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THE ARCH FUND(R), INC.
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
INVESTOR A SHARES
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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
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The ARCH Fund, Inc. is an open-end management investment company authorized
to issue Shares in seventeen investment portfolios. This Prospectus describes
the Investor A Shares of the ARCH EQUITY INDEX and BOND INDEX PORTFOLIOS.
Investor A Shares are sold through selected broker/dealers and other financial
intermediaries to individual customers. Investor A Shares are sold with a
front-end sales charge.
The Portfolios use a strategy called "indexing," which means that they seek
to provide investment results that, before deduction of operating expenses,
approximate the price and yield performance of particular sets of securities or
market segments. The Portfolios' market segments are:
THE ARCH EQUITY INDEX PORTFOLIO -- U.S. publicly traded common stocks with
large stock market capitalizations as represented by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
THE ARCH BOND INDEX PORTFOLIO -- U.S. Government, mortgage-backed,
asset-backed, and corporate debt securities as represented by the Lehman
Brothers Aggregate Bond Index (the "Lehman Aggregate").
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolios; Mercantile serves as custodian; BISYS
Fund Services Ohio, Inc. (the "Administrator") serves as administrator; and
BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated December 23, 1996 (as revised January 21, 1997), 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.
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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.
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997)
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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 seventeen investment portfolios. This Prospectus relates to two
of those portfolios: the ARCH EQUITY INDEX and BOND INDEX 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, Equity Income, Small Cap Equity, International Equity, Balanced,
Government & Corporate Bond, Short-Intermediate Corporate Bond, U.S. Government
Securities, Intermediate Municipal, National Municipal Bond, Missouri Tax-Exempt
Bond and Kansas Tax-Exempt Bond Portfolios, which are described in separate
Prospectuses. Each Portfolio represents a separate pool of assets with different
investment objectives and policies (as described below under "Investment
Objectives, Policies and Risk Considerations"). MVA serves as Adviser,
Mercantile as Custodian, BISYS Fund Services Ohio, Inc. as Administrator, and
BISYS Fund Services as Sponsor and Distributor. (For information on expenses,
fee waivers and services, see "Certain Financial Information" and "Management of
the Fund.")
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Equity Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in equity securities, and who
seek investment results that, before deduction for operating expenses,
approximate the price and yield performance of U.S. publicly traded common
stocks with large stock market capitalizations, as represented by the S&P 500.
The Bond Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in fixed income securities, and
who seek investment results that, before deduction for operating expenses,
approximate the price and yield performance of U.S. Government, mortgage-backed,
asset-backed, and corporate debt securities, as represented by the Lehman
Aggregate.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, enter into repurchase agreements and
reverse repurchase agreements, make securities loans, invest in options and
futures and index-based depository receipts, 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.
Purchasing options is a specialized investment technique which entails a
substantial risk of loss of amounts paid as premiums to option writers. There is
no assurance that a liquid market will exist for a particular futures contract
at any particular time. See "Investment Objectives, Policies and
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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 availability of a
family of seventeen mutual funds should your investment goals change.
This Prospectus describes the Investor A Shares of the Portfolios. Investor
A Shares are sold with a front-end sales charge. For information on purchasing,
exchanging or redeeming Investor A Shares of these Portfolios, please see "How
to Purchase and Redeem Shares" below.
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CERTAIN FINANCIAL INFORMATION
Shares of each 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 Plan" 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 and Investor A Shares in a Portfolio can be expected, at
any given time, to be different.
EXPENSE SUMMARY FOR INVESTOR A SHARES
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EQUITY BOND
INDEX INDEX
PORTFOLIO PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on Purchases (as a percentage of offering
price)(1)....................................................................... 2.5% 2.5%
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees (net of fee waivers)(5)................................ 0.00% 0.00%
12b-1 Fees, including distribution and services fees............................ 0.30% 0.30%
Other Expenses (including administration fees and other expenses) (net of fee
waivers and expense reimbursements)(2,3,4).................................... 0.28% 0.20%
---- ----
TOTAL PORTFOLIO OPERATING EXPENSES
(net of fee waivers and expense reimbursements)(4).............................. 0.58% 0.50%
==== ====
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(1) Reduced sales charges may be available. See "How to Purchase and Redeem
Shares."
(2) Other Expenses are based on estimated expenses to be incurred by each
Portfolio during the current fiscal year.
(3) Without fee waivers, administration fees for each Portfolio would be .20%.
(4) Without fee waivers and expense reimbursements, Other Expenses for each
Portfolio would be .38%, .30% and the Portfolio Operating Expenses for each
Portfolio would be .98%, .90%. Such fee waivers and expense reimbursements
are expected to continue during the current fiscal year.
(5) Without fee waivers, advisory fees for each Portfolio would be .30%.
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EXAMPLE
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1 YEAR 3 YEARS
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You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return, (2) redemption at the end of each period and (3)
deduction at time of purchase of maximum applicable front-end sales
charge:
Equity Index Portfolio................................................... $ 31 $43
Bond Index Portfolio..................................................... $ 30 $41
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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
will bear directly or indirectly. The tables reflect the expenses which each
Portfolio expects to incur during the next twelve months on its Investor A
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 example 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 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 Fund offers you two indexed investment options:
The Equity Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market capitalizations as
represented by the S&P 500.
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Aggregate.
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 investment objective of a Portfolio (other than the fundamental
investment polices described below under "Investment Limitations") may be
changed by the Fund's Board of Directors without shareholder approval. However,
shareholders will be given at least 30 days' written notice before any such
change occurs. Except as noted below under "Investment Limitations," a
Portfolio's investment policies may also be changed by the Fund's Board of
Directors without shareholder approval.
THE INDEXING APPROACH
The Equity Index and Bond Index Portfolios are not managed in a traditional
sense, that is, by making discretionary judgments based on analysis of economic,
financial and market conditions. Instead, these Portfolios seek to approximate
the investment performance of their respective market segments, as represented
by their respective indexes, through the use of sophisticated computer models to
determine which stocks or bonds should be purchased or sold, while keeping
transaction and administrative costs to a minimum. Each Portfolio will invest
substantially all of its total assets in securities listed in that Portfolio's
respective index. The Adviser generally selects securities for each Portfolio on
the basis of their weightings in the respective indexes. A Portfolio will only
purchase a security that is included in its respective index at the time of such
purchase. With respect to the remaining portion of its total assets, each
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market investments. If appropriate,
each Portfolio may use options, futures contracts and depository receipts to
hedge its positions or for other permissible purposes. Each Portfolio also may
enter into reverse repurchase agreements and lend its portfolio securities.
While there can be no guarantee that each Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least .095 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which Standard & Poor's Ratings Group ("S&P") or Lehman Brothers
("Lehman") calculate their respective indexes, and the timing
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of purchases and redemptions. The Adviser monitors the correlation of the
performance of the Portfolios in relation to their indexes under the supervision
of the Board of Directors. In the unlikely event that a high correlation is not
achieved, the Board of Directors will take appropriate steps to correct the
reason for the lower correlation.
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
THE EQUITY INDEX PORTFOLIO
The S&P 500 is composed of approximately 500 common stocks, most of which
are listed on the New York Stock Exchange (the "NYSE"). S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 had an average market capitalization of $5.6 trillion and accounted
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock in approximately the same percentage as that stock
represents in the S&P 500. Under certain circumstances, the Portfolio may not
hold all 500 stocks in the S&P 500, for example because of changes in the S&P
500, or as a result of shareholder activity in the Portfolio. The Portfolio will
rebalance its holdings monthly to reflect changes in the S&P 500. "Market
capitalization" for a company is the market price per share of stock multiplied
by the number of shares outstanding. The Adviser believes that the S&P 500 is an
appropriate benchmark for the Portfolio because it is diversified, it is
familiar to many investors and it is widely accepted as a reference for common
stock investments.
THE BOND INDEX PORTFOLIO
The Lehman Aggregate is composed of U.S. Government, mortgage-backed,
asset-backed, and non-convertible corporate debt securities that meet the
following criteria: the securities have at least $100 million par amount
outstanding; the securities are rated investment grade (at least Baa or BBB) by
Moody's Investors Service, Inc. ("Moody's") or S&P (if not rated by Moody's);
have at least one year until maturity; and have coupons with fixed rates. The
Lehman Aggregate excludes collateralized mortgage obligations ("CMOs"),
adjustable rate mortgages, manufactured homes, non-agency bonds, buydowns,
graduated equity mortgages, project loans and non-conforming (i.e., "jumbo")
mortgages. As of December 31, 1996, 5,727 issues were included in the Lehman
Aggregate, representing approximately $4.5 trillion in market value. U.S.
Treasury and agency
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securities represented approximately 51.6% of the total market value,
asset-backed and mortgage-backed securities represented approximately 30.6% of
the total market value, with corporate debt securities representing the balance
of approximately 17.82%. The average maturity of the Lehman Aggregate was
approximately 8.7 years. The Adviser believes that the Lehman Aggregate is an
appropriate benchmark for the Portfolio because it is diversified, it is
familiar to investors, and it is widely accepted as a reference for bonds and
other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of the approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate -- U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
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 respective
investment objectives and policies, include, in addition to U.S. Treasury bonds,
notes and bills, the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), General Services Administration, Student Loan Marketing Association,
Central Bank for Cooperatives, Federal Intermediate Credit Banks, Resolution
Trust Corporation, and Maritime Administration. Obligations of certain agencies
and instrumentalities of the U.S. Government, such as those of GNMA, are
supported by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of FNMA, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are 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.
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MONEY MARKET INSTRUMENTS. Under certain circumstances described above,
each Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
Investment by the Portfolios in commercial paper will consist of issues
that are rated at the time of purchase in one of the two highest rating
categories assigned by S&P, Moody's or another nationally recognized statistical
rating organization (each 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
may 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. 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. 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.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, the Portfolios 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
the 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 the Portfolios presently do not intend to
enter into repurchase agreements providing for settlement in more than seven
days, the Portfolios have the authority to do so subject to their limitation on
the purchase of illiquid securities described below. Repurchase agreements are
considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to their respective investment
policies and limitations, the Portfolios 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.
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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 or marketable securities. 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 marketable 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 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 indexes. Purchasing
options is a specialized investment technique which entails a substantial risk
of a complete loss of the amounts paid as premiums to the option writer. Such
transactions will be entered into only as a hedge against fluctuations in the
value of securities which a Portfolio holds or intends to purchase.
The 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.)
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolios may invest in
futures contracts and options on futures contracts. Such transactions, including
stock or bond index futures contracts, or options thereon, can be used to
simulate full investment in the S&P 500 or Lehman Aggregate while retaining a
cash balance for Portfolio management purposes, or act as a hedge to protect a
Portfolio from fluctuations in the value of its securities caused by anticipated
changes in interest rates 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
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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
bonds in the index is contemplated. Similarly, it may be in the best interest of
the Bond Index 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 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.)
ASSET-BACKED SECURITIES. The Bond Index 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 included in the Lehman Aggregate and which are issued by entities such as
the GNMA, FNMA, FHLMC and private issuers such as commercial banks, finance
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. 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
Bond Index 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 also decline or 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
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<PAGE> 13
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.
DEPOSITORY RECEIPTS. Each Portfolio may invest in receipts that are issued
by banks or brokerage firms and are created by depositing securities listed in
the respective index into a special account at a custodian bank. The custodian
holds such securities for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. The
Portfolios may invest in index-based depository receipts in lieu of investment
in the actual securities that are listed on the index.
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 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 distribution fees 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. (See the Statement of Additional Information
under "Investment Objectives and Policies -- Securities of Other Investment
Companies.")
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell securities at a stated price and yield with
settlement beyond the normal settlement date. Such transactions permit a
Portfolio to lock-in a price or yield on a security, regardless of future
changes in interest rates. 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. Neither Portfolio intends to engage in such
transactions for speculative purposes but only for the purpose of acquiring
portfolio securities.
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
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<PAGE> 14
Adviser expects that less than 5% of each Portfolio's net assets will be
invested in Rule 144A securities during the current year.
INVESTMENT RISKS AND OTHER CONSIDERATIONS. A Portfolio's ability to
correlate its performance with an index may be affected by, among other things,
changes in the securities markets, the manner in which the index is calculated
and the timing of purchases and redemptions of the Portfolio's shares. The Fund
expects the investments of each Portfolio to decline in value whenever the
market, as represented by the securities in its index, declines. The Equity
Index Portfolio should exhibit price volatility similar to that of the S&P 500.
It is impossible to eliminate risk from investments in common stocks. The
average annual total return of the S&P 500 from 1964 to 1996 was 12.33%. Returns
in individual calendar years ranged from a low of -26.39% (in 1974) to a high of
37.58% (in 1995). You should consider your investment in the Equity Index
Portfolio to be long-term. This Portfolio is not designed to provide you with a
means to speculate on short-term movements in the stock market.
The Bond Index Portfolio should exhibit price and yield volatility similar
to that of the Lehman Aggregate. Generally, the market value of fixed income
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 fixed income securities, such as
the Bond Index Portfolio, 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.
PORTFOLIO TRANSACTIONS. 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.
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."
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<PAGE> 15
A Portfolio may not:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such
investments, more than 5% of the Portfolio's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements
secured by obligations of the U.S. Government or its agencies or
instrumentalities; (b) wholly-owned finance companies will be considered to
be in the industries of their parents if their activities are primarily
related to financing the activities of their parents; and (c) utilities
will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be
considered a separate industry).
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and 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 each Portfolio may purchase or hold debt
instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and enter into
repurchase agreements.
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, each
Portfolio may make commitments more restrictive than the investment policies and
limitations described above. Should
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<PAGE> 16
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.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of each Portfolio are sold subject to a front-end sales
charge, and are sold through broker-dealers or other organizations acting on
behalf of their customers. Generally, investors purchase Investor A 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. The organization is
responsible for transmitting purchase orders directly to the Fund.
In general, the minimum initial investment in each Portfolio is $1,000 and
the minimum 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
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<PAGE> 17
minimum investments, (c) a payroll deduction program, in which case there is no
minimum investment and minimum subsequent investments are $25 per month, or (d)
a wrap fee program, in which case there are no minimum investments. (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.
EFFECTIVE TIME OF PURCHASE. 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.
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. 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 at the net asset value plus any applicable front-end sales
charge next determined
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<PAGE> 18
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
portfolios such as the Equity Index and Bond Index 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 regular fixed
investment amount allows more Shares to be purchased during periods of lower
Share prices and fewer Shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his or her Shares at a price which is lower than their
purchase price.
APPLICABLE SALES CHARGES
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 charges are assessed as follows:
<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
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<PAGE> 19
agreement with the Distributor, and their employees (and the immediate family
members of such individuals); (d) customers who purchase pursuant to a wrap fee
program offered by any broker-dealer or other financial institution or financial
planning organization; (e) individuals who purchase Investor A Shares with the
proceeds of Trust Shares or Institutional Shares redeemed in connection with a
rollover of benefits paid by a qualified retirement or employee benefit plan or
distribution on behalf of any other qualified account administered by Mercantile
or its affiliates or correspondent banks, within 60 days of receipt of such
payment; (f) investors who purchase Investor A Shares through a payroll
deduction program; (g) employees of any sub-adviser to the Fund; (h) holders of
Southwestern Bell Visa cards issued by Mercantile Bank of Illinois, N.A. who
participate in the AIP (credit cards may not be used for the purchase of Fund
shares); (i) investors exchanging Trust Shares of a Portfolio received from the
distribution of assets held in a qualified trust, agency or custodian account
with the trust department of Mercantile or any of its affiliated or
correspondent banks; or (j) other investment companies distributed by the
Distributor or its affiliates. An investor who believes that he or she may
qualify under any of the exemptions listed above must notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
REDUCED SALES CHARGES
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. An investor who has previously purchased Investor
A Shares of the 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. 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. 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
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<PAGE> 20
Investor A Shares in a load Portfolio over a 13-month period (beginning up to 90
days prior to the date indicated on the account application). The Transfer Agent
will hold in escrow 5% of the amount indicated for payment of a higher sales
load if a shareholder does not purchase the full amount indicated on the account
application. Upon completion of the total minimum investment specified on the
account application, the escrow will be released, and an adjustment will be made
to reflect any reduced sales charge applicable to Shares purchased during the
90-day period prior to submission of the account application. Additionally, if
total purchases within the 13-month period exceed the amount specified, an
adjustment will be made to reflect further reduced sales charges applicable to
such purchases. All such adjustments will be made at the conclusion of the
13-month period and in the form of additional Shares credited to the
shareholder's account at the then current public offering price applicable to a
single purchase of the total amount of the total purchases. If total purchases
are less than the amount specified, escrowed Shares may be involuntarily
redeemed to pay the additional sales charge. Checking a Letter of Intent box
does not bind an investor to purchase, or the Fund to sell, the full amount
indicated at the sales load in effect at the time of signing, but an investor
must complete the intended purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE. 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. 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.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange 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. The exchange privilege may be
exercised only in those states where the class of Shares of such other
Portfolios may legally be sold.
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.
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.
OTHER INFORMATION ON 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
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<PAGE> 21
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 in the following Portfolios:
- The ARCH Money Market Portfolio
- The ARCH Treasury Money Market Portfolio
- The ARCH Tax-Exempt Money Market Portfolio
- The ARCH Growth & Income Equity Portfolio
- The ARCH Equity Income Portfolio*
- The ARCH Small Cap Equity Portfolio
- The ARCH International Equity Portfolio
- The ARCH Balanced Portfolio
- The ARCH Government & Corporate Bond Portfolio
- The ARCH Intermediate Corporate Bond Portfolio*
- The ARCH U.S. Government Securities Portfolio
- The ARCH Short-Intermediate Municipal Portfolio
- The ARCH National Municipal Bond Portfolio
- The ARCH Missouri Tax-Exempt Bond Portfolio
- The ARCH Kansas Tax-Exempt Bond Portfolio*
For information concerning these Portfolios, please call 1-800-551-3731.
Shareholders exercising the exchange privilege with any of the other Portfolios
in the Fund should request and review the Portfolio's Prospectus carefully prior
to making an exchange.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A 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
- ---------------
* Expected to commence operations in 1997.
