agreements with banks, trust departments, and other
financial institutions ("Trust Servicing Agreements")
-83-
<PAGE> 173
and with broker-dealers and other organizations ("Servicing Agreements") that
purchase Trust shares, Institutional shares, Investor A Shares or Investor B
Shares of a Portfolio, respectively. The Servicing Agreements provide that the
Service Organizations will render certain shareholder administrative support
services to their customers who are the record or beneficial owners of Trust
Shares, Institutional shares, Investor A Shares or Investor B Shares,
respectively. Services provided pursuant to the Servicing Agreements may include
some or all of the following services: (i) processing dividend and distribution
payments from the Portfolios on behalf of customers; (ii) providing information
periodically to customers showing their positions in Trust, Institutional,
Investor A Shares or Investor B Shares; (iii) arranging for bank wires; (iv)
responding to routine customer inquiries relating to services performed by the
particular Service Organization; (v) providing sub-accounting with respect to
shares owned of record or beneficially by customers or the information necessary
for sub-accounting; (vi) as required by law, forwarding shareholder
communications (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(vii) forwarding to customers proxy statements and proxies containing any
proposals regarding Servicing Agreements or the related Plan; (viii) aggregating
and processing purchase, redemption, and exchange requests from customers and
placing net purchase and redemption orders with the Fund's Distributor; (ix)
providing customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (x) maintaining
records relating to each customer's share transactions; or (xi) other similar
services if requested by the Fund and permitted by law. In addition, Service
Organizations may also provide dedicated facilities and equipment in various
local locations to serve the needs of investors, including walk-in facilities,
800 numbers, and communication systems to handle shareholder inquiries, and in
connection with such facilities, provide on-site management personnel and
monitoring services for their customers who have invested in Investor A or
Investor B Shares, including the operation of telephone lines for daily
quotations of return information.
For the fiscal year or period ended November 30, 1995,
pursuant to the Distribution and Services Plan for Investor A Shares, the
Portfolios were charged the following amounts:
DISTRIBUTION AND SERVICES PLAN - INVESTOR A SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Money Market $137,460 $0 $0 $14,620
</TABLE>
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<PAGE> 174
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $6,872 $0 $0 $1,578
Tax-Exempt Money Market1 $7,090 $0 $0 $1,535
Growth & Income Equity $62,142 $874 $0 $43,313
Emerging Growth $40,545 $1,802 $0 $20,745
Government & Corporate Bond $15,376 $79 $0 $13,308
U.S. Government Securities $26,948 $559 $0 $20,188
Balanced $23,011 $257 $0 $18,675
International Equity $3,517 $245 $0 $1,306
Short-Intermediate Municipal2 $0 $0 $0 $0
Missouri Tax-Exempt Bond1 $36,453 $378 $0 $27,151
Kansas Tax-Exempt Bond3 $0 $0 $0 $0
</TABLE>
1 For the six-month period ended November 30, 1995.
2 Commenced operations on July 10, 1995.
3 Portfolio had not commenced operations as of November 30, 1995.
All amounts paid under the Distribution and Servcies Plan for
Investor A Shares for the fiscal year/period ended November 30, 1995 were
attributable to payments to broker-dealers. For the fiscal year ended November
30, 1995, no brokers of record waived fees.
For the period from March 1, 1995 (date of initial public
offering) through November 30, 1995, pursuant to the Distribution and Services
Plan for Investor B Shares of the Portfolios, the Portfolios were charged the
following amounts:
DISTRIBUTION AND SERVICES PLAN - INVESTOR B SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Money Market(2) $0 $0 $0 $0
