<PAGE> 1
THE ARCH FUND(R), INC.
(THE "FUND")
TRUST SHARES OF THE
ARCH MONEY MARKET, TREASURY MONEY MARKET,
TAX-EXEMPT MONEY MARKET, U.S. GOVERNMENT SECURITIES,
INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE
MUNICIPAL, MISSOURI TAX-EXEMPT BOND,
NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY,
SMALL CAP EQUITY, INTERNATIONAL EQUITY AND
BALANCED PORTFOLIOS
SUPPLEMENT DATED MAY 28, 1997
TO PROSPECTUS DATED MARCH 31, 1997
FINANCIAL HIGHLIGHTS - NATIONAL MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------
The "Financial Highlights" in the following table (which
replaces the table on page 15 of the Prospectus) supplements the financial
statements for the Fund's National Municipal Bond Portfolio (the "Portfolio")
which (i) with respect to the period November 18, 1996 through November 30,
1996, appear in the Fund's Annual Report to Shareholders dated November 30, 1996
and are incorporated by reference into the Statement of Additional Information,
and (ii) with respect to the period December 1, 1996 through March 31, 1997, are
included in the Statement of Additional Information. The data for the period
November 18, 1996 through November 30, 1996 has been audited by KPMG Peat
Marwick LLP, independent accountants, whose unqualified report on the financial
statements containing such information is also incorporated into the Statement
of Additional Information. The data for the period December 1, 1996 through
March 31, 1997 is unaudited. Further information about the performance of the
Portfolio is contained in the Fund's Annual Report to Shareholders. Both the
Annual Report and the Statement of Additional Information may be obtained free
of charge by contacting the Fund at the address or telephone number provided on
page 2 of the Prospectus.
<PAGE> 2
National Municipal Bond Portfolio
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
December 1, 1996
to November 18, 1996
March 31,1997 to
(Unaudited) November 30, 1996(a)
----------- --------------------
Trust Shares Trust Shares
------------ ------------
<S> <C> <C>
Net Asset Value,
Beginning of Period ............. $10.05 $10.00
----------- -----------
Investment Activities
Net Investment income (loss) .... 0.19 0.02
Net realized and unrealized gains
(losses) from investments ..... (0.25) 0.05
----------- -----------
Total from Investment Activities .. (0.06) 0.07
----------- -----------
Distributions
Net investment income ........... (0.19) (0.02)
----------- -----------
Total Distributions ............. (0.19) (0.02)
----------- -----------
Net Asset Value, End of Period .... $9.80 $10.05
=========== ===========
Total Return ...................... (0.64)%(b) 0.74%(b)
Ratios/Supplemental Data:
Net Assets at end of period (000) $313,793 $310,413
Ratio of expenses to average net
assets (including waivers) .... 0.13%(c) 0.12%(c)
Ratio of net investment income to
average net assets (including
waivers) ...................... 5.65%(c) 5.77%(c)
Ratio of expenses to average net
assets (before waivers)* ...... 0.73%(c) 0.82%(c)
Ratio of net investment income to
average net assets (before
waivers)* ..................... 5.06%(c) 5.07%(c)
Portfolio turnover .............. 34.96% 0.0%
<FN>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
-2-
<PAGE> 3
THE ARCH FUND(R), INC.
(THE "FUND")
INVESTOR A SHARES AND INVESTOR B SHARES OF THE
ARCH MONEY MARKET, TREASURY MONEY MARKET,
TAX-EXEMPT MONEY MARKET, U.S. GOVERNMENT SECURITIES,
INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE
MUNICIPAL, MISSOURI TAX-EXEMPT BOND,
NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY,
SMALL CAP EQUITY, INTERNATIONAL EQUITY AND
BALANCED PORTFOLIOS
SUPPLEMENT DATED MAY 28, 1997
TO PROSPECTUS DATED MARCH 31, 1997
FINANCIAL HIGHLIGHTS - NATIONAL MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------
The "Financial Highlights" in the following tables (which
replace the tables on page 20 of the Prospectus) supplements the financial
statements for the Fund's National Municipal Bond Portfolio (the "Portfolio")
which (i) with respect to the period November 18, 1996 through November 30,
1996, appear in the Fund's Annual Report to Shareholders dated November 30, 1996
and are incorporated by reference into the Statement of Additional Information,
and (ii) with respect to the period December 1, 1996 through March 31, 1997, are
included in the Statement of Additional Information. The data for the period
November 18, 1996 through November 30, 1996 has been audited by KPMG Peat
Marwick LLP, independent accountants, whose unqualified report on the financial
statements containing such information is also incorporated into the Statement
of Additional Information. The data for the period December 1, 1996 through
March 31, 1997 is unaudited. Further information about the performance of the
Portfolio is contained in the Fund's Annual Report to Shareholders. Both the
Annual Report and the Statement of Additional Information may be obtained free
of charge by contacting the Fund at the address or telephone number provided on
page 2 of the Prospectus.
<PAGE> 4
NATIONAL MUNICIPAL BOND PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Dec. 1, 1996 Dec. 1, 1996
through Nov. 18, 1996 through Nov. 18, 1996
Mar. 31, 1997 through Mar. 31, 1997 through
(Unaudited) Nov. 30, 1996(a) (Unaudited) Nov. 30, 1996(a)
------------- ---------------- ------------- ----------------
Investor A Investor A Investor B Investor B
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 10.05 $ 10.00 $ 10.05 $ 10.00
---------- --------- --------- ---------
Investment Activities
Net Investment income .................. 0.18 0.02 0.16 0.02
Net realized and unrealized gains
(losses) from investments ............ (0.25) 0.05 (0.25) 0.05
---------- --------- --------- ---------
Total from Investment Activities ..... (0.07) 0.07 (0.09) 0.07
---------- --------- --------- ---------
Distributions
Net investment income .................. (0.18) (0.02) (0.16) (0.02)
---------- --------- --------- ---------
Total Distributions .................. (0.18) (0.02) (0.16) (0.02)
---------- --------- --------- ---------
Net Asset Value, End of Period ........... $ 9.80 $ 10.05 $ 9.80 $ 10.05
========== ========= ========= =========
Total Return (excludes sales charge) ..... (0.72)%(b) 0.73%(b) (0.95)%(b) 0.70%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 499 $ 1 $ 1 $ 1
Ratio of expenses to average net assets
(including waivers) .................. 0.33%(c) 0.37%(c) 1.09%(c) 1.10%(c)
Ratio of net investment income
to average net assets (including
waivers) ............................. 5.37%(c) 9.08%(c) 4.71%(c) 8.35%(c)
Ratio of expenses to average net asssets
(before waivers) ..................... 1.02%(c) 1.07%(c) 1.09%(c) 1.80%(c)
Ratio of net investment income
to average net assets (before
waivers) ............................. 4.68%(c) 8.38%(c) 4.71%(c) 7.65%(c)
Portfolio turnover ..................... 34.96% 0.00% 34.96% 0.00%
<FN>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
</TABLE>
-2-
<PAGE> 5
APPLICABLE SALES CHARGE - INVESTOR A SHARES
- -------------------------------------------
The tables on page 55 of the Prospectus under the heading
"Applicable Sales Charge - Investor A Shares of the Equity and Bond Portfolios"
are amended and restated as follows:
The ARCH Intermediate Corporate Bond, Government &
Corporate Bond, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios
--------------------------------------------
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE OFFERING
AMOUNT OF TRANSACTION PER SHARE PER SHARE PRICE
- --------------------- --------- --------- -----
<S> <C> <C> <C>
Less than $50,000............................................. 4.50% 4.71% 4.00%
$50,000 but less than $100,000................................ 3.50 3.63 3.00
$100,000 but less than $250,000............................... 2.50 2.56 2.00
$250,000 but less than $500,000............................... 1.50 1.52 1.00
$500,000 but less than $1,000,000............................. 1.00 1.01 0.50
$1,000,000 and over........................................... .50 .50 .40
</TABLE>
The ARCH U.S. Government Securities, Bond Index,
Short-Intermediate Municipal and Equity Index Portfolios
--------------------------------------------------------
<TABLE>
<CAPTION>
AS A % AS A % DEALERS'
OF OF REALLOWANCE
OFFERING NET ASSET AS A % OF
PRICE VALUE OFFERING
AMOUNT OF 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 .85
$1,000,000 and over........................................... .50 .50 .40
</TABLE>
-3-
<PAGE> 6
CROSS REFERENCE SHEET
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
<TABLE>
<CAPTION>
Heading in Statement of
Form N-1A Part B Item Additional Information
- --------------------- -----------------------
<S> <C> <C>
10. Cover Page............................................................... Cover Page
11. Table of Contents........................................................ Table of Contents
12. General Information and History.......................................... The Fund
13. Investment Objective and Policies........................................ Investment
Objectives and Policies
14. Management of the Fund................................................... Management of the Fund
15. Control Persons and Principal............................................ Miscellaneous
Holders of Securities
16. Investment Advisory and Other............................................ Management of the Fund;
Services Independent Auditors;
Counsel
17. Brokerage Allocation and Other........................................... Investment Objectives
Practices and Policies
18. Capital Stock and Other.................................................. Description of Shares
Securities
19. Purchase, Redemption and Pricing......................................... Net Asset Value;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status............................................................... Additional Information
Concerning Taxes
21. Underwriters............................................................. Management of the Fund
22. Calculation of Performance Data.......................................... Additional Yield and
Total Return
Information; Net Asset
Value
23. Financial Statements..................................................... Financial Statements
</TABLE>
<PAGE> 7
THE ARCH FUND(R), INC.