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<PAGE> 22
account and will automatically invest that amount in Shares of the Portfolio
designated by the shareholder on the date of such deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from the service organization servicing
their Fund accounts. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written request to their investment representative or to the Fund. The Automatic
Exchange Program may be amended or terminated without notice at any time by the
Distributor.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. 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 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 five 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, as amended. 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.
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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
believed to be genuine. The Fund will employ procedures designed to provide
reasonable assurance that instructions by telephone are genuine; if these
procedures are not followed, the Fund or its service contractors may be liable
for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, investors are
encouraged to follow the procedures described in "Other Exchange or Redemption
Information" below.
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. A shareholder who desires to establish an AWP after opening an account
should complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Distributor for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time.
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of 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.
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OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares and Investor A 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 Shares may be quoted in advertisements or in
communications to shareholders. The yield of a Portfolio is computed based on
the net income of such Shares in the particular Portfolio during a 30-day (or
one-month) period identified in connection with the particular yield quotation.
More specifically, the yield is computed by dividing the Portfolio's net income
per Share during a 30-day (or one-month) period by the maximum public offering
price per Share on the last day of the period and annualizing the result.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to such Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular class 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 the Portfolio and that the
maximum sales load in effect during the period has been charged by the
Portfolio. The
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Portfolios' total return figures may also be calculated without the deduction of
the maximum sales charge in effect during the period. The effect of not
deducting the sales charge will be to increase the total return reflected. When
considering average annual total return figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any one
year in the period might have been more or less than the average for the entire
period.
Performance data of the Portfolios' Investor A 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 S&P, Lehman Brothers or any of its affiliates, Ibbotson Associates,
Inc., Lipper Analytical Services, Inc., 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 INDEX PORTFOLIO
Net investment income for the Equity Index Portfolio is declared and paid
monthly as a dividend to shareholders of record. Shares of the Portfolio 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 the 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
Plan adopted for such Shares and the Portfolio's Investor A Shares bear all
expenses of the Distribution and Services Plan adopted for such Shares. (See
"Management of the Fund" and "Other Information Concerning the Fund and Its
Shares.")
THE BOND INDEX PORTFOLIO
Dividends from net investment income of the Bond Index Portfolio are
declared daily and paid monthly not later than five Business Days after the end
of each month. Shares of the Portfolio earn dividends from the day after the
purchase order is received by the Fund through the day the redemption order for
such Shares is received. Dividends on each Share of such Portfolios are
determined in the same manner and are paid in the same amounts irrespective of
class, except that 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 bear
25
<PAGE> 26
all expenses of the Distribution and Services Plan adopted for such Shares. (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 current
taxable year. It is intended that each Portfolio will continue to so qualify as
long as such qualification is in the best interests of shareholders. A regulated
investment company 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 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 Index
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.
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
Index Portfolio, the record date of any
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<PAGE> 27
dividend or capital gains distribution) should be aware that the amount of the
forthcoming distribution, although in effect a return of capital, will be
taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by the shareholders and paid by the Portfolio on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by a Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to each Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of June 30, 1996, MVA had approximately $7.3
billion in assets under investment management, including the Fund's assets,
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<PAGE> 28
which were approximately $2.3 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 .30% and .30% of the average daily net assets of
the Equity Index and Bond Index 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.
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 Administrative Services Plan described below. For its services,
the Administrator is entitled to receive a fee, computed daily and payable
monthly, at the annual rate of .20% of each Portfolio's average daily net
assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the fees otherwise payable by a Portfolio in order to increase the net income
available for distribution to shareholders.
DISTRIBUTOR
Investor A Shares of each Portfolio are sold continuously by the
Distributor, BISYS Fund Services ("BISYS"), an affiliate of the Administrator.
The Distributor also monitors the Fund's arrangements under the Distribution and
Services Plan described below. BISYS 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
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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 PLAN
The Fund has adopted a Distribution and Services Plan pursuant to Rule
12b-1 under the 1940 Act with respect to Investor A Shares of the Portfolios.
Under the Distribution and Services Plan, the Fund may pay (i) the Distributor
or another person for distribution services provided and expenses assumed and
(ii) Service Organizations for shareholder administrative services provided
pursuant to servicing agreements in connection with Investor A Shares 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, 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. (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, payment 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.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plan
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A 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.
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 Plan (as described under "Distribution
and Services Plan" 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.)
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OTHER INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which is classified as a diversified company under the 1940
Act: 25 million Trust Shares, 25 million Institutional Shares and 25 million
Investor A Shares, representing interests in the Equity Index Portfolio; and 25
million Trust Shares, 25 million Institutional shares and 25 million Investor A
Shares, representing interests in the Bond Index 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 interests in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Portfolios will be issued without
Share certificates.
The Investor A Shares of the Portfolios are described in this Prospectus.
The Portfolios also offer Trust Shares and Institutional Shares. Trust Shares,
which are offered for financial institutions acting on their own behalf or on
behalf of certain qualified accounts, and Institutional Shares, which are
offered to financial institutions acting on behalf of accounts for which they do
not exercise investment discretion, are sold without a sales charge. Trust,
Institutional and Investor A Shares bear their pro rata portion of all operating
expenses paid by a Portfolio, except that Trust Shares and Institutional Shares
bear all payments under a Portfolio's respective Administrative Services Plans
adopted for such Shares and Investor A Shares bear all payments under a
Portfolio's Distribution and Services Plan adopted for such Shares. In addition,
Institutional Shares of a Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust Shares or Institutional Shares. Payments
under the Administrative Services Plans may not exceed .30% (on an annual basis)
of the average daily net asset value of a Portfolio's outstanding Trust Shares
or Institutional Shares.
The Fund offers various services and privileges in connection with Investor
A 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.
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Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
Portfolios will vote together and not by class unless otherwise required by law
or permitted by the Board of Directors. All shareholders of a particular
Portfolio will vote together as a single class on matters relating to the
Portfolio's investment advisory agreement and investment objective and
fundamental policies. Only holders of Trust Shares, however, will vote on
matters relating to the Administrative Services Plan for Trust Shares and only
holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares.
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 December 23, 1996, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
For information with respect to Investor A Shares of the Fund's other
investment portfolios, call the Fund at 1-800-551-3731.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIOS'
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIOS, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIOS, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights................................. 3
Certain Financial Information.............. 5
Expense Summary for Investor A Shares...... 5
Investment Objectives, Policies and Risk
Considerations........................... 7
Investment Limitations..................... 14
Pricing of Shares.......................... 16
How to Purchase and Redeem Shares.......... 16
Purchase of Shares....................... 16
Automatic Investment Program (AIP)....... 17
Applicable Sales Charges................. 18
Reduced Sales Charges.................... 19
Exchange Privilege....................... 20
Redemption of Shares..................... 22
Redemption by Mail....................... 22
Redemption by Telephone.................. 23
Automatic Withdrawal Plan (AWP).......... 23
Purchase of Investor A Shares
at Net Asset Value..................... 23
Other Exchange or Redemption
Information............................ 24
Yields and Total Returns................... 24
Dividends and Distributions................ 25
Taxes...................................... 26
Management of the Fund..................... 27
Other Information Concerning the Fund and
its Shares............................... 31
Miscellaneous.............................. 32
</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 Index Portfolio
Bond Index Portfolio
INVESTOR A SHARES
[ARCH LOGO]
PROSPECTUS
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997)
<PAGE> 37
THE ARCH FUND(R), INC.
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
TRUST SHARES
<TABLE>
<S> <C>
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
</TABLE>
The ARCH Fund, Inc. is an open-end management investment company authorized
to issue Shares in seventeen investment portfolios. This Prospectus describes
the Trust Shares of the ARCH EQUITY INDEX AND BOND INDEX PORTFOLIOS. Trust
Shares are offered to financial institutions acting on their own behalf or on
behalf of certain qualified accounts.
The Portfolios use a strategy called "indexing," which means that they seek
to provide investment results that, before deduction of operating expenses,
approximate the price and yield performance of particular sets of securities or
market segments. The Portfolios' market segments are:
THE ARCH EQUITY INDEX PORTFOLIO -- U.S. publicly traded common stocks with
large stock market capitalizations as represented by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
THE ARCH BOND INDEX PORTFOLIO -- U.S. Government, mortgage-backed,
asset-backed, and corporate debt securities as represented by the Lehman
Brothers Aggregate Bond Index (the "Lehman Aggregate").
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolios; Mercantile serves as custodian; BISYS
Fund Services Ohio, Inc. (the "Administrator") serves as administrator; and
BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated December 23, 1996 (as revised January 21, 1997), 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.
------------------------
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.
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997.)
<PAGE> 38
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 seventeen investment portfolios. This Prospectus relates to two
of those portfolios: the ARCH EQUITY INDEX and BOND INDEX 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, Equity Income, Small Cap Equity, International Equity, Balanced,
Government & Corporate Bond, Intermediate Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal, National Municipal Bond, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios, which are described in
separate Prospectuses. Each Portfolio represents a separate pool of assets with
different investment objectives and policies (as described below under
"Investment Objectives, Policies and Risk Considerations"). MVA serves as
Adviser, Mercantile as Custodian, BISYS Fund Services Ohio, Inc. as
Administrator, and BISYS Fund Services as sponsor and Distributor. (For
information on expenses, fee waivers and services, see "Certain Financial
Information" and "Management of the Fund.")
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Equity Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in equity securities, and who
seek investment results that, before deduction for operating expenses,
approximate the price and yield performance of U.S. publicly traded common
stocks with large stock market capitalizations, as represented by the S&P 500.
The Bond Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in fixed income securities, and
who seek investment results that, before deduction for operating expenses,
approximate the price and yield performance of U.S. Government, mortgage-backed,
asset-backed, and corporate debt securities, as represented by the Lehman
Aggregate.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, enter into repurchase agreements and
reverse repurchase agreements, make securities loans, invest in options, futures
and index-based depository receipts, 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. Purchasing options
is a specialized investment technique which entails a substantial risk of loss
of amounts paid as premiums to option writers. There is no assurance that a
liquid market will exist for a particular futures contract at any particular
time. See "Investment Objectives, Policies and
2
<PAGE> 39
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 availability of a
family of seventeen mutual funds should your investment goals change.
This Prospectus describes the Trust Shares of the Portfolios. For
information on purchasing, exchanging or redeeming Trust Shares of these
Portfolios, please see "How to Purchase and Redeem Shares" below.
3
<PAGE> 40
CERTAIN FINANCIAL INFORMATION
Shares of each 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 -- Administrative Services Plan"
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 and Investor A
Shares in a Portfolio can be expected, at any given time, to be different.
4
<PAGE> 41
EXPENSE SUMMARY FOR TRUST SHARES
<TABLE>
<CAPTION>
EQUITY INDEX BOND INDEX
PORTFOLIO PORTFOLIO
------------ ----------
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees (net of fee waivers)(1)............... 0.00% 0.00%
12b-1 Fees..................................................... 0.00% 0.00%
Other Expenses (including administration fees, administrative
services fees and other expenses) (net of fee waivers and
expense reimbursements)(2,3)................................ .28% .20%
--- ---
TOTAL PORTFOLIO OPERATING EXPENSES (net of fee waivers and
expense reimbursements)(3)..................................... .28% .20%
=== ===
- ---------------
<FN>
1 Without fee waivers, advisory fees for each Portfolio would be .30%.
2 Other Expenses are based on estimated expenses to be incurred by each
Portfolio during the current fiscal year.
3 Without fee waivers and expense reimbursements, Other Expenses for each
Portfolio would be .38%, .30% and Total Portfolio Operating Expenses for each
Portfolio would be .68%, .60%. Such fee waivers and expense reimbursements are
expected to continue during the current fiscal year.
</TABLE>
EXAMPLE
<TABLE>
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of
each period:
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Equity Index Portfolio............................................. $3 $ 9
Bond Index Portfolio............................................... $2 $ 7
</TABLE>
5
<PAGE> 42
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 Trust Shares will
bear directly or indirectly. The tables reflect the expenses which each
Portfolio expects to incur during the next twelve months on its Trust Shares.
For more complete descriptions of the various costs and expenses, see
"Management of the Fund" in this Prospectus and the Statement of Additional
Information. The tables and example 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.
6
<PAGE> 43
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The Fund offers you two indexed investment options:
The Equity Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market capitalizations as
represented by the S&P 500.
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Aggregate.
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 investment objective of a Portfolio may be changed by the Fund's
Board of Directors without shareholder approval. However, shareholders will be
given at least 30 day's written notice before any such change occurs. Except as
noted below under "Investment Limitations", a Portfolio's investment policies
may also be changed by the Fund's Board of Directors without shareholder
approval.
THE INDEXING APPROACH
The Equity Index and Bond Index Portfolios are not managed in a traditional
sense, that is, by making discretionary judgments based on analysis of economic,
financial and market conditions. Instead, these Portfolios seek to approximate
the investment performance of their respective market segments, as represented
by their respective indexes, through the use of sophisticated computer models to
determine which stocks or bonds should be purchased or sold, while keeping
transaction and administrative costs to a minimum. Each Portfolio will invest
substantially all of its total assets in securities listed in that Portfolio's
respective index. The Adviser generally selects securities for each Portfolio on
the basis of their weightings in the respective indexes. A Portfolio will only
purchase a security that is included in its respective index at the time of such
purchase. With respect to the remaining portion of its total assets, each
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market investments. If appropriate,
each Portfolio may use options, futures contracts and depository receipts to
hedge its positions or for other permissible purposes. Each Portfolio also may
enter into reverse repurchase agreements and lend its portfolio securities.
While there can be no guarantee that each Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which Standard & Poor's Ratings Group ("S&P") or Lehman Brothers
("Lehman") calculate their respective indexes, and the timing of purchases and
redemptions. The Adviser monitors the correlation of the performance of the
7
<PAGE> 44
Portfolios in relation to their indexes under the supervision of the Board of
Directors. In the unlikely event that a high correlation is not achieved, the
Board of Directors will take appropriate steps to correct the reason for the
lower correlation.
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
THE EQUITY INDEX PORTFOLIO
The S&P 500 is composed of approximately 500 common stocks, most of which
are listed on the New York Stock Exchange (the "NYSE"). S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 have an average market capitalization of $5.6 trillion and account
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock approximately the same percentage as that stock represents
in the S&P 500. Under certain circumstances, the Portfolio may not hold all 500
stocks in the S&P 500, for example because of changes in the S&P 500, or as a
result of shareholder activity in the Portfolio. The Portfolio will rebalance
its holdings monthly to reflect changes in the S&P 500. "Market capitalization"
for a company is the market price per share of stock multiplied by the number of
shares outstanding. The Adviser believes that the S&P 500 is an appropriate
benchmark for the Portfolio because it is diversified, it is familiar to many
investors and it is widely accepted as a reference for common stock investments.
THE BOND INDEX PORTFOLIO
The Lehman Aggregate is composed of U.S. Government, mortgage-backed,
asset-backed, and non-convertible corporate debt securities that meet the
following criteria: the securities have at least $100 million par amount
outstanding; the securities are rated investment grade (at least Baa or BBB) by
Moody's Investors Service, Inc. ("Moody's") or S&P (if not rated by Moody's);
have at least one year until maturity; and have coupons with fixed rates. The
Lehman Aggregate excludes collateralized mortgage obligations ("CMOs"),
adjustable rate mortgages, manufactured homes, non-agency bonds, buydowns,
graduated equity mortgages, project loans and non-conforming (i.e., "jumbo")
mortgages. As of December 31, 1996, 5,727 issues were included in the Lehman
Aggregate, representing approximately $4.5 trillion in market value. U.S.
Treasury and agency securities represented approximately 51.6% of the total
market value, asset-backed and mortgage-
8
<PAGE> 45
backed securities represented approximately 30.6% of the total market value,
with corporate debt securities representing the balance of approximately 17.82%.
The average maturity of the Lehman Aggregate was approximately 8.7 years. The
Adviser believes that the Lehman Aggregate is an appropriate benchmark for the
Portfolio because it is diversified, it is familiar to investors, and it is
widely accepted as a reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate -- U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
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 respective
investment objectives and policies, include, in addition to U.S. Treasury bonds,
notes and bills, the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), General Services Administration, Student Loan Marketing Association,
Central Bank for Cooperatives, Federal Intermediate Credit Banks, Resolution
Trust Corporation, and Maritime Administration. Obligations of certain agencies
and instrumentalities of the U.S. Government, such as those of GNMA, are
supported by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of FNMA, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are 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.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above,
each Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
9
<PAGE> 46
Investment by the Portfolios in commercial paper will consist of issues
that are rated at the time of purchase in one of the two highest rating
categories assigned by S&P, Moody's or another nationally recognized statistical
rating organization (each 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
may 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. 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. 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.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, the Portfolios 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
the 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 the Portfolios presently do not intend to
enter into repurchase agreements providing for settlement in more than seven
days, the Portfolios have the authority to do so subject to their limitation on
the purchase of illiquid securities described below. Repurchase agreements are
considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to their respective investment
policies and limitations, the Portfolios 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 or
10
<PAGE> 47
marketable securities. 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 marketable 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 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 indexes. Purchasing
options is a specialized investment technique which entails a substantial risk
of a complete loss of the amounts paid as premiums to the option writer. Such
transactions will be entered into only as a hedge against fluctuations in the
value of securities which a Portfolio holds or intends to purchase.
The 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.)
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolios may invest in
futures contracts and options on futures contracts. Such transactions, including
stock or bond index futures contracts, or options thereon, can be used to
simulate full investment in the S&P 500 or Lehman Aggregate while retaining a
cash balance for Portfolio management purposes, or act as a hedge to protect a
Portfolio from fluctuations in the value of its securities caused by anticipated
changes in interest rates 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 bonds in the index is contemplated.
Similarly, it may be in the best interest of the
11
<PAGE> 48
Bond Index 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 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.)
ASSET-BACKED SECURITIES. The Bond Index 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 included in the Lehman Aggregate and which are issued by entities such as
the GNMA, FNMA, FHLMC and private issuers such as commercial banks, finance
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. 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
Bond Index 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 also decline or 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.
