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THE ARCH FUND(R), INC.
THE ARCH EQUITY INCOME PORTFOLIO
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
THE ARCH SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
TRUST SHARES
The ARCH Fund, Inc. is an open-end management investment company authorized
to issue Shares in fifteen investment portfolios. This Prospectus describes the
Trust Shares of the ARCH EQUITY INCOME, NATIONAL MUNICIPAL BOND AND
SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIOS. Trust Shares are offered to
financial institutions acting on their own behalf or on behalf of certain
qualified accounts.
THE ARCH EQUITY INCOME PORTFOLIO'S investment objective is to seek to
provide an above-average level of income consistent with long-term capital
appreciation. Under normal market and economic conditions, the Portfolio intends
to invest substantially all of its assets in common stock, preferred stock,
rights, warrants and securities convertible into common stock.
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO'S investment objective is to
seek as high a level of current income exempt from regular federal income tax as
is consistent with conservation of capital. Under normal market and economic
conditions, the Portfolio intends to invest substantially all of its assets in
investment-grade debt 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.
THE ARCH SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO'S investment objective
is to seek as high a level of current income as is consistent with preservation
of capital. Under normal market and economic conditions, the Portfolio intends
to invest at least 65% of its assets in non-convertible corporate debt
obligations.
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.
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 May 13, 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.
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.
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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.
MAY 13, 1996
(AS REVISED OCTOBER 25, 1996)
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HIGHLIGHTS
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund offers investment
opportunities in fifteen investment portfolios. This Prospectus relates to three
of those portfolios: the ARCH EQUITY INCOME, NATIONAL MUNICIPAL BOND and
SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIOS (the "Portfolios"). In addition,
the Fund offers investment opportunities in the ARCH Money Market, Treasury
Money Market, Tax-Exempt Money Market, Growth & Income Equity, Emerging Growth,
International Equity, Balanced, Government & Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios, which are described in separate Prospectuses. 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. (For information on expenses, fee waivers
and services, see "Certain Financial Information", 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 investment objectives.
The Equity Income Portfolio is designed for investors who seek an
above-average level of income consistent with long-term capital appreciation,
and who are prepared to accept the risks associated with an investment in equity
securities.
The National Municipal Bond Portfolio is designed for investors who seek
current income that is exempt from regular federal income tax and relative
stability of principal.
The Short-Intermediate Corporate Bond Portfolio is designed for investors
who seek higher current income than is typically offered by money market funds
with less principal volatility than is normally associated with a long-term bond
fund.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, purchase variable and floating rate
instruments, 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. For example, the absence of a
secondary market for a particular variable or floating rate instrument could
make it difficult for a Portfolio to dispose of an instrument if the issuer were
to default on its payment obligation. Default by a counterparty to a repurchase
agreement or securities lending transaction could expose a Portfolio to loss
because of adverse market action or possible delay in disposing of the
underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by a Portfolio will decline below
the repurchase price which the Portfolio is obligated to pay. Foreign securities
entail certain inherent risks, such as future political and economic
developments and the adoption of foreign government restrictions, that might
adversely affect payment of dividends or principal and interest. Purchasing
options is a specialized investment technique which entails a substantial risk
of loss of amounts paid as premiums to option writers. Investments in futures
and related options are
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subject to the ability of the Adviser to correctly predict movements in the
direction of the market and there is no assurance that a liquid market will
exist for a particular futures contract at any particular time. In addition,
each Portfolio may engage in short-term trading, which may also involve greater
risk and increase the Portfolio's expenses. The National Municipal Bond
Portfolio may also, under certain unusual market or economic 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 Fund also offers the economic advantages
of block trading in securities and the availability of a family of fifteen
mutual funds should your investment goals change.
This Prospectus describes the Trust Shares of the Portfolios. For
information on purchasing, exchanging or redeeming Trust Shares of the
Portfolios, please see "How to Purchase and Redeem Shares" below.
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CERTAIN FINANCIAL INFORMATION
Shares of the Equity Income Portfolio have been classified into four
classes of Shares -- Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares; Shares of the National Municipal Bond Portfolio have been
classified into three classes of Shares -- Trust Shares, Investor A Shares and
Investor B Shares; and Shares of the Short-Intermediate Corporate Bond Portfolio
have been classified into three classes of Shares -- Trust Shares, Institutional
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" and "Management of the Fund -- Administrative Services Plan" 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.
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EXPENSE SUMMARY FOR TRUST SHARES
<TABLE>
<CAPTION>
SHORT-
NATIONAL INTERMEDIATE
EQUITY INCOME MUNICIPAL BOND CORPORATE BOND
PORTFOLIO PORTFOLIO PORTFOLIO
------------- -------------- ----------------
<S> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees (net of fee
waivers)1........................... .00% .00% .00%
12b-1 Fees............................. .00% .00% .00%
Other Expenses (including
administration fees, administrative
services fees and other expenses)
(net of fee waivers and expense
reimbursements)2,3.................. .18% .12% .23%
--- --- ---
Total Portfolio Operating Expenses (net
of fee waivers and expense
reimbursements)3....................... .18% .12% .23%
=== === ===
</TABLE>
- ---------------
1 Without fee waivers, advisory fees for the Equity Income, National Municipal
Bond and Short-Intermediate Corporate Bond Portfolios would be .75%, .55% and
.55%, respectively.
2 Without fee waivers, administration fees for each Portfolio would be 0.20%.
Administrative services fees are payable at an annual rate not to exceed
0.30%.
3 Without fee waivers and expense reimbursements, Other Expenses would be .32%,
.30% and .37% and Total Portfolio Operating Expenses would be 1.37%, .1.15%
and 1.22% for the Equity Income, National Municipal Bond and
Short-Intermediate Corporate Bond Portfolios, respectively.
EXAMPLE
<TABLE>
<S> <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:
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Equity Income Portfolio............................................ $2 $ 6
National Municipal Bond Portfolio.................................. $1 $ 4
Short-Intermediate Corporate Bond Portfolio........................ $2 $ 7
</TABLE>
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THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE PORTFOLIOS ARE NEW AND ACTUAL EXPENSES
AND RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN. Information about the
actual performance of the Portfolios will be contained in the Fund's future
Annual Reports to Shareholders, which may be obtained without charge when they
become available 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 the Portfolios' Trust Shares will
bear directly or indirectly. The tables reflect the expenses which the
Portfolios expect to incur during the next twelve months on their Trust Shares.
(For more complete descriptions of the various costs and expenses, see
"Management of the Fund" in this Prospectus and the Statement of Additional
Information.) The Tables 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.
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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 EQUITY INCOME PORTFOLIO
The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation. In
pursuing its investment objective, the Portfolio intends to invest, under normal
market and economic conditions, substantially all of its assets in common stock,
preferred stock, rights, warrants, and securities convertible into common stock.
The Adviser will select stocks based on a number of quantitative factors,
including dividend yield, current and future earnings potential compared to
stock prices, total return potential and other measures of value, such as cash
flow, asset value or book value, if appropriate. 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 as compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce an above average level of income
(as measured by the Standard & Poor's 500 Index). Under normal market and
economic conditions, at least 65% of the Portfolio's total assets will be
invested in income-producing equity securities.
The 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 reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets in
cash and short-term obligations (having remaining maturities of 13 months or
less) at such times and in such proportions as, in the opinion of the Adviser,
such abnormal market or economic conditions warrant. Short-term obligations in
which the Portfolio may invest include money market instruments, such as
commercial paper and bank obligations, obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and repurchase agreements.