THE ARCH TREASURY MONEY MARKET PORTFOLIO
THE ARCH MONEY MARKET PORTFOLIO
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO
THE ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
THE ARCH EQUITY INCOME PORTFOLIO
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO
THE ARCH SMALL CAP EQUITY PORTFOLIO
THE ARCH INTERNATIONAL EQUITY PORTFOLIO
THE ARCH BALANCED PORTFOLIO
Statement of Additional Information
Part B
March 31, 1997
(as revised May 28, 1997)
<PAGE> 8
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
March 31, 1997
(as revised May 28, 1997)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . 1
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Additional Purchase and Redemption Information . . . . . . . . . . . . . . . 41
Additional Yield and Total Return Information . . . . . . . . . . . . . . . . 44
Description of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . . 61
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . FS-1
</TABLE>
This Statement of Additional Information, which provides supplemental
information applicable to the above-listed Portfolios of The ARCH Fund, Inc.
(the "Portfolios"), is not a prospectus. It should be read only in conjunction
with the Portfolios' Prospectuses dated March 31, 1997 (as revised May 28,
1997 with respect to the Prospectuses for Trust Shares and Investor A and
Investor B shares of the Portfolios) and is incorporated by reference in
its entirety into the Prospectuses. No investment in shares of any Portfolio
should be made without reading the applicable Prospectus. A copy of the
applicable Prospectus may be obtained by writing the Fund at P.O. Box 78069,
St. Louis Missouri 63178 or by calling 1-800-452-ARCH(2724). Capitalized terms
used but not defined herein have the same meanings as in each Prospectus.
-i-
<PAGE> 9
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end investment
company currently offering fifty-four classes of shares in sixteen investment
portfolios.
The Fund was organized on September 9, 1982 as a Maryland
corporation. The ARCH Tax-Exempt Money Market Portfolio (the "Predecessor
Tax-Exempt Money Market Portfolio") and the ARCH Missouri Tax Exempt Bond
Portfolio (the "Predecessor Missouri Tax-Exempt Bond Portfolio") commenced
operations on July 10, 1986 and July 15, 1988, respectively, as separate
investment portfolios of The ARCH Tax-Exempt Trust, which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest
that were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the description of the
investment objectives and policies of the Treasury Money Market, Money Market
and Tax-Exempt Money Market Portfolios (the "Money Market Portfolios") and the
U.S. Government Securities, Intermediate Corporate Bond, Bond Index, Government
& Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond, Equity Income, Equity Index, Growth & Income Equity,
Small Cap Equity (formerly Emerging Growth), International Equity and Balanced
Portfolios (the "Bond and Equity Portfolios") described in the Prospectuses.
TREASURY MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Treasury Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
STATE EXEMPTIONS AND U.S. GOVERNMENT OBLIGATIONS. As stated
in the Prospectuses, the Treasury Money Market Portfolio invests primarily in
selected U.S. Government (and certain agency and instrumentality) obligations,
the income from which is generally exempt from state income tax. In addition,
investments in certain of these obligations are, or may be, exempt from your
state's income tax. For a current list of the types of investments that are
and are not exempt from your state's income tax, please consult your tax
adviser or write to your state's Department of Revenue.
<PAGE> 10
MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Money Market Portfolio in accordance with the SEC's rules and regulations for
money market funds.
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF
DEPOSIT AND TIME DEPOSITS. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor but may be subject to
early withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
As stated in the Prospectuses, the Money Market Portfolio may
invest a portion of its assets in the obligations of foreign banks and foreign
branches of domestic banks. Such obligations may include Eurodollar
Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule
Bs, which are obligations issued by Canadian branches of foreign or domestic
banks; Yankee Certificates of Deposit ("Yankee CDs") which are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the United States; and Yankee Bankers' Acceptances ("Yankee
BAs") which are U.S. dollar-denominated bankers' acceptances issued by a U.S.
branch of a foreign bank and held in the United States.
TAX-EXEMPT MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Tax-Exempt Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
-2-
<PAGE> 11
U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio may invest in
certificates issued by government-backed trusts. Such certificates represent
an undivided fractional interest in the respective government-backed trust's
assets. The assets of each government-backed trust consist of (i) a promissory
note issued by a foreign government (the "Note"), (ii) a guaranty by the U.S.
Government, acting through the Defense Security Assistance Agency of the
Department of Defense, of the due and punctual payment of 90% of all principal
and interest due on such Note, and (iii) a beneficial interest in a government
securities trust holding U.S. Treasury bills, notes and other direct
obligations of the U.S. Treasury sufficient to provide the Portfolio with funds
in an amount equal to at least 10% of all principal and interest payments due
on the Note.
INTERMEDIATE CORPORATE BOND PORTFOLIO
An increase in interest rates will generally reduce the value
of the investments in the Intermediate Corporate Bond Portfolio, and a decline
in interest rates will generally increase the value of those investments.
Depending upon the prevailing market conditions, the Adviser may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at a premium
over face value, the yield will be lower than the coupon rate. In response to
changing conditions in fixed-income markets, the Portfolio may make modest
shifts in terms of anticipated interest rate and sector spread changes.
BOND INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the
Bond Index Portfolio is to seek 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 securities, as
represented by the Lehman Brothers Aggregate Bond Index.
THE INDEXING APPROACH. In using sophisticated computer models
to select securities, each of the Bond Index and Equity Index Portfolios will
only purchase a security that is included in its respective index at the time
of such purchase. Each 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.
The value of the fixed income investments of the Bond Index
Portfolio is generally sensitive to changes in interest rates. (See
"Investment Objectives and Policies -- Intermediate
-3-
<PAGE> 12
Corporate Bond Portfolio" above for a discussion of the effects of interest
rate changes).
GOVERNMENT & CORPORATE BOND PORTFOLIO
The value of the fixed income investments of the Government
and Corporate Bond Portfolio is generally sensitive to changes in interest
rates. (See "Investment Objectives and Policies -- Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes).
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Municipal Obligations in which the Short-Intermediate
Municipal Portfolio may invest are rated "investment grade" (e.g., fixed income
securities rated at the time of purchase in the four highest categories by
Rating Agencies or deemed comparable). The value of the Municipal Obligations
held by the Portfolio is generally sensitive to changes in interest rates.
(See "Investment Objectives and Policies -- Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes.)
MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Municipal Obligations in which the Missouri Tax-Exempt
Bond Portfolio may invest are rated "investment grade." (See "Investment
Objectives and Policies -- Short-Intermediate Municipal Portfolio" above for a
description of investment grade securities.) The value of the Municipal
Obligations held by the Portfolio is generally sensitive to changes in interest
rates. (See "Investment Objectives and Policies -- Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes.)
NATIONAL MUNICIPAL BOND PORTFOLIO
The Municipal Obligations in which the National Municipal Bond
Portfolio may invest are rated "investment grade." (See "Investment Objectives
and Policies - Short-Intermediate Municipal Portfolio" above for a description
of investment grade securities.) The value of the Portfolio's securities is
generally sensitive to changes in interest rates. (See "Investment Objectives
and Policies - Intermediate Corporate Bond Portfolio" above for a discussion of
the effects of interest rate changes.)
-4-
<PAGE> 13
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of
less than three years of continuous operations.
EQUITY INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the
Equity Index Portfolio is to seek 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"). (See "Investment Objectives and Policies - Bond Index Portfolio" above
for a description of index investing.)
GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio will not normally invest
in securities of issuers having a record, together with their predecessors, of
less than three years of continuous operations.
As stated in the Prospectuses, the Portfolio may participate
in rights offerings and purchase warrants. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants.
SMALL CAP EQUITY PORTFOLIO
As stated in the Prospectuses, the Small Cap Equity Portfolio
may participate in rights offerings and purchase warrants. The Portfolio will
not invest more than 5% of its net assets, taken at market value, in warrants.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of
less than three years of continuous operations.
As stated in the Prospectuses, the Portfolio may participate
in rights offerings and purchase warrants. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants. Warrants
acquired by the Portfolio in units or attached to other securities are not
subject to this restriction.
-5-
<PAGE> 14
BALANCED PORTFOLIO
The fixed-income securities in which the Balanced Portfolio
may invest are rated "investment grade" (see "Investment Objectives and
Policies - Short-Intermediate Municipal Portfolio above for a description of
investment grade securities). The Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of
less than three years of continuous operations.
The value of the fixed income investments of the Balanced
Portfolio is generally sensitive to changes in interest rates. (See
"Investment Objectives and Policies -- Intermediate Corporate Bond Portfolio"
above for a discussion of the effects of interest rate changes). The Portfolio
may also participate in rights offerings and purchase warrants.
* * *
The following policies supplement the description of the
Portfolios' investment objectives and policies in the Prospectuses.