Growth & Income Equity $2,730 $0 $2,730 $0
Emerging Growth $1,821 $0 $1,821 $0
Government & Corporate Bond $324 $0 $324 $0
U.S. Government Securities $112 $0 $112 $0
</TABLE>
-85-
<PAGE> 175
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balanced $126 $0 $126 $0
International Equity $271 $0 $271 $0
Missouri Tax-Exempt Bond1 $1,452 $0 $1,452 $0
Kansas Tax-Exempt Bond2 $0 $0 $0 $0
</TABLE>
1 For the six-month period ended November 30, 1995.
2 Portfolio had not commenced operations as of November 30, 1995.
For the fiscal year or period ended November 30, 1995,
pursuant to the Administrative Services Plan for Trust shares, the Portfolios
were charged the following amounts:
ADMINISTRATIVE SERVICES PLAN - TRUST SHARES
<TABLE>
<CAPTION>
AMOUNT PAID
AMOUNT PAID TO
TO THE AMOUNT PAID AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market $378,044 $0 $0 $378,044
Treasury Money Market $150,278 $0 $0 $150,278
Tax-Exempt Money Market(1) $5,937 $0 $0 $ 5,937
Growth & Income Equity $0 $0 $0 $0
Emerging Growth $0 $0 $0 $0
Government & Corporate Bond $0 $0 $0 $0
U.S. Government Securities $0 $0 $0 $0
Balanced $0 $0 $0 $0
International Equity $0 $0 $0 $0
Short-Intermediate Municipal(2) $0 $0 $0 $0
Missouri Tax-Exempt Bond(1) $0 $0 $0 $0
Kansas Tax-Exempt Bond(3) $0 $0 $0 $0
</TABLE>
1 For the six month period ended through November 30, 1995.
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2 Commenced operations on July 10, 1995.
3 Portfolio had not commenced operations as of November 30, 1995.
For the fiscal year ended November 30, 1995, pursuant to the
Administrative Services Plan for Institutional shares, the Portfolios paid the
following amounts:
ADMINISTRATIVE SERVICES PLAN - INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
AMOUNT PAID
AMOUNT PAID TO
TO THE AMOUNT PAID AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market $28,854 $0 $0 $28,854
Treasury Money Market $36 $0 $0 $36
Growth & Income Equity $83,607 $0 $0 $83,607
Emerging Growth $30,538 $0 $0 $30,538
Government & Corporate Bond $20,784 $0 $0 $20,784
U.S. Government Securities $1,291 $0 $0 $1,291
Balanced $84,400 $0 $0 $84,400
International Equity $4,305 $0 $0 $4,305
</TABLE>
For the fiscal year ended November 30, 1995, the
Administrator, MVA and/or various service organizations waived no fees with
respect to the Administrative Services Plans.
OTHER PLAN INFORMATION. The Board of Directors has approved
each Plan and its respective arrangements with the Distributor, Service
Organizations and broker-dealer based on information provided by the Fund's
service contractors that there is a reasonable likelihood that these Plans and
arrangements will benefit the Portfolios and their shareholders. Pursuant to
each Plan, the Board of Directors reviews, at least quarterly, a written report
of the amounts of distribution fees and servicing fees expended pursuant to each
Plan and the Service Organizations and the purposes for which the expenditures
were made. So long as the Fund has one or more of the above described Plans in
effect, the selection and nomination of the members of the Board of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Fund will
be committed to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer
accounts, Service Organizations and other institutions may also charge their
customers directly for cash management and other services provided in connection
with the accounts,
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<PAGE> 177
including, for example, account maintenance fees, compensating balance
requirements, or fees based upon account transactions, assets, or income. An
investor should therefore read the Prospectuses and this Statement of Additional
Information in light of the terms of his or her account with a Service
Organization, or other institution before purchasing shares of a Portfolio.
INDEPENDENT AUDITORS
For the fiscal year or period ended November 30, 1995, KPMG
Peat Marwick LLP, certified public accountants, with offices at Two Nationwide
Plaza, Columbus, Ohio 43215, served as independent auditors for the Fund. KPMG
Peat Marwick LLP performs an annual audit of the Fund's financial statements.
Reports of its activities are provided to the Fund's Board of Directors. The
financial statements dated November 30, 1995, which are incorporated by
reference into this Statement of Additional Information, have been audited by
KPMG Peat Marwick LLP, whose report thereon is incorporated herein by reference.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of
the Fund, is a partner), Suite 1100, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496, is counsel to the Fund and will pass upon certain legal
matters on its behalf.
MISCELLANEOUS
As of March 5, 1996, Mercantile held of record 99.999% and
41.838% of the outstanding Institutional and Trust shares, respectively, in the
Money Market Portfolio; 95.316% and 59.242% of the outstanding Institutional and
Trust shares, respectively, in the Treasury Money Market Portfolio; 98.604% and
97.020% of the outstanding Institutional and Trust shares, respectively, in the
Growth & Income Equity Portfolio; 99.012% and 63.208% of the outstanding
Institutional and Trust shares, respectively, in the Emerging Growth Portfolio;
99.738% and 97.067% of the outstanding Institutional and Trust shares,
respectively, in the Government & Corporate Bond Portfolio; 99.998% and 93.391%
of the outstanding Institutional and Trust shares, respectively, in the U.S.