THE NATIONAL MUNICIPAL BOND PORTFOLIO
The National Municipal Bond Portfolio's investment objective is to seek as
high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. In pursuing its investment objective,
the Portfolio intends to invest, under normal market and economic conditions,
substantially all of its assets in investment-grade debt 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
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which, in the opinion of bond counsel or counsel to the issuer, is exempt from
regular federal income tax (collectively, "Municipal Obligations"). As a matter
of fundamental policy, under normal market and economic 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 Portfolio may purchase Municipal Obligations that are rated at the time
of purchase in one of the four highest rating categories assigned by one or more
unaffiliated nationally recognized statistical rating organizations ("Rating
Agencies") or in unrated Municipal Obligations deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its assets in Municipal Obligations
rated at the time of purchase in one of the three highest rating categories
assigned by one or more Rating Agencies (or unrated Municipal Obligations
determined to be of comparable quality). Securities that are rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment-grade quality, and will be
purchased (and retained) only if the Adviser believes that 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. 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 to
60 days. The applicable ratings issued by the Rating Agencies are described in
the Appendix to the Statement of Additional Information.
In addition, the 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 and 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. The Portfolio does not intend to invest in
taxable obligations under normal market conditions.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the 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 Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
The Portfolio's average dollar-weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors.
THE SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
The Short-Intermediate Corporate Bond Portfolio's investment objective is
to seek as high a level of current income as is consistent with preservation of
capital. In pursuing its investment objective, the Portfolio intends to invest,
under normal market and economic conditions, at least 65% of its total assets in
non-convertible corporate debt obligations, which shall mean obligations of (i)
domestic or foreign business corporations, or (ii) agencies, instrumentalities
or authorities which are organized in corporate form by one or more states or
political subdivisions in the United
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States or one or more foreign governments. The Portfolio may also invest in
obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities, and asset-backed securities, including various
collateralized mortgage obligations and other mortgage-related securities. 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 Portfolio may purchase debt securities which are rated at the time of
purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated debt securities deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its total assets in debt obligations
rated in one of the three highest rating categories assigned by one or more
Rating Agencies (or unrated debt obligations determined to be of comparable
quality). Securities that are rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of
investment-grade quality, and such securities will be purchased (and retained)
only if the Adviser believes that the issuers have an adequate capacity to pay
interest and repay principal. Unrated debt securities 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. Debt
securities 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 to 60 days. The applicable ratings
issued by the Rating Agencies are described in the Appendix to the Statement of
Additional Information.
The 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 13 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 in which the Portfolio may invest include money
market instruments, such as commercial paper and bank obligations, obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
and repurchase agreements.
The Portfolio's average 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.
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. Examples of the types of U.S. Government
obligations that may be held by the Portfolios, subject to their 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, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), General
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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 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, the Portfolios may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury, as well as
"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. 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 Short-Intermediate Corporate Bond Portfolio 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.
MONEY MARKET INVESTMENTS. Under certain circumstances described above,
each Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
Investment by the Portfolios in taxable or tax-exempt commercial paper will
consist of issues that are rated at the time of purchase in one of the two
highest rating categories assigned by a Rating Agency or, if unrated, deemed to
be of comparable quality by the Adviser at the time of purchase. Commercial
paper may include variable and floating rate instruments. See "Other Applicable
Policies -- Variable and Floating Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. or foreign banks, having total
assets at the time of purchase in excess of $1 billion. Although the Portfolios
will invest in obligations of foreign banks or foreign branches of U.S. banks
only when the Adviser determines that the instrument presents minimal credit
risks, such investments nevertheless entail risks that are different from those
of investments in domestic obligations of U.S. banks. See "Other Applicable
Policies -- Foreign Securities" below. Investments in the obligations of foreign
banks or foreign branches of U.S. banks will not exceed 25% of a particular
Portfolio's total assets at the time of purchase.
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REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, the Portfolios, other than the
National Municipal Bond 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 believes to be creditworthy. During the term of any repurchase
agreement, the 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 neither 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.")
REVERSE REPURCHASE AGREEMENTS. Subject to their respective investment
policies and limitations, the Portfolios, other than the National Municipal Bond
Portfolio, may borrow funds for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such agreements, a Portfolio would sell
portfolio securities to financial institutions such as banks and broker-dealers
and agree to 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
may, from time to time, lend 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 Securities and Exchange Commission
("SEC") policies, each Portfolio is currently limiting its securities lending to
33 1/3% of its aggregate net assets. Loans are subject to termination by a
Portfolio or the borrower at any time.
OPTIONS. The Equity Income and Short-Intermediate Corporate 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 their respective net assets. Such options may relate to
particular securities or to various stock or bond indices. Purchasing options is
a specialized
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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.
The Equity Income and Short-Intermediate Corporate Bond 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 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 either Portfolio. (For additional information relating to option
trading practices, including particular risks, see the Statement of Additional
Information and Appendix B thereof.)
FUTURES CONTRACTS AND RELATED OPTIONS. The Equity Income and
Short-Intermediate Corporate Bond 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. 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 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 either Portfolio. Neither the Equity Income
Portfolio nor Short-Intermediate Corporate Bond Portfolio 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.)
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ASSET-BACKED SECURITIES. The Short-Intermediate 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 GNMA, FNMA, 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
Short-Intermediate Corporate Bond Portfolio 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.
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the National Municipal Bond Portfolio
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. Revenue 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
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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 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.
The National Municipal Bond Portfolio 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 the Portfolio's applicable
limitation on illiquid securities described below.
Municipal Obligations purchased by the National Municipal Bond Portfolio
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 the 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.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax 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 the National
Municipal Bond Portfolio from tax-exempt derivative securities are rendered by
counsel to the respective sponsors of such securities. The National Municipal
Bond Portfolio and the Adviser will rely on such opinions and will not review
independently the underlying proceedings relating to
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<PAGE> 15
the issuance of Municipal Obligations, the creation of any tax-exempt derivative
security, or the basis for such opinions.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated
or unrated variable and floating rate instruments. These instruments may include
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 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.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to its investment policies, 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. Such charges will be payable by the 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.")
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. Additionally, the National
Municipal Bond Portfolio may purchase or sell securities on a "delayed
settlement" basis. When-issued and forwarded commitment 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. Delayed settlement refers to a transaction in
the secondary market that will settle some time in the future. These
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.
STAND-BY COMMITMENTS. The National Municipal Bond Portfolio 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
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price. The National Municipal Bond 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. The National Municipal Bond Portfolio 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 the National Municipal Bond
Portfolio's net 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%
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 this 15% limit
(unless the Adviser, pursuant to guidelines established by the Fund's Board of
Directors, determines that a liquid market exists). The Adviser expects that
less than 5% of each Portfolio's net assets will be invested in Rule 144A
securities during the current year.
FOREIGN SECURITIES. Investments made in foreign securities, whether made
directly or indirectly, involve certain inherent risks, such as future political
and economic developments, the possible imposition of foreign withholding tax on
the interest income payable on such instruments, the possible establishment of
foreign controls, the possible seizure or nationalization of foreign deposits or
assets, or the adoption of other foreign government restrictions that might
adversely affect payment of interest or principal. 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 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.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. The Equity Income Portfolio
invests primarily in equity securities. As with other mutual funds that invest
primarily or to a significant degree in equity securities, the Equity Income
Portfolio is 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.
Generally, the market value of fixed income securities, such as Municipal
Obligations and other debt securities, 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
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<PAGE> 17
fixed income securities, such as the National Municipal Bond and
Short-Intermediate Corporate Bond Portfolios, will tend to increase, and during
periods of rising interest rates, the market value will tend to decrease. In
addition, during periods of declining interest rates, the yields of investment
portfolios comprised primarily of fixed income securities will tend to be higher
than prevailing market rates and, in periods of rising interest rates, yields
will tend to be somewhat lower. 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 the
Portfolio's net asset value.