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DEPOSITORY RECEIPTS. Each Portfolio may invest in receipts that are issued
by banks or brokerage firms and are created by depositing securities listed in
the respective index into a special account at a custodian bank. The custodian
holds such securities for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. The
Portfolios may invest in index-based depository receipts in lieu of investment
in the actual securities that are listed on the index.
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 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 advisory and distribution fees 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. (See the Statement of Additional
Information under "Investment Objectives and Policies -- Securities of Other
Investment Companies.")
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell securities at a stated price and yield with
settlement beyond the normal settlement date. Such transactions permit a
Portfolio to lock-in a price or yield on a security, regardless of future
changes in interest rates. 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. Neither Portfolio intends to engage in such
transactions for speculative purposes but only for the purpose of acquiring
portfolio securities.
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.
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INVESTMENT RISKS AND OTHER CONSIDERATIONS. A Portfolio's ability to
correlate its performance with an index may be affected by, among other things,
changes in the securities markets, the manner in which the index is calculated
and the timing of purchases and redemptions of the Portfolio's shares. The Fund
expects the investments of each Portfolio to decline in value whenever the
market, as represented by the securities in its index, declines. The Equity
Index Portfolio should exhibit price volatility similar to that of the S&P 500.
It is impossible to eliminate risk from investments in common stocks. The
average annual total return of the S&P 500 from 1964 to 1996 was 12.33%. Returns
in individual calendar years ranged from a low of -26.39% (in 1974) to a high of
37.58% (in 1995). You should consider your investment in the Equity Index
Portfolio to be long-term. This Portfolio is not designed to provide you with a
means to speculate on short-term movements in the stock market.
The Bond Index Portfolio should exhibit price and yield volatility similar
to that of the Lehman Aggregate. Generally, the market value of fixed income
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 fixed income securities, such as
the Bond Index Portfolio, 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.
PORTFOLIO TRANSACTIONS. 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.
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
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securities of such issuer, or more than 10% of the issuer's outstanding
voting securities would be owned by the Portfolio or the Fund, except that
up to 25% of the Portfolio's total assets may be invested without regard to
such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements
secured by obligations of the U.S. Government or its agencies or
instrumentalities; (b) wholly-owned finance companies will be considered to
be in the industries of their parents if their activities are primarily
related to financing the activities of their parents; and (c) utilities
will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be
considered a separate industry).
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and 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 each Portfolio may purchase or hold debt
instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and enter into
repurchase agreements.
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, each
Portfolio 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.
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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.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or other financial institutions
(collectively "financial institutions"), acting on their own behalf or on behalf
of their qualified fiduciary accounts, employee benefit, retirement plan or
other such qualified accounts. Trust Shares are sold to qualified purchasers
without a sales charge imposed by the Fund or the Distributor. Generally,
investors purchase Trust Shares through a financial institution, which is
responsible for transmitting purchase orders directly to the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
Financial institutions placing orders directly or on behalf of their
customers should contact the Fund at 1-800-551-3731. Investors may also call the
Fund for information on how to purchase Shares.
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All shareholders of record will receive confirmations of Share purchases,
exchanges and redemptions in the mail. If Shares are held in the name of banks
or other financial institutions, such institution is responsible for
transmitting purchase, exchange and redemption orders to the Fund on a timely
basis, recording all purchase, exchange and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Trust Shares will be priced
according to the net asset value per Share next determined on that day after
receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Trust Shares of a
Portfolio for Trust Shares of another Portfolio offered by the Fund or, under
certain circumstances described below, for Investor A Shares of the same
Portfolio. Exchanges for Trust Shares in another Portfolio are effected without
payment of any exchange or sales charges. In addition, Trust Shares of a
Portfolio may be exchanged for Investor A Shares of the same Portfolio in
connection with the distribution of assets held in a qualified trust, agency or
custodian account with the trust department of Mercantile or any of its
affiliated or correspondent banks. The exchanges are made without a sales charge
at the net asset value of the respective share class.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such exchange
request to the Fund. (See "Other Exchange or Redemption Information" below.) An
investor should consult the financial institution or the Fund for further
information regarding procedures for exchanging Shares.
In addition to the Portfolios described in this Prospectus, the Fund
currently offers Trust Shares in the following Portfolios:
- The ARCH Money Market Portfolio
- The ARCH Treasury Money Market Portfolio
- The ARCH Tax-Exempt Money Market Portfolio
- The ARCH Growth & Income Equity Portfolio
- The ARCH Equity Income Portfolio*
- The ARCH Small Cap Equity Portfolio
- The ARCH International Equity Portfolio
- The ARCH Balanced Portfolio
- The ARCH Government & Corporate Bond Portfolio
- The ARCH Intermediate Corporate Bond Portfolio*
- The ARCH U.S. Government Securities Portfolio
- The ARCH National Municipal Bond Portfolio
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<PAGE> 54
- The ARCH Short-Intermediate Municipal Portfolio
- The ARCH Missouri Tax-Exempt Bond Portfolio
- The ARCH Kansas Tax-Exempt Bond Portfolio*
For information concerning these Portfolios, please call 1-800-551-3731.
Shareholders exercising the exchange privilege with any of the other Portfolios
in the Fund should request and review the Portfolio's Prospectus carefully prior
to making an exchange.
REDEMPTION OF SHARES
Redemption orders should be placed, in writing or by phone, with or through
the same financial institution that placed the original purchase order.
Redemption orders are effected at a Portfolio's net asset value per Share next
determined after receipt of the order by the Fund. The financial institution is
responsible for transmitting redemption orders to the Fund on a timely basis.
Proceeds from redemptions of Trust Shares of the Portfolios with respect to
redemption orders received and accepted by the Fund before 4:00 p.m. (Eastern
time) on a Business Day normally are sent electronically to the financial
institution that placed the redemption order the next Business Day 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
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 the financial institution servicing his or her
account or the Distributor. Additional documentation may be required if the
redemption is requested by a corporation, partnership, trust, fiduciary,
executor, or administrator. If, due to temporary adverse conditions, investors
are unable to effect telephone transactions, investors are encouraged to follow
the procedures described in "Other Exchange or Redemption Information" below.
- ---------------
* Expected to commence operations in 1997.
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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
believed to be genuine. The Fund will employ procedures designed to provide
reasonable assurance that instructions by telephone are genuine; if these
procedures are not followed, the Fund or its service contractors may be liable
for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, investors are
encouraged to follow the procedures described in "Other Exchange or Redemption
Information" below.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
financial institutions and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares and Investor A 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
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compute each Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
From time to time, performance information such as total return and yield
data for the Portfolios' Trust Shares may be quoted in advertisements or in
communications to shareholders. The yield of a Portfolio is computed based on
the net income of such Shares in the particular Portfolio during a 30-day (or
one-month) period identified in connection with the particular yield quotation.
More specifically, the yield is computed by dividing the Portfolio's net income
per Share during a 30-day (or one-month) period by the net asset value per Share
on the last day of the period and annualizing the result.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to such Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular Portfolio over the particular measuring period.
Aggregate total returns reflect the cumulative percentage change in value over
the measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by the Portfolio during the period
are reinvested in the Portfolio's Trust Shares. When considering average annual
total return figures for periods longer than one year, it is important to note
that a Portfolio's annual total return for any one year in the period might have
been more or less than the average for the entire period.
Performance data of the Portfolios' Trust Shares may be compared to the
performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by S&P, Lehman Brothers, or any of its affiliates, Ibbotson Associates,
Inc., Lipper Analytical Services, Inc. and Mutual Fund Forecaster. References
may also be made to indices or data published in Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Institutional Investor, Pensions and Investments, U.S.A. Today, Fortune,
CDA/Weisenberger, Morningstar, Inc. and publications of a local or regional
nature. In addition to performance information, general information about the
Portfolios that appears in a publication such as those mentioned above may be
included in advertisements and in reports to shareholders.
Performance quotations of a class of Shares in a Portfolio represent that
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by a bank or other financial
institution (as described in "Management of The Fund -- Service Organizations"
below) or other institutions will not be included in the calculations of a
Portfolio's yields and total returns. Such fees, if any, will reduce the
investor's net return on an investment in a Portfolio. Investors may call
1-800-452-4015 to obtain current yield and total return information.
DIVIDENDS AND DISTRIBUTIONS
THE EQUITY INDEX PORTFOLIO
Dividends from net investment income of the Equity Index Portfolio are declared
monthly and paid monthly not later than five Business Days after the end of each
month. Shares of the Portfolio earn
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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 the 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 bear all
expenses of the Distribution and Services Plan adopted for such Shares. (See
"Management of the Fund" and "Other Information Concerning the Fund and Its
Shares.")
THE BOND INDEX PORTFOLIO
Dividends from net investment income of the Bond Index Portfolio are declared
daily and paid monthly not later than five Business Days after the end of each
month. Shares of the Portfolio earn dividends from the day after the purchase
order is received by the Fund through the day the redemption order for such
Shares is received. Dividends on each Share of such Portfolios are determined in
the same manner and are paid in the same amounts irrespective of class, except
that 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 bear all expenses of the Distribution and Services
Plan adopted for such Shares. (See "Management of the Fund" and "Other
Information Concerning the Fund and Its Shares.")
OTHER DIVIDEND AND DISTRIBUTION INFORMATION
Net realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated on the account application, or (ii)
redeemed all the Shares held in a Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"), for the current
taxable year. It is intended that each Portfolio will continue to so qualify as
long as such qualification is in the best interests of shareholders. A regulated
investment company 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 Portfolios to
distribute as dividends
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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 Index 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.
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
Index Portfolio, the record date of any dividend or capital gains distribution)
should be aware that the amount of the forthcoming distribution, although in
effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by the shareholders and paid by the Portfolio on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by a Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
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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 June 30, 1996, MVA had approximately $7.3
billion in assets under investment management, including the Fund's assets,
which were approximately $2.3 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 .30% and .30% of the average daily net assets of
the Equity Index and Bond Index 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.
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
Administrative Services Plan described below. For its services, the
Administrator is entitled to receive a fee, computed daily and payable monthly,
at the annual rate of .20% of each Portfolio's average daily net assets.
23
<PAGE> 60
From time to time, the Administrator may voluntarily waive all or a portion
of the fees otherwise payable by a Portfolio in order to increase the net income
available for distribution to shareholders.
DISTRIBUTOR
Trust Shares of each Portfolio are sold continuously by the Distributor,
BISYS Fund Services ("BISYS"), an affiliate of the Administrator. BISYS 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.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to the
Trust Shares of the Portfolios. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .30% of the average daily net
assets of a Portfolio's Trust Shares owned beneficially by a Service
Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(collectively, the "Servicing Agreements") require the Service Organizations
receiving such compensation (which may include Mercantile and its affiliates) to
perform certain services, including providing administrative services with
respect to the beneficial owners of Trust Shares of a Portfolio, such as
establishing and maintaining accounts and records for their customers who invest
in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such 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
24
<PAGE> 61
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.
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 Plan (as described below under "Other
Information Concerning the Fund and its Shares"). Expenses are deducted from the
total income of each Portfolio before dividends and distributions are paid.
These expenses include, but are not limited to, fees paid to the Adviser and
Administrator, transfer agency fees, fees and expenses of officers and directors
who are not affiliated with the Adviser or the Distributor, taxes, interest,
legal fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain
fees and expenses in registering and qualifying a Portfolio and its Shares for
distribution under Federal and state securities laws, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, the expense of reports
to shareholders, shareholders' meetings and proxy solicitations, fidelity bond
and directors and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by the Adviser, Distributor or Administrator under their respective agreements
with the Fund. The Fund also pays for brokerage fees, commissions and other
transaction charges, if any, in connection with the purchase and sale of
portfolio securities. Any general expenses of the Fund that are not readily
identifiable as belonging to a particular Portfolio will be allocated among all
the Fund's Portfolios by or under the direction of the Board of Directors in a
manner the Board determines to be fair and equitable. Any expenses relating only
to a particular class of Shares within a Portfolio will be borne solely by such
class. (See "Certain Financial Information" and "Management of the Fund" above
for additional information regarding expenses of each Portfolio.)
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which is classified as a diversified company under the 1940
Act: 25 million Trust Shares, 25 million Institutional Shares and 25 million
25
<PAGE> 62
Investor A Shares, representing interests in the Equity Index Portfolio; and 25
million Trust Shares, 25 million Institutional shares and 25 million Investor A
Shares, representing interests in the Bond Index Portfolio. Institutional and
Investor A 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 interests in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Portfolios will be issued without
Share certificates.
The Trust Shares of the Portfolios are described in this Prospectus. The
Portfolios also offer Institutional Shares and Investor A Shares. Institutional
Shares, which are offered to financial institutions acting on behalf of accounts
for which they do not exercise investment discretion, are sold without a sales
charge. Investor A Shares of the Portfolios are sold with a maximum 2.5% front-
end sales charge. Investor A Shares are sold through selected broker/dealers and
other financial intermediaries to individual or institutional customers. Trust,
Institutional and Investor A Shares bear their pro rata portion of all operating
expenses paid by a Portfolio, except that Trust Shares and Institutional Shares
bear all payments under a Portfolio's respective Administrative Services Plans
adopted for such Shares and Investor A Shares bear all payments under a
Portfolio's Distribution and Services Plan adopted for such Shares. In addition,
Institutional Shares of a Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plan for Institutional Shares
are made to Service Organizations for administrative services provided to the
Service Organizations' clients or account holders who are the beneficial owners
of Institutional Shares. Payments under the Administrative Services Plan may not
exceed .30% (on an annual basis) of the average daily net asset value of a
Portfolio's outstanding Institutional Shares. Payments under the Distribution
and Services Plan for Investor A Shares are made to (i) the Distributor or
another person for providing distribution assistance and assuming certain
related expenses, and (ii) Service Organizations for administrative services
provided to the Service Organizations' clients or account holders who are the
beneficial owners of Investor A Shares. Payments under the Distribution and
Services Plan for Investor A Shares may not exceed .30% (on an annual basis) of
the average daily net asset value of Investor A Shares of a Portfolio.
Distribution payments made under the Distribution and Services Plan are subject
to the requirements of Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares 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 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
26
<PAGE> 63
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.
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 means, with respect to the approval of an investment
advisory agreement or a change in an investment objective or fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding Shares of such Portfolio (irrespective of class), or (b) 67% or
more of the Shares of such Portfolio (irrespective of class) present at a
meeting if more than 50% of the outstanding Shares of such Portfolio are
represented at the meeting in person or by proxy.
As of December 23, 1996, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
For information with respect to Trust Shares of the Fund's other investment
portfolios, call the Fund at 1-800-551-3731.
27
<PAGE> 64
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................................ 2
Certain Financial Information............. 4
Expense Summary for Trust Shares.......... 5
Investment Objectives, Policies and Risk
Considerations.......................... 7
Investment Limitations.................... 14
Pricing of Shares......................... 16
How to Purchase and Redeem Shares......... 16
Purchase of Shares...................... 16
Exchange Privilege...................... 17
Redemption of Shares.................... 18
Redemption by Mail...................... 18
Redemption by Telephone................. 19
Other Exchange or Redemption
Information........................... 19
Yields and Total Returns.................. 19
Dividends and Distributions............... 20
Taxes..................................... 21
Management of the Fund.................... 23
Other Information Concerning the Fund
and Its Shares.......................... 25
</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 INDEX PORTFOLIO
BOND INDEX PORTFOLIO
TRUST SHARES
[ARCH MUTUAL FUNDS LOGO]
PROSPECTUS
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997)
<PAGE> 65
THE ARCH FUND(R), INC.
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
INSTITUTIONAL SHARES
<TABLE>
<S> <C>
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
</TABLE>
The ARCH Fund, Inc. is an open-end management investment company authorized
to issue Shares in seventeen investment portfolios. This Prospectus describes
the Institutional Shares of the ARCH EQUITY INDEX AND BOND INDEX PORTFOLIOS.
Institutional Shares are offered to financial institutions acting on behalf of
accounts for which they do not exercise investment discretion.
The Portfolios use a strategy called "indexing," which means that they seek
to provide investment results that, before deduction of operating expenses,
approximate the price and yield performance of particular sets of securities or
market segments. The Portfolios' market segments are:
THE ARCH EQUITY INDEX PORTFOLIO -- U.S. publicly traded common stocks with
large stock market capitalizations as represented by the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
THE ARCH BOND INDEX PORTFOLIO -- U.S. Government, mortgage-backed,
asset-backed, and corporate debt securities as represented by the Lehman
Brothers Aggregate Bond Index (the "Lehman Aggregate").
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolios; Mercantile serves as custodian; BISYS
Fund Services Ohio, Inc. (the "Administrator") serves as administrator; and
BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated December 23, 1996 (as revised January 21, 1997), 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.
------------------------
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.
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997)
<PAGE> 66
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 seventeen investment portfolios. This Prospectus relates to two
of those portfolios: the ARCH EQUITY INDEX and BOND INDEX 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, Equity Income, Small Cap Equity, International Equity, Balanced,
Government & Corporate Bond, Intermediate Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal, National Municipal Bond, Missouri
Tax-Exempt Bond and Kansas Tax-Exempt Bond Portfolios, which are described in
separate Prospectuses. Each Portfolio represents a separate pool of assets with
different investment objectives and policies (as described below under
"Investment Objectives, Policies and Risk Considerations"). MVA serves as
Adviser, Mercantile as Custodian, BISYS Fund Services Ohio, Inc. as
Administrator, and BISYS Fund Services as sponsor and Distributor. (For
information on expenses, fee waivers and services, see "Certain Financial
Information" and "Management of the Fund.")
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Equity Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in equity securities, and who
seek investment results that, before deduction for operating expenses,
approximate the price and yield performance of U.S. publicly traded common
stocks with large stock market capitalizations, as represented by the S&P 500.
The Bond Index Portfolio is designed for investors who are willing to accept
the risks associated with an investment in fixed income securities, and who seek
investment results that, before deduction for operating expenses, approximate
the price and yield performance of U.S. Government, mortgage-backed, asset-
backed, and corporate debt securities, as represented by the Lehman Aggregate.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, enter into repurchase agreements and
reverse repurchase agreements, make securities loans, invest in options and
futures and index-based depository receipts, 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.
