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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
INVESTOR A SHARES AND INVESTOR B SHARES
For information, write: Or call your investment
P.O. Box 78069 representative or
St. Louis, Missouri 63178 the ARCH Funds' Service Center
at 1-800-551-3731
The ARCH Fund, Inc. is an open-end management investment company authorized
to issue Shares in fifteen investment portfolios. This Prospectus describes the
Investor A Shares of the ARCH EQUITY INCOME, NATIONAL MUNICIPAL BOND and
SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIOS and the Investor B Shares of the
EQUITY INCOME and NATIONAL MUNICIPAL BOND PORTFOLIOS. Investor A Shares and
Investor B Shares are sold through selected broker/dealers and other financial
intermediaries to individual or institutional customers. Investor A Shares are
sold with a front-end sales charge. Investor B Shares are sold with a contingent
deferred sales charge.
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. Features of the Portfolio include:
- Objective of Above Average Income and Long-Term Capital Appreciation
- Emphasis on Equity Investments Providing Dividend Income
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. Features of the Portfolio include:
- Objective of Income Exempt From Regular Federal Income Tax
- Potential Yield that is Higher than a Short-Term Municipal Fund with
Greater Price Volatility
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. Features of the Portfolio include:
- Potential Yield that is Higher than a Money Market Fund but a Lower
Potential Yield with Less Price Volatility than a Long-Term
Corporate Bond Fund
- Average Weighted Maturity Between Two and Five Years
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.
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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 (as revised October 25, 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," "Financial Highlights" and
"Management of the Fund.")
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their 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 willing 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 Investor A Shares and/or Investor B Shares of
the Portfolios. Investor A Shares are sold with a front-end sales charge.
Investor B Shares are sold with a contingent deferred sales charge. For
information on purchasing, exchanging or redeeming Investor A and Investor B
Shares of these Portfolios, please see "How to Purchase and Redeem Shares"
below. For a discussion comparing Investor A Shares and Investor B Shares,
please see "Characteristics of Investor A Shares and Investor B Shares," and
"Factors to Consider When Selecting Investor A Shares or Investor B Shares" on
pages 28 and 29, respectively.
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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," "Management of the Fund -- Distribution and Services Plans" and
"Management of the Fund -- Custodian and Transfer Agent" below.) As a result of
payments for distribution and/or shareholder administrative servicing fees and
certain other operating expenses that may be made in differing amounts, the net
investment income of Trust Shares, Institutional Shares, Investor A Shares
and/or Investor B Shares in a Portfolio can be expected, at any given time, to
be different.
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EXPENSE SUMMARY FOR INVESTOR A AND INVESTOR B SHARES
<TABLE>
<CAPTION>
SHORT-
NATIONAL INTERMEDIATE
EQUITY MUNICIPAL CORPORATE
INCOME BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- ------------
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases (as a percentage of
offering price)1.................. 4.5% NONE 4.5% NONE 2.5%
DEFERRED SALES CHARGE2
(as a percentage of original
purchase price or redemption
proceeds, whichever is lower)..... NONE 5.0% NONE 5.0% NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees
(net of fee waivers)3............. .00% .00% .00% .00% .00%
12b-1 Fees, including distribution
and services fees
(after fee waivers)4............ .30% 1.00% .20% 1.00% .30%
Other Expenses (including
administration fees and other
expenses) (net of fee waivers
and expense reimbursements)5,6.. .20% .20% .20% .20% .21%
------- ------- ------- ------- --------
TOTAL PORTFOLIO OPERATING EXPENSES
(after fee waivers and expense
reimbursements)6.................. .50% 1.20% .40% 1.20% .51%
======= ======= ======= ======= =======
<FN>
- ---------------
1 Reduced sales charges may be available. See "How to Purchase and Redeem
Shares."
2 This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales charge
is charged after the sixth year. See "How to Purchase and Redeem Shares."
3 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.
4 Without fee waivers, 12b-1 fees (including distribution and service fees) for
Investor A Shares of the National Municipal Bond Portfolio would be .30%.
5 Without fee waivers, administration fees for each Portfolio would be .20%.
6 Without fee waivers and expense reimbursements, Other Expenses would be .30%,
.30% and .31% for Investor A Shares of the Equity Income, National Municipal
Bond and Short-Intermediate Corporate Bond Portfolios, respectively, and .30%
and .30% for Investor B Shares of the Equity Income and National Municipal
Bond Portfolios, respectively, and Total Portfolio Operating Expenses would be
1.35%, 1.15% and 1.16% for Investor A Shares of the Equity Income, National
Municipal Bond and Short-Intermediate Corporate Bond Portfolios, respectively,
and 2.05% and 1.85% for Investor B Shares of the Equity Income and National
Municipal Bond Portfolios, respectively.