Although the National Municipal Bond Portfolio may invest 25% or more of
its total assets in (i) Municipal Obligations whose issuers are in the same
state, and (ii) Municipal Obligations the interest on which is paid solely from
revenues of similar projects, it does not presently intend to do so unless, in
the opinion of the Adviser, the investment is warranted. The National Municipal
Bond Portfolio's ability to achieve its investment objective is dependent upon
the ability of issuers of Municipal Obligations to meet their continuing
obligations for the payment of principal and interest. To the extent that the
Portfolio's assets are invested in Municipal Obligations that are payable from
the revenues of similar projects or, the Portfolio will be subject to the
particular risks (including legal and economic conditions) relating to such
securities to a greater extent than it would be if its assets were not so
concentrated. (See "Investment Objectives and Policies -- Municipal Obligations"
in the Statement of Additional Information.)
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Portfolios will not
normally engage in short-term trading, each Portfolio reserves the right to do
so if the 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 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 Portfolios cannot accurately predict
their respective annual portfolio turnover rates, such rates are not expected to
exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the 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 the Adviser believes the charge for the transaction does not exceed the
usual and customary broker's commission.
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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."
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, however, that (a) with respect
to the National Municipal Bond 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, and (b) with respect to the Equity Income and
Short-Intermediate Corporate Bond Portfolios (i) there is no limitation
with respect to obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, repurchase agreements secured by
obligations of the U.S. Government or its agencies or instrumentalities,
and, with respect to the Equity Income Portfolio only, securities issued by
domestic banks, thrifts or savings institutions; (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).
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and each Portfolio other than the National Municipal
Bond Portfolio may 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 the 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.
4. Make loans, except that (a) each Portfolio may purchase or hold
debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies and (b) the Equity
Income and Short-Intermediate Corporate Bond Portfolios may enter into
repurchase agreements.
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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.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting solely from a change in the
value of a Portfolio's securities will not constitute a violation of such
limitation.
In order to permit the sale of a Portfolio's Shares in certain states, the
Portfolios may make commitments more restrictive than the investment policies
and limitations described above. Should the Adviser determine that any such
commitment is no longer in the best interests of a Portfolio, it will revoke the
commitment by terminating sales of its Shares in the state involved.
PRICING OF SHARES
The Portfolios' respective net asset values per Share are determined by the
Administrator as of the close of regular trading hours on the New York Stock
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 is closed (a "Business Day"). Currently, one or both of these
institutions is closed on the customary national business holidays of New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day (observed).
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
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.)
The public offering price for each class of Shares is based upon net asset
value per Share plus, in the case of Investor A Shares, 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 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.
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HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or other financial institutions
(collectively "financial institutions"), acting on their own behalf or on behalf
of their qualified fiduciary accounts, employee benefit, retirement plan or
other such qualified accounts. Trust Shares are sold to qualified purchasers
without a sales charge imposed by the Fund or the Distributor. Generally,
investors purchase Trust Shares through a financial institution, which is
responsible for transmitting purchase orders directly to the Fund.
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.
Financial institutions 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.
All shareholders of record will receive confirmations of Share purchases,
exchanges and redemptions in the mail. If Shares are held in the name of banks
or other financial institutions, such institution 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. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Trust 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. on the next Business Day following 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 financial institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Trust Shares of a
Portfolio for Trust Shares of another Portfolio offered by the Fund. Exchanges
for Trust Shares in another Portfolio are effected without payment of any
exchange or sales charges. In addition, Trust Shares of a Portfolio may be
exchanged for Investor A Shares of the same Portfolio in connection with 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. Such exchanges will also be effected without payment of any
exchange or sales charges. The exchange privilege may be exercised only in those
states where the class of Shares of such other Portfolios may be legally sold.
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 financial institution, which is responsible for
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<PAGE> 21
transmitting such request to the Distributor. (See "Other Exchange or Redemption
Information" below.) An investor should consult the financial institution or the
Distributor for further information regarding procedures for exchanging Shares.
In addition to the Portfolios described in this Prospectus, the Fund
currently offers Trust Shares in the following Portfolios:
- 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 International Equity Portfolio
- The ARCH Balanced Portfolio
- The ARCH Government & Corporate Bond Portfolio
- The ARCH U.S. Government Securities Portfolio
- The ARCH Short-Intermediate Municipal Portfolio
- The ARCH Missouri Tax-Exempt Bond Portfolio
- The ARCH Kansas Tax-Exempt Bond Portfolio*
For information concerning these Portfolios, please call 1-800-551-3731.
Shareholders exercising the exchange privilege with any of the other Portfolios
in the Fund should request and review the Portfolio's Prospectus carefully prior
to making an exchange.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution 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. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. Proceeds from
redemptions of Trust Shares of the Portfolios with respect to redemption orders
received in good form by the Fund before 4:00 p.m. (Eastern time) on a Business
Day normally are sent electronically to the financial institution that placed
the redemption order the next Business Day. No charge for sending redemption
payments 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.
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.
- ---------------
*Expected to commence operations in 1997.
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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 the financial institution servicing his or her
account or the Distributor. Additional documentation may be required if the
redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator. 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.
Neither the Fund nor its service providers 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, 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 providers may be
liable for any losses due to unauthorized or fraudulent instructions.
OTHER EXCHANGE OR REDEMPTION INFORMATION
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
financial institution 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
financial institutions and their investors.
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YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and 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.
From time to time, performance information such as total return and yield
data for the Portfolios' Trust Shares may be quoted in advertisements or in
communications to shareholders. The yield of a Portfolio is computed based on
the net income of such 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 net asset value per Share
on the last day of the period and annualizing the result. The National Municipal
Bond Portfolio's "tax equivalent" yield, which shows the level of taxable yield
needed to produce an after-tax equivalent to the Portfolio's tax-free yield, may
also be quoted from time to time. This is done by increasing the Portfolio's
yield (calculated as above) by the amount necessary to reflect the payment of
federal income tax at a stated tax 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 such Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular 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 the Portfolio during the period
are reinvested in the Portfolio's Trust Shares. 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.
Performance data of the Portfolios' Trust 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. and Mutual Fund Forecaster.
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/Weisenberger, 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 a bank or other financial
institution (as described in "Management of the Fund -- Service Organizations"
below) or other institutions will not be included in the calculations of a
Portfolio's yields and total returns. Such fees, if any, will reduce the
investor's net return on an
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investment in a Portfolio. Investors may call 1-800-452-4015 to obtain current
yield and total return information.
DIVIDENDS AND DISTRIBUTIONS
THE EQUITY INCOME PORTFOLIO
Net investment income for the Equity Income Portfolio is declared and paid
monthly as a dividend to shareholders of record. Dividends on each Share of this
Portfolio are determined in the same manner and are paid in the same amount,
irrespective of class, except that the Portfolio's Trust Shares and
Institutional Shares bear all expenses of the respective Administrative Services
Plans adopted for such Shares and the 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, the 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.")
THE NATIONAL MUNICIPAL BOND AND SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIOS
Dividends from net investment income of the National Municipal Bond and
Short-Intermediate Corporate Bond Portfolios are declared daily and paid monthly
not later than five Business Days after the end of each month. Trust Shares of
these Portfolios earn dividends from the day after the purchase order is
received by the Fund through the day the redemption order for such Shares is
received. 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 National
Municipal Bond Portfolio which does 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 Short-
Intermediate Corporate Bond Portfolio which does 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.")
OTHER DIVIDEND AND DISTRIBUTION INFORMATION
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 in additional Shares of the same class unless the
investor has (i) otherwise indicated on 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 intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"), for the taxable year
ending November 30, 1996,
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and to continue to so qualify as long as such qualification is in the best
interests of shareholders. A regulated investment company generally is exempt
from federal income tax on amounts distributed to shareholders.
Qualification as a regulated investment company under 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 exempt-interest income (if any) net of
certain deductions for such year. 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 for the taxable year over the net short-term
capital loss, if any, for such year. It is the policy of the Equity Income and
Short-Intermediate Corporate Bond Portfolios 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 Equity Income Portfolio, such
dividends will qualify for the dividends received deduction for corporations to
the extent of the total qualifying dividends received by the Portfolio from
domestic corporations for the taxable year.