OTHER APPLICABLE INVESTMENT POLICIES
MUNICIPAL OBLIGATIONS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Money
Market, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios (the "Tax-Exempt Portfolios") may invest in Municipal
Obligations. Municipal Obligations include debt obligations issued by
governmental entities which obtain funds for various public purposes, including
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses and the
extension of loans to public institutions and facilities.
As described in the Prospectuses, the two principal
classifications of Municipal Obligations consist of "general obligation" and
"revenue" issues. In addition, the Tax-Exempt Portfolios may purchase "moral
obligation" issues, which are normally issued by special purpose authorities.
There are, of course, variations in the quality of Municipal Obligations both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend upon a variety of factors, including general
conditions of the money market and/or the municipal bond market, the financial
condition of the issuer, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Rating Agencies, such
as Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings
Group ("S&P"), represent their opinions as to
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the quality of Municipal Obligations. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and Municipal
Obligations with the same maturity, interest rate and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield.
The Tax-Exempt Portfolios may also purchase Municipal
Obligations in the form of certificates of participation which represent
undivided interests in lease payments by a governmental or nonprofit entity.
A lease may provide that the certificate trustee cannot accelerate lease
obligations upon default. The trustee would only be able to enforce lease
payments as they become due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment. In addition, certificates of
participation are less liquid than other bonds because there is a limited
secondary trading market for such obligations. To alleviate potential
liquidity problems with respect to these investments, a Portfolio may enter
into remarketing agreements which may provide that the seller or a third party
will repurchase the obligation within seven days after demand by the Portfolio
and upon certain conditions such as the Portfolio's payment of a fee.
The payment of principal and interest on most securities
purchased by a Tax-Exempt Portfolio will depend upon the ability of the issuers
to meet their obligations. An issuer's obligations under its Municipal
Obligations are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
bankruptcy code, and laws, if any, which may be enacted by federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest on and principal of its
Municipal Obligations may be materially adversely affected by litigation or
other conditions. The District of Columbia, each state, each of their
political subdivisions, agencies, instrumentalities and authorities and each
multi-state agency of which a state is a member is a separate "issuer" as that
term is used in this Statement of Additional Information and the Prospectuses.
The non-governmental user of facilities financed by private activity bonds is
also considered to be an "issuer."
Each Tax-Exempt Portfolio may also purchase general obligation
notes, tax anticipation notes, bond anticipation notes, revenue anticipation
notes, tax-exempt commercial paper, construction loan notes and other
tax-exempt loans. Such
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<PAGE> 16
instruments are issued in anticipation of the receipt of tax funds, the
proceeds of bond placements, or other revenues.
Certain types of Municipal Obligations (private activity
bonds) have been or are issued to obtain funds to provide, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Private activity bonds are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. The principal and interest on these
obligations may be payable from the general revenues of the users of such
facilities. Furthermore, payment of principal and interest on Municipal
Obligations of certain projects may be secured by mortgages or deeds of trust.
In the event of a default, enforcement of the mortgages or deeds of trust will
be subject to statutory enforcement procedures and limitations, including
rights of redemption and limitations on obtaining deficiency judgments. In the
event of a foreclosure, collection of the proceeds of the foreclosure may be
delayed, and the amount of proceeds from the foreclosure may not be sufficient
to pay the principal of and accrued interest on the defaulted Municipal
Obligations.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. For example, the Tax Reform
Act of 1986 (the "Act"), adopted in October 1986, substantially revised
provisions of prior law affecting the issuance and use of proceeds of certain
tax-exempt obligations. The Act made a new definition of private activity
bonds applicable to many types of bonds, including those which were industrial
development bonds under prior law. Interest on private activity bonds is
exempt from regular federal income tax only if the bonds fall within and meet
the requirements of certain defined categories of qualified private activity
bonds. The Act also extended to all Municipal Obligations issued after August
16, 1986 (August 31, 1986 in the case of certain bonds) certain rules formerly
applicable only to industrial development bonds. If the issuer fails to
observe such rules, the interest on the Municipal Obligations may become
taxable retroactive to the date of issue. In addition, interest on certain
private activity bonds must be included in an investor's federal alternative
minimum taxable income, and corporate investors must include all tax-exempt
interest in their federal alternative minimum taxable income. (See the
applicable Prospectus under "Taxes - Federal Taxes.") Moreover, with
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respect to Missouri Obligations, the Fund cannot predict what legislation, if
any, may be proposed in the Missouri Legislature relating to the status of the
Missouri income tax on interest on such obligations, or which proposals, if
any, might be enacted. Such proposals, while pending or if enacted, might
adversely affect the availability of Municipal Obligations generally, or
Missouri Obligations specifically, for investment by a Portfolio and the
liquidity and value of a Portfolio's assets. In such an event, each Portfolio
would reevaluate its investment objective and policies and consider possible
changes in its structure or possible dissolution.
As stated in the Prospectuses and subject to its investment
policies, the Money Market Portfolio may also invest in Municipal Obligations.
Dividends paid by the Money Market Portfolio that are derived from interest on
Municipal Obligations would be taxable to its shareholders for federal income
tax purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their
respective investment limitations, each Portfolio may purchase variable and
floating rate obligations as described in the Prospectuses. The Adviser will
consider the earning power, cash flows and other liquidity ratios of the
issuers and guarantors of such obligations and, for obligations subject to a
demand feature, will monitor their financial status to meet payment on demand.
The Money Market Portfolios and the International Equity Portfolio will invest
in such instruments only when the Adviser believes that any risk of loss due to
issuer default is minimal. In determining average weighted portfolio maturity,
a variable or floating rate instrument issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, or a variable or floating rate
instrument scheduled on its face to be paid in 397 days or less, will be deemed
to have a maturity equal to the period remaining until the obligation's next
interest rate adjustment. Other variable or floating rate notes will be deemed
to have a maturity equal to the longer of the period remaining to the next
interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
Variable or floating rate obligations held by the Money Market
Portfolios may have maturities of more than 397 days provided that: (i) the
Portfolio is entitled to payment of principal at any time upon not more than 30
days' notice or at specified intervals not exceeding 397 days (upon not more
than 30 days' notice); (ii) the rate of interest on a variable rate instrument
is adjusted automatically on set dates not exceeding 397 days, and the
instrument, upon adjustment, can reasonably be expected to have a market value
that approximates its par value; and (iii) the rate of interest on a floating
rate instrument is
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adjusted automatically whenever a specified interest rate changes and the
instrument, at any time, can reasonably be expected to have a market value that
approximates its par value.
The variable and floating rate demand instruments that the
Tax-Exempt Portfolios may purchase include participations in Municipal
Obligations purchased from and owned by financial institutions, primarily
banks. Participation interests provide a Portfolio with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice, not to exceed thirty days. Each participation interest is backed by an
irrevocable letter of credit or guarantee of a bank that the Adviser has
determined meets the prescribed quality standards for the Portfolio. The bank
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
RESTRICTED SECURITIES. The SEC has adopted Rule 144A which
allows for a broader institutional trading market for securities otherwise
subject to restrictions on resale to the general public. The International
Equity Portfolio will not invest more than 10% of its total assets in the
securities of issuers which are restricted as to disposition, other than
restricted securities eligible for resale pursuant to Rule 144A.
The Adviser or Sub-Adviser monitors the liquidity of
restricted securities in the Fund's Portfolios under the supervision of the
Board of Directors. In reaching liquidity decisions, the Adviser and
Sub-Adviser may consider the following factors, although such factors may not
necessarily be determinative: (1) the unregistered nature of a security; (2)
the frequency of trades and quotes for the security; (3) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers; (4) the trading markets for the security; (5) dealer undertakings
to make a market in the security; and (6) the nature of the security and the
nature of the marketplace trades (including the time needed to dispose of the
security, methods of soliciting offers, and mechanics of transfer).
CONVERTIBLE SECURITIES. As stated in their Prospectuses and
subject to their respective investment limitations, the Equity and Bond
Portfolios (other than the Short-Intermediate Municipal, Missouri Tax-Exempt
Bond and National Municipal Bond Portfolios) may purchase convertible
securities. Convertible securities entitle the holder to receive interest paid
or accrued on debt until the convertible securities
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<PAGE> 19
mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities for a Portfolio, the
Adviser (or Sub-Adviser) will consider, among other factors, its evaluation of
the creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the benefits of sinking funds or other
protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Ratings Agencies and, if so, the ratings
assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion
value of convertible securities is determined by the market price of the
underlying stock. If the conversion value is low relative to the investment
value, the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying stock while holding fixed income securities.
RIGHTS AND WARRANTS. As stated in the Prospectuses, the
Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios (the "Equity Portfolios") may
participate in rights offerings and purchase warrants, which are privileges
issued by corporations
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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 Portfolios 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 Portfolios will not invest more than 5% of their respective net
assets, taken at market value, in warrants, or more than 2% of their respective
net assets, taken at market value, in warrants not listed on the New York,
American or Canadian Stock Exchanges. Warrants acquired by the Portfolios in
units or attached to other securities are not subject to this restriction.