Purchasing options is a specialized investment technique which entails a
substantial risk of loss of amounts paid as premiums to option writers. There is
no assurance that a liquid market will exist for a particular futures contract
at any particular time. 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 availability of a
family of seventeen mutual funds should your investment goals change.
This Prospectus describes the Institutional Shares of the Portfolios. For
information on purchasing, exchanging or redeeming Institutional Shares of these
Portfolios, please see "How to Purchase and Redeem Shares" below.
2
<PAGE> 67
CERTAIN FINANCIAL INFORMATION
Shares of each 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 -- Administrative Services Plan"
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 and Investor A
Shares in a Portfolio can be expected, at any given time, to be different.
EXPENSE SUMMARY FOR INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
EQUITY BOND
INDEX INDEX
PORTFOLIO PORTFOLIO
--------- ---------
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average net assets)
Investment Advisory Fees (net of fee waivers)(1)......................... 0.00% 0.00%
12b-1 Fees............................................................... 0.00% 0.00%
Other Expenses (including administration fees, administrative services
fees and other expenses) (net of fee waivers and expense
reimbursements)(2,3).................................................. .58% .50%
--- ---
TOTAL PORTFOLIO OPERATING EXPENSES (net of fee waivers and expense
reimbursements)(3)....................................................... .58% .50%
=== ===
</TABLE>
- ---------------
(1) Without fee waivers, advisory fees for each Portfolio would be .30%.
(2) Other Expenses are based on estimated expenses to be incurred by each
Portfolio during the current fiscal year.
(3) Without fee waivers and expense reimbursements, Other Expenses for each
Portfolio would be .58%, .60% and Total Portfolio Operating Expenses for
each Portfolio would be .98%, .90%. Such fee waivers and expense
reimbursements are expected to continue during the current fiscal year.
<TABLE>
<CAPTION>
EXAMPLE 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 Index Portfolio...................................................... $ 6 $19
Bond Index Portfolio........................................................ $ 5 $16
</TABLE>
3
<PAGE> 68
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 Institutional
Shares will bear directly or indirectly. The tables reflect the expenses which
each Portfolio expects to incur during the next twelve months on its
Institutional 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 example 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.
4
<PAGE> 69
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The Fund offers you two indexed investment options:
The Equity Index Portfolio seeks to provide investment results that, before
deduction of trading and operating expenses, approximate the price and yield
performance of U.S. publicly traded common stocks with large stock market
capitalizations as represented by the S&P 500.
The Bond Index Portfolio seeks to provide investment results that, before
deduction of trading and operating expenses, approximate the price and yield
performance of U.S. Government, mortgage-backed, asset-backed and corporate debt
securities as represented by the Lehman Aggregate.
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 investment objective of a Portfolio (other than the fundamental
investment policies described below under "Investment Limitations") may be
changed by the Fund's Board of Directors without shareholder approval. However,
shareholders will be given at least 30 days' written notice before any such
change occurs. Except as noted below under "Investment Limitations," a
Portfolio's investment policies may also be changed by the Fund's Board of
Directors without shareholder approval.
THE INDEXING APPROACH
The Equity Index and Bond Index Portfolios are not managed in a traditional
sense, that is, by making discretionary judgments based on analysis of economic,
financial and market conditions. Instead, these Portfolios seek to approximate
the investment performance of their respective market segments, as represented
by their respective indexes, through the use of sophisticated computer models to
determine which stocks or bonds should be purchased or sold, while keeping
transaction and administrative costs to a minimum. Each Portfolio will invest
substantially all of its total assets in securities listed on that Portfolio's
respective index. The Adviser generally selects securities for each Portfolio on
the basis of their weightings in the respective indexes. A Portfolio will only
purchase a security that is included in its respective index at the time of such
purchase. With respect to the remaining portion of its total assets, each
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market investments. If appropriate,
each Portfolio may use options, futures contracts and depository receipts to
hedge its positions or for other permissible purposes. Each Portfolio also may
enter into reverse repurchase agreements and lend its portfolio securities.
While there can be no guarantee that each Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which Standard & Poor's Ratings
5
<PAGE> 70
Group ("S&P") or Lehman Brothers ("Lehman") calculate their respective indexes,
and the timing of purchases and redemptions. The Adviser monitors the
correlation of the performance of the Portfolios in relation to their indexes
under the supervision of the Board of Directors. In the unlikely event that a
high correlation is not achieved, the Board of Directors will take appropriate
steps to correct the reason for the lower correlation.
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
THE EQUITY INDEX PORTFOLIO
The S&P 500 is composed of approximately 500 common stocks, most of which
are listed on the New York Stock Exchange (the "NYSE"). S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 had an average market capitalization of $5.6 trillion and accounted
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock in approximately the same percentage as that stock
represents in the S&P 500. Under certain circumstances, the Portfolio may not
hold all 500 stocks in the S&P 500, for example because of changes in the S&P
500, or as a result of shareholder activity in the Portfolio. The Portfolio will
rebalance its holdings monthly to reflect changes in the S&P 500. "Market
capitalization" for a company is the market price per share of stock multiplied
by the number of shares outstanding. The Adviser believes that the S&P 500 is an
appropriate benchmark for the Portfolio because it is diversified, it is
familiar to many investors and it is widely accepted as a reference for common
stock investments.
THE BOND INDEX PORTFOLIO
The Lehman Aggregate is composed of U.S. Government, mortgage-backed,
asset-backed, and non-convertible corporate debt securities that meet the
following criteria: the securities have at least $100 million par amount
outstanding; the securities are rated investment grade (at least Baa or BBB) by
Moody's Investors Service, Inc. ("Moody's") or S&P (if not rated by Moody's);
have at least one year until maturity; and have coupons with fixed rates. The
Lehman Aggregate excludes collateralized mortgage obligations ("CMOs"),
adjustable rate mortgages, manufactured homes, non-agency bonds, buydowns,
graduated equity mortgages, project loans and non-conforming (i.e., "jumbo")
mortgages. As of December 31, 1996, 5,727 issues were included in the
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Lehman Aggregate, representing approximately $4.5 trillion in market value. U.S.
Treasury and agency securities represented approximately 51.6% of the total
market value, asset-backed and mortgage-backed securities represented
approximately 30.6% of the total market value, with corporate debt securities
representing the balance of approximately 17.82%. The average maturity of the
Lehman Aggregate was approximately 8.7 years. The Adviser believes that the
Lehman Aggregate is an appropriate benchmark for the Portfolio because it is
diversified, it is familiar to investors, and it is widely accepted as a
reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate -- U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
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 respective
investment objectives and policies, include, in addition to U.S. Treasury bonds,
notes and bills, the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), General Services Administration, Student Loan Marketing Association,
Central Bank for Cooperatives, Federal Intermediate Credit Banks, Resolution
Trust Corporation, and Maritime Administration. Obligations of certain agencies
and instrumentalities of the U.S. Government, such as those of GNMA, are
supported by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of FNMA, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are 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.
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MONEY MARKET INSTRUMENTS. Under certain circumstances described above,
each Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
Investment by the Portfolios in commercial paper will consist of issues
that are rated at the time of purchase in one of the two highest rating
categories assigned by S&P, Moody's or another nationally recognized statistical
rating organization (each 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
may 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. 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. 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.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, the Portfolios 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
the 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 the Portfolios presently do not intend to
enter into repurchase agreements providing for settlement in more than seven
days, the Portfolios have the authority to do so subject to their limitation on
the purchase of illiquid securities described below. Repurchase agreements are
considered to be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to their respective investment
policies and limitations, the Portfolios 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.
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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 or marketable securities. 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 marketable 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 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 indexes. Purchasing
options is a specialized investment technique which entails a substantial risk
of a complete loss of the amounts paid as premiums to the option writer. Such
transactions will be entered into only as a hedge against fluctuations in the
value of securities which a Portfolio holds or intends to purchase.
The 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.)
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolios may invest in
futures contracts and options on futures contracts. Such transactions, including
stock or bond index futures contracts, or options thereon, can be used to
simulate full investment in the S&P 500 or Lehman Aggregate while retaining a
cash balance for Portfolio management purposes, or act as a hedge to protect a
Portfolio from fluctuations in the value of its securities caused by anticipated
changes in interest rates 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
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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
bonds in the index is contemplated. Similarly, it may be in the best interest of
the Bond Index 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 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.)
ASSET-BACKED SECURITIES. The Bond Index 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 included in the Lehman Aggregate and which are issued by entities such as
the GNMA, FNMA, FHLMC and private issuers such as commercial banks, finance
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. 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
Bond Index 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 also decline or 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
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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.
DEPOSITORY RECEIPTS. Each Portfolio may invest in receipts that are issued
by banks or brokerage firms and are created by depositing securities listed on
the respective index into a special account at a custodian bank. The custodian
holds such securities for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. The
Portfolios may invest in index-based depository receipts in lieu of investment
in the actual securities that are listed on the index.
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 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 distribution fees 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. (See the Statement of Additional Information
under "Investment Objectives and Policies -- Securities of Other Investment
Companies.")
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell securities at a stated price and yield with
settlement beyond the normal settlement date. Such transactions permit a
Portfolio to lock-in a price or yield on a security, regardless of future
changes in interest rates. 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. Neither Portfolio intends to engage in such
transactions for speculative purposes but only for the purpose of acquiring
portfolio securities.
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
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Adviser expects that less than 5% of each Portfolio's net assets will be
invested in Rule 144A securities during the current year.
INVESTMENT RISKS AND OTHER CONSIDERATIONS. A Portfolio's ability to
correlate its performance with an index may be affected by, among other things,
changes in the securities markets, the manner in which the index is calculated
and the timing of purchases and redemptions of the Portfolio's shares. The Fund
expects the investments of each Portfolio to decline in value whenever the
market, as represented by the securities in its index, declines. The Equity
Index Portfolio should exhibit price volatility similar to that of the S&P 500.
It is impossible to eliminate risk from investments in common stocks. The
average annual total return of the S&P 500 from 1964 to 1996 was 12.33%. Returns
in individual calendar years ranged from a low of -26.39% (in 1974) to a high of
37.58% (in 1995). You should consider your investment in the Equity Index
Portfolio to be long-term. This Portfolio is not designed to provide you with a
means to speculate on short-term movements in the stock market.
The Bond Index Portfolio should exhibit price and yield volatility similar
to that of the Lehman Aggregate. Generally, the market value of fixed income
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 fixed income securities, such as
the Bond Index Portfolio, 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.
PORTFOLIO TRANSACTIONS. 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.
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."
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A Portfolio may not:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such
investments, more than 5% of the Portfolio's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that, however, (a) there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements
secured by obligations of the U.S. Government or its agencies or
instrumentalities; (b) wholly-owned finance companies will be considered to
be in the industries of their parents if their activities are primarily
related to financing the activities of their parents; and (c) utilities
will be divided according to their services (for example, gas, gas
transmission, electric and gas, electric, and telephone will each be
considered a separate industry).
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and 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 each Portfolio may purchase or hold debt
instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and enter into
repurchase agreements.
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, each
Portfolio may make commitments more restrictive than the investment policies and
limitations described above. Should
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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.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Institutional Shares are sold to financial institutions, such as banks,
trust companies, thrift institutions, mutual funds or other financial
institutions (collectively "financial institutions") acting on behalf of their
employee benefit, retirement plan or other such accounts for which they do not
have investment discretion. Institutional Shares are sold to qualified
purchasers without a sales charge imposed by the Fund or the Distributor.
Generally, investors purchase Institutional Shares through a financial
institution, which is responsible for transmitting purchase orders directly to
the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
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Financial institutions placing orders directly or on behalf of their
clients should contact the Fund at 1-800-551-3731. Investors may also call the
Fund for information on how to purchase Shares.
All shareholders of record will receive confirmations of Share purchases,
exchanges and redemptions in the mail. An investor's Shares are held in the name
of the financial institution that has entered into a servicing agreement with
the Fund, and such financial institution is responsible for transmitting
purchase, exchange and redemption orders to the Fund on a timely basis,
recording all purchase, exchange and redemption transactions, and providing
regular account statements which confirm such transactions to beneficial owners
(or arranging for such services). Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting financial
institution.
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Institutional Shares will be
priced according to the net asset value per Share next determined on that day
after receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Institutional
Shares of a Portfolio for Institutional Shares of another Portfolio offered by
the Fund or, under certain circumstances described below, for Investor A Shares
of the same Portfolio. Exchanges for Institutional Shares in another Portfolio
are effected without payment of any exchange or sales charges. In addition,
Institutional Shares of a Portfolio may be exchanged for Investor A Shares of
the same Portfolio in connection with the distribution of assets held in a
qualified trust, agency or custodian account with the trust department of
Mercantile or any of its affiliated or correspondent banks. The exchanges are
made without a sales charge at the net asset value of the respective share
class.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such request to
the Fund. (See "Other Exchange or Redemption Information" below.) An investor
should consult the financial institution or the Fund for further information
regarding procedures for exchanging Shares.
In addition to the Portfolios described in this Prospectus, the Fund
currently offers Institutional Shares in the following Portfolios:
- The ARCH Money Market Portfolio
- The ARCH Treasury Money Market Portfolio
- The ARCH Growth & Income Equity Portfolio
- The ARCH Equity Income Portfolio*
- The ARCH Small Cap Equity Portfolio
- The ARCH International Equity Portfolio
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- The ARCH Balanced Portfolio
- The ARCH Government & Corporate Bond Portfolio
- The ARCH Intermediate Corporate Bond Portfolio*
- The ARCH U.S. Government Securities Portfolio
For information concerning these Portfolios, please call 1-800-551-3731.
Shareholders exercising the exchange privilege with any of the other Portfolios
in the Fund should request and review the Portfolio's Prospectus carefully prior
to making an exchange.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. Proceeds from
redemptions of Institutional 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 to the financial institution that
placed the redemption order the next Business Day 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.
A written request for redemption must be received by the Fund in order to
honor the request. 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 the financial institution servicing his or her account or the
Distributor. Additional documentation may be required if the redemption is
requested by a corporation, partnership, trust, fiduciary, executor, or
administrator. If, due to temporary adverse conditions, investors are unable to
effect telephone transactions, investors are encouraged to follow the procedures
described in "Other Exchange or Redemption Information" below.
- ---------------
* Expected to commence operations in 1997.
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Neither the Fund nor its service providers will be liable for any loss,
damage, expense or cost arising out of any telephone redemption effected in
accordance with the Fund's telephone redemption procedures, upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed, the Fund or its service providers may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares and Investor A 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' Institutional Shares may be quoted in advertisements or
in communications to shareholders. The yield is computed based on the net income
of such Shares in the particular Portfolio during a 30-day (or one-month) period
identified in connection with the particular yield quotation. More specifically,
the yield is computed by dividing the Portfolio's net income per Share during a
30-day (or one-month) period by the net asset value per Share on the last day of
the period and annualizing the result.
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<PAGE> 82
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to such Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular Portfolio over the particular measuring period.
Aggregate total returns reflect the cumulative percentage change in value over
the measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by the Portfolio during the period
are reinvested in the Portfolio's Institutional Shares. When considering average
annual total return figures for periods longer than one year, it is important to
note that a Portfolio's annual total return for any one year in the period might
have been more or less than the average for the entire period.
Performance data of the Portfolios' Institutional 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 S&P, Lehman Brothers, 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 Service Organizations (as described
under "Management of The Fund -- Service Organizations") or other institutions
will not be included in the calculations of a Portfolio's yields and total
returns. Such fees, if any, will reduce the investor's net return on an
investment in a Portfolio. Investors may call 1-800-452-4015 to obtain current
yield and total return information.
DIVIDENDS AND DISTRIBUTIONS
THE EQUITY INDEX PORTFOLIO
Net investment income for the Equity Index Portfolio is declared and paid
monthly as a dividend to shareholders of record. Shares of the Portfolio 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 the 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 bear all
expenses of the Distribution and Services Plan adopted for such Shares. (See
"Management of the Fund" and "Other Information Concerning the Fund and Its
Shares.")
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<PAGE> 83
THE BOND INDEX PORTFOLIO
Dividends from net investment income of the Bond Index Portfolio are
declared daily and paid monthly not later than five Business Days after the end
of each month. Shares of the Portfolio earn dividends from the day after the
purchase order is received by the Fund through the day the redemption order for
such Shares is received. Dividends on each Share of such Portfolios are
determined in the same manner and are paid in the same amounts irrespective of
class, except that 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 bear all expenses of the
Distribution and Services Plan adopted for such Shares. (See "Management of the
Fund" and "Other Information Concerning the Fund and Its Shares.")
OTHER DIVIDEND AND DISTRIBUTION INFORMATION
Net realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated on the account application, or (ii)
redeemed all the Shares held in a Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"), for the current
taxable year. It is intended that each Portfolio will continue to so qualify as
long as such qualification is in the best interests of shareholders. A regulated
investment company 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 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 Index
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.
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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
Index Portfolio, the record date of any dividend or capital gains distribution)
should be aware that the amount of the forthcoming distribution, although in
effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by the shareholders and paid by the Portfolio on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by a Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
20
<PAGE> 85
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 June 30, 1996, MVA had approximately $7.3
billion in assets under investment management, including the Fund's assets,
which were approximately $2.3 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 .30% and .30% of the average daily net assets of
the Equity Index and Bond Index 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.
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
Administrative Services Plan described below. For its services, the
Administrator is entitled to receive a fee, computed daily and payable monthly,
at the annual rate of .20% of each Portfolio's average daily net assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the fees otherwise payable by a Portfolio in order to increase the net income
available for distribution to shareholders.
DISTRIBUTOR
Institutional Shares of each Portfolio are sold continuously by the
Distributor, BISYS Fund Services ("BISYS"), an affiliate of the Administrator.
BISYS is a registered broker-dealer with
21
<PAGE> 86
principal offices at 3435 Stelzer Road, Columbus, Ohio 43219. The Distributor
also acts as distributor to each of the Fund's other Portfolios.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to
Institutional Shares of the Portfolios. Pursuant to the Administrative Services
Plan, Institutional Shares are sold to banks and other financial institutions
(which may include Mercantile or its affiliated or correspondent banks) on
behalf of their qualified accounts (such financial institutions collectively,
the "Service Organizations"), which agree to provide certain shareholder
administrative services for their clients or account holders (collectively, the
"customers") who are the beneficial owners of such Shares. The holders of
Institutional Shares bear separately their pro rata portion of the fees which
may be paid to Service Organizations for such services at an annual rate of up
to .30% of the average daily net assets of a Portfolio's Institutional Shares
owned beneficially by a Service Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(collectively, 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 Institutional Shares of a Portfolio, such as
establishing and maintaining accounts and records for their customers who invest
in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such 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.