It is the policy of the National Municipal Bond 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 Statement of
Additional Information under "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 the National Municipal Bond 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 dividends are received in
cash or reinvested in additional Shares.
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An investor considering purchasing Shares of a Portfolio on or just before
the record date of any capital gains distribution (or in the case of the Equity
Income Portfolio, 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 the shareholders and paid by the Portfolio on
December 31 of such year in the event 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 to properly 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, depending upon the cost of such Shares when
purchased 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.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
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.
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 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
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,
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Missouri 63101. MVA is a wholly-owned subsidiary of Mercantile. As of December
31, 1995, MVA had approximately $7.0 billion in assets under investment
management, including the Fund's assets, which were approximately $2.1 billion.
MVA also serves as investment adviser to each of the Fund's other Portfolios.
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, at the annual rates of .75%, .55% and .55% of the average daily net
assets of the Equity Income, National Municipal Bond and Short-Intermediate
Corporate Bond Portfolios, respectively.
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.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, Senior Associate, has
been with MVA since 1983. For the past 13 years, he has served as a stock
analyst and has managed several of Mercantile's common funds.
Peter Merzian is the person primarily responsible for the day-to-day
management of the National Municipal Bond Portfolio. Mr. Merzian, Senior
Associate joined MVA in 1993 and prior thereto was employed as a portfolio
manager by another financial institution.
David A. Bethke, is the person primarily responsible for the day-to-day
management of the Short-Intermediate Corporate Bond Portfolio. Mr. Bethke,
Senior Associate, joined MVA in 1987 and has six years of prior investment
experience.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolios' Administrator. The Administrator also serves
as the administrator to each of the Fund's other Portfolios.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Fund's arrangements under the Administrative Services Plan
described below. For its services, the Administrator is entitled to receive a
fee, computed daily and payable monthly, at the annual rate of .20% of each
Portfolio's average daily net assets.
DISTRIBUTOR
Trust Shares of the Portfolios are sold continuously by the Distributor,
BISYS Fund Services, an affiliate of the Administrator. The Distributor is a
registered broker-dealer with principal offices at
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3435 Stelzer Road, Columbus, Ohio 43219. The Distributor also acts as
distributor to each of the Fund's other Portfolios.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to the
Trust Shares of the Portfolios. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .30% of the average daily net
assets of a Portfolio's Trust Shares owned beneficially by a Service
Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(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 Trust 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.
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 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 Service Organizations
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
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. 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.
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
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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 their 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 below under "Other
Information Concerning the Fund and Its Shares"). 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 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
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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 the Fund's 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 is classified as a diversified company under the 1940
Act: 50 million Trust Shares, 25 million Institutional Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Equity Income Portfolio; 50 million Trust Shares, 25 million Investor A
Shares and 25 million Investor B Shares, representing interests in the National
Municipal Bond Portfolio; and 50 million Trust Shares, 25 million Institutional
Shares and 25 million Investor A Shares, representing interest in the Short-
Intermediate Corporate Bond Portfolio. Institutional, Investor A and/or Investor
B Shares of these Portfolios are described in separate prospectuses which are
available from the Distributor at the telephone number on the cover of this
Prospectus. The Board of Directors has also authorized the issuance of
additional classes of shares representing interest in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Fund's Portfolios will be issued
without Share certificates.
The Trust Shares of the Portfolios are described in this Prospectus. The
Portfolios also offer Investor A Shares and, in addition, the Equity Income and
National Municipal Bond Portfolios offer Investor B Shares and the Equity Income
and Short-Intermediate Corporate Bond Portfolios offer Institutional Shares.
Institutional Shares, which are offered to financial institutions acting on
behalf of accounts for which they do not exercise investment decision, are sold
without a sales charge. Investor A Shares of the Portfolios are sold with a
maximum 4.5% (2.5% with respect to the Short-Intermediate Corporate Bond
Portfolio) front-end sales charge, and Investor B Shares are sold with a maximum
5.0% contingent deferred sales charge. Investor A Shares and Investor B Shares
are
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sold through selected broker/dealers and other financial intermediaries to
individual or institutional customers. Trust Shares, Institutional Shares,
Investor A Shares 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 of a Portfolio bear all payments under the Fund's
respective Administrative Services Plans adopted for such Shares and Investor A
Shares and Investor B Shares of a Portfolio bear all payments under the Fund'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 Plan for 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 Institutional Shares. Payments under the Administrative Services Plan may not
exceed .30% (on an annual basis) of the average daily net asset value of a
Portfolio's outstanding Institutional Shares.
Payments under the Distribution and Services Plans for Investor A Shares
and Investor B Shares are made to (i) the Distributor or another person for
providing distribution assistance and assuming certain related expenses, and
(ii) Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of
Investor A Shares or Investor B Shares. Payments under the Distribution and
Services Plans for Investor A Shares and Investor B Shares may not exceed .30%
and 1.00%, respectively, (on an annual basis) of the average daily net asset
value of Investor A Shares and Investor B Shares of a Portfolio. Distribution
payments made under the Distribution and Services Plans are subject to the
requirements of Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares and Investor B Shares of a Portfolio that are not offered in connection
with the Portfolio's Trust Shares or Institutional Shares, including an
automatic investment program and an 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 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 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 Fund's 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
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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 means, with respect to the approval of an investment
advisory agreement 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 (irrespective of class), or (b) 67% or
more of the Shares of such Portfolio (irrespective of class) present at a
meeting if more than 50% of the outstanding Shares of such Portfolio are
represented at the meeting in person or by proxy.
As of the date of this Prospectus, 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.
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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
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<S> <C>
Highlights............................... 2
Certain Financial Information............ 4
Expense Summary for Trust Shares......... 5
Investment Objectives, Policies and Risk
Considerations......................... 7
Investment Limitations................... 18
Pricing of Shares........................ 19
How to Purchase and Redeem Shares........ 20
Purchase of Shares..................... 20
Exchange Privilege..................... 20
Redemption of Shares................... 21
Other Exchange or Redemption
Information.......................... 22
Yields and Total Returns................. 23
Dividends and Distributions.............. 24
Taxes.................................... 24
Management of the Fund................... 26
Other Information Concerning the Fund
and Its Shares......................... 30
</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.
EQUITY INCOME PORTFOLIO
NATIONAL MUNICIPAL BOND PORTFOLIO
SHORT-INTERMEDIATE
CORPORATE BOND PORTFOLIO
TRUST SHARES
[ARCH MUTUAL FUNDS LOGO]
PROSPECTUS
MAY 13, 1996
(AS REVISED OCTOBER 25, 1996)
<PAGE> 35
THE ARCH FUND(R), INC.
(THE "FUND")
THE ARCH EQUITY INCOME PORTFOLIO
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
THE ARCH SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
SUPPLEMENT DATED OCTOBER 25, 1996
TO PROSPECTUS DATED MAY 13, 1996
(AS REVISED OCTOBER 25, 1996)
The Fund is not currently offering Trust Shares of the ARCH Equity Income
Portfolio or the ARCH Short-Intermediate Corporate Bond Portfolio.
<PAGE> 36
THE ARCH FUND(R), INC.
THE ARCH EQUITY INCOME PORTFOLIO
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
THE ARCH SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
Statement of Additional Information
Part B
May 13, 1996
(as revised October 25, 1996)
<PAGE> 37
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Equity Income Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Short-Intermediate Corporate Bond Portfolio
May 13, 1996
(as revised October 25, 1996)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE FUND............................................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES..................................................................... 1
NET ASSET VALUE........................................................................................ 23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................................... 24
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION.......................................................... 26
DESCRIPTION OF SHARES.................................................................................. 32
ADDITIONAL INFORMATION CONCERNING TAXES................................................................ 35
MANAGEMENT OF THE FUND................................................................................. 42
INDEPENDENT AUDITORS................................................................................... 51
COUNSEL................................................................................................ 51
MISCELLANEOUS.......................................................................................... 51
APPENDIX A............................................................................................ A-1
</TABLE>
This Statement of Additional Information, which provides supplemental
information applicable to the Equity Income, National Municipal Bond and
Short-Intermediate Corporate Bond Portfolios is not a prospectus. It should be
read only in conjunction with the Portfolios' Prospectuses dated May 13, 1996
(as revised October 25, 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 relevant 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 (800) 551-3731. Capitalized terms used but not defined herein
have the same meanings as in each Prospectus.