</TABLE>
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EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<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:
Equity Income Portfolio
Investor A Shares1................................................... $50 $60
Investor B Shares
Assuming complete redemption at end of period2..................... $62 $68
Assuming no redemption............................................. $12 $38
National Municipal Bond Portfolio
Investor A Shares1................................................... $49 $57
Investor B Shares
Assuming complete redemption at end of period2..................... $62 $68
Assuming no redemption............................................. $12 $38
Short-Intermediate Corporate Bond Portfolio
Investor A Shares1................................................... $30 $41
<FN>
- ---------------
1 Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
2 Assumes the deduction of maximum applicable deferred sales charge.
</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 a Portfolio's Investor A Shares
or Investor B Shares will bear directly or indirectly. The tables reflect the
expenses which the Portfolios expect to incur during the next twelve months on
their Investor A Shares and/or Investor B 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.
Because of the payments for distribution services (12b-1 fees) under the
Distribution and Services Plans as shown in the above table, long-term
shareholders of Investor A Shares and Investor B Shares may pay more than the
economic equivalent of the maximum front-end sales load permitted by the
National Association of Securities Dealers, Inc.
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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 no Portfolio presently intends to enter into repurchase agreements
providing for settlement in more than seven days, each Portfolio does have the
authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act. The income on repurchase agreements is taxable. (See
"Taxes.")
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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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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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 are closed (a "Business Day"). Currently, one or both of these
institutions are closed on the customary national business holidays of New
Year's Day, Martin Luther King, Jr. Day, 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 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
Investor A Shares of each Portfolio are sold subject to a front-end sales
charge. Investor B Shares of the Equity Income and National Municipal Bond
Portfolios are sold subject to a back-end sales charge. This back-end sales
charge declines over time and is known as a "contingent deferred sales charge."
Before choosing between Investor A Shares or Investor B Shares of a Portfolio,
investors should read "Characteristics of Investor A Shares and Investor B
Shares" and "Factors to Consider When Selecting Investor A Shares or Investor B
Shares" below.
Investor A Shares and Investor B Shares are sold through broker-dealers or
other organizations acting on behalf of their customers. Generally, investors
purchase Investor A Shares or Investor B Shares through a broker-dealer
organization which has a sales agreement with the Distributor or through an
organization which has entered into a servicing agreement with the Fund with
respect to Investor A Shares and/or Investor B Shares. The organization is
responsible for transmitting purchase orders directly to the Fund. Investors
purchasing Shares of the Equity Income and/or National Municipal Bond Portfolios
must specify at the time of investment whether they are purchasing Investor A
Shares or Investor B Shares.
In general, the minimum initial investment in each Portfolio is $1,000 and
the minimum for each subsequent investment is $100, except for investments made
through (a) the Automatic Investment Program, in which case the initial minimum
and subsequent minimum investments are $50, (b) a sweep program available
through an investor's financial institution, in which case there are no minimum
investments, (c) a payroll deduction program, in which case the initial minimum
and subsequent minimum investments are $25, or (d) a wrap fee program, in which
case there are no minimum investments. The minimum initial investment to
participate in the Automatic Exchange Program is $5,000. (See "How to Purchase
and Redeem Shares -- Exchange Privileges -- Automatic Exchange Program" below
for additional requirements.)
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks. All orders for new IRAs or other retirement plan
accounts placed through the transfer agent must be accompanied by an account
application. Account applications may be obtained from your investment
representative or the Fund at 1-800-551-3731.
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-551-3731. Investors may also call the Fund for
information on how to purchase Shares.
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, Shares will be priced according
to the net asset value per Share next determined on that day after receipt of
the order. Immediately available funds must be received by the Custodian prior
to 4:00 p.m. within three Business Days following the receipt of such order. If
funds are not received by such date, the order will be cancelled, and notice
thereof will be given to the person or organization placing the order.
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<PAGE> 23
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of a Portfolio by mail, complete an
account application and send it to the Fund along with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, made payable to the appropriate Portfolio. Investors purchasing Shares
of the Equity Income and/or National Municipal Bond Portfolios by mail must
indicate whether they wish to buy Investor A Shares or Investor B Shares.
Subsequent purchases of Shares of a Portfolio may be made at any time in at
least the subsequent minimum purchase amount by mailing a check payable to the
Portfolio.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of an
organization, such organization is responsible for transmitting purchase,
exchange, and redemption orders to the Fund on a timely basis, recording all
purchase, exchange, and redemption transactions, and providing regular account
statements which confirm such transactions to beneficial owners (or arranging
for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a monthly
basis in a minimum amount of $50, on the 20th day (or the next Business Day
after the 20th day) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A Shares or Investor B Shares, as appropriate, at the net asset value
plus any applicable front-end sales charge next determined on the day an order
is effected by the transfer agent, BISYS Fund Services Ohio, Inc. (the "Transfer
Agent"). An investor may apply for participation in the AIP through the
organization servicing his or her Fund account and by completing the
supplementary AIP authorization form. The AIP may be modified or terminated by a
shareholder on 30 days' written notice to his or her investment representative
or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging" in
making investments. Dollar Cost Averaging can be useful in investing in funds
such as the Portfolios whose price per Share fluctuates. Instead of trying to
time market performance, a fixed dollar amount is invested in Portfolio Shares
at predetermined intervals. This may help investors to reduce their average cost
per Share because the agreed upon fixed investment amount allows more Shares to
be purchased during periods of lower Share prices and fewer Shares during
periods of higher prices. In order to be effective, Dollar Cost Averaging should
usually be followed on a sustained, consistent basis. Investors should be aware,
however, that Shares bought using Dollar Cost Averaging are made without regard
to their price on the day of investment or to market trends. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent a
loss if an investor ultimately redeems his or her Shares at a price which is
lower than their purchase price.