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
22
<PAGE> 87
contractors bear all expenses in connection with the performance of their
services, except that the Distributor is compensated pursuant to the
Distribution and Services Plan (as described below under "Other Information
Concerning the Fund and Its Shares"). Expenses are deducted from the total
income of each Portfolio before dividends and distributions are paid. These
expenses include, but are not limited to, fees paid to the Adviser and
Administrator, transfer agency fees, fees and expenses of officers and directors
who are not affiliated with the Adviser or the Distributor, taxes, interest,
legal fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain
fees and expenses in registering and qualifying a Portfolio and its Shares for
distribution under Federal and state securities laws, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, the expense of reports
to shareholders, shareholders' meetings and proxy solicitations, fidelity bond
and directors and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by the Adviser, Distributor or Administrator under their respective agreements
with the Fund. The Fund also pays for brokerage fees, commissions and other
transaction charges, if any, in connection with the purchase and sale of
portfolio securities. Any general expenses of the Fund that are not readily
identifiable as belonging to a particular Portfolio will be allocated among all
the Fund's Portfolios by or under the direction of the Board of Directors in a
manner the Board determines to be fair and equitable. Any expenses relating only
to a particular class of Shares within a Portfolio will be borne solely by such
class. (See "Certain Financial Information" and "Management of the Fund" above
for additional information regarding expenses of each Portfolio.)
OTHER INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which is classified as a diversified company under the 1940
Act: 25 million Trust Shares, 25 million Institutional Shares and 25 million
Investor A Shares, representing interests in the Equity Index Portfolio; and 25
million Trust Shares, 25 million Institutional shares and 25 million Investor A
Shares, representing interests in the Bond Index Portfolio. Investor A Shares
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 interests in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Portfolios will be issued without
Share certificates.
23
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The Institutional Shares of the Portfolios are described in this
Prospectus. The Portfolios also offer Trust Shares and Investor A Shares. Trust
Shares, which are offered to financial institutions acting on their own behalf
or on behalf of certain qualified accounts, are sold without a sales charge.
Investor A Shares of the Portfolios are sold with a maximum 2.5% front-end sales
charge. Investor A Shares are sold through selected broker/dealers and other
financial intermediaries to individual or institutional customers. Trust Shares,
Institutional Shares and Investor A Shares bear their pro rata portion of all
operating expenses paid by a Portfolio, except that Trust Shares and
Institutional Shares bear all payments under a Portfolio's respective
Administrative Services Plans adopted for such Shares and Investor A Shares bear
all payments under a Portfolio's Distribution and Services Plan adopted for such
Shares. In addition, Institutional Shares of the Portfolios bear the expense of
certain sub-transfer agency fees.
Payments under the Administrative Services Plan for Trust Shares are made
to Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of Trust
Shares. 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 Shares.
Payments under the Distribution and Services Plan for Investor A Shares are
made to (i) the Distributor or another person for providing distribution
assistance and assuming certain related expenses, and (ii) Service Organizations
for administrative services provided to the Service Organizations' clients or
account holders who are the beneficial owners of Investor A Shares. Payments
under the Distribution and Services Plan for Investor A Shares may not exceed
.30% (on an annual basis) of the average daily net asset value of the
outstanding Investor A Shares of a Portfolio. Distribution payments made under
the Distribution and Services Plan are subject to the requirements of Rule 12b-1
under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares 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 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.
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.
24
<PAGE> 89
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 means, with respect to the approval of an investment
advisory agreement or a change in an investment objective or fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding Shares of such Portfolio (irrespective of class), or (b) 67% or
more of the Shares of such Portfolio (irrespective of class) present at a
meeting if more than 50% of the outstanding Shares of such Portfolio are
represented at the meeting in person or by proxy.
As of December 23, 1996, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
For information with respect to Institutional Shares of the Fund's other
investment portfolios, call the Fund at 1-800-551-3731.
25
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[This Page Intentionally Left Blank]
<PAGE> 91
[This Page Intentionally Left Blank]
<PAGE> 92
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................................ 2
Certain Financial Information............. 3
Expense Summary for Institutional
Shares.................................. 3
Investment Objectives, Policies and Risk
Considerations.......................... 5
Investment Limitations.................... 12
Pricing of Shares......................... 14
How to Purchase and Redeem Shares......... 14
Purchase of Shares...................... 14
Exchange Privilege...................... 15
Redemption of Shares.................... 16
Other Exchange or Redemption
Information........................... 17
Yields and Total Returns.................. 17
Dividends and Distributions............... 18
Taxes..................................... 19
Management of the Fund.................... 21
Other Information Concerning the
Fund and its Shares..................... 23
Miscellaneous............................. 25
</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 INDEX PORTFOLIO
BOND INDEX PORTFOLIO
INSTITUTIONAL SHARES
[ARCH MUTUAL FUNDS LOGO]
PROSPECTUS
DECEMBER 23, 1996
(AS REVISED JANUARY 21, 1997)
<PAGE> 93
THE ARCH FUND(R), INC.
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
Statement of Additional Information
Part B
December 23, 1996
(As revised January 21, 1997)
<PAGE> 94
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Equity Index Portfolio
The ARCH Bond Index Portfolio
December 23, 1996
(As revised January 21, 1997)
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE FUND.........................................................
INVESTMENT OBJECTIVES AND POLICIES...............................
NET ASSET VALUE..................................................
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION....................
DESCRIPTION OF SHARES............................................
ADDITIONAL INFORMATION CONCERNING TAXES..........................
MANAGEMENT OF THE FUND...........................................
INDEPENDENT AUDITORS.............................................
COUNSEL..........................................................
MISCELLANEOUS....................................................
APPENDIX A.......................................................
</TABLE>
This Statement of Additional Information, which provides supplemental
information applicable to the ARCH Equity Index and Bond Index Portfolios, is
not a prospectus. It should be read only in conjunction with the Portfolios'
Prospectuses dated December 23, 1996 and is incorporated by reference in its
entirety into the Prospectuses. No investment in shares of either Portfolio
should be made without reading the relevant Prospectus. A copy of the applicable
Prospectus may be obtained by writing the Fund at P.O. Box 78069, St. Louis,
Missouri 63178 or by calling (800) 551-3731. Capitalized terms used but not
defined herein have the same meanings as in each Prospectus.
-i-
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THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end investment company
currently offering fifty-five classes of shares in seventeen investment
portfolios.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the description of the investment
objectives and policies of the Equity Index and Bond Index Portfolios (the
"Portfolios") described in the Prospectuses.
THE INDEXING APPROACH
In using sophisticated computer models to select securities, each Portfolio
will only purchase a security that is included in its respective index at the
time of such purchase. A Portfolio may, however, temporarily continue to hold a
security that has been deleted from its respective index pending the rebalancing
of the Portfolio's holdings.
EQUITY INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the Equity Index
Portfolio is to provide investment results that, before deduction of operating
expenses, approximate the price and yield performance of U.S. publicly traded
common stocks with large stock market capitalizations as represented by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
RIGHTS AND WARRANTS. The Equity Index Portfolio may participate in rights
offerings and purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that the Portfolio could lose the
purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' or warrants' expiration. Also, the
purchase of rights or warrants involves the risk that the effective price paid
for the right or warrant added to the subscription price of the related security
may exceed the value of the subscribed security's market price such as when
there is no movement in the level of the underlying security. The Portfolio will
not invest more than 5% of its net assets, taken at market value, in rights or
warrants, or more than 2% of its net assets, taken at market value, in rights or
warrants not listed on the New York, American or Canadian Stock Exchanges.
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Warrants acquired by the Portfolio in units or attached to other securities are
not subject to this restriction.
BOND INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the Bond Index
Portfolio is to provide investment results that, before deduction for operating
expenses, approximate the price and yield performance of U.S. Government,
mortgage-backed, asset-backed, and non-convertible corporate obligations issued
by issuers whose debt securities are listed on the Lehman Brothers Aggregate
Bond Index (the "Lehman Aggregate").
The value of the Portfolio's securities is generally sensitive to change in
interest rates. An increase in interest rates will generally reduce the value of
the investments in the Bond Index Portfolio, and a decline in interest rates
will generally increase the value of those investments. Depending upon the
prevailing market conditions, the Adviser may purchase debt securities at a
discount from face value, which produces a yield greater than the coupon rate.
Conversely, if debt securities are purchased at a premium over face value, the
yield will be lower than the coupon rate.
OTHER APPLICABLE INVESTMENT POLICIES
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to its investment
limitations, the Portfolios may purchase variable and floating rate obligations
as described in the Prospectuses. The Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
obligations and, for obligations subject to a demand feature, will monitor their
financial status to meet payment on demand. In determining average weighted
portfolio maturity, an instrument issued or guaranteed by the U.S. Government or
an agency or instrumentality thereof, or a variable rate instrument scheduled on
its face to be paid in 397 days or less, will be deemed to have a maturity equal
to the period remaining until the next interest rate adjustment. Other variable
and floating rate obligations will be deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the time
the Portfolio can recover payment of principal as specified in the instrument.
RESTRICTED SECURITIES. The SEC has adopted Rule 144A which allows for a
broader institutional trading market for securities otherwise subject to
restrictions on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act of 1933 for the
resale of certain securities to qualified institutional buyers. The purchase of
securities which can be sold under Rule 144A
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could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities.
The Adviser monitors the liquidity of restricted securities in the
Portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, the Adviser may consider the following factors, although
such factors may not necessarily be determinative: (1) the unregistered nature
of a security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (4) the trading markets for the security; (5) dealer
undertakings to make a market in the security; and (6) the nature of the
security and the nature of the marketplace trades (including the time needed to
dispose of the security, methods of soliciting offers, and mechanics of
transfer).
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S. Government
obligations that may be held by the Bond Index Portfolio, subject to its
respective investment policies, include, in addition to U.S. Treasury bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust
Corporation, and International Bank for Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
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STRIPPED U.S. GOVERNMENT OBLIGATIONS. Subject to its investment objectives
and policies, the Bond Index Portfolio may hold stripped U.S. Treasury
securities, including (1) coupons that have been stripped from U.S. Treasury
bonds, which are held through the Federal Reserve Bank's book-entry system
called "Separate Trading of Registered Interest and Principal of Securities"
("STRIPS") or (2) through a program entitled "Coupon Under Book-Entry
Safekeeping" ("CUBES"). The Bond Index Portfolio may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying principal,
which is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped principal-only
securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that, in their opinion, purchasers of the
stripped securities, such as the Portfolios, most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
and security purposes.
The U.S. Government does not issue stripped Treasury securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market in the stripping of selected U.S. Treasury notes and bonds into separate
interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
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For custodial receipts, by agreement the underlying debt obligations are
held separate from the general assets of the custodian and nominal holder of
such securities, and are not subject to any right, charge, security interest,
lien or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for applying
all payments received on those underlying debt obligations to the related
receipts or certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
SECURITIES LENDING. While the Portfolios would not have the right to vote
securities on loan, each Portfolio intends to terminate the loan and regain the
right to vote should this be considered important with respect to the
investment. When the Portfolios lend their securities, they continue to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral which will be invested in
readily marketable, high quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the applicable
Prospectuses, the Portfolios intend to limit investments in securities issued by
other investment companies within the limits prescribed by the 1940 Act. Each
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
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ASSET-BACKED SECURITIES. The Bond Index Portfolio may purchase asset-backed
securities, as described in the Prospectuses. Asset-backed securities represent
interests in "pools" of assets in which payments of both interest and principal
on the securities are made monthly, thus in effect "passing through" monthly
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of asset-backed securities varies with the maturities of the
underlying instruments, and for this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation with the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by the FNMA include FNMA
Guaranteed Mortgage Pass-through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States, but are supported by the
right of the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-backed
securities issued by the FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities.
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Primarily, these securities do not have the benefit of the same security
interest in the underlying collateral. Credit card receivables are generally
unsecured, and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may not, in some cases,
be able to support payments on these securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio agrees to
purchase securities on a when-issued or forward commitment basis, the Custodian
(or sub-custodian) will maintain in a segregated account cash, U.S. Government
securities, liquid portfolio securities or other high-grade debt obligations
having a value (determined daily) at least equal to the amount of the
Portfolio's commitments. In the case of a forward commitment to sell portfolio
securities, the Custodian (or sub-custodian) will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that a Portfolio will maintain sufficient
assets at all times to cover its obligations under when-issued purchases and
forward commitments.
A Portfolio will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Portfolio may dispose of or renegotiate a commitment after it is entered into
and may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases, the Portfolio
may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
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The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining a Portfolio's net asset value
starting on the day the Portfolio agrees to purchase the securities. The
Portfolio does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date. When a Portfolio
makes a forward commitment to sell securities it owns, the proceeds to be
received upon settlement are included in the Portfolio's assets, and
fluctuations in the value of the underlying securities are not reflected in the
Portfolio's net asset value as long as the commitment remains in effect.
OPTIONS TRADING. As described in the Prospectuses, the Portfolios may
purchase put and call options listed on a national securities exchange and
issued by the Options Clearing Corporation in an amount not exceeding 10% of a
Portfolio's total net assets. Options trading is a specialized activity which
entails greater than ordinary investment risks. Regardless of how much the
market price of the underlying security or index increases or decreases, the
option buyer's risk is limited to the amount of the original investment for the
purchase of the option. However, options may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities. A listed call option gives the purchaser of the option
the right to buy from a clearing corporation, and a writer has the obligation to
sell to the clearing corporation, the underlying security at the stated exercise
price at any time prior to the expiration of the option, regardless of the
market price of the security. The premium paid to the writer is in consideration
for undertaking the obligations under the option contract. A listed put option
gives the purchaser the right to sell to a clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security. In contrast to an
option on a particular security, an option on a stock or bond index provides the
holder with the right to make or receive a cash settlement upon the exercise of
the option. The amount of this settlement will be equal to the difference
between the closing price of the index at the time of exercise and the exercise
price of the option expressed in dollars, times a specified multiple.
A Portfolio's obligation to sell a security subject to a covered call
option written by it may be terminated prior to the expiration date of the
option by the Portfolio's executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
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previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying security from being
called, to permit the sale of the underlying security or to permit the writing
of a new option containing different terms on such underlying security. The cost
of such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Portfolio will
have incurred a loss in the transaction. An option position may be closed out
only on an exchange which provides a secondary market for an option of the same
series. There is no assurance that a liquid secondary market on an exchange will
exist for any particular option. A covered call option writer, unable to effect
a closing purchase transaction, would not be able to sell the underlying
security until the option expires or the underlying security is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline in the underlying security during such period. A
Portfolio will write an option on a particular security only if the Adviser
believes that a liquid secondary market will exist on an exchange for options of
the same series which will permit the Portfolio to make a closing purchase
transaction in order to close out its position.
When a Portfolio writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Portfolio is included
in the liability section of the Portfolio's statement of assets and liabilities
as a deferred credit. The amount of the deferred credit is subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale,
the average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Portfolio enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a covered
call option may be offset by a decline in the market price of the underlying
security during the option period. If a covered call option is exercised, the
Portfolio may deliver the underlying security held by it or purchase the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the Portfolio
will realize a gain or loss. Premiums from expired options written by a
Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
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As noted previously, there are several risks associated with transactions
in options on securities and indices. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. In addition, a liquid secondary market for particular
options, even when traded on a national securities exchange ("Exchange"), may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events.
FUTURES CONTRACTS. As discussed in the Prospectuses, the Portfolios may
invest in futures contracts and options thereon (stock or bond index futures
contracts or interest rate futures or options) to hedge or manage risks
associated with a Portfolio's securities investments.
To enter into a futures contract, an amount of cash and cash equivalents,
equal to the market value of the futures contracts, is deposited in a segregated
account with the Fund's Custodian and/or in a margin account with a broker to
collateralize the position and thereby insure that the use of such futures is
unleveraged. Positions in futures contracts may be closed out only on an
exchange which provides a secondary market for such futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio had insufficient cash, it might have
to sell
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portfolio securities to meet daily margin requirements at a time when it would
be disadvantageous to do so. In addition, a Portfolio might be required to make
delivery of the instruments underlying futures contracts that it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to hedge effectively.
There is an imperfect correlation between movements in the price of futures
and movements in the price of the securities which are the subject of the hedge.
As a result, the use of futures may not serve the objective of an index fund.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves the risk of
loss by the Portfolio of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
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The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
MONEY MARKET INVESTMENTS. As stated in the Prospectuses and subject to
their respective investment policies, the Portfolios may invest in the following
money market instruments for temporary defensive or other purposes: commercial
paper, bankers' acceptances, certificates of deposit and time deposits, floating
rate notes.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by banks or bank holding companies, corporations and finance
companies. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase agreements
with respect to their respective securities. Under the terms of a repurchase
agreement, a Portfolio purchases securities from financial institutions such as
banks and broker-dealers that are deemed to be creditworthy by the Adviser under
guidelines approved by the Board of Directors, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price. Securities subject
to repurchase agreements are held by the Portfolios' Custodian or in the Federal
Reserve/Treasury book-entry system. During the term of any repurchase agreement,
the Adviser will continue to monitor the creditworthiness of the seller. The
repurchase price generally equals 102% of the price paid by the Portfolio plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio securities). Under a
repurchase agreement, the seller is required to maintain the value of the
securities subject to
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the agreement at not less than the repurchase price, and securities subject to
repurchase agreements are maintained by the Portfolios' Custodian in segregated
accounts in accordance with the 1940 Act. Default by the seller could, however,
expose the Portfolio to possible loss because of adverse market action or delay
in connection with the disposition of the underlying securities. Repurchase
agreements are considered to be loans by the Portfolio under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the Prospectuses, the
Portfolios may enter into reverse repurchase agreements (agreements under which
a Portfolio sells portfolio securities and agrees to repurchase them at an
agreed-upon date and price). At the time a Portfolio enters into such an
arrangement, it will place, in a segregated custodial account, liquid assets
having a value at least equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to ensure that such
equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
that it is obligated to repurchase. Reverse repurchase agreements are considered
to be borrowings under the 1940 Act. Each Portfolio intends to limit its
borrowings (including reverse repurchase agreements) during the current fiscal
year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Portfolios.