-i-
<PAGE> 38
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end investment company
currently offering fifty-one classes of shares in fifteen investment
portfolios.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the description of the investment
objectives and policies of the Equity Income, National Municipal Bond and
Short-Intermediate Corporate Bond Portfolios (the "Portfolios") described in
the Prospectuses.
EQUITY INCOME PORTFOLIO
The Equity Income 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 Equity Income
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 net assets, taken at market value, in warrants, or more than 2% of its net
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.
NATIONAL MUNICIPAL BOND PORTFOLIO
As stated in the Prospectuses, the National Municipal Bond Portfolio's
investment objective is to seek as high a level of current income, exempt from
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 debt 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
<PAGE> 39
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 value of the Portfolio's securities is generally sensitive to change in
interest rates. See "Short-Intermediate Corporate Bond Portfolio" below.
MUNICIPAL OBLIGATIONS. As described in its Prospectuses and subject to its
investment limitations, the National Municipal Bond Portfolio may invest in
Municipal Obligations. Municipal Obligations include debt obligations issued by
governmental entities which 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.
As described in the Prospectuses, the two principal classifications of
Municipal Obligations consist of "general obligation" and "revenue" issues. In
addition, the National Municipal Bond Portfolio 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 the 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 the Portfolio. The Adviser will
consider such an event in determining whether the Portfolio involved should
continue to hold the obligation.
The National Municipal Bond Portfolio 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
-2-
<PAGE> 40
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, the 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 the
National Municipal Bond Portfolio will depend upon 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."
The National Municipal Bond 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
-3-
<PAGE> 41
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.
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.")
SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
An increase in interest rates will generally reduce the value of the
investments in the Short-Intermediate 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
-4-
<PAGE> 42
fixed-income markets, the Portfolio may make modest shifts in terms of
anticipated interest rate and sector spread changes.
OTHER APPLICABLE INVESTMENT POLICIES
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to its investment
limitations, the Portfolios 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. In determining average
weighted portfolio maturity, an instrument issued or guaranteed by the U.S.
Government or an agency or instrumentality thereof, or a variable 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 next interest rate
adjustment. Other variable and floating rate obligations 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.
The variable and floating rate demand instruments that the National
Municipal Bond Portfolio may purchase include participations in Municipal
Obligations purchased from and owned by financial institutions, primarily
banks. Participation interests provide the 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 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.
-5-
<PAGE> 43
The Adviser monitors the liquidity of restricted securities in the
Portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, the 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. The National Municipal Bond Portfolio may acquire
"stand-by commitments" with respect to Municipal Obligations held by the
Portfolio. Under a stand-by commitment, a dealer or bank agrees to purchase
from the 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 the 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 the 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.
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, the National Municipal Bond 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 to maturity otherwise available for the same securities).
The National Municipal Bond Portfolio intends to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in the Adviser's
opinion, present minimal credit risks. The 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.
-6-
<PAGE> 44
The National Municipal Bond 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 the
Portfolio would be valued at zero in determining net asset value. Where the
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 the Portfolio.
TAX-EXEMPT DERIVATIVES. The National Municipal Bond Portfolio 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 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 Portfolio 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
-7-
<PAGE> 45
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 policies, the 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 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.
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<PAGE> 46
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.
For custodial receipts, by agreement 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.
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<PAGE> 47
SECURITIES LENDING. While the 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 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. The Short-Intermediate Corporate Bond Portfolio
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.
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<PAGE> 48
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 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
-11-
<PAGE> 49
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 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.
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<PAGE> 50
The National Municipal Bond Portfolio expects that commitments to purchase
when-issued securities will not exceed 5% of the value of its total assets
under normal market conditions.
OPTIONS TRADING. As described in the Prospectuses, the Equity Income and
Short-Intermediate Corporate 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 a Portfolio's total net assets.
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 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
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<PAGE> 51
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
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 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
-14-
<PAGE> 52
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.
FUTURES CONTRACTS. As discussed in the Prospectuses, the Equity Income and
Short-Intermediate Corporate Bond Portfolios may invest in 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.
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<PAGE> 53
Successful use of futures by a Portfolio is also subject to the 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
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 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 (as well as 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.
-16-
<PAGE> 54
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.
ADRS AND EDRS. The Equity Income and Short-Intermediate Corporate Bond
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.
MONEY MARKET INVESTMENTS. As stated in the Prospectuses and subject to
their respective investment policies, the Portfolios may invest in the
following money market instruments for temporary defensive or other purposes:
commercial paper, bankers' acceptances, certificates of deposit and time
deposits, floating rate notes.
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
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<PAGE> 55
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.
REPURCHASE AGREEMENTS. The Short-Intermediate Corporate Bond Portfolio may
enter into repurchase agreements with respect to portfolio securities. Under
the terms of a repurchase agreement, a Portfolio purchases securities from
financial institutions such as banks and broker-dealers that are deemed to be
creditworthy by the Adviser under guidelines approved by the Board of
Directors, subject to the seller's agreement to repurchase them at a mutually
agreed-upon date and price. Securities subject to repurchase agreements are
held by the Portfolios' Custodian or in the Federal Reserve/Treasury book-entry
system. During the term of any repurchase agreement, the Adviser will continue
to monitor the creditworthiness of the seller. The repurchase price generally
equals 102% of the price paid by the 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). Under a repurchase agreement, the seller
is required to maintain the value of the securities subject to the agreement at
not less than the repurchase price, and securities subject to repurchase
agreements are maintained by the Portfolios' Custodian in segregated accounts
in accordance with the 1940 Act. Default by the seller could, however, expose
the Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying securities. Repurchase
agreements are considered to be loans by the Portfolio under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the Prospectuses, the
Short-Intermediate Corporate Bond Portfolio may enter into reverse repurchase
agreements (agreements under which a Portfolio sells portfolio securities and
agrees to repurchase them at an agreed-upon date and price). 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.
Reverse repurchase agreements involve the risk that the market value of
the securities sold by the Portfolio may decline below the price of the
securities that it is obligated to repurchase. Reverse repurchase agreements
are considered to be borrowings under the 1940 Act. Each Portfolio intends to
limit
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<PAGE> 56
its borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Portfolios.
The Portfolios' rate of 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.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On the exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. 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, in
its sole discretion, believes such practice to be otherwise in a Portfolio's
interests.
While the Adviser generally seeks competitive 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 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 may receive orders for transactions by a Portfolio.
Information so received
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<PAGE> 57
is in addition to and not in lieu of services required to be performed by the
Adviser and does not reduce the advisory fees payable to it by a Portfolio.
Such information may be useful to the 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 in carrying
out its obligations to the Portfolios. Portfolio securities will not be
purchased from or sold to the 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.
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
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 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.
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 PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising control or management.
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<PAGE> 58
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
Short-Intermediate 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, mortgage-backed securities and CMOs.
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, provided that each 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
provided further that the Equity Income and Short-Intermediate Corporate Bond
Portfolios may invest in futures contracts and related options in accordance
with their respective investment activities 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 transactions by either the Equity Income or Short-Intermediate
Corporate Bond Portfolios 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.
NET ASSET VALUE
As stated in the applicable Prospectuses, the net asset value per share of
each class of a Portfolio is calculated by adding the value of all of the
portfolio securities and other assets belonging to a Portfolio, subtracting the
liabilities charged to such class, and dividing the result by the number of
outstanding shares of such class. "Assets belonging to" each class of a
Portfolio consist of the consideration received upon the issuance of shares of
each class of the Portfolio together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale,
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<PAGE> 59
exchange, or liquidation of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Fund not belonging to a particular Portfolio. Assets belonging to each
class of a Portfolio are charged with the direct liabilities of each class of
that Portfolio and with a share of the general liabilities of the Fund
allocated in proportion to the relative net assets of that Portfolio and the
Fund's other Portfolios. 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 class of a Portfolio are conclusive.