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<PAGE> 24
APPLICABLE SALES CHARGES -- INVESTOR A SHARES
The public offering price for Investor A Shares of the Portfolios is the
sum of the net asset value of the Shares being purchased plus any applicable
sales charge. No sales charge is assessed on the reinvestment of distributions.
The sales charge is assessed as follows:
THE ARCH EQUITY INCOME AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
AMOUNT OF PRICE VALUE OFFERING
TRANSACTION PER SHARE PER SHARE PRICE
----------- --------- --------- -----------
<S> <C> <C> <C>
Less than $50,000................................. 4.50% 4.70% 4.00%
$50,000 but less than $100,000.................... 3.50 3.63 3.00
$100,000 but less than $250,000................... 2.50 2.56 2.00
$250,000 but less than $500,000................... 1.50 1.52 1.00
$500,000 but less than $1,000,000................. 1.00 1.01 0.50
$1,000,000 and over............................... 0.50 0.50 0.40
</TABLE>
THE ARCH SHORT-INTERMEDIATE CORPORATE BOND PORTFOLIO
<TABLE>
<CAPTION>
DEALERS'
AS A % OF AS A % OF REALLOWANCE
OFFERING NET ASSET AS A % OF
AMOUNT OF PRICE VALUE OFFERING
TRANSACTION PER SHARE PER SHARE PRICE
----------- --------- --------- -----------
<S> <C> <C> <C>
Less than $250,000................................ 2.50% 2.56% 2.00%
$250,000 but less than $500,000................... 1.50 1.52 1.30
$500,000 but less than $1,000,000................. 1.00 1.01 0.85
$1,000,000 and over............................... 0.50 0.50 0.40
</TABLE>
The Distributor will pay the appropriate Dealers' Reallowance to
broker-dealer organizations which have entered into an agreement with the
Distributor. The Dealers' Reallowance may be changed from time to time. Upon
notice to the Fund's shareholders, the Distributor, at its sole discretion, may
reallow up to the full applicable sales charge as shown on the above schedule
during periods specified in such notice. Dealers who receive 90% or more of a
sales load may be deemed to be "underwriters" under the Securities Act of 1933,
as amended.
No sales charge is assessed on purchases of Investor A Shares by: (a)
directors and officers of the Fund and the immediate family members of such
individuals; (b) directors, current and retired employees and participants in
employee benefit/retirement plans (future and current annuitants) of Mercantile
Bancorporation Inc. or any of its affiliates or the Distributor or its
affiliates and the immediate family members of such individuals; (c) brokers,
dealers, and agents who have a sales agreement with the Distributor, and their
employees (and the immediate family members of such individuals); (d) customers
who purchase pursuant to a wrap fee program offered by any broker-dealer or
other financial institution or financial planning organization; (e) individuals
who purchase Investor A Shares with the proceeds of Trust Shares or
Institutional Shares redeemed in connection
24
<PAGE> 25
with a rollover of benefits paid by a qualified retirement or employee benefit
plan or distribution on behalf of any other qualified account administered by
Mercantile or its affiliates or correspondent banks, within 60 days of receipt
of such payment; (f) investors who purchase Investor A Shares through a payroll
deduction program; (g) employees of any sub-adviser to the Fund; (h) holders of
Southwestern Bell Visa cards issued by Mercantile Bank of Illinois, N.A. who
participate in the Automatic Investment Program (credit cards may not be used
for the purchase of Fund shares); (i) investors exchanging Trust Shares or
Institutional Shares of a Portfolio received from the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile or any of its affiliated or correspondent banks; or (j) other
investment companies distributed by the Distributor or its affiliates. Investors
who believe that they may qualify under any of the exemptions listed above
should contact the Fund at 1-800-551-3731 prior to making a purchase.
REDUCED SALES CHARGES -- INVESTOR A SHARES
The sales charge on purchases of Investor A Shares of the Portfolios may be
reduced through:
- rights of accumulation
- quantity discounts
- letter of intent
- reinvestment privilege
To qualify for a reduced sales load, an investor must so notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
RIGHTS OF ACCUMULATION -- INVESTOR A SHARES. An investor who has
previously purchased Investor A Shares of a Portfolio and has paid a sales
charge ("load") may be eligible for reduced sales charges when purchasing
additional Investor A Shares of a Portfolio with a sales charge. An investor's
aggregate investment in Shares of such load Portfolios is the total value (based
on the higher of current net asset value or the public offering price originally
paid) of: (a) current purchases, and (b) Shares that are already beneficially
owned by the investor on which a sales charge has already been paid. If, for
example, an investor beneficially owns Investor A Shares of a load Portfolio
with an aggregate current value of $240,000 and subsequently purchases
additional Investor A Shares of a load Portfolio having a current value of
$10,000, the sales charge applicable to the subsequent purchase would be reduced
to 1.50% of the offering price.