STAND-BY COMMITMENTS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may acquire "stand-by commitments" with respect to Municipal Obligations held
by a Portfolio. Under a stand-by commitment, a dealer or bank agrees to
purchase from a Portfolio, at the Portfolio's option, specified Municipal
Obligations at their amortized cost value to the Portfolio plus accrued
interest, if any. Standby commitments acquired by a Portfolio must meet the
quality standards described in the Prospectuses (be rated in the two highest
categories as determined by a Rating Agency, or, if not rated, must be of
comparable quality as determined by the Adviser pursuant to guidelines approved
by the Fund's Board of Directors). Stand-by commitments are exercisable by a
Portfolio at any time before the maturity of the underlying Municipal
Obligations and may be sold, transferred or assigned by the Portfolio only with
the underlying instruments. The Missouri Tax-Exempt Bond Portfolio expects
that its investments in stand-by commitments will not exceed 5% of the value of
its total assets under normal market conditions.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Tax-Exempt Portfolio may pay for a
stand-by commitment either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus
reducing the yield to maturity otherwise available for the same securities).
The Tax-Exempt Portfolios intend to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in
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the Adviser's opinion, present minimal credit risks. A Portfolio's reliance
upon the credit of these dealers, banks and broker-dealers will be secured by
the value of the underlying Municipal Obligations that are subject to the
commitment. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. Stand-by commitments acquired by a
Portfolio would be valued at zero in determining net asset value. The
acquisition of a "stand-by commitment" by the Tax-Exempt Money Market Portfolio
would thus not affect the valuation or assumed maturity of the underlying
Municipal Obligations, which would continue to be valued in accordance with the
amortized cost method. Where a Portfolio paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. If a stand-by commitment is exercised, its cost will reduce the
amount realized on the sale of the Municipal Obligations for purposes of
determining the amount of gain or loss. If a stand-by commitment expires
unexercised, its cost is added to the basis of the security to which it relates
in those instances where the stand-by commitment was acquired on the same day
as the bond, and in other cases will be treated as a capital loss at the time
of expiration. Stand-by commitments would not affect the average weighted
maturity of a Portfolio.
TAX-EXEMPT DERIVATIVES. As described in their Prospectuses
and subject to their respective investment limitations, the Tax-Exempt
Portfolios may hold tax-exempt derivatives which may be in the form of tender
option bonds, participations, beneficial interests in a trust, partnership
interests or other forms. A number of different structures have been used.
For example, interests in long-term fixed-rate Municipal Obligations, held by a
bank as trustee or custodian, are coupled with tender option, demand and other
features when the tax-exempt derivatives are created. Together, these features
entitle the holder of the interest to tender (or put), the underlying Municipal
Obligation to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, Municipal Obligations are represented by
custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying Municipal Obligation at its
face value to the sponsor (usually a bank or broker dealer or other
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<PAGE> 22
financial institution), which is paid periodic fees equal to the difference
between the bond's fixed coupon rate and the rate that would cause the bond,
coupled with the tender option, to trade at par on the date of a rate
adjustment. The Portfolios may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for Municipal Obligations which
give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor the
Adviser will review the proceedings related to the creation of any tax-exempt
derivatives or the basis for such opinions.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be held by the Portfolios, subject to their
respective investment policies, include, in addition to U.S. Treasury bills,
the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal
Land Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust
Corporation, and International Bank for Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the
U.S. Government, such as the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the
Prospectuses and subject to their respective investment policies, each
Portfolio, except the Tax-Exempt Money Market, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and Equity Index Portfolios, may hold stripped U.S.
Treasury securities, including (1) coupons that have been stripped from U.S.
Treasury bonds, which are held through the Federal Reserve Bank's book-
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entry system called "Separate Trading of Registered Interest and Principal of
Securities" ("STRIPS") or (2) through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"). Each Portfolio (except the Treasury Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Equity Income,
Equity Index and International Equity Portfolios) may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying
principal, which is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive
any rights to periodic interest (cash) payments. Purchasers of stripped
principal-only securities acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury
Department sells itself. In the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder), the underlying
U.S. Treasury bonds and notes themselves are held in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences
of ownership of the U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. Government
obligations for federal tax and security purposes.
The U.S. Government does not issue stripped Treasury securities
directly. The STRIPS program, which is ongoing, is designed to facilitate the
secondary market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
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<PAGE> 24
For custodial receipts, the underlying debt obligations are
held separate from the general assets of the custodian and nominal holder of
such securities, and are not subject to any right, charge, security interest,
lien or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for applying
all payments received on those underlying debt obligations to the related
receipts or certificates without making any deductions other than applicable
tax withholding. The custodian is required to maintain insurance for the
protection of holders of receipts or certificates in customary amounts against
losses resulting from the custody arrangement due to dishonest or fraudulent
action by the custodian's employees. The holders of receipts or certificates,
as the real parties in interest, are entitled to the rights and privileges of
the underlying debt obligations, including the right, in the event of default
in payment of principal or interest, to proceed individually against the issuer
without acting in concert with other holders of those receipts or certificates
or the custodian.
SECURITIES LENDING. As described in the Prospectuses, each
Portfolio (except the Treasury Money Market, Money Market, Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) may lend its portfolio
securities to broker-dealers, banks or institutional borrowers. While these
Portfolios would not have the right to vote securities on loan, each Portfolio
intends to terminate the loan and regain the right to vote should this be
considered important with respect to the investment. When the Portfolios lend
their securities, they continue to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral which will be invested in readily marketable, high quality,
short-term obligations. Although voting rights, or rights to consent,
attendant to securities on loan pass to the borrower, such loans may be called
at any time and will be called so that the securities may be voted by a
Portfolio if a material event affecting the investment is to occur.
Securities lending arrangements with broker/dealers require
that the loans be secured by the collateral equal in value to at least the
market value of the securities loaned. During the term of such arrangements,
the Portfolios will maintain such value by the daily marking-to-market of the
collateral.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the
applicable Prospectuses, the Portfolios intend to limit investments in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Portfolio currently intends to limit its investments so
that, as determined immediately after a securities purchase is made: (a) not
more
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<PAGE> 25
than 5% of the value of its total assets will be invested in the securities of
any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio; and (d) not more than 10% of
the outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
ASSET-BACKED SECURITIES. Subject to their respective
investment policies, the U.S. Government Securities, Intermediate Corporate
Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios may
purchase asset-backed securities, as described in the Prospectuses.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly,
thus in effect "passing through" monthly payments made by the individual
borrowers on the assets that underlie the securities, net of any fees paid to
the issuer or guarantor of the securities. The average life of asset-backed
securities varies with the maturities of the underlying instruments, and for
this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-backed
securities and among the securities that they issue. Mortgage-backed
securities guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates
(also known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation with the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by the FNMA include FNMA Guaranteed Mortgage Pass-through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by
private stockholders. Fannie Maes are guaranteed as to timely payment of the
principal and interest by FNMA. Mortgage-backed securities issued by the FHLMC
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "PCs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States
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<PAGE> 26
or by any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
underlying collateral. Credit card receivables are generally unsecured, and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which have given debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
Most issuers of automobile receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. When a Portfolio agrees
to purchase securities on a when-issued or forward commitment basis, the
Custodian (or sub-custodian) will maintain in a segregated account cash, U.S.
Government securities, liquid portfolio securities or other high-grade debt
obligations having a value (determined daily) at least equal to the amount of
the Portfolio's commitments. In the case of a forward commitment to sell
portfolio securities, the Custodian (or sub-custodian) will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that a Portfolio will
maintain sufficient assets at all times to cover is obligations under
when-issued purchases and forward commitments.
A Portfolio will make commitments to purchase securities on a
when-issued basis or to purchase or sell securities on a forward commitment
basis only with the intention of completing the transaction and actually
purchasing or selling the securities. If deemed advisable as a matter of
investment
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<PAGE> 27
strategy, however, a Portfolio may dispose of or renegotiate a commitment after
it is entered into and may sell securities it has committed to purchase before
those securities are delivered to the Portfolio on the settlement date. In
these cases, the Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their value, is taken into account when determining a Portfolio's net asset
value starting on the day the Portfolio agrees to purchase the securities. The
Portfolio does not earn interest on the securities it has committed to purchase
until they are paid for and delivered on the settlement date. When a Portfolio
makes a forward commitment to sell securities it owns, the proceeds to be
received upon settlement are included in the Portfolio's assets, and
fluctuations in the value of the underlying securities are not reflected in the
Portfolio's net asset value as long as the commitment remains in effect.
Because the Portfolios will each set aside cash or liquid
assets to satisfy its purchase commitments in the manner described, a
Portfolio's liquidity and ability to manage its portfolio might be affected in
the event its commitments to purchase securities on a when-issued or forward
commitment basis ever exceeded 25% of the value of its total assets. The
National Municipal Bond Portfolio expects that commitments to purchase
when-issued securities will not exceed 5% of its total assets under normal
market conditions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The International
Equity Portfolio is authorized to enter into forward foreign currency exchange
contracts. These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather allow the Portfolio to establish a rate of
exchange for a future point in time. The Portfolio may enter into forward
foreign currency exchange contracts when deemed advisable by their investment
adviser under two circumstances.