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."
Among the factors that ordinarily will be considered in valuing portfolio
securities are the existence of restrictions upon the sale of the security by a
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.
Additionally, 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
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<PAGE> 60
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.
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 (other than the National Municipal Bond
Portfolio which does not offer Institutional Shares) are sold to certain
qualified customers at their net asset value without a sales charge. Investor A
shares of each Portfolio 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 Short-Intermediate Corporate Bond Portfolio which
does 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.
A hypothetical illustration of the computation of the public offering
price per share of Investor A shares of the Portfolios, based on the projected
value of each 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 4.5% (2.5% with respect to the
Short-Intermediate Corporate Bond Portfolio) sales charge currently applicable,
is as follows:
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<PAGE> 61
TABLE
<TABLE>
<CAPTION>
National
Equity Municipal
Income Bond
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets $ 10.00 $ 10.00
----- -----
Outstanding Shares 1 1
- -
Net Asset Value Per
Share $ 10.00 $ 10.00
----- -----
Sales Charge, 4.50% of
offering price (4.70%
of net asset value
per share) $ 0.47 $ 0.47
Offering to Public $ 10.47 $ 10.47
===== =====
</TABLE>
TABLE
<TABLE>
<CAPTION>
Short-Intermediate Corporate Bond
Portfolio
---------
<S> <C>
Net Assets $ 10.00
-----
Outstanding Shares 1
Net Asset Value Per Share $ 10.00
-----
Sales Charge, 2.50% of
offering price (2.56%
of net asset value
per share) $ 0.26
Offering to Public $ 10.26
=====
</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. The Portfolio may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
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<PAGE> 62
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.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their shares in the Portfolios as
so described in the applicable Prospectus. Any rights an investor may have to
reduce (or have waived) the sales load applicable to an exchange, as may be
provided in a Prospectus, will apply in connection with any such exchange.
By use of the exchange privilege, the investor authorizes his or her
Selected Dealer, Service Organization or the Distributor to act on telephonic
instructions from any person representing himself or herself to be the investor
and believed by the Selected Dealer, Service Organization or the Distributor to
be genuine. The investor, Selected Dealer, Service Organization or the
Distributor must notify the transfer agent of the investor's prior ownership of
Portfolio shares and account number. The transfer agent's records of such
instructions are binding. The exchange privilege may be modified or terminated
at any time upon 60 days' written notice to shareholders.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
From time to time yields and total returns of Trust Shares, Institutional
Shares, Investor A Shares and Investor B Shares (computed separately) of a
Portfolio may be quoted in advertisements, shareholder reports of other
communications to Shareholders.
YIELD CALCULATIONS. A 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
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<PAGE> 63
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)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 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 tax-exempt obligations of the National Municipal Bond
Portfolio that are issued without original issue discount and have a current
market discount is
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<PAGE> 64
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt 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 tax-exempt
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 each series 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 National Municipal Bond Portfolio's "tax-equivalent" yield for each
class of shares is computed by dividing the portion of the Portfolios' 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 Portfolios' yield that is not exempt from federal income tax.
The Fund currently calculates 30 day yield for its fixed income non-money
market Portfolios but not for its equity Portfolios.
TOTAL RETURN CALCULATIONS. 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:
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<PAGE> 65
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:
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 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.
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
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<PAGE> 66
effect of not deducting the sales charge will be to increase the total return
reflected.
IN GENERAL
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 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 may or may not include the Portfolios; (7) comparisons of investment
products (including the Portfolios) with relevant
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<PAGE> 67
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 National Municipal Bond Portfolio, 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 Portfolio, 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: NATIONAL MUNICIPAL BOND PORTFOLIO
SINGLE RETURN
Sample Taxable Federal -------------Tax-Exempt Yields---------------
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> 68
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: NATIONAL MUNICIPAL BOND PORTFOLIO
MARRIED FILING
JOINTLY
Sample Taxable Federal -------------Tax-Exempt Yields---------------
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
$40,100 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$40,100 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>
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 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 - (800) 452-ARCH; OR TRUST OR INSTITUTIONAL SHARES - (800) 452-4015.
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
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<PAGE> 69
issuance of fifty-one classes of shares representing interests in one of
fifteen investment Portfolios: the Money Market, Treasury Money Market,
Tax-Exempt Money Market, Growth & Equity Income, Emerging Growth, Government &
Corporate Bond, U.S. Government Securities, Balanced, International Equity,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
Equity Income, National Municipal Bond and Short-Intermediate Corporate Bond
Portfolios. Trust shares, Institutional shares, Investor A shares and/or
Investor B shares in each Portfolio 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 are
subject to a front-end sales charge and Investor B shares are subject to a
contingent deferred sales charge as described in the Prospectuses. The series
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.
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<PAGE> 70
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 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
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
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<PAGE> 71
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 Internal Revenue Code of 1986, as amended, (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 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 red 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
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<PAGE> 72
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 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. Interest on indebtedness incurred by a shareholder to purchase
or carry the National Municipal Bond Portfolio's Shares, 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 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
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<PAGE> 73
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
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.
The policy of the National Municipal Bond 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
the National Municipal Bond 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 the National Municipal Bond Portfolio and
designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than 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
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<PAGE> 74
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 the National Municipal Bond 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 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, (ii) who occupies more than 5% of the usable area of such
facilities or (iii) 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.
While the National Municipal Bond Portfolio does not expect to realize
long-term capital gains, any net realized long-term capital gains will be
distributed at least annually. The National Municipal Bond Portfolio generally
will have no tax liability with respect to such gains and distributions derived
from such gains will be taxable to the National Municipal Bond Portfolio's
shareholders as long-term capital gains, regardless of how long a shareholder
has held the Portfolio Shares. Such distributions will be designated as capital
gain dividends in a written notice mailed by the Portfolio to shareholders
after the close of the Portfolio's taxable year.
Similarly, while the National Municipal Bond Portfolio does not expect to
earn any investment company taxable income, any taxable income earned by the
National Municipal Bond Portfolio will be distributed to shareholders. In
general, the National Municipal Bond Portfolio's investment company taxable
income will be its taxable income subject to certain adjustments and excluding
the excess of any net long-term capital gain for the taxable year over any net
short-term capital loss for such year. The National Municipal Bond Portfolio
would be taxed on any undistributed investment company taxable income. To the
extent such income is distributed by the Portfolio, it will be taxable to
shareholders as ordinary income (whether paid in cash or additional Shares).
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<PAGE> 75
Each Portfolio will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on his return
payments of taxable interest or dividends.
In those states and localities which have income tax laws, the treatment
of a Portfolio and its shareholders under such laws may differ from their
treatment under federal income tax laws. Under state or local law,
distributions of net income may be taxable to shareholders as dividend income
even though such distributions are derived from interest on Municipal
Obligations which, if realized directly, would be exempt from such income
taxes. Shareholders are advised to consult their tax advisors concerning the
application of state and local taxes.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Equity Income and Short-Intermediate
Corporate Bond 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
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<PAGE> 76
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 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 Equity Income and Short-Intermediate
Corporate Bond 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 Equity Income
and Short-Intermediate Corporate Bond
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<PAGE> 77
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 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> 78
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers(1) 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 Treasurer, St. Louis University,
St. Louis University The Board; and August 1996 to present;
3500 Linden Blvd. President and Former Treasurer, Washington
Fitzgerald Hall Director University, 1981 to 1995.
St. Louis, MO 63103
Age: 53
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: 51
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 (manufacturer of wearing
600 Kellwood Parkway apparel and camping soft
Chesterfield, MO 63017 goods) since 1975; Vice Chairman,
Age: 61 Kellwood Company since May 1989.