QUANTITY DISCOUNTS -- INVESTOR A SHARES. As shown in the table under
"Applicable Sales Charges -- Investor A Shares," larger purchases reduce the
sales charge paid. The Fund will combine purchases made in a load Portfolio on
the same day by the investor and immediate family members when calculating the
applicable sales charge.
LETTER OF INTENT -- INVESTOR A SHARES. By checking the Letter of Intent
box on the account application, a shareholder becomes eligible for reduced sales
charges applicable to the total amount invested in Investor A Shares in a load
Portfolio over a 13-month period (beginning up to 90 days prior to the date
indicated on the account application). The Transfer Agent will hold in escrow 5%
of the amount indicated for payment of a higher sales load if a shareholder does
not purchase the full
25
<PAGE> 26
amount indicated on the account application. Upon completion of the total
minimum investment specified on the account application, the escrow will be
released, and an adjustment will be made to reflect any reduced sales charge
applicable to Shares purchased during the 90-day period prior to submission of
the account application. Additionally, if total purchases within the 13-month
period exceed the amount specified, an adjustment will be made to reflect
further reduced sales charges applicable to such purchases. All such adjustments
will be made at the conclusion of the 13-month period and in the form of
additional Shares credited to the shareholder's account at the then current
public offering price applicable to a single purchase of the total amount of the
total purchases. If total purchases are less than the amount specified, escrowed
Shares may be involuntarily redeemed to pay the additional sales charge.
Checking a Letter of Intent box does not bind an investor to purchase, or the
Fund to sell, the full amount indicated at the sales load in effect at the time
of signing, but an investor must complete the intended purchase to obtain the
reduced sales load.
REINVESTMENT PRIVILEGE -- INVESTOR A SHARES. Upon redemption of Investor A
Shares on which a sales charge was paid, a shareholder has a one-time right, to
be exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
MISCELLANEOUS -- INVESTOR A SHARES. Reduced sales charges may be modified
or terminated at any time and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, an investor should
contact his or her investment representative or the Distributor.
APPLICABLE SALES CHARGES -- INVESTOR B SHARES
The public offering price for Investor B Shares of the Equity Income and
National Municipal Bond Portfolios is the net asset value of the Investor B
Shares purchased. Although investors pay no front-end sales charge on purchases
of Investor B Shares, such Shares are subject to a deferred sales charge at the
rates set forth in the chart below if they are redeemed within six years of
purchase. Service Organizations will receive commissions from the Distributor in
connection with sales of Investor B Shares. These commissions may be different
than the reallowances or placement fees paid to dealers in connection with sales
of Investor A Shares. The deferred sales charge on Investor B Shares is based on
the lesser of the net asset value of the Shares on the redemption date or the
original cost of the Shares being redeemed. As a result, no sales charge is
charged on any increase in the principal value of an investor's Shares. In
addition, a contingent deferred sales charge will not be assessed on Investor B
Shares purchased through reinvestment of dividends or capital gains
distributions.
The amount of any contingent deferred sales charge an investor must pay on
Investor B Shares depends on the number of years that elapse between the
purchase date and the date such Investor B Shares are redeemed. Solely for
purposes of determining the number of years from the time of
26
<PAGE> 27
payment for an investor's Share purchase, all payments during a month will be
aggregated and deemed to have been made on the first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------- ----------------------------
<S> <C>
One or less......................................................... 5.0%
More than one, but less than two.................................... 4.0%
Two, but less than three............................................ 3.0%
Three, but less than four........................................... 3.0%
Four, but less than five............................................ 2.0%
Five, and up to and including six................................... 1.0%
After six years..................................................... None
</TABLE>
When an investor redeems his or her Investor B Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Investor B Shares are redeemed first from those Investor B
Shares that are not subject to the deferred sales load (i.e., Investor B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) and after that from the Investor B Shares that have been held the
longest.
For example, assume an investor purchased 100 Investor B Shares at $10 a
Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value of $12 per
share). Therefore, only $400 of the $600 such investor received from selling his
or her Shares will be subject to the contingent deferred sales charge, at a rate
of 3.0% (the applicable rate in the third year after purchase). The proceeds
from the contingent deferred sales charge that the investor may pay upon
redemption go to the Distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to Investor B Shares, enables those Shares
to be purchased without the imposition of a front-end sales charge.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The following types
of redemptions qualify for an exemption from the contingent deferred sales
charge: (i) exchanges described under "Exchange Privileges" below; (ii)
redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension,
profit-sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code due to death, disability or the attainment of a
specified age; (iii) redemptions effected pursuant to a Portfolio's right to
liquidate a shareholder's account if the aggregate net asset value of Shares
held in the account is
27
<PAGE> 28
less than the minimum account size; (iv) redemptions in connection with the
death or disability of a shareholder; or (v) redemptions resulting from a
tax-free return of an excess contribution pursuant to Section 408(d)(4) or (5)
of the Internal Revenue Code.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares lies
in their sales charge structures and distribution arrangements. An investor
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Investor A Shares and Investor B Shares
are the same.