The Portfolios' rate of portfolio turnover may vary greatly from year to
year as well as within a particular year. Portfolio turnover may also be
affected by cash requirements for redemptions of shares and by requirements
which enable a Portfolio to receive certain favorable tax treatment. The
portfolio turnover rate for each Portfolio is not expected to exceed 25% during
the current fiscal year. Portfolio turnover will not be a limiting factor in
making investment decisions. These Portfolios follow an index strategy and,
therefore, any variation in turnover rate should be related to the turnover of
securities listed in each Portfolio's respective index.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On the exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. There is
generally no stated commission in the case of securities traded
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in the over-the-counter markets, but the price of those securities includes an
undisclosed commission or mark-up. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down.
The Portfolios may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolios will engage in this practice, however, only when the Adviser, in
its sole discretion, believes such practice to be otherwise in a Portfolio's
interests.
While the Adviser generally seeks competitive spreads or commissions, it
may not necessarily allocate each transaction to the underwriter or dealer
charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the Adviser may receive orders for transactions by a Portfolio.
Information so received is in addition to and not in lieu of services required
to be performed by the Adviser and does not reduce the advisory fees payable to
it by a Portfolio. Such information may be useful to the Adviser in serving both
the Portfolios and other clients, and conversely, supplemental information
obtained by the placement of business of other clients may be useful to the
Adviser in carrying out its obligations to the Portfolios. Portfolio securities
will not be purchased from or sold to the Adviser, the Distributor, the
Administrator or any "affiliated person" (as such term is defined under the 1940
Act) or any of them acting as principal, except to the extent permitted by the
SEC. In addition, the Portfolios will not give preference to the Adviser's
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements and reverse repurchase agreements.
Investment decisions for the Portfolios are made independently from those
for other investment companies and accounts advised or managed by the Adviser.
Such other investment companies and accounts may also invest in the same
securities as the Portfolios. When a purchase or sale of the same security is
made at substantially the same time on behalf of a Portfolio and another
investment company or account, the
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transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Adviser believes to be equitable to the
Portfolio and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Portfolio or the size of the position obtained by the Portfolio. To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in order to obtain best execution.
INVESTMENT LIMITATIONS
The following investment limitations may be changed with respect to a
particular Portfolio only by an affirmative vote of a majority of the
outstanding shares of that Portfolio (as defined under "Other Information
Concerning the Fund and Its Shares -- Miscellaneous" in the Portfolios'
Prospectuses). These investment limitations supplement those that appear in the
Prospectuses.
THE PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising control or management.
2. Purchase or sell real estate, provided that each Portfolio may invest in
securities secured by real estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests therein, provided
further that, as described in the Prospectuses, the Bond Index Portfolio may
invest in first mortgage loans, income participation loans and participation
certificates in pools of mortgages, including mortgages issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities, and mortgage-backed
securities.
3. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except insofar as a Portfolio might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with a Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, provided that each Portfolio may, to the
extent appropriate to its investment objective, purchase publicly traded
securities of
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companies engaging in whole or in part in such activities, and provided further
that the Portfolios may invest in futures contracts and related options in
accordance with their respective investment activities and policies.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to transactions by either Portfolio in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
NET ASSET VALUE
As stated in the applicable Prospectuses, the net asset value per share of
each class of a Portfolio is calculated by adding the value of all of the
portfolio securities and other assets belonging to a Portfolio, subtracting the
liabilities charged to such class, and dividing the result by the number of
outstanding shares of such class. "Assets belonging to" each class of a
Portfolio consist of the consideration received upon the issuance of shares of
each class of the Portfolio together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Fund not belonging to a particular Portfolio. Assets belonging to
each class of a Portfolio are charged with the direct liabilities of each class
of that Portfolio and with a share of the general liabilities of the Fund
allocated in proportion to the relative net assets of that Portfolio and the
Fund's other Portfolios. The determinations by the Board of Directors as to the
direct and allocable liabilities, and the allocable portion of general assets,
with respect to a particular class of a Portfolio are conclusive.
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
closing over-the-counter bid prices. Securities for which there were no
transactions are valued at the average of the current bid and asked prices.
Restricted securities and other assets for which market quotations are not
readily available are valued at fair value as determined in accordance with
guidelines approved by the Fund's Board of Directors. In computing net
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asset value, the current value of a Portfolio's open futures contracts and
related options will be "marked-to-market."
Among the factors that ordinarily will be considered in valuing portfolio
securities are the existence of restrictions upon the sale of the security by a
Portfolio, the existence and extent of a market for the security, the extent of
any discount in acquiring the security, the estimated time during which the
security will not be freely marketable, the expenses of registering or otherwise
qualifying the security for public sale, underwriting commissions if
underwriting would be required to effect a sale, the current yields on
comparable securities for debt obligations traded independently of any equity
equivalent, changes in the financial condition and prospects of the issuer, and
any other factors affecting fair value. In making valuations, opinions of
counsel to the issuer may be relied upon as to whether or not securities are
restricted securities and as to the legal requirements for public sale.
Additionally, the Administrator may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods of valuation used by the pricing
service will be reviewed by the Administrator under the general supervision of
the Fund's Board of Directors. Several pricing services are available, one or
more of which may be used by the Administrator from time to time. In valuing a
Portfolio's securities, the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances, and other factors which are
deemed relevant in determining valuations for normal institutionalized trading
units of debt securities and would not rely exclusively on quoted prices.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the Distributor.
As described in the applicable Prospectuses, Trust shares and Institutional
shares of each Portfolio are sold to certain qualified customers at their net
asset value without a sales charge. Investor A shares of each Portfolio are sold
to retail customers at the public offering price based on a Portfolio's net
asset value plus a front-end load or sales charge as described in the applicable
Prospectus.
The Fund may redeem shares involuntarily if the net income with respect to
a Portfolio's shares is negative or such redemption otherwise appears
appropriate in light of the Fund's responsibilities under the 1940 Act.
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A hypothetical illustration of the computation of the public offering price
per share of Investor A shares of the Portfolios, based on the projected value
of each Portfolio's estimated net assets and projected number of outstanding
shares on the date its shares are first offered for sale to public investors and
the maximum front-end 2.5% sales charge currently applicable, is as follows:
TABLE
-----
<TABLE>
<CAPTION>
Equity Index Bond Index
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets $ 10.00 $ 10.00
----- -----
Outstanding Shares 1 1
----- -----
Net Asset Value Per
Share $ 10.00 $ 10.00
----- -----
Sales Charge, (2.50%
of offering price,
2.60% of net asset
value per share) $ 0.26 $ 0.26
Offering to Public $ 10.26 $ 10.26
===== =====
</TABLE>
Under the 1940 Act, a Portfolio may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closing; (c)
the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC. The Portfolio may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
In addition to the situations described in the Prospectuses under "How to
Purchase and Redeem Shares," the Portfolios may redeem shares involuntarily to
reimburse the Portfolios for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
applicable Prospectuses from time to time.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their shares in the Portfolios as
so described in the applicable Prospectus. Any rights an investor may have to
reduce (or have waived) the
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sales load applicable to an exchange, as may be provided in a Prospectus, will
apply in connection with any such exchange.
By use of the exchange privilege, the investor authorizes his or her
Selected Dealer, Service Organization or the Distributor to act on telephonic
instructions from any person representing himself or herself to be the investor
and believed by the Selected Dealer, Service Organization or the Distributor to
be genuine. The investor, Selected Dealer, Service Organization or the
Distributor must notify the transfer agent of the investor's prior ownership of
Portfolio shares and account number. The transfer agent's records of such
instructions are binding. The exchange privilege may be modified or terminated
at any time upon 60 days' written notice to shareholders.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
From time to time yields and total returns of Trust Shares, Institutional
Shares and Investor A Shares (computed separately) of a Portfolio may be quoted
in advertisements, shareholder reports or other communications to Shareholders.
YIELD CALCULATIONS. A Portfolio's 30 day "yield" described in the
Prospectuses is calculated separately for Trust shares, Institutional shares and
Investor A shares of a Portfolio by dividing the Portfolio's net investment
income per share earned during a 30-day period by the maximum offering price per
share (the "maximum offering price") with respect to Investor A shares and the
net asset value per share with respect to Trust shares and Institutional shares
on the last day of the period and annualizing the result on a semi-annual basis
by adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. A Portfolio's net
investment income per share (irrespective of series) earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes income dividends and interest earned
during the period minus expenses accrued for the period, net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(------- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
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reimbursements).
c = the average daily number of shares outstanding that
were entitled to receive dividends.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining interest earned during the period (variable
"a" in the formula), dividend income on equity securities held by a Portfolio is
recognized by accruing 1/360 of the stated dividend rate of the security each
day that the security is in that Portfolio. A Portfolio calculates interest
earned on any debt obligation held in its portfolio by computing the yield to
maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30 day period, or, with respect to obligations
purchased during the 30 day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30 day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by a Portfolio to all shareholder accounts in proportion
to the length of the base period and the Portfolio's mean (or median) account
size. Investor A Shares, Institutional Shares and Trust Shares each bear
separate fees applicable to each series of Shares. Undeclared earned income will
not be subtracted from the maximum offering price per share (variable "d" in the
formula). Undeclared earned income is net investment income which, at the end of
the base period, has not been declared and paid as a dividend, but is reasonably
expected to be and is declared and paid as a dividend shortly thereafter.
The Fund currently calculates 30 day yield for its fixed income non-money
market Portfolios but not for its equity Portfolios.
TOTAL RETURN CALCULATIONS. A Portfolio computes its "average annual total
return" for each series of that Portfolio
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by determining the average annual compounded rate of return during specified
periods that would equate the initial amount invested in a particular series to
the ending redeemable value of such investment in the series by dividing the
ending redeemable value of a hypothetical $1,000 payment by $1,000 (representing
a hypothetical initial payment) and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the 1, 5 or 10 year
(or other) periods (or a fractional portion thereof)
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed
in terms of years
A Portfolio computes its aggregate total returns separately for each series
by determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested in a particular series to the
ending redeemable value of such investment in the series. The formula for
calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate total return
assume reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and include all recurring fees charged
to all shareholder accounts, assuming an account size equal to a Portfolio's
mean or median account size for any fees that vary with the size of the account.
The ending redeemable value (variable "ERV" in each quotation) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all non-recurring charges at the end of the period covered by the computation.
In addition, a Portfolio's average annual total return and aggregate total
return quotations reflect
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the deduction of the maximum front-end sales charge in connection with the
purchase of Investor A shares.
As stated in the Prospectus relating to Investor A shares, a Portfolio may
also calculate total return figures for that Portfolio without deducting the
maximum sales charge imposed on purchases or redemptions. The effect of not
deducting the sales charge will be to increase the total return reflected.
IN GENERAL
Investors may judge the performance of the Portfolios by comparing them to
the performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies. Such comparisons may be made by referring to
market indices such as those prepared by Dow Jones & Co., Inc., Russell, Salomon
Brothers, Inc., LEHMAN BROTHERS, INC. or STANDARD & POOR'S RATINGS GROUP or any
of their affiliates, the Consumer Price Index, the EAFE Index, the NASDAQ
Composite, or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. Such
comparisons may also be made by referring to data prepared by Lipper Analytical
Services, Inc., (a widely recognized independent service which monitors the
performance of mutual funds) Indata, Frank Russell, CDA, and the Bank Rate
Monitor (which reports average yields for money market accounts offered by the
50 leading banks and thrift institutions in the top five standard metropolitan
statistical areas). Other similar yield data, including comparisons to the
performance of Mercantile repurchase agreements, or the average yield data for
similar asset classes including but not limited to Treasury bills, notes and
bonds, may also be used for comparison purposes. Comparisons may also be made to
indices or data published in the following national financial publications:
MONEY FUND REPORT(R) published by IBC/Donoghue, MorningStar, CDA/Wiesenberger,
Money Magazine, Forbes, Fortune, Barron's, The Wall Street Journal, The New York
Times, Business Week, American Banker, Fortune, Institutional Investor, U.S.A.
Today and publications of Ibbotson Associates, Inc. and other publications of a
local or regional nature. In addition to performance information, general
information about the Portfolios that appears in a publication such as those
mentioned above may be included in advertisements and in reports to
Shareholders.
From time to time, the Fund may include the following types of information
in advertisements, supplemental sales literature and reports to Shareholders:
(1) discussions of general economic or financial principles (such as the effects
of inflation, the power of compounding and the benefits of dollar-cost
averaging); (2) discussions of general economic trends; (3) presentations of
statistical data to supplement such discussions;
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(4) descriptions of past or anticipated portfolio holdings for one or more of
the Portfolios within the Fund; (5) descriptions of investment strategies for
one or more of such Portfolios; (6) descriptions or comparisons of various
investment products, which may or may not include the Portfolios; (7)
comparisons of investment products (including the Portfolios) with relevant
market or industry indices or other appropriate benchmarks; and (8) discussions
of rankings or ratings by recognized rating organizations.
Such data are for illustrative purposes only and are not intended to
indicate past or future performance results of a Portfolio. Actual performance
of the Portfolios' may be more or less than that noted in the hypothetical
illustrations.
Since performance will fluctuate, performance data for the Portfolios
cannot necessarily be used to compare an investment in the Portfolios' shares
with bank deposits, savings accounts, and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. The current yield and performance of
the Portfolios may be obtained by calling the Fund at: INVESTOR A SHARES - (800)
452-ARCH; OR TRUST OR INSTITUTIONAL SHARES - (800) 452- 4015.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors to
issue up to seven billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of the Fund into one or more
additional classes or by setting or changing in any one or more respects, their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority the Fund's Board of Directors has
authorized the issuance of fifty-five classes of shares representing interests
in one of seventeen investment Portfolios: the Money Market, Treasury Money
Market, Tax-Exempt Money Market, Growth & Equity Income, Emerging Growth,
Government & Corporate Bond, U.S. Government Securities, Balanced, International
Equity, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, Kansas
Tax-Exempt Bond, Equity Income, National Municipal Bond, Short-Intermediate
Corporate Bond, Equity Index and Bond Index Portfolios. Trust shares,
Institutional shares, Investor A shares and/or Investor B shares in each
Portfolio are offered through separate prospectuses to different categories of
investors. Portfolio shares have no preemptive rights and only
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such conversion or exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectuses, the shares will be
fully paid and nonassessable.
Except as noted in the Prospectuses with respect to certain sub-transfer
agency expenses borne by Institutional shares and below with respect to the
Administrative Services Plans for Trust shares and Institutional shares and the
Distribution and Services Plan for Investor A shares, shares of each class of
the Equity Index and Bond Index Portfolios bear the same types of ongoing
expenses with respect to the Portfolio to which they belong. In addition,
Investor A shares are subject to a front-end sales charge as described in the
Prospectuses. The series also have different exchange privileges.
In the event of a liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation, except
that Trust shares of a particular Portfolio will be solely responsible for that
Portfolio's payments pursuant to the Administrative Services Plan for those
shares, Institutional shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative Service
Plan for those shares, and Investor A shares of a particular Portfolio will be
solely responsible for that Portfolio's payments pursuant to the Distribution
and Services Plan for those shares. In addition, Institutional shares will be
solely responsible for the payment of certain sub-transfer agency fees
attributable to those shares.
Holders of all outstanding shares of a particular Portfolio will vote
together in the aggregate and not by class, except that only Trust shares of a
Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to a Portfolio's Administrative Services Plan for Trust
shares, only Institutional shares of a Portfolio will be entitled to vote on
matters submitted to a vote of shareholders pertaining to such Portfolio's
Administrative Services Plan for Institutional shares, and only Investor A
shares of a Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Portfolio's Distribution and Services Plan for
Investor A shares. Further, shareholders of all of the Portfolios, irrespective
of class, will vote in the aggregate and not separately on a
Portfolio-by-Portfolio basis, except as otherwise required by law or when the
Board of Directors determines that the matter to be voted upon affects only the
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interests of the shareholders of a particular Portfolio or class of shares. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
series (Portfolio) affected by the matter. A Portfolio is considered to be
affected by a matter unless it is clear that the interests of each Portfolio in
the matter are identical or that the matter does not affect any interest of the
Portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in investment policy would be effectively acted upon with respect to
a Portfolio only if approved by a majority of the outstanding shares of that
Portfolio. However, the Rule also provides that the ratification of the
appointment of independent auditors, the approval of principal underwriting
contracts, and the election of directors may be effectively acted upon by
shareholders of the Fund's Portfolios voting without regard to class or
Portfolio.
Shares in the Fund's Portfolios will be issued without certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolios and their shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolios or their shareholders, and the discussion here and
in the Prospectuses are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisors with specific reference to
their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended, (the "Code"). Each Portfolio
intends to qualify each year as a regulated investment company. In order to so
qualify for a taxable year under the Code, each Portfolio must satisfy, in
addition to the distribution requirement described in the Prospectuses, certain
other requirements set forth below.
At least 90% of the gross income for a taxable year of each Portfolio must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the
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Portfolio's business of investing in such stock, securities or currencies (the
"90% gross income test").
A Portfolio also must derive less than 30% of its gross income for a
taxable year from gains realized on the sale or other disposition of securities
and certain other investments held for less than three months (the "30% test").
Interest (including original issue discount and accrued market discount)
received by a Portfolio upon maturity or disposition of a security held for less
than three months will not be treated as gross income derived from the sale or
other disposition of such security within the meaning of this requirement.