</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> 79
<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 (manufacturer of
Corporation paperboard and packaging materials),
8182 Maryland Avenue April 1989 to present; President,
St. Louis, MO 63105 Smurfit Pension & Insurance Services
Age: 60 Company, November 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: 54
W. Bruce McConnel, III Secretary Partner of the law
Suite 1100 firm of Drinker Biddle
1345 Chestnut Street & Reath, Philadelphia,
Philadelphia, PA 19107 Pennsylvania
Age: 53
Walter B. Grimm* Assistant From June, 1992 to present,
3435 Stelzer Road Secretary employee of BISYS Fund Services;
Columbus, Ohio 43219 From 1981 to present, President of
Age: 52 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 Services.
Columbus, Ohio 43219 Treasurer
Age: 43
</TABLE>
- --------
* Messrs. Grimm, Winney and Mintos are "interested persons" of the Fund as
defined in the 1940 Act.
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<PAGE> 80
For the fiscal year ended November 30, 1995, the Directors received the
following compensation:
<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 $0 $15,000.00
- --------------------------------------------------------------------------------------------
Robert M. Cox, Jr. $8,973.13 $0 $10,000.00
- --------------------------------------------------------------------------------------------
Joseph J. Hunt $8,793.13 $0 $10,000.00
- --------------------------------------------------------------------------------------------
James C. Jacobsen $8,793.13 $0 $10,000.00
- --------------------------------------------------------------------------------------------
Donald E. Kiernan $8,793.13 $0 $10,000.00
- --------------------------------------------------------------------------------------------
Lyle L. Meyer $8,793.13 $0 $10,000.00
- --------------------------------------------------------------------------------------------
Ronald D. Winney $8,793.13 $0 $10,000.00
===========================================================================================
</TABLE>
(1) The "Fund Complex" includes The ARCH Fund, Inc. and, prior to its
reorganization into The ARCH Fund, Inc., 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 AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to each Portfolio. Pursuant to the
advisory agreement, MVA has agreed to provide investment advisory services as
described in the Portfolios' Prospectuses. MVA has agreed to pay all expenses
incurred by it in connection with its activities under the agreement other than
the cost of securities, including brokerage commissions, if any, purchased for
the Portfolios.
The investment advisory agreement provides that MVA shall not be liable
for any error of judgment or mistake of law or for any loss suffered in
connection with the performance of its agreement, 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 it
of its duties and obligations thereunder.
Under its administration agreement with the Fund, BISYS Fund Services
Ohio, Inc. (the "Administrator") serves as
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<PAGE> 81
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" 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.
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 Selected Dealers may
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<PAGE> 82
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.
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. This fee, which is paid monthly, is calculated as the
greater of $6,000 or $.30 for each $1,000 of such Portfolio's average daily net
assets, plus $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 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.
-45-
<PAGE> 83
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 a Portfolio's Trust shares and Institutional shares, no
compensation is payable by the Fund to the Distributor for distribution
services. With respect to a Portfolio's Investor A shares and Investor B
shares, the Distributor is entitled to receive a portion of the front-end sales
charge or contingent deferred sales charge imposed on such shares. In addition,
under the Distribution and Services Plans for Investor A shares and Investor B
shares described below, the Distributor is entitled to a distribution fee at
the annual rate of .10% (for Investor A shares) and .75% (for Investor B
shares) for distribution services. (For information regarding the distribution
services provided and distribution fees payable thereunder, see "Distribution
and Services Plan(s)" under "Management of the Fund" in the Prospectuses and
"The Plans" 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 may include
Selected Dealers and 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
-46-
<PAGE> 84
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, which 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 sells and
assigns 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") 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
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<PAGE> 85
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.
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.
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<PAGE> 86
Depending upon the terms governing the particular customer accounts,
Service Organizations, Selected Dealers, and other institutions may also charge
their customers directly for cash management and other services provided in
connection with the accounts, 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, Selected Dealer, or other institution before
purchasing Trust or Investor shares of a Portfolio.
FUND EXPENSES. As discussed previously, the Portfolios' service
contractors bear all expenses in connection with the performance of their
services, except that the Portfolios bear certain expenses incurred pursuant to
the their Distribution and Services Plans, their Administration Services Plans
and certain sub-transfer agency fees (with respect to Institutional shares).
The Portfolios bear the expenses incurred in their operations. Fund expenses
include taxes, interest, fees and salaries of its directors and officers,
Securities and Exchange Commission fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to shareholders, advisory and administration fees, distribution
fees for distribution services provided to and expenses assumed in connection
with marketing Investor A shares and Investor B shares, charges of the
Custodian, transfer agent, and dividend disbursing agent, Service Organization
fees, certain insurance premiums, outside auditing and legal expenses, costs of
any independent pricing service, costs of shareholder reports and meetings and
any extraordinary expenses. The Portfolios also pay for brokerage fees,
commission and other transaction charges (if any) incurred in connection with
the purchase and sale of portfolio securities.
INDEPENDENT AUDITORS
For the fiscal year 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.
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<PAGE> 87
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 February 7, 1996, Mercantile held of record 99.999% and 41.313% of
the outstanding Institutional and Trust shares, respectively, in the Money
Market Portfolio; 95.085% and 59.403% of the outstanding Institutional and
Trust shares, respectively, in the Treasury Money Market Portfolio; 72.909% of
the outstanding Trust shares in the Tax-Exempt Money Market Portfolio; 98.086%
and 96.937% of the outstanding Institutional and Trust shares, respectively, in
the Growth & Income Equity Portfolio; 98.977% and 64.349% of the outstanding
Institutional and Trust shares, respectively, in the Emerging Growth Portfolio;
99.708% and 96.824% of the outstanding Institutional and Trust shares,
respectively, in the Government & Corporate Bond Portfolio; 99.998% and 93.210%
of the outstanding Institutional and Trust shares, respectively, in the U.S.
Government Securities Portfolio; 99.884% and 96.111% of the outstanding
Institutional and Trust shares, respectively, in the Balanced Portfolio;
97.261% and 94.363% of the outstanding Institutional and Trust shares,
respectively, in the International Equity Portfolio; 99.833% of the outstanding
Trust shares in the Short-Intermediate Municipal 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 (13.671)%; Mercantile Bank NA Trust,
Trust Securities Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office,
St. Louis, MO 63166-0000 (41.313%); Hawaiian Trust Company Ltd., 783 Funds
Accounting, P.O. Box 3170, Honolulu, HI 96802-3170 (10.633%); American Trust
Co. of Hawaii Inc., Trust Short-Term Investment Fund, P.O. Box 3170, Honolulu,
HI 96802-3170 (5.354%); Investor A Shares - BHC Securities Inc., Attn: Cash
Balance Sweep Dept., One Commerce Square, 11th Floor, 2005 Market Street,
Philadelphia, PA 19103 (90.072%); Mercantile Investment Services, Inc., Firm
Capital Account, Attn: Judy Horbelt, P.O. Box 790121, St. Louis, MO 63179-0121
(6.104%);
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<PAGE> 88
Institutional Shares - Mercantile Bank St. Louis NA, Attn: Trust Securities
Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (99.999%).
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 (7.029%); Hawaiian Trust Company Ltd., 783 Funds Accounting, P.O.
Box 3170, Honolulu, HI 96802-3170 (9.249%); Express Scripts, Inc., Attn: Joe
Plum, 14000 Riverport Drive, Maryland Heights, MO 63043 (7.012%); City of St.
Louis, Airport Revenue Fund, Attn: Kenneth L. Below, Room 2200 City Hall, 101
S. Tucker, St. Louis, MO 63103 (8.837%); Mercantile Bank NA Trust, Trust
Securities Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office, St.