Government Securities Portfolio; 99.895% and 96.143% of the outstanding
Institutional and Trust shares, respectively, in the Balanced Portfolio; 97.578%
and 94.549% of the outstanding Institutional and Trust shares, respectively, in
the International Equity Portfolio; 99.850% of the outstanding Trust shares in
the Short-Intermediate Municipal Portfolio; 74.877% of
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the outstanding Trust shares in the Tax-Exempt Money Market Portfolio; and
99.999% of the outstanding Trust shares in the Missouri Tax-Exempt Bond
Portfolio, as fiduciary or agent on behalf of its customers. Mercantile is a
wholly owned subsidiary of Mercantile Bancorporation Inc., a Missouri
corporation. Under the 1940 Act, Mercantile may be deemed to be a controlling
person of the Fund.
As of the same date, the following institutions also owned of
record 5% or more of the Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - First Fidelity
Bank NA, Broad & Walnut Streets, Philadelphia, PA 19109 (13.672%); Hawaiian
Trust Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI 96802-3170
(10.219%); Mercantile Bank NA Trust, Trust Securities Unit 17-1, Attn: Dede
Clark, P.O. Box 387 Main Post Office, St. Louis, MO 63166 (41.838%);
Institutional Shares - Mercantile Bank St. Louis NA, Attn: Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166 (99.999%); Investor A Shares - BHC
Securities, Attn: Cash Balance Sweep Dept., One Commerce Square, 11th Floor,
2005 Market Street, Philadelphia, PA 19103 (90.354%); Mercantile Investment
Services, Inc., Firm Capital Account, Attn: Judy Horbelt, P.O. Box 790121, St.
Louis, MO 63179-0121 (6.033%);
As of the same date, the following institutions also owned of
record 5% or more of the Treasury Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - American Trust
Co. of Hawaii Inc., Trust Short-Term Investment Fund, P.O. Box 3170, Honolulu,
HI 96802-3170 (7.408%); Hawaiian Trust Company Ltd., 783 Funds Accounting, P.O.
Box 3170, Honolulu, HI 96802-3170 (9.009%); Express Scripts, Inc., Attn: Joe
Plum, 14000 Riverport Drive, Maryland Heights, MO 63043 (5.500%); City of St.
Louis, Airport Revenue Fund, Attn: Kenneth L. Below, Room 2200 City Hall, 101 S.
Tucker, St. Louis, MO 63013 (8.867%); Mercantile Bank NA Trust, Trust Securities
Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office, St. Louis, MO 63166
(59.242%); Institutional Shares - Mercantile Bank St. Louis NA, Attn: Trust
Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (95.316%); Investor A
Shares - BHC Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square,
11th Floor, 2005 Market Street, Philadelphia, PA 19103 (79.319%); Mercantile
Bank of St. Louis NA, Custodian Richard E. Crippa Rollover IRA, 2948 Castelford
Drive, Florissant, MO 63033 (16.570%).
As of the same date, the following institutions also owned of
record 5% or more of the Tax-Exempt Money Market Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Hawaiian
Trust Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI 96802-3170
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<PAGE> 179
(10.790%); Mercantile Bank NA Trust, Trust Securities Unit 17-1, Attn: Dede
Clark, P.O. Box 387 Main Post Office, St. Louis, MO 63166 (74.877%); Investor A
Shares - BHC Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square,
11th Floor, 2005 Market Street, Philadelphia, PA 19103 (87.226%); Charles H.
Weiss, Trustee Charles H. Weiss Trust, UA Dated 08/15/72, 1209 Washington
Avenue, St. Louis, MO 63103-1934 (11.114%).
As of the same date, the following institutions also owned of
record 5% or more of the International Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(40.367%); Locust & Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166 (54.182%); Boat & Co., P.O. Box 14737, St. Louis, MO 63178-4737
(5.248%); Institutional Shares - Locust and Company, Attn: Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166 (97.578%); Investor A Shares -BHC
Securities Inc., Trade House Acct., 2005 Market Street, Philadelphia, PA 19103
(51.338%); Frances Dakers, 200 E. 89th St., 28D, New York, NY 10128 (16.506%);
Investor B Shares - BHC Securities, Inc., FAO 24252597, Attn: Mutual Funds
Dept., One Commerce Square, Suite 1200, Philadelphia, PA 19103 (5.566%); BHC
Securities, Inc., FAO 24104352, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (5.572%); Mercantile Bank
of St. Louis NA, Custodian Glenn Richard Chitwood IRA, 965 Weathervane Lane,
Troy, IL 62294 (9.704%); BHC Securities Inc., FAO 24283805, Attn: Mutual Funds
Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA
19103 (5.237%).