When entering into a contract for the purchase or sale of a
security, the International Equity Portfolio may enter into a forward foreign
currency exchange contract for the amount of
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the purchase or sale price to protect against variations in the value of the
foreign currency relative to the U.S. dollar or other foreign currency between
the date the security is purchased or sold and the date on which payment is
made or received.
When the Sub-Adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the International Equity Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of
foreign currency approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. The Portfolio does not intend
to enter into forward contracts under this second circumstance on a regular or
continuing basis. The Portfolio will not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign currency
in excess of the value of its portfolio securities or other assets denominated
in that currency. While forward contracts may offer protection from losses
resulting from declines in the value of a particular foreign currency, they
also limit potential gains which might result from increases in the value of
such currency. Furthermore, forward foreign currency exchange contracts do not
eliminate fluctuations in the underlying prices of securities. In addition,
the Portfolio will incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
The Fund's Custodian will place in a separate account of the
International Equity Portfolio cash or liquid securities in an amount equal to
the value of the Portfolio's assets that could be required to consummate
forward contracts entered into under the second circumstance, as set forth
above. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional cash or
securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Portfolio.
At the maturity of a forward contract, the International
Equity Portfolio may either sell the portfolio security and make delivery of
the foreign currency, or it may retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating it to purchase,
on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of the
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contract. Accordingly, it may be necessary for the International Equity
Portfolio to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Portfolio is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Portfolio is obligated
to deliver.
If the International Equity Portfolio retains the portfolio
security and engages in an offsetting transaction, it will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Portfolio engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline between the date the Fund enters into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, it will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. For a discussion of the Federal tax treatment of forward
contracts, see "Additional Information Concerning Taxes -- Taxation of Certain
Financial Instruments."
OPTIONS TRADING. As described in the Prospectuses, each of
the Equity and Bond Portfolios (except the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios) may purchase
put and call options listed on a national securities exchange and issued by the
Options Clearing Corporation in an amount not exceeding 10% of that Portfolio's
net assets. The International Equity Portfolio will not invest more than 5% of
its total assets in initial margin deposits and premiums (including without
limitation, puts, calls, straddles and spreads) and any combination thereof.
Options trading is a specialized activity which entails greater than ordinary
investment risks. Regardless of how much the market price of the underlying
security or index increases or decreases, the option buyer's risk is limited to
the amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying securities. A listed call
option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation,
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the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A listed put option gives the purchaser the right
to sell to a clearing corporation the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on a stock or bond index provides the holder
with the right to make or receive a cash settlement upon the exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price
of the option expressed in dollars, times a specified multiple.
A Portfolio's obligation to sell a security subject to a
covered call option written by it may be terminated prior to the expiration
date of the option by the Portfolio's executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, would not be
able to sell the underlying security until the option expires or the underlying
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline in the underlying
security during such period. A Portfolio will write an option on a particular
security only if the Adviser or Sub-Adviser believes that a liquid secondary
market will exist on an exchange for options of the same series which will
permit the Portfolio to make a closing purchase transaction in order to close
out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred
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credit. The amount of the deferred credit is subsequently marked-to-market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. Any gain on a covered call
option may be offset by a decline in the market price of the underlying
security during the option period. If a covered call option is exercised, the
Portfolio may deliver the underlying security held by it or purchase the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the
Portfolio will realize a gain or loss. Premiums from expired options written
by a Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in 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-
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conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The International Equity
Portfolio may purchase foreign currency put options on U.S. exchanges or U.S.
over-the-counter markets. (See "Other Applicable Investment Policies -- Options
Trading" above for a discussion of options trading). A put option gives the
Portfolio, upon payment of a premium, the right to sell a currency at the
exercise price until the expiration of the option and serves to insure against
adverse currency price movements in the underlying portfolio assets denominated
in that currency. Exchange listed options markets in the United States include
seven major currencies, and trading may be thin and illiquid. The seven major
currencies are Australian dollars, British pounds, Canadian dollars, German
marks, French francs, Japanese yen and Swiss francs.
FUTURES CONTRACTS. As discussed in the Prospectuses, the Equity
Portfolios and the U.S. Government Securities, Intermediate Corporate Bond, Bond
Index and Government & Corporate Bond Portfolios may invest in futures contracts
(and with respect to the International Equity Portfolio -- interest rate,
foreign currency and other types of financial futures contracts) and options
thereon (stock or bond index futures contracts or interest rate futures or
options) to hedge or manage risks associated with a Portfolio's securities
investments.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited
in a segregated account with the Fund's Custodian and/or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged. Positions in futures contracts may be closed out
only on an exchange which provides a secondary market for such futures.
However, there can be no assurance that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close a futures position. In the event of adverse price movements,
a Portfolio would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Portfolio had
insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when it would be disadvantageous to do so. In
addition, a Portfolio might be required to make delivery of the instruments
underlying futures contracts that it holds. The inability to close options and
futures positions also could have an adverse impact on a Portfolio's ability to
hedge effectively.
Successful use of futures by a Portfolio is also subject to
the Adviser's or Sub-Adviser's ability to predict
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movements correctly in the direction of the market. There is an imperfect
correlation between movements in the price of futures and movements in the
price of the securities which are the subject of the hedge. In addition, the
price of futures may not correlate perfectly with movement in the cash market
due to certain market distortions. Due to the possibility of price distortion
in the futures market and because of the imperfect correlation between the
movements in the cash market and movements in the price of futures, a correct
forecast of general market trends or interest rate movements by the Adviser or
Sub-Adviser may still not result in a successful hedging transaction over a
short time frame.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required,
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a futures contract may result in
immediate and substantial loss (or gain) to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions by a Portfolio involves
the risk of loss by the Portfolio of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond the limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.
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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.
ADRS AND EDRS. The Intermediate Corporate Bond, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios may invest their assets in
securities such as ADRs and EDRs, which are receipts issued by a U.S. bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs and EDRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR and EDR prices are denominated in
U.S. dollars, even though the underlying security may be denominated in a
foreign currency. The underlying security may be subject to foreign government
taxes which would reduce the yield on such securities. Investments in such
instruments involve risks similar to those of investing directly in foreign
securities. Such risks include political or economic instability of the issuer
or the country of issue, the difficulty of predicting international trade
patterns and the possibility of imposition of exchange controls. Such
securities may also be subject to greater fluctuations in price than securities
of domestic corporations. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. With respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries.
MONEY MARKET INSTRUMENTS. As stated in the Prospectuses and
subject to their respective investment policies, the Equity and Bond Portfolios
may invest in the following taxable investments for temporary defensive or
other purposes: commercial paper, bankers' acceptances, certificates of
deposit, time deposits and floating rate notes. (See "Investment Objectives
and Policies -- Money Market Portfolio" above for a discussion of cash
equivalents and "Investment Objectives and Policies -- Other Applicable
Investment Policies -- Variable and Floating Rate Instruments" above for a
discussion of variable and floating rate instruments.)
The International Equity Portfolio may invest a portion of its
assets in the obligations of foreign banks and foreign branches of domestic
banks. Such obligations may include ECDs;
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ETDs; CTDs; Schedule Bs, which are obligations issued by Canadian branches of
foreign or domestic banks; Yankee CDs; and Yankee BAs. (See "Investment
Objectives and Policies -- Money Market Portfolio" above for a description of
certain of these obligations.)
REPURCHASE AGREEMENTS. Under the terms of a repurchase
agreement, a Portfolio purchases securities from financial institutions such as
banks and broker-dealers that are deemed to be creditworthy by the Adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price.
Securities subject to repurchase agreements are held by the Portfolios'
Custodian or in the Federal Reserve/Treasury book-entry system. During the
term of any repurchase agreement, the Adviser will continue to monitor the
creditworthiness of the seller. The repurchase price generally equals 102% of
the price paid by the Portfolio plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on the
underlying portfolio securities). Under a repurchase agreement, the seller is
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price, and securities subject to repurchase
agreements are maintained by the Portfolios' Custodian in segregated accounts
in accordance with the 1940 Act. Default by the seller could, however, expose
the Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying securities. Repurchase
agreements are considered to be loans by the Portfolio under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, the Portfolios (except the Treasury Money Market and the
Tax-Exempt Portfolios) may enter into reverse repurchase agreements. At the
time a Portfolio enters into such an arrangement, it will place, in a
segregated custodial account, liquid assets having a value at least equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that such equivalent value is maintained.
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 (and with respect to the International
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<PAGE> 36
Equity Portfolio, the Sub-Adviser) is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities for the Portfolios.
In the case of the Equity and Bond Portfolios, portfolio
turnover may vary greatly from year to year as well as within a particular
year. Portfolio turnover may also be affected by cash requirements for
redemptions of shares and by requirements which enable a Portfolio to receive
certain favorable tax treatment. Portfolio turnover will not be a limiting
factor in making investment decisions.
The Fund did not acquire any securities of its "regular
brokers or dealers" or their parents during its most recent fiscal year.