Louis, MO 63166-0000 (59.403%); Investor A Shares - BHC Securities Inc., Attn:
Cash Balance Sweep Dept., 1 Commerce Square, 11th Floor, 2005 Market Street,
Philadelphia, PA 19103 (79.254%); Mercantile Bank of St. Louis NA, Custodian
Richard E. Crippa Rollover IRA, 2948 Castelford Drive, Florissant, MO 63033
(16.622%); Institutional Shares - Mercantile Bank St. Louis NA, Attn: Trust
Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (95.085%).
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 (13.281%);
Mercantile Bank NA Trust, Trust Securities Unit 17-1, Attn: Dede Clark, P.O.
Box 387 Main Post Office, St. Louis, MO 63166 (72.909%); Investor A Shares -
BHC Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th
Floor, 2005 Market Street, Philadelphia, PA 19103 (86.456%); Charles H. Weiss,
Trustee Charles H. Weiss Trust, UA Dated 08/15/72, 1209 Washington Avenue, St.
Louis, MO 63103-1934 (11.760%).
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 (40.299%); Locust
and Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166 (54.064%); Boat & Co., P.O. Box 14737, St. Louis, MO 63178-4737 (5.451%);
Investor A Shares - BHC Securities Inc., Trade House Acct., 2005 Market Street,
Philadelphia, PA 19103 (49.707%); Frances Dakers, 200 E. 89th St., 28D, New
York, NY 10128 (17.252%); Investor B Shares - BHC Securities, Inc., FAO
24252597, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA
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19103 (6.877%); BHC Securities, Inc., FAO 24126127, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(6.013%); BHC Securities Inc., FAO 24104352, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(6.884%); BHC Securities Inc., FAO 24283805, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(6.470%); Institutional Shares - Locust and Company, Attn: Trust Securities
Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (97.261%).
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 and Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St.
Louis MO 63166-0387 (77.809%) Olive & Company, Mercantile Bank St. Louis NA,
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (19.128%);
Investor A Shares - BHC Securities Inc., Trade House Account, Attn: Mutual Fund
Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA 19103
(29.419%); Investor B Shares - BHC Securities Inc., FAO 24282580, Attn: Mutual
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (8.035%); Institutional Shares - Locust & Company, Mercantile Bank St.
Louis NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St.Louis, MO 63166
(98.086%).
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 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 (12.750%); Olive & Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17- 1, P.O. Box 387, St.
Louis, MO 63166-0387 (14.189%); American Bar Endowment, 750 North Lake Shore
Drive, Chicago, IL 60611 (6.538%); Locust & Company, Mercantile Bank St. Louis
NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(50.160%); Investor A Shares - BHC Securities Inc., Trade House Account, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103 (38.990%); Institutional Shares - Locust & Company, Mercantile Bank St.
Louis NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(98.977%).
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
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(6.459%); Locust & Company, Mercantile Bank St. Louis NA, Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (60.517%); Olive & Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (32.693%); Investor A Shares - BHC Securities Inc., Trade
House Account, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103 (13.613%); Mercantile Bank of St. Louis NA,
Custodian Edmund C. Albrecht, Jr. IRA, 17 Outer Ladue Dr., St. Louis, MO 63131
(5.358%); Mercantile Bank of St. Louis NA, Custodian Robert W. Davis Rollover
IRA, 818 Broadway, Elsberry, MO 63343-1109 (5.912%); Investor B Shares - BHC
Securities Inc., FAO 24297242, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (11.693%); BHC
Securities Inc., FAO 24296577, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (7.073%); BHC Securities
Inc., FAO 24296172, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Suite 1200, Philadelphia, PA 19103 (7.394%); Mercantile Bank of St.
Louis NA, Custodian Richard Dell Woods, SEP IRA, 3114 Picket Road, St. Joseph,
MO 64503 (9.376%); BHC Securities Inc., FAO 24297609, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(10.384%); BHC Securities Inc., FAO 24296474, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(8.168%); BHC Securities Inc., FAO 24286253, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(7.293%); 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%).
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 63166-0387
(96.111%); Investor A Shares - Mercantile Bank of St. Louis NA, Custodian
Edmund J. Markevicius Rollover IRA, 17 Agate Avenue, Worcester, MA 01604
(6.574%); BHC Securities Inc., Trade House Account, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (18.809%);
Investor B Shares - Mercantile Bank of St. Louis NA, Custodian William J. Sipe
IRA, 4606 Zebra Lane, St. Joseph, MO 64506 (6.560%); BHC Securities Inc., FAO
24123548, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (20.154%); BHC Securities Inc., FAO
24318923, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (5.376%); Mercantile Bank of St. Louis NA,
Custodian Brian A. Bundy IRA, 1807 Hilltop Dr., St. Joseph, MO 64505 (7.009%);
BHC Securities Inc., FAO 24130105, Attn: Mutual Funds Dept., One Commerce
Square, 2005 Market Street,
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Suite 1200, Philadelphia, PA 19103 (6.299%); Mercantile Bank of St. Louis NA,
Custodian Richard Dell Woods, SEP IRA, 3114 Picket Road, St. Joseph, MO 64503
(25.766%); Institutional Shares - Locust & Company, Mercantile Bank St. Louis
NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(99.884%).
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 (58.023%); Olive & Company, Mercantile Bank St.
Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(38.801); Investor A Shares - BHC Securities Inc., Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (13.346%);
Investor B Shares - Mercantile Bank of St. Louis NA, Custodian Edwin C.
Hogrebe, IRA, 5537 Goethe, St. Louis, MO 63109 (6.901%); BHC Securities Inc.,
FAO 24284744, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Suite 1200, Philadelphia, PA 19103 (6.905%); BHC Securities Inc., FAO
24294267, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (14.434%); BHC Securities Inc., FAO
24297770, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (30.566%); Institutional Shares - Locust &
Company, Mercantile Bank St. Louis NA, Attn: Trust Securities Unit 17-1, P.O.
Box 387, St. Louis, MO 63166 (99.708%).
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
(8.309%); Olive & Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (91.524%); Investor A Shares -James Sutton, P.O. Box 2465,
Inverness, FL 34451-2465 (96.744%).
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 (20.648%); Olive & Company, Mercantile Bank St.
Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(79.351%); Investor A Shares - BHC Securities Inc., Trade House Account, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103 (27.763%); Investor B Shares - BHC Securities Inc., FAO 24126820, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market
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Street, Suite 1200, Philadelphia, PA 19103 (14.032%); BHC Securities Inc., FAO
24131119, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street,
Suite 1200, Philadelphia, PA 19103 (7.561%); BHC Securities Inc., FBO 24282580,
Attn: Mutual Funds Dept., 100 N. 20th Street, Philadelphia, PA 19103 (5.782%);
BHC Securities Inc. FAO 24286677, Attn: Mutual Funds Dept., One Commerce
Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103 (11.519%); BHC
Securities Inc., FAO 24290504, Attn: Mutual Funds Dept., One Commerce Square,
2005 Market Street, Suite 1200, Philadelphia, PA 19103 (19.149%).
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.
As used in the Statement of Additional Information and in the Prospectuses
of the same date, "assets belonging to a Portfolio" means the consideration
received by the Fund upon the issuance or sale of shares in that Portfolio,
together with all income, earnings, profits and proceeds derived from the
investment thereof, including any proceeds from the sale, exchange or
liquidation of such investments, any funds or payments derived from any
reinvestments of such proceeds, and a portion of any general assets of the Fund
not belonging to a particular Portfolio. Assets belonging to a particular
Portfolio are charged with the direct liabilities in respect of that Portfolio
and with a share of the general liabilities of the Fund which are normally
allocated in proportion to the relative net asset levels of the respective
Portfolios. Determinations by the Board of Directors as to the direct and
allocable liabilities, and allocable portion of any general assets, with
respect to a particular Portfolio are conclusive.
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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
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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.
"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
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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 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.
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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 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.
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"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.
"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.
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"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 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
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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.
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.
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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 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
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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:
"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.
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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 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:
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"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 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.
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"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 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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