As of the same date, the following institutions also owned of
record 5% or more of the Growth & Income Equity Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (77.844%); Olive & Company, Mercantile Bank St. Louis
NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(19.176%); Institutional Shares - Locust & Company, Mercantile Bank St. Louis
NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(98.604%); Investor A Shares - BHC Securities Inc., Trade House Account, Attn:
Mutual Fund Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103 (29.835%); Investor B Shares - BHC Securities Inc., FAO 24282580, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103 (6.353%).
As of the same date, the following institutions also owned of
record 5% or more of the Emerging Growth Portfolio's outstanding shares as
fiduciary or agent on behalf of their
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customers: Trust Shares - State Street Bank & Trust Co., Trustee Pioneer Hi-Bred
International Savings Plan Trust, One Enterprise Drive, Mail Stop D13, North
Quincy, MA 02171 (12.498%); Olive & Company, Mercantile Bank St. Louis NA, Trust
Securities Unit 17- 1, P.O. Box 387, St. Louis, MO 63166-0387 (13.879%);
American Bar Endowment, 750 North Lake Shore Drive, Chicago, IL 60611 (6.330%);
Locust & Company, Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166-0387 (49.329%); Institutional Shares - Locust &
Company, Mercantile Bank St. Louis NA, Attn: Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166 (99.012%); Investor A Shares - BHC Securities Inc.,
Trade House Account, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103 (39.210%).
As of the same date, the following institutions also owned of
record 5% or more of the U.S. Government Securities Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - First
American Bank of Louisiana, Attn: Gerald Ferrar, P.O. Box 7232, Monroe, LA 71211
(6.167%); Locust & Company, Mercantile Bank St. Louis NA, Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (59.936%); Olive & Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (33.455%); Institutional Shares - Locust & Company,
Mercantile Bank St. Louis NA, Attn: Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166 (99.998%); Investor A Shares - BHC Securities Inc., Trade
House Account, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103 (13.688%); Mercantile Bank of St. Louis NA,
Custodian Edmund C. Albrecht, Jr. IRA, 17 Outer Ladue Dr., St. Louis, MO 63131
(5.364%); Mercantile Bank of St. Louis NA, Custodian Robert W. Davis Rollover
IRA, 818 Broadway, Elsberry, MO 63343-1109 (5.920%); Investor B Shares - BHC
Securities Inc., FAO 24297242, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (7.032%); BHC Securities
Inc., FAO 24130191, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Suite 1200, Philadelphia, PA 19103 (21.082%); BHC Securities Inc., FAO
24248505, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (6.281%); Mercantile Bank of St. Louis NA,
Custodian Richard Dell Woods, SEP IRA, 3114 Pickett Road, St. Joseph, MO 64503
(5.639%); BHC Securities Inc., FAO 24297609, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(6.245%).
As of the same date, the following institutions also owned of
record 5% or more of the Balanced Portfolio's outstanding share as fiduciary or
agent on behalf of their customers: Trust Shares - Locust & Company, Mercantile
Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
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<PAGE> 181
63166-0387 (96.143%); Institutional Shares - Locust & Company, Mercantile Bank
St. Louis NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166 (99.895%); Investor A Shares Mercantile Bank of St. Louis NA, Custodian
Edmund J. Markevicius Rollover IRA, 17 Agate Avenue, Worcester, MA 01604
(6.503%); BHC Securities Inc., Trade House Account, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (19.059%);
Investor B Shares - Mercantile Bank of St. Louis NA, Custodian Richard Dell Wood
SEP IRA, 3114 Pickett Road, St. Joseph, MO 64503 (16.477%); BHC Securities Inc.,
FAO 24123548, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (12.889%); Mercantile Bank of St. Louis, NA
Custodian Edmund Frances CODR, Rollover IRA, 2820 South 42nd Street, St. Joseph,
MO 64503 (9.393%); Mercantile Bank of St. Louis, NA Custodian David J. Neumann,
IRA, 2330 Goff Avenue, St. Joseph, MO 64505 (13.437%); Mercantile Bank of St.
Louis, NA Custodian Robert L. Barnes, IRA, 2307 Coventry Glenn Court,
Chesterfield, MO 63017 (7.756%).
As of the same date, the following institutions also owned of
record 5% or more of the Government & Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box
387, St. Louis, MO 63166-0387 (57.955%); Olive & Company, Mercantile Bank St.
Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(39.112%); Institutional Shares - Locust & Company, Mercantile Bank St. Louis
NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(99.738%); Investor A Shares - BHC Securities Inc., Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (13.505%);
Investor B Shares - Mercantile Bank of St. Louis NA, Custodian Edmund Frances
CODR, Rollover IRA, 2820 South 42nd Street, St. Joseph, MO 64503 (11.313%); BHC
Securities Inc., FAO 24284744, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (5.561%); BHC Securities
Inc., FAO 24294267, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Suite 1200, Philadelphia, PA 19103 (11.574%); BHC Securities Inc., FAO
24297770, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (24.510%); Mercantile Bank of St. Louis NA,
Custodian Edwin C. Hogrebe, IRA, 5537 Goethe, St. Louis, MO 63109 (5.531%);
Lloyd R. Updegraff and Mildred L. Updegraff, JTWROS T.O.D. Snyder, Route 1, Box
540, Gower, MD 64454 (7.761%).
As of the same date, the following institutions also owned of
record 5% or more of the Short - Intermediate Municipal Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
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<PAGE> 182
(7.459%); Olive & Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St.
Louic, MO 63166-0387 (92.391%); Investor A Shares - Ben J. Fazio and Antonina
Fazio, JTWROS, 9912 Emil Avenue, St. Louis, MO 63126 (99.109%).
As of the same date, the following institutions also owned of
record 5% or more of the Missouri Tax-Exempt Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (21.710%); Olive & Company, Mercantile Bank St. Louis
NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis MO 63166-0387 (78.289%);
Investor A Shares - BHC Securities Inc., Trade House Account, Attn: Mutual Funds
Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA 19103
(28.274%); Investor B Shares - BHC Securities Inc., FAO 24126820, Attn: Mutual
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (13.734%); BHC Securities Inc., FAO 24131119, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(7.401%); BHC Securities Inc., FBO 24282580, Attn: Mutual Funds Dept., 100 N.
20th Street, Philadelphia, PA 19103 (5.677%); BHC Securities Inc. FAO 24286677,
Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103 (11.275%); BHC Securities Inc., FAO 24290504, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103 (18.743%).
On the basis of information received from these institutions,
the Fund believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year
or period ended November 30, 1995 has been filed with the Securities and
Exchange Commission. The financial statements in such Annual Report (the
"Financial Statements") are incorporated into this Statement of Additional
Information by reference. The Financial Statements included in such Annual
Report have been audited by the Fund's independent accountants, KPMG Peat
Marwick LLP, whose report thereon also appears in such Annual Report and is
incorporated herein by reference. The Financial Statements in such Annual Report
have been incorporated herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
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<PAGE> 183
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
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"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D- 1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
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<PAGE> 185
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
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interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by a strong capacity
for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
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<PAGE> 187
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit 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.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt 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
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category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt 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.
"CCC" - Debt 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 an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically 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.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds 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.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes
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probable credit stature upon completion of construction or elimination of basis
of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
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"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
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principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited
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incremental risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable
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Moody's Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following summarizes the
ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
The Growth & Income Equity, Emerging Growth, Government &
Corporate Bond, U.S. Government Securities, Balanced and International Equity
Portfolios may enter into futures contracts and options for hedging purposes in
furtherance of their respective investment objectives as stated in the
Prospectuses. Such transactions are described further in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to
that which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term bonds
and investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts. A Portfolio would engage in an interest rate futures
contract sale to maintain the income advantage from continued holding of a
long-term bond while endeavoring to avoid part or all of the loss in market
value that would otherwise accompany a decline in long-term securities prices. A
Portfolio would engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous interim
investments, for example, shorter-term securities whose yields are greater than
those available on long-term bonds.
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Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by the Portfolio, as
seller, to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future time
at a specific price. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board of
Trade and the Chicago Mercantile Exchange. A Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury Bonds
and Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
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II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order
to offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. The Portfolio may do so either to hedge
the value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated without
a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that the Portfolio expects to narrow the
range of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on a
more restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of the portfolio will decline
prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange
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rates between the U.S. dollar and other currencies arising from multi-national
transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be required to deposit with the
broker or in a segregated account with the Fund's custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Portfolio has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
the adviser may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend
to use interest rate futures contracts and stock index and foreign currency
futures contracts (and related options) in connection with their hedging
activities. Nevertheless, each of these Portfolios is authorized to enter into
hedging transactions in any other futures or options
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contracts which are currently traded or which may subsequently become available
for trading. Such instruments may be employed in connection with the Portfolios'
hedging strategies if, in the judgment of the adviser, transactions therein are
necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
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