Investor A Shares are sold at their net asset value plus a front-end sales
charge of up to 4.50% (2.50% with respect to the Short-Intermediate Corporate
Bond Portfolio). (See "Pricing of Shares.") This front-end sales charge may be
reduced or waived in some cases. (See "Applicable Sales Charges -- Investor A
Shares.") Investor A Shares are subject to ongoing distribution fees at an
annual rate of up to 0.30% of a Fund's average daily net assets attributable to
its Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. (See "Applicable Sales
Charges -- Investor B Shares.") Investor B Shares are subject to ongoing
distribution fees at an annual rate of up to 1.00% of a Fund's average daily net
assets attributable to its Investor B Shares. These ongoing fees, which are
higher than those charged on Investor A Shares, will cause Investor B Shares to
have a higher expense ratio and pay lower dividends than Investor A Shares.
Eight years after purchase, Investor B Shares will convert automatically to
Investor A Shares. The purpose of the conversion is to relieve a holder of
Investor B Shares of the higher ongoing expenses charged to those Shares, after
enough time has passed to allow the Distributor to recover approximately the
amount it would have received if a front-end sales charge had been charged. The
conversion from Investor B Shares to Investor A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Investor A Shares as he or she had of Investor B Shares. The conversion
occurs eight years after the beginning of the calendar month in which the Shares
are purchased. As a result of the conversion, the converted Shares are relieved
of the distribution and service fees borne by Investor B Shares, although they
are subject to the distribution and service fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions (as discussed under "Applicable Sales Charges -- Investor B
Shares") are also converted at the earlier of two dates -- eight years after the
beginning of the calendar month in which the reinvestment occurred or the date
of conversion of the most recently purchased Investor B Shares that were not
acquired through reinvestment of dividends or distributions. For example, if an
investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
28
<PAGE> 29
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both Investor A Shares
and Investor B Shares, investors should consider whether, during the anticipated
life of their investment in the Portfolio, the accumulated distribution and
service fees and potential contingent deferred sales charges on Investor B
Shares prior to conversion would be less than the initial sales charge and
accumulated distribution and service fees on Investor A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that the sales charge
for Investor A Shares is waived or reduced by one of the methods described
above, investments in Investor A Shares become more desirable. The Fund will
refuse all purchase orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares
that do not qualify for waivers of or reductions in the initial sales charge
would have less of their purchase price initially invested in a Portfolio than
purchasers of Investor B Shares of the same Portfolio.
As described above, purchasers of Investor B Shares of a Portfolio will
have more of their initial purchase price invested. Any positive investment
return on this additional invested amount would partially or wholly offset the
expected higher annual expenses borne by Investor B Shares. Because the
Portfolios' future returns cannot be predicted, there can be no assurance that
this will be the case. Holders of Investor B Shares would, however, own Shares
that are subject to higher annual expenses and, for a six-year period, such
Shares would be subject to a contingent deferred sales charge of up to 5.00%
upon redemption, depending upon the year of redemption. Investors expecting to
redeem during this six-year period should compare the cost of the contingent
deferred sales charge plus the aggregate annual Investor B Shares' distribution
and service fees to the cost of the initial sales charge and distribution and
service fees on the Investor A Shares. Over time, the expense of the annual
distribution and service fees on the Investor B Shares may equal or exceed the
initial sales charge and annual distribution and service fee applicable to
Investor A Shares. For example, if net asset value remains constant, the
aggregate distribution and service fees with respect to Investor B Shares of a
Portfolio would equal or exceed the initial sales charge and aggregate
distribution and service fees of Investor A Shares of the same Portfolio
approximately eight years after the purchase. In order to reduce such fees of
investors that hold Investor B Shares for more than eight years, Investor B
Shares will be automatically converted to Investor A Shares as described above
at the end of such eight-year period.
EXCHANGE PRIVILEGES
The exchange privilege enables shareholders to exchange (i) Investor A
Shares of a Portfolio for Investor A Shares of another Portfolio offered by the
Fund or, under certain circumstances described below, for Trust Shares or
Institutional Shares of the same Portfolio, and (ii) Investor B Shares of the
Equity Income or National Municipal Bond Portfolios for Investor B Shares of
another Portfolio offered by the Fund. The exchange privilege may be exercised
only in those states where the class of Shares of such other Portfolios may be
legally sold.