Transactions on United States stock exchanges involve the
payment of negotiated brokerage commissions. On the exchanges on which
commissions are negotiated, the cost of the transactions may vary among
different brokers. During the fiscal years ended November 30, 1996, 1995 and
1994, the Growth & Income Equity Portfolio paid $708,924, $461,078 and
$504,330, respectively, in brokerage commissions. During the fiscal years
ended November 30, 1996, 1995 and 1994, the Small Cap Equity Portfolio paid
$352,745, $307,607 and $174,206, respectively, in brokerage commissions.
During the fiscal years ended November 30, 1996 and 1995 and the period April
4, 1994 (commencement of operations) through November 30, 1994, the
International Equity Portfolio paid $235,230, $129,568 and $98,911
respectively, in brokerage commissions. During the fiscal years ended November
30, 1996, 1995 and 1994, the Balanced Portfolio paid $144,448, $96,090 and
$115,913 in brokerage commissions. No commissions were paid by the Fund to any
"affiliated" persons (as defined in the 1940 Act) of the Fund. The Equity
Income and Equity Index Portfolios had not commenced operations as of November
30, 1996.
Securities purchased and sold by the Portfolios which are
traded in the over-the-counter market are generally done so on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. There is generally no stated
commission in the case of securities traded in the over-the-counter markets,
but the price of those securities includes an undisclosed commission or
mark-up. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower
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<PAGE> 37
purchase price available to members of a bidding group. The Portfolios will
engage in this practice, however, only when the Adviser (or Sub-Adviser in the
case of the International Equity Portfolio), in its sole discretion, believes
such practice to be otherwise in a Portfolio's interests.
While the Adviser (or Sub-Adviser in the case of the International
Equity Portfolio) generally seeks competitive spreads or commissions, it may not
necessarily allocate each transaction to the underwriter or dealer charging the
lowest spread or commission available on the transaction. Allocation of
transactions, including their frequency, to various dealers is determined by the
Adviser or Sub-Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental
investment research to the Adviser (or Sub-Adviser) may receive orders for
transactions by a Portfolio. Information so received is in addition to and not
in lieu of services required to be performed by the Adviser (or Sub-Adviser) and
does not reduce the advisory fees payable to it by a Portfolio. Such information
may be useful to the Adviser (or Sub-Adviser) in serving both the Portfolios and
other clients, and conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Adviser (or
Sub-Adviser) in carrying out its obligations to the Portfolios. Portfolio
securities will not be purchased from or sold to the Adviser, the Sub-Adviser,
the Distributor, the Administrator or any "affiliated person" (as such term is
defined under the 1940 Act) or any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Portfolios will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements and reverse repurchase
agreements.
Investment decisions for the Portfolios are made independently
from those for other investment companies and accounts advised or managed by
the Adviser (or Sub-Adviser). Such other investment companies and accounts may
also invest in the same securities as the Portfolios. When a purchase or sale
of the same security is made at substantially the same time on behalf of a
Portfolio and another investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser (or Sub-Adviser) believes to be equitable to the
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by
the Portfolio or the size of the position obtained by the Portfolio. To the
extent permitted by law, the Adviser (or
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Sub-Adviser) may aggregate the securities to be sold or purchased for the
Portfolios with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI OBLIGATIONS
The following highlights some of the more important economic
and financial trends and considerations and is based on information from
official statements, prospectuses and other publicly available documents
relating to securities offerings of the State of Missouri, its agencies and
instrumentalities, as available on the date of this Statement of Additional
Information. The Fund has not independently verified any of the information
contained in such statements or other documents.
Missouri's population was 5,117,073 according to the 1990
decennial census of the United States Bureau of Census, which represented an
increase of 4.1% from the 1980 decennial census of 4,916,686 inhabitants.
Based on July, 1992 U.S. Census Bureau estimates, St. Louis and the
surrounding metropolitan area constituted the 17th largest Metropolitan
Statistical Area ("MSA") in the nation with approximately 2.52 million
inhabitants, of which 1.92 million are Missouri residents. St. Louis is
located on the eastern boundary of the state on the Mississippi River and is a
distribution center and an important site for banking and manufacturing
activity, Anchoring the western boundary is Kansas City, which is Missouri's
second largest metropolitan area. Based on July, 1992 U.S. Census Bureau
estimates, Kansas City was the 25th largest MSA nationally with approximately
1.62 million inhabitants, nearly one million of which were Missouri residents.
Kansas City is a major agri-business center for the United States and is an
important center for finance and industry. Springfield, St. Joseph, Joplin and
Columbia are also important population and industrial centers in the State.
[Source: U.S. Department of Commerce, Bureau of the Census.] Per capita
personal income in Missouri grew 3.1% between 1992 and 1993 while during the
same period per capita personal income nationally grew 3.2%. [Source: U.S.
Department of Commerce, Bureau of Economic Analysis.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally
played a dominant role in the State's economy contributing between $15 billion
and $17 billion annually. Although the concentration in farming remains above
the national average, with increasing urbanization, significant
income-generating activity has shifted from agriculture to the manufacturing
and services sectors. Earnings and employment are distributed among the
manufacturing, trade and service sectors in
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a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1990, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and manufacturing ranking third. In 1990, these
three economic sectors accounted for 66% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 15.4% of
employment, is concentrated in defense, transportation equipment and other
durable goods.
Defense-related business plays an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards.
Over the past decade, Missouri has annually ranked among the top six states in
total military contract awards. Although declining defense appropriations by
the U.S. Congress have had and will continue to have an impact on the State,
Missouri's defense related industries have rebounded and shown significant
strength over the past year. Nonetheless, McDonnell-Douglas remains the
state's largest employer with over 29,000 employees and analysts expect the
long term effects of federal downsizing in defense to be negligible. [Source:
Missouri's Economic Forecast: 1994; Mo. Dept. of Economic Development].
Limitations on State debt and bond issues are contained in
Article III, Section 37 of the Constitution of Missouri. Pursuant to this
section, the General Assembly may issue general obligation bonds solely (1) to
refund outstanding bonds (provided that the refunding bonds must mature within
25 years of issuance) or (2) upon the recommendation of the Governor, to incur
a temporary liability by reason of unforeseen emergency or of deficiency in
revenue, in an amount not to exceed $1,000,000 for any one year and to be paid
in not more than five years. When the liability exceeds $1,000,000, the
General Assembly, or the people by initiative, may submit the proposition to
incur indebtedness to the voters of the State, and the bonds may be issued if
approved by a majority of those voting. Such bonds must be retired serially
and by installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the
payment of principal and interest and may provide for an annual tax on all
taxable property in an amount sufficient for that purpose. Certain water
pollution bonds and state building bonds are also authorized pursuant to
Sections 37(b)-(e), inclusive, of Article III.
In 1971, Missouri voters approved a constitutional amendment
providing for the issuance of $150,000,000 of general obligation bonds for the
protection of the environment through
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<PAGE> 40
the control of water pollution. The bonds were subsequently issued over a
period of years. In 1979, voters approved a constitutional amendment
authorizing an additional $200,000,000 State Water Pollution Control Bonds. In
1982 State voters approved a constitutional amendment authorizing the issuance
of $600,000,000 Third State Building Bonds. Proceeds from the Third State
Building Bonds are used to provide funds for improvement of State buildings and
property, including education, mental health, parks, corrections and other
State facilities, and for water, sewer, transportation, soil conservation and
other economic development projects. In 1988, Missouri voters approved a
constitutional amendment authorizing the issuance of bonds in the aggregate sum
of $275,000,000 for controlling water pollution and making improvements to
drinking water systems.
Article III, Section 36 of the Constitution of Missouri
requires that the General Assembly appropriate the annual principal and
interest requirements for outstanding general obligation bonds before any other
appropriations are made. Such amounts must be transferred from the General
Revenue Fund to bond interest and sinking funds. Authorization for these
transfers, as well as the actual payments of principal and interest, are
provided in the first appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri
legislature has established numerous entities as bodies corporate and politic
which are authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the
"Tax Limitation Amendment"), imposes a limit on the amount of taxes and other
revenue enhancement charges such as user fees which may be imposed by the State
or a political subdivision in any fiscal year. This limit is tied to total
State revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit for any fiscal
year equals the product of the ratio of total state revenues in fiscal year
1980-1981 divided by the aggregate personal income received by persons in
Missouri from all sources ("Personal Income of Missouri") in calendar year 1979
multiplied by the Personal Income of Missouri in either the calendar year prior
to the calendar year in which appropriations for the fiscal year for which the
calculation is being made, or the average of Personal Income of Missouri in the
previous three calendar years, whichever is greater. If the revenue limit is
exceeded by 1% or more in any fiscal year, a refund of the excess revenues
collected by the State is required. If the excess revenues collected are less
than 1%, then they are not refunded but are transferred to the General Revenue
Fund.
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<PAGE> 41
Since passage of the legislation, no refund to taxpayers has ever occurred.