However, any income that is attributable to real red market appreciation will be
treated as gross income from the sale or other disposition of securities for
this purpose. With respect to covered call options, if the call is exercised by
the holder, the premium and the price received on exercise constitute the
proceeds of sale, and the difference between the proceeds and the cost of the
securities subject to the call is capital gain or loss. Premiums from expired
call options written by a Portfolio and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses. With respect to forward contracts, futures contracts, options on futures
contracts, and other financial instruments subject to the mark-to-market rules
described below under "Taxation of Certain Financial Instruments," the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a contract, option or financial instrument will be treated as being derived
from a security held for three months or more (regardless of the actual period
for which the contract, option or instrument is held) if the gain arises as a
result of a constructive sale under the mark-to-market rules, and will be
treated as being derived from a security held for less than three months only if
the contract, option or instrument is terminated (or transferred) during the
taxable year (other than by reason of mark-to-market) and less than three months
have elapsed between the date the contract, option or instrument is acquired and
the termination date. Increases and decreases in the value of a Portfolio's
forward contracts, futures contracts, options on futures contracts and other
investments that qualify as part of a "designated hedge," as defined in Section
851(g) of the Code, may be netted for purposes of determining whether the 30%
test is met.
Finally, at the close of each quarter of its taxable year, at least 50% of
the value of a Portfolio's assets must consist of cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
securities of other issuers (as to which a Portfolio has not invested more than
5% of the value of its total assets in
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securities of such issuer and as to which that Portfolio does not hold more than
10% of the outstanding voting securities of such issuer) and no more than 25% of
the value of such Portfolio's total assets may be invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies), or in two or more issuers which the Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each Portfolio will designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the shareholder has held these
shares. Shareholders should note that, upon the sale or exchange of Portfolio
shares, if the shareholder has not held such shares for more than six months,
any loss on the sale or exchange of those shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum rate of 28%. For corporations, long-term capital gains and
ordinary income are both taxable at a maximum nominal rate of 35% (or at a
maximum marginal rate of 39% in the case of corporations having taxable income
between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
each year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable as ordinary income to shareholders, to
the extent of the Portfolio's current and accumulated earnings and profits, and
would be eligible for the dividends received deduction allowed to corporations.
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Each Portfolio will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on his return
payments of taxable interest or dividends.
In those states and localities which have income tax laws, the treatment of
a Portfolio and its shareholders under such laws may differ from their treatment
under federal income tax laws. Under state or local law, distributions of net
income may be taxable to shareholders as dividend income. Shareholders are
advised to consult their tax advisors concerning the application of state and
local taxes.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Portfolios. These rules may have a
particular impact on the amount of income or gain that a Portfolio must
distribute to shareholders to comply with the distribution requirement, on the
income or gain qualifying under the 90% gross income test, and on a Portfolio's
ability to comply with the 30% test described above.
Generally, futures contracts and options on futures contracts held by a
Portfolio at the close of its taxable year are treated for federal income tax
purposes as sold for their fair market value on the last business day of such
year, a process known as "mark-to-market." Forty percent of any gain or loss
resulting from such constructive sales are treated as short-term capital gain or
loss and 60% of such gain or loss are treated as long-term capital gain or loss
without regard to the period the Portfolio holds the futures contract or related
option (the "40%-60% rule"). The amount of any capital gain or loss actually
realized by a Portfolio in a subsequent sale or other disposition of those
futures contracts and related options is adjusted to reflect any capital gain or
loss taken into account by a Portfolio in a prior year as a result of the
constructive sale of the contracts and options. Losses with respect to futures
contracts to sell and related options, which are regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by a Portfolio, are subject to certain loss deferral rules which
limit the amount of loss currently deductible on either part of the straddle to
the amount thereof which exceeds the unrecognized gain (if any) with respect to
the other part of the straddle, and to certain wash sales regulations. Under
short sales rules, which are also applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for
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the long-term holding period) be deemed not to begin prior to termination of the
straddle. With respect to certain futures contracts and related options,
deductions for interest and carrying charges may not be allowed. Notwithstanding
the rules described above, with respect to futures contracts to sell and related
options which are properly identified as such, a Portfolio may make an election
which will exempt (in whole or in part) those identified futures contracts and
options from being treated for federal income tax purposes as sold on the last
business day of the Portfolio's taxable year, but gains and losses will be
subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from positions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts and options, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Some of the non-U.S. dollar denominated investments that the Portfolios may
make, such as non-U.S. dollar-denominated debt securities and obligations and
preferred stock may be subject to the provisions of Subpart J of the Code, which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S dollar. The types of
transactions covered by these provisions include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer also is treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and nonequity options generally are not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the mark-to-market rules, unless an election is made to
have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and normally is taxable as ordinary
gain or loss. A Portfolio may elect to treat as capital gain or
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loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the Portfolio and which are not part of a straddle. In accordance with Treasury
Regulations, certain transactions subject to the special currency rules that are
part of a "Section 988 hedging transaction" (as defined in the Code and Treasury
regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Portfolio which are not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) is treated as capital gain or loss and is not segregated from the gain
or loss on the underlying transaction.
CONCLUSIONS
The foregoing discussion is based on federal tax laws and regulations which
are in effect on the date of this Statement of Additional Information; such laws
and regulations may be changed by legislative or administrative action.
Shareholders are advised to consult their tax advisors concerning the
application of state and local taxes.
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<PAGE> 125
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers(1) of the Fund, their addresses, ages,
principal occupations during the past five years, and other affiliations are as
follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Jerry V. Woodham(2) Chairman of Treasurer, St. Louis
St. Louis University The Board; and University, August, 1996
3500 Linden Blvd. President and to present; Treasurer,
Fitzgerald Hall Director Washington University,
St. Louis, MO 63103 1981 to 1995
Age: 53
Robert M. Cox, Jr. Director Senior Vice President,
Emerson Electric Co. Emerson Electric Co.
8000 W. Florissant Ave. since November 1990.
P.O. Box 4100
St. Louis, MO 63136-8506
Age: 51
Joseph J. Hunt Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and Orna-
3544 Watson Road mental Iron Workers (Interna-
St. Louis, MO 63139 tional Labor Union), January 1994
Age: 53 to present; General Organizer,
International Association of
Bridge, Structural and Ornamental
Iron Workers, September 1983 to
December 1993.
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping soft
Chesterfield, MO 63017 goods) since 1975; Vice Chairman,
Age: 61 Kellwood Company since May 1989.
<FN>
- --------
1 Directors and officers of the Fund owned less than 1% of the outstanding
shares of the Fund as of November 30, 1995.
2 Mr. Woodham is an "interested person" of the Fund as defined in the
1940 Act.
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Donald E. Kiernan Director Senior Vice President -
Southwestern Bell Finance and Treasurer,
Corporation Southwestern Bell
175 E. Houston St. Corporation since
P.O. Box 2933 December 1990; Vice
Room 7-A-50 President-Finance,
San Antonio, TX 78299 Southwestern Bell Corporation
Age: 55 May 1990 to December 1990; Partner,
Ernst & Young (predecessor
firm, Arthur Young & Company),
prior thereto.
Lyle L. Meyer Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation (manufacturer of
Corporation paperboard and packaging materials),
8182 Maryland Avenue April 1989 to present; President,
St. Louis, MO 63105 Smurfit Pension & Insurance Services
Age: 60 Company, November 1982 to December
1992.
Ronald D. Winney* Director and Treasurer, Ralston
Ralston Purina Company Treasurer Purina Company
Checkerboard Square since 1985
St. Louis, MO 63164
Age: 54
W. Bruce McConnel, III Secretary Partner of the law
Suite 1100 firm of Drinker Biddle
1345 Chestnut Street & Reath, Philadelphia,
Philadelphia, PA 19107 Pennsylvania
Age: 53
Walter B. Grimm* Assistant From June, 1992 to present,
3435 Stelzer Road Secretary employee of BISYS Fund Services;
Columbus, Ohio 43219 From 1981 to present,
Age: 52 President of Leigh
Investments Consulting/
Investments (investment
firm); from May, 1989 to
November, 1990, President
of Security Bank.
Stephen G. Mintos* Vice President From April, 1987 to present,
3435 Stelzer Road and Assistant employee of BISYS Fund Services.
Columbus, Ohio 43219 Treasurer
Age: 43
<FN>
- --------
* Messrs. Grimm, Winney and Mintos are "interested persons" of the Fund as
defined in the 1940 Act.
</TABLE>
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<PAGE> 127
For the fiscal year ended November 30, 1995, the Directors received the
following compensation:
<TABLE>
<CAPTION>
=============================================================================================
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM THE FUND AND
COMPENSATION AS PART OF FUND FUND COMPLEX(1)
NAME OF DIRECTOR FROM THE FUND EXPENSE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham $13,459.70 $0 $15,000.00
- ---------------------------------------------------------------------------------------------
Robert M. Cox, Jr. $8,973.13 $0 $10,000.00
- ---------------------------------------------------------------------------------------------
Joseph J. Hunt $8,793.13 $0 $10,000.00
- ---------------------------------------------------------------------------------------------
James C. Jacobsen $8,793.13 $0 $10,000.00
- ---------------------------------------------------------------------------------------------
Donald E. Kiernan $8,793.13 $0 $10,000.00
- ---------------------------------------------------------------------------------------------
Lyle L. Meyer $8,793.13 $0 $10,000.00
- ---------------------------------------------------------------------------------------------
Ronald D. Winney $8,793.13 $0 $10,000.00
=============================================================================================
<FN>
(1) The "Fund Complex" includes The ARCH Fund, Inc. and, prior to its
reorganization into The ARCH Fund, Inc., The ARCH Tax-Exempt Trust.
</TABLE>
Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives legal
fees as counsel to the Fund.
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to each Portfolio. Pursuant to the
advisory agreement, MVA has agreed to provide investment advisory services as
described in the Portfolios' Prospectuses. MVA has agreed to pay all expenses
incurred by it in connection with its activities under the agreement other than
the cost of securities, including brokerage commissions, if any, purchased for
the Portfolios.
The investment advisory agreement provides that MVA shall not be liable for
any error of judgment or mistake of law or for any loss suffered in connection
with the performance of its agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of their duties or from reckless disregard by it of its duties and
obligations thereunder.
Under its administration agreement with the Fund, BISYS Fund Services Ohio,
Inc. (the "Administrator") serves as
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<PAGE> 128
administrator. The Administrator has agreed to maintain office facilities for
the Portfolios, furnish the Portfolios with statistical and research data,
clerical, accounting, and certain bookkeeping services, stationery and office
supplies, and certain other services required by the Portfolios, and to compute
the net asset value and net income of the Portfolios. The Administrator prepares
annual and semi-annual reports to the SEC on Form N-SAR, compiles data for and
prepares federal and state tax returns and required tax filings other than those
required to be made by the Fund's custodian and transfer agent, prepares the
Fund's compliance filings with state securities commissions, maintains the
registration or qualification of shares for sale under the securities laws of
any state in which the Fund's shares shall be registered, assists in the
preparation of annual and semi-annual reports to shareholders of record,
participates in the periodic updating of the Fund's Registration Statement,
prepares and assists in the timely filing of notices to the SEC required
pursuant to Rule 24f-2 under the 1940 Act, arranges for and bears the cost of
processing share purchase, exchange and redemption orders, keeps and maintains
the Portfolios' financial accounts and records including calculation of daily
expense accruals, monitors compliance procedures for each of the classes of the
Fund's Portfolios with each Portfolio's investment objective, policies and
limitations, tax matters, and applicable laws and regulations, and generally
assists in all aspects of the Portfolios' operations. The Administrator bears
all expenses in connection with the performance of its services, except that a
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities. (See "Net Asset Value" above.)
From time to time, MVA and the Administrator may voluntarily waive a
portion or all of their respective fees otherwise payable to them with respect
to the Fund's Portfolios in order to increase the net income available for
distribution to shareholders.
In addition, the Portfolios' advisory and administration agreements provide
that if expenses borne by any Portfolio in any fiscal year exceed expense
limitations imposed by applicable state securities regulations, (i) MVA will
reimburse the Fund for 60% of such excess expenses and (ii) the Administrator
will reimburse the Fund for a portion of any such excess expenses in an amount
equal to the proportion that the administration fees otherwise payable by the
Portfolio to the Administrator bears to the total amount of the investment
advisory and administration fees otherwise payable by the Portfolio, in each
case to the extent required by such regulations. To the Fund's knowledge, it is
not presently subject to any expense limitation. The fees that financial
institutions, Service Organizations, and Selected Dealers may
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<PAGE> 129
charge to customers for services provided in connection with their investments
in the Portfolios are not covered by the state securities expense limitations
described above.
CUSTODIAN AND TRANSFER AGENT
Mercantile is Custodian of the Portfolios' assets pursuant to a Custodian
Agreement. Under the Custodian Agreement, Mercantile has agreed to (i) maintain
a separate account or accounts in the name of each Portfolio; (ii) receive and
disburse money on behalf of each Portfolio; (iii) collect and receive all income
and other payments and distributions on account of each Portfolio's portfolio
securities; (iv) respond to correspondence relating to its duties; and (v) make
periodic reports to the Fund's Board of Directors concerning the operations of
each Portfolio. Mercantile may, at its own expense, open and maintain a custody
account or accounts on behalf of each Portfolio with other banks or trust
companies, provided that Mercantile shall remain liable for the performance of
all of its custodial duties under the Custodian Agreement, notwithstanding any
delegation. Mercantile is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Portfolios, provided that
Mercantile shall remain responsible for the performance of all of its duties
under the Custodian Agreement and shall hold the Fund harmless from the acts and
omissions of any bank or trust company servicing as sub-custodian.
In the opinion of the staff of the SEC, since the Custodian is an affiliate
of the investment adviser, the Fund and the Custodian are subject to the
requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and the
Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each Portfolio pays
Mercantile an annual fee. This fee, which is paid monthly, is calculated as the
greater of $6,000 or $.30 for each $1,000 of such Portfolio's average daily net
assets, plus $15.00 for each purchase, sale or delivery of a security upon its
maturity date, $50.00 for each interest collection or claim item, $20.00 for
each transaction involving GNMA, tax-free or other non-depository registered
items with monthly dividends or interest, $30.00 for each purchase, sale or
expiration of an option contract, $50.00 for each purchase, sale or expiration
of a futures contract, and $15.00 for each repurchase trade with an institution
other than Mercantile. In addition, each Portfolio pays Mercantile's incremental
costs in providing foreign custody services for any foreign-denominated and
foreign-held securities and reimburses Mercantile for out-of-pocket expenses
related to such services.
-35-
<PAGE> 130
BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer agent and
dividend disbursing agent (in those capacities, the "Transfer Agent") pursuant
to a Transfer Agency Agreement. Under the Agreement, the Transfer Agent has
agreed to (i) process shareholder purchase and redemption orders; (ii) maintain
shareholder records for each of the Portfolios' shareholders; (iii) process
transfers and exchanges of shares of the Portfolios; (iv) issue periodic
statements for each of the Portfolios' shareholders; (v) process dividend
payments and reinvestments; (vi) assist in the mailing of shareholder reports
and proxy solicitation materials; and (vii) make periodic reports to the Fund's
Board of Directors concerning the operations of each Portfolio.
DISTRIBUTOR AND SERVICE ORGANIZATIONS
BISYS Fund Services (the "Distributor"), an affiliate of the Administrator,
serves as the Distributor of the Portfolios' shares pursuant to a Distribution
Agreement. Under the Distribution Agreement, the Distributor, as agent, sells
shares of the Portfolios on a continuous basis. The Distributor has agreed to
use appropriate efforts to solicit orders for the sale of shares. With respect
to a Portfolio's Trust shares and Institutional shares, no compensation is
payable by the Fund to the Distributor for distribution services. With respect
to a Portfolio's Investor A shares, the Distributor is entitled to receive a
portion of the front-end sales charge imposed on such shares. In addition, under
the Distribution and Services Plans for Investor A shares described below, the
Distributor is entitled to a distribution fee at the annual rate of .10% for
distribution services. (For information regarding the distribution services
provided and distribution fees payable thereunder, see "Distribution and
Services Plan(s)" under "Management of the Fund" in the Prospectuses and "The
Plans" below.)
THE PLANS
DISTRIBUTION AND SERVICES PLANS. As described in the Prospectuses, the Fund
has adopted a Distribution and Services Plan with respect to Investor A shares
of the Portfolios pursuant to the 1940 Act and Rule 12b-1 thereunder. Any
material amendment to the Plan or arrangements with the Distributor or Service
Organizations (which may include selected dealers and affiliates of the Fund's
Adviser) must be approved by a majority of the Board of Directors, including a
majority of the directors who are not "interested persons" of the Fund as
defined in the 1940 Act and have no direct or indirect financial interest in
such arrangements (the "Disinterested Directors") and by a majority of the
Investor A shares of the Portfolio. Pursuant to the Plan, the Fund may enter
into Servicing Agreements with
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<PAGE> 131
broker-dealers and other organizations ("Servicing Agreements") that purchase
Investor A shares of a Portfolio. The Servicing Agreements provide that the
Servicing Organizations will render certain shareholder administrative support
services to their customers who are the record or beneficial owners of Investor
A shares. Services provided pursuant to the Servicing Agreements may include
such services as providing information periodically to customers showing their
positions in Investor A shares and monitoring services for their customers who
have invested in Investor A shares, including the operation of telephone lines
for daily quotations of return information.
ADMINISTRATIVE SERVICES PLANS. As stated in the applicable Prospectuses,
separate Administrative Services Plans have been adopted with respect to Trust
shares and Institutional shares of the Portfolios. Pursuant to each Plan and the
Distribution and Services Plan described above, the Fund may enter into
Servicing Agreements with banks, trust departments, and other financial
institutions and with broker-dealers and other organizations ("Service
Organizations") that purchase Trust shares, Institutional shares or Investor A
shares of a Portfolio, respectively. The Servicing Agreements provide that the
Service Organizations will render certain shareholder administrative support
services to their customers who are the record or beneficial owners of Trust
Shares, Institutional shares or Investor A shares, respectively. Services
provided pursuant to the Servicing Agreements may include some or all of the
following services: (i) processing dividend and distribution payments from the
Portfolios on behalf of customers; (ii) providing information periodically to
customers showing their positions in Trust, Institutional or Investor A shares;
(iii) arranging for bank wires; (iv) responding to routine customer inquiries
relating to services performed by the particular Service Organization; (v)
providing sub-accounting with respect to shares owned of record or beneficially
by customers or the information necessary for sub-accounting; (vi) as required
by law, forwarding shareholder communications (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (vii) forwarding to customers proxy statements
and proxies containing any proposals regarding Servicing Agreements or the
related Plan; (viii) aggregating and processing purchase, redemption, and
exchange requests from customers and placing net purchase and redemption orders
with the Fund's Distributor; (ix) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (x) maintaining records relating to each customer's
share transactions; or (xi) other similar services if requested by the Fund and
permitted by law. In addition, Service Organizations may also provide dedicated
facilities and equipment in various local locations to serve the needs of
investors, including walk-in facilities, 800 numbers,
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<PAGE> 132
and communication systems to handle shareholder inquiries, and in connection
with such facilities, provide on-site management personnel and monitoring
services for their customers who have invested in Investor A shares, including
the operation of telephone lines for daily quotations of return information.