29
<PAGE> 30
EXCHANGE PRIVILEGE -- INVESTOR A SHARES. Shareholders who have purchased
Investor A Shares of a Portfolio and who have paid any applicable sales charge
("load") (including Shares acquired through reinvestment of dividends or
distributions on such Shares) may exchange those Shares for Investor A Shares of
another load Portfolio without paying an additional sales load. Shareholders who
have purchased Investor A Shares of a Portfolio (other than through a previous
exchange from another load Portfolio on which any applicable sales load has been
paid) with a lower sales load may be charged an additional sales load on
exchanges of Shares of such Portfolio for Shares of a Portfolio with a higher
sales load. Shareholders may also exchange Investor A Shares of a no-load
Portfolio for Investor A Shares of another no-load Portfolio without paying a
sales load. When Investor A Shares of a no-load Portfolio are exchanged for
Investor A Shares of a load Portfolio, the applicable sales load (if any) will
be assessed. However, shareholders exchanging Investor A Shares of a no-load
Portfolio that were acquired through a previous exchange involving Shares on
which a load was paid will not be required to pay an additional sales load upon
the reinvestment of the equivalent investment into a load Portfolio within a
twelve month period. Under such circumstances, the shareholder must notify the
Distributor that a sales load was originally paid and provide the Distributor
with sufficient information to permit confirmation of the shareholder's right
not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks, and whose shares are to be held in that account, may also
exchange Investor A Shares in a Portfolio for Trust Shares or Institutional
Shares in the same Portfolio.
EXCHANGE PRIVILEGE -- INVESTOR B SHARES. Shareholders who have purchased
Investor B Shares of a Portfolio (including Shares acquired through reinvestment
of dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from the service organization servicing
their Fund accounts. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written
30
<PAGE> 31
request to their investment representative or to the Fund. The Automatic
Exchange Program may be amended or terminated without notice at any time by the
Distributor.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must have a
current value at least equal to the minimum initial or subsequent investment
required by the particular Portfolio into which the exchange is being made. The
Fund reserves the right to reject any exchange request. The exchange privilege
may be modified or terminated at any time upon 60 days' written notice to
shareholders. An investor may telephone an exchange request by calling his or
her investment representative, which is responsible for transmitting such
exchange request to the Fund. (See "Other Exchange or Redemption Information"
below.) Investors who want to telephone an exchange request directly to the
Fund, and have elected this privilege on the account application, may follow the
procedures described below under "Redemption by Telephone." An investor should
consult his or her investment representative or the Fund for further information
regarding procedures for exchanging Shares.
In addition to the Portfolios described in this Prospectus, the Fund
currently offers Investor A Shares and/or Investor B Shares in the following
Portfolios:
- The ARCH Money Market Portfolio
- The ARCH Treasury Money Market Portfolio(1)
- The ARCH Tax-Exempt Money Market Portfolio(1)
- 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(1)
- The ARCH Missouri Tax-Exempt Bond Portfolio
- The ARCH Kansas Tax-Exempt Bond Portfolio(2)
For information concerning these Portfolios, please call (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.
- ---------------
1 Does not offer Investor B Shares.
2 Expected to commence operations in 1997.
31
<PAGE> 32
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. Proceeds from the redemptions of Investor B
Shares will be reduced by the amount of any applicable contingent deferred sales
charge. The organization through which the investor placed the order is
responsible for transmitting redemption orders to the Fund on a timely basis.
Proceeds from redemptions of Investor A and Investor B Shares of the Portfolios
with respect to redemption orders received and accepted by the Fund before 4:00
p.m. (Eastern time) on a Business Day normally are sent electronically or mailed
by check to the organization that placed the redemption order within three
Business Days after the Distributor's receipt of the order in good form. 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.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on the account application. It is not necessary for shareholders to
confirm telephone redemption requests in writing. If a shareholder did not
originally select the telephone redemption privilege, the shareholder must
provide written instructions to the Transfer Agent to add this feature. Neither
the Fund nor its service contractors will be liable for any loss, damage,
expense or cost arising out of any telephone redemption effected in accordance
with the Fund's telephone redemption procedures, upon instructions reasonably
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believed to be genuine. The Fund will employ procedures designed to provide
reasonable assurance that instructions by telephone are genuine; if these
procedures are not followed the Fund or its service contractors may be liable
for any losses due to unauthorized or fraudulent instructions. If, 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.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be reduced by any applicable contingent deferred sales charge.
Portfolio Shares will be redeemed as necessary to meet withdrawal payments.
Withdrawals may reduce principal and eventually deplete the shareholder's
account. The maintenance of an AWP may be disadvantageous for holders of
Investor B Shares due to the effect of the contingent deferred sales charge. A
shareholder who desires to establish an AWP after opening an account should
complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Distributor for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time.
PURCHASE OF SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of a Portfolio at net asset value
without payment of a front-end sales charge. To qualify for a net asset value
purchase, the investor must pay for such purchase with the proceeds from the
redemption of Shares of a non-affiliated mutual fund on which a front-end sales
charge was paid. A qualifying purchase of Shares must occur within 30 days of
the prior redemption and must be evidenced by a confirmation of the redemption
transaction. At the time of purchase, the investment representative must notify
the Distributor that the purchase qualifies for a purchase at net asset value.