The details of the Tax Limitation Amendment are complex. The
revenue limit can be exceeded only if the General Assembly approves by a
two-thirds vote of each house an emergency declaration as requested by the
Governor. As previously noted, however, Article III, Section 36 of the
Constitution of Missouri requires the General Assembly to appropriate the
annual principal and interest requirements for outstanding general obligation
bonds before any other appropriations are made. The revenue limitation also
does not apply to taxes imposed for payment of principal and interest on bonds
that have been approved by the voters, as authorized by the Missouri
Constitution. The Tax Limitation Amendment could adversely affect the
repayment capabilities of certain non-general obligation issues if payment is
dependent upon increases in taxes or appropriations by the State's General
Assembly.
In the spring of 1993, the Missouri legislature passed into
law a $310,000,000 tax increase, with most of the increase being allocated for
state-wide education needs. This tax increase was approved by the citizens of
the state in November, 1994.
Revenue collections for the fiscal year ended June 30, 1996
("Fiscal Year 1996") were $5,778 million, excluding $33.6 million from the
state lottery and other transfers, representing an increase of 7.2 percent over
revenue collections from the fiscal year ended June 30, 1995. These revenues
supplement a carry-over balance from the previous year of $383.4 million.
Expenditures for Fiscal Year 1996 are estimated at $5,822 million including
$153.7 million and $140.5 million, respectively, for the St. Louis and Kansas
City school desegregation cases.
For the fiscal year ending June 30, 1997 ("Fiscal Year 1997")
revenues are projected to be $6,000.3 million. This projection does not
include an estimated $98.3 million in proceeds from other transfers or a
carry-over balance of approximately $328.8 million. Expenditures are projected
at $6,263.9 million, including $151.7 million and $110.3 million respectively
for the St. Louis and Kansas City desegregation cases. Projected expenditures
also include $80 million for supplemental appropriations for Fiscal Year 1997.
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
-33-
<PAGE> 42
Shares -- Miscellaneous" in the Portfolios' Prospectuses). These investment
limitations supplement those that appear in the Prospectuses.
THE TREASURY MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted by the
1940 Act.
2. Borrow money except from banks for temporary purposes
and then in an amount not exceeding 10% of the value of the Portfolio's total
assets, or mortgage, pledge or hypothecate its assets except in connection with
any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Portfolio's total assets at the
time of such borrowing. (This borrowing provision is not for investment
leverage, but solely to facilitate management of the Portfolio by enabling the
Fund to meet redemption requests where the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous).
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or
hold debt obligations in accordance with its investment objective and policies
and, under the certain circumstances described in the Prospectuses, may enter
into repurchase agreements for U.S. Treasury securities that equal at all times
at least 100% of the value of the repurchase price.
5. Purchase or sell real estate.
6. Purchase or sell commodities or commodity contracts or invest
in oil, gas, or other mineral exploration programs.
THE MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets, or where otherwise permitted by the
1940 Act.
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<PAGE> 43
2. Purchase securities of any one issuer, other than
obligations of the U.S. Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of the Portfolio's
total assets would be invested in such issuer, except that up to 25% of the
value of a Portfolio's total assets may be invested without regard to such 5%
limitation.
3. Buy common stocks or voting securities, or state,
municipal or industrial revenue bonds.
4. Purchase or sell real estate (the Portfolio may
purchase commercial paper issued by companies which invest in real estate or
interests therein).
5. Purchase securities on margin, make short sales of
securities or maintain a short position.
6. Underwrite the securities of other issuers.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
8. Write or purchase put or call options.
In accordance with Rule 2a-7 of the 1940 Act, the Money Market
Portfolio intends to invest no more than five percent of its total assets in
the securities of any one issuer; provided, however, that the Portfolio may
invest more than five percent of its total assets in the First Tier Eligible
Securities of a single issuer for a period of up to three business days after
the purchase thereof, provided, further that the Portfolio would not make more
than one investment in accordance with the foregoing provision at any time.
This intention is not, however, a fundamental policy of the Portfolio and may
change in the event Rule 2a-7 is amended in the future.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO MAY NOT:
1. Make loans, except that the Portfolio may purchase or
hold debt instruments in accordance with its investment objective and policies.
2. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization or where
otherwise permitted by the 1940 Act.
3. Purchase securities on margin, make short sales of
securities, or maintain a short position.
-35-
<PAGE> 44
4. Act as an underwriter of securities within the
meaning of the Securities Act of 1933, except insofar as the Portfolio might be
deemed to be an underwriter upon purchase of certain portfolio securities
acquired subject to the investment limitation pertaining to purchases of
restricted securities.
5. Purchase or sell real estate, except that the
Portfolio may invest in Municipal Obligations which are secured by real estate
or interests therein.
6. Purchase or sell commodities or commodity contracts
or invest in oil, gas, or other mineral exploration or development programs.
7. Invest in or sell put options (except as described
above under "Investment Objectives and Policies -- Stand-by Commitments"), call
options, straddles, spreads, or any combination thereof.
8. Purchase foreign securities.
9. Invest in industrial development bonds where the
payment of principal and interest are the responsibility of a company
(including its predecessors) with less than three years of continuous
operation, or buy common stock or voting securities.
10. Purchase any securities, except securities issued or guaranteed
by the United States, any state, territory or possession of the United States,
the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 25% or more of
the Portfolio's net assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry.
With respect to investment limitation no. 1 pertaining to the
Tax-Exempt Money Market Portfolio in the Prospectuses, the Fund intends that
guarantees will only be treated as separate securities for diversification
purposes to the extent required by Rule 5b-2 under the 1940 Act. Letters of
credit will not be treated as separate securities with regard to
diversification as the Fund does not consider the latter instruments to be
securities.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND,
BOND INDEX, GOVERNMENT & CORPORATE BOND, NATIONAL MUNICIPAL BOND, EQUITY
INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY AND BALANCED
PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that each Portfolio
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein; provided further that, as described in the Prospectuses, (a) the
Government & Corporate Bond Portfolio may invest in first mortgage loans,
income participation loans and participation
-36-
<PAGE> 45
certificates in pools of mortgages, including mortgages issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities and CMOs; (b) the
U.S. Government Securities Portfolio may invest in certain mortgage-backed
securities, CMOs and certain other securities; (c) the Intermediate Corporate
Bond Portfolio may invest in first mortgage loans, income participation loans
and participation certificates in pools of mortgages, including mortgages
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
mortgage-backed securities or CMOs; and (d) the Bond Index Portfolio may invest
in first mortgage loans, income participation loans and participations in pools
of mortgages, including mortgages issued or guaranteed by the U.S. Government,
its agencies or 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, except that the
Intermediate Corporate Bond, Bond Index, National Municipal Bond, Equity
Income, Equity Index and Balanced Portfolios may, to the extent appropriate to
their respective investment objectives, purchase publicly traded securities of
companies engaging in whole or in part in such activities; and provided
further, that (a) the Bond Index, Equity Index and Balanced Portfolios may
enter into futures contracts and related options, and (b) the Intermediate
Corporate Bond and Equity Income Portfolios may invest in futures contracts and
related options in accordance with their respective investment obligations and
policies.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a), with the exception of
the National Municipal Bond Portfolio, this investment limitation shall not
apply to a Portfolio's transactions in options, and futures contracts and
related options, and (b) a Portfolio may obtain short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities.
THE INTERNATIONAL EQUITY PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
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<PAGE> 46
2. Purchase or sell real estate, provided that the Portfolio
may invest in securities secured by real estate or interests therein or issued
by companies or investment trusts which invest in real estate or interests
therein.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to
be an underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs, except that: (a) it may, to
the extent appropriate to its investment objective, invest in securities issued
by companies which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures contracts and
options on futures contracts.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, except that the Portfolio
may invest in Municipal Obligations which are secured by real estate or
interests therein.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to
be an underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil,
gas or mineral exploration or development programs.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO MAY NOT:
1. Purchase or sell real estate, except that the
Portfolio may purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real estate.
-38-
<PAGE> 47
2. Purchase securities of companies for the purpose of exercising
control.
3. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or as otherwise permitted by the 1940 Act.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with the Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that the Portfolio may obtain short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Portfolio may, to
the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities.
7. Write or sell put options, call options, straddles, spreads, or
any combination thereof.
NET ASSET VALUE
As stated in the applicable Prospectuses, the net asset value per share
of each class of shares of a Portfolio is calculated separately by adding the
value of all of the portfolio securities and other assets belonging to a
Portfolio that are attributable to such class, subtracting the liabilities of
the Fund that are attributable to such class, and dividing the result by the
number of outstanding shares of such class. Assets attributable to a particular
class of shares of a Portfolio are charged with any direct liabilities that the
Board of Directors has allocated to such class pursuant to the Fund's Plan for
Operation of a Multi-Class System adopted pursuant to Rule 18f-3 under the 1940
Act. The determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of general assets, with respect to a
particular Portfolio or class are conclusive.
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<PAGE> 48
THE MONEY MARKET PORTFOLIOS
The assets in the Money Market Portfolios are valued according
to the amortized cost method of valuation. Pursuant to this method, an
instrument is valued at its cost initially and, thereafter, a constant
amortization to maturity of any discount or premium is assumed, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
This method may result in periods during which value, as determined by
amortized cost, is higher or lower than the market price a Portfolio would
receive if it sold the instrument. The value of securities in the Portfolios
can be expected to vary inversely with changes in prevailing interest rates.