OTHER PLAN INFORMATION. The Board of Directors has approved each Plan and
its respective arrangements with the Distributor, Service Organizations and
broker-dealers based on information provided by the Fund's service contractors
that there is a reasonable likelihood that these Plans and arrangements will
benefit the Portfolios and their shareholders. Pursuant to each Plan, the Board
of Directors reviews, at least quarterly, a written report of the amounts of
distribution fees and servicing fees expended pursuant to each Plan and the
Service Organizations and the purposes for which the expenditures were made. So
long as the Fund has one or more of the above described Plans in effect, the
selection and nomination of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund will be committed
to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer accounts,
Service Organizations, selected dealers, and other institutions may also charge
their customers directly for cash management and other services provided in
connection with the accounts, including, for example, account maintenance fees,
compensating balance requirements, or fees based upon account transactions,
assets, or income. An investor should therefore read the Prospectuses and this
Statement of Additional Information in light of the terms of his or her account
with a Service Organization, selected dealer, or other institution before
purchasing Trust or Investor shares of a Portfolio.
FUND EXPENSES. As discussed previously, the Portfolios' service contractors
bear all expenses in connection with the performance of their services, except
that the Portfolios bear certain expenses incurred pursuant to their
Distribution and Services Plan, their Administration Services Plans and certain
sub-transfer agency fees (with respect to Institutional shares). The Portfolios
bear the expenses incurred in their operations. Fund expenses include taxes,
interest, fees and salaries of its directors and officers, Securities and
Exchange Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders, advisory and administration fees, distribution fees for
distribution services provided to and expenses assumed in connection with
marketing Investor A shares, charges of the Custodian, transfer agent, and
dividend disbursing agent, Service Organization fees, certain insurance
premiums, outside auditing and legal expenses, costs of
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<PAGE> 133
any independent pricing service, costs of shareholder reports and meetings and
any extraordinary expenses. The Portfolios also pay for brokerage fees,
commission and other transaction charges (if any) incurred in connection with
the purchase and sale of portfolio securities.
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 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.
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<PAGE> 134
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.
INDEPENDENT AUDITORS
For the fiscal year ended November 30, 1995, KPMG Peat Marwick LLP,
certified public accountants, with offices at Two Nationwide Plaza, Columbus,
Ohio 43215, served as independent auditors for the Fund. KPMG Peat Marwick LLP
performs an annual audit of the Fund's financial statements. Reports of its
activities are provided to the Fund's Board of Directors.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the Fund, is a
partner), Suite 1100, 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, is counsel to the Fund and will pass upon certain legal matters on
its behalf.
MISCELLANEOUS
As of September 27, 1996, Mercantile held of record 99.314% and 68.32% of
the outstanding Institutional and Trust shares, respectively, in the Money
Market Portfolio; 97.539% and 80.942% of the outstanding Institutional and Trust
shares, respectively, in the Treasury Money Market Portfolio; 84.76% of the
outstanding Trust shares in the Tax-Exempt Money Market Portfolio; 97.608% and
97.111% of the outstanding Institutional and Trust shares, respectively, in the
Growth & Income Equity Portfolio; 99.251% and 59.012% of the outstanding
Institutional and Trust shares, respectively, in the Emerging Growth Portfolio;
96.985% and 98.108% of the outstanding Institutional and Trust shares,
respectively, in the Government & Corporate Bond Portfolio; 99.999% and 94.369%
of the outstanding Institutional and Trust shares, respectively, in the U.S.
Government Securities Portfolio; 96.312% of the outstanding Trust shares in the
Balanced Portfolio; 98.456% and 94.184% of the outstanding Institutional and
Trust shares, respectively, in the International Equity Portfolio; 95.925% of
the outstanding Trust shares in the Short-Intermediate Municipal Portfolio; and
99.68% of the outstanding Trust shares in the Missouri Tax-Exempt Bond Portfolio
as fiduciary or agent on behalf of its customers. Mercantile is a wholly owned
subsidiary of Mercantile Bancorporation Inc., a Missouri corporation. Under the
1940 Act,
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Mercantile may be deemed to be a controlling person of the Fund.
As of the same date, the following institutions also owned of record 5% or
more of the Money Market Portfolio's outstanding shares as fiduciary or agent on
behalf of their customers: Trust Shares - First Union National Bank, CMG 2-1151
Attn: Funds Group, 401 South Tryon Street, Charlotte, NC 28288 (9.580%);
Hawaiian Trust Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI
96802-3170 (10.963%); Mercantile Bank NA Trust, Trust Securities Unit 17-1,
Attn: Dede Clark, P.O. Box 387 Main Post Office, St. Louis, MO 63166 (33.119%);
BISYS Fund Services, PBO Mercantile EOD Sweep, Attn: Linda Zerbe, First and
Market Building, Suite 300, Pittsburgh, PA 15222 (35.201%); Institutional Shares
- - Mercantile Bank St. Louis, NA Attn: Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166 (99.314%); Investor A Shares - BHC Securities, Attn: Cash
Balance Sweep Dept., One Commerce Square, 11th Floor, 2005 Market Street,
Philadelphia, PA 19103 (86.715%); Mercantile Investment Services, Inc., Firm
Capital Account, Attn: Judy Horbelt, P.O. Box 790121, St. Louis, MO 63179-0121
(5.406%); Mercantile Bank of St. Louis, NA Custodian Pheba A. Steinmeyer, IRA,
314 Westbrook, Ofallon, MO 63366 (5.527%); Alberta Buenemann and Ernie W.
Buenemann, TRST Alberta Buenemann Rev Liv Trust, DTD 08/30/91, 1649 Sand Run
Rd., Troy, MO 63379 (7.451%); Mercantile Bank of St. Louis, NA, Custodian Wayne
D. Matheis, Rollover IRA, RR2 Box 142, Russellville, MO 65074 (12.734%);
Mercantile Bank of St. Louis, NA Custodian Edwin C. Hogrebe, IRA, 5537 Goethe,
St. Louis, MO 63109 (5.182%); Merlin R. Burke and Mary Alice Burke, JTWROS, 2516
Highland, Sedalia, MO 65301 (5.251%).
As of the same date, the following institutions also owned of record 5% or
more of the Treasury Money Market Portfolio's outstanding shares as fiduciary or
agent on behalf of their customers: Trust Shares - Hawaiian Trust Company Ltd.,
Trust Short-Term Investment Fund, P.O. Box 3170, Honolulu, HI 96802-3170
(8.747%); Hawaiian Trust Company Ltd., 783 Funds Accounting, P.O. Box 3170,
Honolulu, HI 96802-3170 (9.321%); Mercantile Bank NA Trust, Trust Securities
Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office, St. Louis, MO 63166
(55.239%); BISYS Fund Services, PBO Mercantile EOD Sweep, Attn: Linda Zerbe,
First and Market Building, Suite 300, Pittburgh, PA 15222 (25.703%);
Institutional Shares - Mercantile Bank St. Louis, NA Attn: Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166 (97.539%); Investor A Shares - BHC
Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th Floor,
2005 Market Street, Philadelphia, PA 19103 (31.059%); Mercantile Bank of St.
Louis NA, Custodian Richard E. Crippa, Rollover IRA, 2948 Castelford Drive,
Florissant, MO 63033 (6.283%); St. Louis Regional Medical Center, Attn: Sharon
Edison, 5535 Delmar Blvd., St. Louis, MO 63112 (57.461%).
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As of the same date, the following institutions also owned of record 5% or
more of the Tax-Exempt Money Market Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - Mercantile Bank NA Trust,
Trust Securities Unit 17-1, Attn: Dede Clark, P.O. Box 387 Main Post Office, St.
Louis, MO 63166 (76.872%) Investor B Shares - First American Bank LA, Trust
Department, Attn: Bill Keith, P.O. Box 7232, Monroe, LA 71211 (10.617%); BISYS
Fund Services, PBO Mercantile BOD Sweep, Attn: Linda Zerbe, First and Market
Building, Suite 300, Pittsburgh, PA 15222 (7.888%); Investor A Shares - BHC
Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th Floor,
2005 Market Street, Philadelphia, PA 19103 (98.072%).
As of the same date, the following institutions also owned of record 5% or
more of the International Equity Portfolio's outstanding shares as fiduciary or
agent on behalf of their customers: Trust Shares - Olive & Company, Attn: Trust
Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (45.824%); Locust &
Company, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(48.360%); Boat & Co., P.O. Box 14737, St. Louis, MO 63178-4737 (5.634%);
Institutional Shares - Locust and Company, Attn: Trust Securities Unit 17-1,
P.O. Box 387, St. Louis, MO 63166 (98.456%); Investor A Shares -BHC Securities
Inc., Trade House Acct., 2005 Market Street, Philadelphia, PA 19103 (45.966%);
Frances Dakers, 200 E. 89th St., 28D, New York, NY 10128 (14.052%); Investor B
Shares - BHC Securities, Inc., FAO 24275966, Attn: Mutual Funds Dept., One
Commerce Square, Suite 1200, Philadelphia, PA 19103 (5.686%).
As of the same date, the following institutions also owned of record 5% or
more of the Growth & Income Equity Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - Locust & Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (75.409%); Olive & Company, Mercantile Bank St. Louis NA,
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387 (21.702%);
Institutional Shares - Locust & Company, Mercantile Bank St. Louis NA, Attn:
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (97.608%);
Investor A Shares - BHC Securities Inc., Trade House Account, Attn: Mutual Fund
Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA 19103
(34.929%).
As of the same date, the following institutions also owned of record 5% or
more of the Emerging Growth Portfolio's outstanding shares as fiduciary or agent
on behalf of their customers: Trust Shares - State Street Bank & Trust Co.,
Trustee Pioneer Hi-Bred International Savings Plan Trust, One Enterprise Drive,
Mail Stop D13, North Quincy, MA 02171 (12.335%); Olive & Company, Mercantile
Bank St. Louis NA, Trust Securities Unit 17-
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<PAGE> 137
1, P.O. Box 387, St. Louis, MO 63166-0387 (13.726%); American Bar Endowment, 750
North Lake Shore Drive, Chicago, IL 60611 (5.784%); Locust & Company, Mercantile
Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (45.286%); Boatmens Trust Co, TRST Carpenters Pension Trust Fund,
Attn: William Grayson, 100 N. Broadway, St. Louis, Mo 63102 (6.727%);
Institutional Shares - Locust & Company, Mercantile Bank St. Louis NA, Attn:
Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166 (93.453%);
Mercantile Bank, Expediter Daily Valuation Account, Attn: Institutional
Retirement Team 16-2, P.O. Box 387, St. Louis, MO 63166 (5.798%); Investor A
Shares - BHC Securities Inc., Trade House Account, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (41.414%); Investor
B Shares - BHC Securities Inc., FAO 24044848, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(5.342%).
As of the same date, the following institutions also owned of record 5% or
more of the U.S. Government Securities Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - First American
Bank of Louisiana, Attn: Gerald Ferrar, P.O. Box 7232, Monroe, LA 71211
(5.371%); Locust & Company, Mercantile Bank St. Louis NA, Trust Securities Unit
17-1, P.O. Box 387, St. Louis, MO 63166-0387 (60.025%); Olive & Company,
Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St.
Louis, MO 63166-0387 (34.344%); Institutional Shares - Locust & Company,
Mercantile Bank St. Louis NA, Attn: Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166 (99.999%); Investor A Shares - BHC Securities Inc., Trade
House Account, Attn: Mutual Funds Dept., One Commerce Square, 2005 Market
Street, Philadelphia, PA 19103 (13.165%); Mercantile Bank of St. Louis NA,
Custodian Robert W. Davis, Rollover IRA, 818 Broadway, Elsberry, MO 63343-1109
(6.487%); Investor B Shares - BHC Securities Inc., FAO 24130191, Attn: Mutual
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (14.830%); BHC Securities Inc., FAO 24275966, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(9.542%).
As of the same date, the following institutions also owned of record 5% or
more of the Balanced Portfolio's outstanding share as fiduciary or agent on
behalf of their customers: Trust Shares - Locust & Company, Mercantile Bank St.
Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(96.392%); Investor A Shares - BHC Securities Inc., Trade House Account, Attn:
Mutual Funds Dept., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103 (19.542%); Investor B Shares - Mercantile Bank of St. Louis NA, Custodian
Richard Dell Wood, SEP IRA, 3114 Pickett Road, St. Joseph, MO 64503 (8.489%);
BHC Securities Inc., FAO 24123548, Attn: Mutual
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<PAGE> 138
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (6.370%); BHC Securities Inc., FBO 24273057, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(9.126%); Mercantile Bank of St. Louis, NA Custodian Gerald C. Pasch, IRA, 2817
Duncan, St. Joseph, MO 64507 (8.177%); Mercantile Bank of St. Louis, NA
Custodian Edmund Frances CODR, Rollover IRA, 2820 South 42nd Street, St. Joseph,
MO 64503 (7.861%); Mercantile Bank of St. Louis, NA Custodian David J. Neumann,
IRA, 2330 Goff Avenue, St. Joseph, MO 64505 (6.641%); Mercantile Bank of St.
Louis, NA Custodian Betty J. Renfro, IRA, 2317 Penn, St. Joseph, MO 64507
(5.324%).
As of the same date, the following institutions also owned of record 5% or
more of the Government & Corporate Bond Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, Mercantile Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387,
St. Louis, MO 63166-0387 (53.916%); Olive & Company, Mercantile Bank St. Louis
NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(44.192%); Institutional Shares - Locust & Company, Mercantile Bank St. Louis
NA, Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166
(96.985%); Investor A Shares - BHC Securities Inc., Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (12.661%);
Mercantile Bank of St. Louis NA, Custodian Eugene P. Tucker, IRA Rollover, 70
Berkshire, St. Louis, MO 63117 (5.421%); Investor B Shares - Mercantile Bank of
St. Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(6.962%); Mercantile Bank of St. Louis, NA Custodian Wayne D. Matheis, Rollover
IRA, RR2 Box 142, Russellville, MO 65074 (8.678%); Alberta Buenemann and Ernie
W. Buenemann, TRST Alberta Buenemann Rev Liv Trust, DTD 08 30 91, 1649 Sand Run
Rd., Troy, MO 63379 (5.123%); BHC Securities Inc., FAO 24294267, Attn: Mutual
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (6.204%); BHC Securities Inc., FAO 24297770, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(13.139%).
As of the same date, the following institutions also owned of record 5% or
more of the Short-Intermediate Municipal Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
Attn: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO 63166-0387
(95.925%); Investor A Shares - Ben J. Fazio and Antonina Fazio, JTWROS, 9912
Emil Avenue, St. Louis, MO 63126 (97.971%).
As of the same date, the following institutions also owned of record 5% or
more of the Missouri Tax-Exempt Bond Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - Locust & Company,
Mercantile
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Bank St. Louis NA, Trust Securities Unit 17-1, P.O. Box 387, St. Louis, MO
63166-0387 (13.268%); Olive & Company, Mercantile Bank St. Louis NA, Trust
Securities Unit 17-1, P.O. Box 387, St. Louis MO 63166-0387 (86.412%); Investor
A Shares - BHC Securities Inc., Trade House Account, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Philadelphia, PA 19103 (30.326%);
Investor B Shares - BHC Securities Inc., FAO 24126820, Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(12.393%); BHC Securities Inc., FAO 24131119, Attn: Mutual Funds Dept., One
Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(5.439%); BHC Securities Inc., FBO 24017977, Attn: Mutual Funds Dept., 100 N.
20th Street, Philadelphia, PA 19103 (8.925%); BHC Securities Inc. FAO 24286677,
Attn: Mutual Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103 (8.286%); BHC Securities Inc., FAO 24290504, Attn: Mutual
Funds Dept., One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia,
PA 19103 (13.775%); BHC Securities Inc., FAO 24293705 Attn: Mutual Funds Dept.,
One Commerce Square, 2005 Market Street, Suite 1200, Philadelphia, PA 19103
(6.271%).
On the basis of information received from these institutions, the Fund
believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As used in the Statement of Additional Information and in the Prospectuses
of the same date, "assets belonging to a Portfolio" means the consideration
received by the Fund upon the issuance or sale of shares in that Portfolio,
together with all income, earnings, profits and proceeds derived from the
investment thereof, including any proceeds from the sale, exchange or
liquidation of such investments, any funds or payments derived from any
reinvestments of such proceeds, and a portion of any general assets of the Fund
not belonging to a particular Portfolio. Assets belonging to a particular
Portfolio are charged with the direct liabilities in respect of that Portfolio
and with a share of the general liabilities of the Fund which are normally
allocated in proportion to the relative net asset levels of the respective
Portfolios. Determinations by the Board of Directors as to the direct and
allocable liabilities, and allocable portion of any general assets, with respect
to a particular Portfolio are conclusive.
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APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes and circumstances
than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset
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protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing
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requirements, access to capital markets is good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
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Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which is issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by a strong capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
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<PAGE> 144
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are currently
in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by Standard
& Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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<PAGE> 145
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may
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<PAGE> 146
experience high volatility or high variability in expected returns due to
non-credit risks. Examples of such obligations are: securities whose principal
or interest return is indexed to equities, commodities, or currencies; certain
swaps and options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
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<PAGE> 147
Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the
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addition of a plus (+) or minus (-) sign to show relative standing within these
major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess one
of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation
for bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is
an assessment of the ultimate recovery value through reorganization or
liquidation.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "C" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
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IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
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"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and "CC"
the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
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