Proceeds from the redemption of Shares on which no front-end sales charge was
paid do not qualify for a purchase at net asset value.
OTHER EXCHANGE OR REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A PORTFOLIO THAT OFFERS BOTH INVESTOR A SHARES AND
INVESTOR B SHARES, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING
INVESTOR A SHARES OR INVESTOR B SHARES. In the event a redeeming shareholder
owns both Investor A Shares and Investor B Shares in a Portfolio, the Investor A
Shares will be redeemed first unless the shareholder indicates otherwise.
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
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At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and 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' Investor A and/or Investor B Shares may be quoted in
advertisements or in communications to shareholders. The yield is computed based
on the net income of a particular class of Shares in a Portfolio during a 30-day
(or one-month) period identified in connection with the particular yield
quotation. More specifically, the yield is computed by dividing the Portfolio's
net income per Share during a 30-day (or one-month) period by the maximum Public
Offering Price per Share on the last day of the period and annualizing the
result. The 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 a particular class
of Shares reflect the average annual percentage change in value of an investment
in such Shares of a Portfolio over the particular measuring period. Aggregate
total returns reflect the cumulative percentage change in value over the
measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by the Portfolio during the period
are reinvested in the same class of Shares of the Portfolio and that the maximum
sales load in effect during the period has been charged by the Portfolio. The
Portfolios' total return figures may also be calculated without the deduction of
the maximum sales charge in effect during the period. The effect of not
deducting the sales charge will be to increase the
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total return reflected. When considering average annual total return figures for
periods longer than one year, it is important to note that a Portfolio's annual
total return for any one year in the period might have been more or less than
the average for the entire period.
Performance data of the Portfolios' Investor A and Investor B Shares may be
compared to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices and data
such as that provided by Lehman Brothers, Inc. or any of its affiliates,
Ibbotson Associates, Inc., Lipper Analytical Services, Inc. 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 an investment representative will
not be included in the calculations of a Portfolios' yields and total returns.
Such fees, if any, will reduce the investor's net return on an investment in a
Portfolio. Investors may call 1-800-452-ARCH to obtain current yield and total
return information.
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. Investor A Shares
and/or Investor B 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 the Short Intermediate corporate Bond Portfolio bear all expenses
of the respective Administrative Services Plans adopted for such Shares and
Investor A Shares of each Portfolio and Investor B Shares of the National
Municipal Bond Portfolio bear all expenses of the respective Distribution and
Services Plans adopted for such Shares. In addition, the Short-Intermediate
Corporate Bond
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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 (without a sales load) 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, 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
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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.
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
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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, 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.
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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 Portfolios' arrangements with Service Organizations under the
Distribution and Services Plans 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
Investor A Shares and/or Investor B Shares in each Portfolio are sold
continuously by the Distributor, BISYS Fund Services, an affiliate of the
Administrator. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor also acts as distributor to each of the Fund's other Portfolios.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of any of the Portfolios. Such compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Portfolios, and/or other dealer-sponsored
special events. In some instances, this compensation will be made available only
to certain dealers whose representatives have sold a significant amount of such
Shares. Compensation will include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) business and vacation trips, including the provision of
travel arrangements and lodging at resorts, (2) tickets for entertainment events
(such as concerts, cruises and sporting events) and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of a Portfolio's
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Portfolios or shareholders.
DISTRIBUTION AND SERVICES PLANS
The Fund has adopted separate Distribution and Services Plans pursuant to
Rule 12b-1 under the 1940 Act with respect to Investor A Shares of the
Portfolios and Investor B Shares of the Equity Income and National Municipal
Bond Portfolios. Under the Distribution and Services Plans, the Fund may pay (i)
the Distributor or another person for distribution services provided and
expenses
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assumed and (ii) Service Organizations for shareholder administrative services
provided pursuant to servicing agreements in connection with Investor A or
Investor B Shares of a Portfolio. Payments to the Distributor are to compensate
it for distribution assistance and expenses assumed and activities primarily
intended to result in the sale of Investor A Shares or Investor B Shares,
including compensating dealers and other sales personnel (which may include
affiliates of the Fund's Adviser), direct advertising and marketing expenses and
expenses incurred in connection with preparing, printing, mailing and
distributing or publishing advertisements and sales literature, for printing and
mailing Prospectuses and Statements of Additional Information (except those used
for regulatory purposes or for distribution to existing shareholders), and costs
associated with implementing and operating the Distribution and Services Plan.
In addition, payments under the Distribution and Services Plan for Investor B
Shares will be used to pay for or finance sales commissions and other fees
payable to Service Organizations and other broker-dealers who sell Investor B
Shares. (See "Management of the Fund -- Service Organizations" below for a
description of the servicing agreements and the services provided by Service
Organizations.)
Under the Distribution and Services Plan for Investor A Shares, payments by
the Fund for distribution expenses may not exceed .10% (annualized) of the
average daily net asset value of each Portfolio's outstanding Investor A Shares
and payments for shareholder administrative servicing expenses may not exceed
.20% (annualized) of the average daily net asset value of each Portfolio's
outstanding Investor A Shares.
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not exceed .75% (annualized) of the
average daily net asset value of each Portfolio's outstanding Investor B Shares
and payments for shareholder administrative servicing expenses may not exceed
.25% (annualized) of the average daily net asset value of each Portfolio's
outstanding Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Retail A Shares or Retail B Shares of a Portfolio, such
as establishing and maintaining accounts and records for their customers who
invest in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be fully responsible to the Fund for the acts or
omissions of any subcontractor as it would be for its own acts or omissions. The
fees
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payable to any sub-contractor are paid by the Service Organization out of the
fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such 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 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
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possible, of course, to predict whether or in what form such legislation might
be enacted or the terms upon which Mercantile, or such an affiliate, might offer
to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by a Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all expenses in connection with the
performance of their services, except that the Distributor is compensated
pursuant to the Distribution and Services Plans (as described under
"Distribution and Services Plans" above). Expenses are deducted from the total
income of each Portfolio before dividends and distributions are paid. These
expenses include, but are not limited to, fees paid to the Adviser and
Administrator, transfer agency fees, fees and expenses of officers and directors
who are not affiliated with the Adviser or the Distributor, taxes, interest,
legal fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain
fees and expenses in registering and qualifying a Portfolio and its Shares for
distribution under Federal and state securities laws, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, the expense of reports
to shareholders, shareholders' meetings and proxy solicitations, fidelity bond
and directors and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by the Adviser, Distributor or Administrator under their respective agreements
with the Fund. The Fund also pays for brokerage fees, commissions and other
transaction charges, if any, in connection with the purchase and sale of
portfolio securities. Any general expenses of the Fund that are not readily
identifiable as belonging to a particular Portfolio will be allocated among all
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, 1992 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.
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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 interests in the Short-
Intermediate Corporate Bond Portfolio. Institutional and Trust 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 Investor A Shares and/or Investor B Shares of the Portfolios are
described in this Prospectus. The Portfolios also offer Trust 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 discretion, and Trust Shares, which are offered for financial
institutions acting on their own behalf or on behalf of certain qualified
accounts, are sold without a sales charge. Trust, Institutional, 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 Plans for Trust and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust or Institutional Shares. Payments under the
Administrative Services Plans may not exceed .30% (on an annual basis) of the
average daily net asset value of a Portfolio's outstanding Trust or
Institutional Shares.
The Fund offers various services and privileges in connection with Investor
A Shares and/or Investor B Shares of the Portfolios that are not offered in
connection with its 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
43
<PAGE> 44
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 of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of a Portfolio or class of shares means, with respect to the approval of
an investment advisory agreement or Distribution and Services Plan or a change
in an investment objective or fundamental investment policy, the affirmative
vote of the lesser of (a) more than 50% of the outstanding Shares of such
Portfolio or class of shares, or (b) 67% or more of the Shares of such Portfolio
or class of shares present at a meeting if more than 50% of the outstanding
Shares of such Portfolio or class of shares are represented at the meeting in
person or by proxy.
As of 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.
44
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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
----
<S> <C>
Highlights................................... 3
Certain Financial Information................ 5
Expense Summary for Investor Shares.......... 6
Investment Objectives, Policies and Risk
Considerations............................. 9
Pricing of Shares............................ 21
How to Purchase and Redeem Shares............ 22
Purchase of Shares......................... 22
Automatic Investment Program (AIP)......... 23
Applicable Sales Charges -- Investor A
Shares................................... 24
Reduced Sales Charges -- Investor A
Shares................................... 25
Applicable Sales Charges -- Investor B
Shares................................... 26
Exchange Privileges........................ 29
Redemption of Shares....................... 32
Redemption by Mail......................... 32
Redemption by Telephone.................... 32
Automatic Withdrawal Plan (AWP)............ 33
Purchase of Shares at Net Asset Value...... 33
Other Exchange or Redemption
Information.............................. 33
Yields and Total Returns..................... 34
Dividends and Distributions.................. 35
Taxes........................................ 36
Management of the Fund....................... 38
Other Information Concerning the Fund and its
Shares..................................... 42
</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
INVESTOR A SHARES
AND
INVESTOR B SHARES
[LOGO]
PROSPECTUS
MAY 13, 1996
(AS REVISED OCTOBER 25, 1996)
<PAGE> 49
THE ARCH FUND(R), INC.
(THE "FUND")
INVESTOR A SHARES AND INVESTOR B SHARES OF
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 Investor A Shares or Investor B Shares
of the ARCH Equity Income Portfolio or Investor A Shares of the ARCH
Short-Intermediate Corporate Bond Portfolio.