Each Portfolio invests only in instruments that present minimal credit
risks and meet the ratings criteria described in the Prospectuses. In addition,
each Portfolio maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset value per share,
provided that no Portfolio will purchase any security with a remaining maturity
of more than thirteen months (397 days) (securities subject to repurchase
agreements and certain other securities may bear longer maturities) nor maintain
a dollar-weighted average portfolio maturity that exceeds 90 days. The Fund's
Board of Directors has approved procedures that are intended to stabilize the
Portfolios' net asset value per share at $1.00 for purposes of pricing sales and
redemptions. These procedures include the determination, at such intervals as
the Board deems appropriate, of the extent, if any, to which the net asset value
per share of a Portfolio calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, the Board will promptly consider what action, if any, should be
initiated. If the Board believes that the extent of any deviation from a
Portfolio's $1.00 amortized cost price per share may result in material dilution
or other unfair results to new or existing investors, it will take such steps as
it considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include, but
are not limited to, selling portfolio instruments prior to maturity; shortening
the average portfolio maturity; withholding or reducing dividends; redeeming
shares in kind; or utilizing a net asset value per share determined by using
available market quotations.
THE EQUITY AND BOND PORTFOLIOS
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities
-40-
<PAGE> 49
traded on only over-the-counter markets are valued on the basis of closing
over-the-counter bid prices. Securities for which there were no transactions
are valued at the average of the current bid and asked prices. Restricted
securities and other assets for which market quotations are not readily
available are valued at fair value as determined in accordance with guidelines
approved by the Fund's Board of Directors. In computing net asset value, the
current value of a Portfolio's open futures contracts and related options will
be "marked-to-market." Short-term securities are valued at amortized cost,
which approximates fair market value.
Among the factors that ordinarily will be considered in valuing
portfolio securities are the existence of restrictions upon the sale of the
security by the Portfolio, the existence and extent of a market for the
security, the extent of any discount in acquiring the security, the estimated
time during which the security will not be freely marketable, the expenses of
registering or otherwise qualifying the security for public sale, underwriting
commissions if underwriting would be required to effect a sale, the current
yields on comparable securities for debt obligations traded independently of any
equity equivalent, changes in the financial condition and prospects of the
issuer, and any other factors affecting fair value. In making valuations,
opinions of counsel to the issuer may be relied upon as to whether or not
securities are restricted securities and as to the legal requirements for public
sale.
The Administrator may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods of valuation used by the pricing
service will be reviewed by the Administrator under the general supervision of
the Fund's Board of Directors. Several pricing services are available, one or
more of which may be used by the Administrator from time to time. In valuing a
Portfolio's securities, the pricing service would normally take into
consideration such factors as yield, risk, quality, maturity, type of issue,
trading characteristics, special circumstances, and other factors which are
deemed relevant in determining valuations for normal institutionalized trading
units of debt securities and would not rely exclusively on quoted prices.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the
Distributor. As described in the applicable Prospectuses, Trust shares and
Institutional shares of each Portfolio are sold to certain qualified customers
at their net asset value without a sales charge. Investor A Shares of each
Portfolio (other than
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<PAGE> 50
Investor A Shares of the Money Market Portfolios which are sold at their net
asset value without a sales charge) are sold to retail customers at the public
offering price based on a Portfolio's net asset value plus a front-end load or
sales charge as described in the applicable Prospectuses. Investor B Shares of
each Portfolio (other than the Treasury Money Market, Tax-Exempt Money Market,
Intermediate Corporate Bond, Bond Index, Short-Intermediate Municipal and
Equity Index Portfolios, which do not offer Investor B Shares) are sold to
retail customers at the net asset value next determined after a purchase order
is received, but are subject to a contingent deferred sales charge which is
payable on redemption of such shares as described in the applicable
Prospectuses.
The Fund may redeem shares involuntarily if the net income with respect
to a Portfolio's shares is negative or such redemption otherwise appears
appropriate in light of the Fund's responsibilities under the 1940 Act.
An illustration of the computation of the public offering
price per share of Investor A Shares of the Equity and Bond Portfolios, based
on the value of each Portfolio's net assets and the number of outstanding
Investor A Shares on November 30, 1996 (March 31, 1997 with respect to the
National Municipal Bond Portfolio) and the maximum front-end sales charge
of 4.5% (2.5% with respect to the U.S. Government Securities, Bond Index,
Short-Intermediate Municipal and Equity Index Portfolios) currently applicable,
is as follows (The following illustration is hypothetical with respect to
Investor A Shares of the Intermediate Corporate Bond, Bond Index, Equity Index
and Equity Income Portfolios and is based on the projected value of each such
Portfolio's estimated net assets and projected number of outstanding shares on
the date its shares are first offered for sale to public investors):
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<PAGE> 51
<TABLE>
<CAPTION>
Missouri National
Intermediate Government & Tax-Exempt Municipal
Corporate Bond Corporate Bond Bond Bond Equity Income
Portfolio Portfolio Portfolio Portfolio Portfolio
---------- -------------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net Assets $10 $161,740,901 $81,723,725 $314,293,528 $10
Outstanding Shares 1 15,645,100 6,991,562 32,060,641 1
Net Asset Value $10.00 $10.34 $11.69 $ 9.80 $10.00
Per Share
Sales Charge, 4.50%
of offering price
(4.70% of net asset
value per share) .47 .49 .55 .46 .47
Offering Price
to Public $10.47 $10.83 $12.24 $10.26 $10.47
</TABLE>
<TABLE>
<CAPTION>
Growth & Income Small Cap International
Equity Equity Equity Balanced
Portfolio Portfolio Portfolio Portfolio
--------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Net Assets $462,899,079 $216,537,536 $61,250,060 $126,201,169
Outstanding Shares 24,755,784 16,086,645 5,059,161 10,046,491
Net Asset Value
Per Share $18.67 $13.40 $12.05 $12.58
Sales Charge, 4.50%
of offering price
(4.70% of net
asset value per
share) .88 .63 .57 .59
Offering Price
to Public $19.55 $14.03 $12.62 $13.17
</TABLE>
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<PAGE> 52
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate Equity
Securities Bond Index Municipal Index
Portfolio Portfolio Portfolio Portfolio
--------------- --------- ------------------ ---------
<S> <C> <C> <C> <C>
Net Assets $69,823,660 $10 $29,523,085 $10
Outstanding Shares 6,545,263 1 2,931,506 1
Net Asset Value
Per Share $10.67 $10.00 $10.08 $10.00
Sales Charge, 2.50%
of offering price
(2.60% of net
asset value per
share) .28 .26 .26 .26
Offering Price
to Public $10.95 $10.26 $10.34 $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. A Portfolio may also suspend or
postpone the recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.
In addition to the situations described in the Prospectuses
under "How to Purchase and Redeem Shares," the Portfolios may redeem shares
involuntarily to reimburse the Portfolios for any loss sustained by reason of
the failure of a shareholder to make full payment for shares purchased by the
shareholder or to collect any charge relating to a transaction effected for the
benefit of a shareholder which is applicable to Portfolio shares as provided in
the applicable Prospectuses from time to time.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
THE MONEY MARKET PORTFOLIOS
A Money Market Portfolio's "yield" and "effective yield," as
described in the Prospectuses, are calculated separately for Trust Shares,
Institutional Shares, Investor A
-44-
<PAGE> 53
Shares and/or Investor B Shares of the Portfolios according to formulas
prescribed by the SEC. Standardized 7 day "yield" is computed by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in a Portfolio having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, dividing the difference by the value of
the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7). The net change
in the value of an account includes the value of additional shares purchased
with dividends from the original share, and dividends declared on both the
original share and any such additional shares, net of all fees, other than
nonrecurring account or sales charges, that are charged by the Portfolio to all
shareholder accounts in proportion to the length of the base period and the
Portfolio's mean (or median) account size. The capital changes to be excluded
from the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and
depreciation. "Effective yield" is computed by compounding the unannualized
base period return (calculated as above) by adding one to the base period
return, raising the sum to a power equal to 365 divided by seven, and
subtracting one from the result. Based upon the same calculations, each
Portfolio's 30 day yields and 30 day effective yields may also be quoted. The
Tax-Exempt Money Market Portfolio's "tax-equivalent yield" is computed by
dividing the tax-exempt portion of the yield (calculated as above) by one minus
a stated federal income tax rate and adding the product to that portion, if
any, of the yield that is not tax-exempt. In addition, a "Missouri"
tax-equivalent yield may be calculated by dividing the portion of the
Tax-Exempt Money Market Portfolio's yield (calculated as above) that is exempt
from federal tax and the portion that is exempt from Missouri personal income
tax by one minus a stated tax rate and adding such figure to that portion, if
any, of the Portfolio's yield that is not exempt from federal or state income
tax. Based on the foregoing calculations, for the year ended November 30,
1996, the 7-day yields, 7-day effective yields and the 30-day yields were as
follows:
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<PAGE> 54
<TABLE>
<CAPTION>
7-Day Effective
Portfolio 7-Day Yield Yield 30-Day Yield
--------- ----------- --------------- ------------
<S> <C> <C> <C>
Treasury Money Market
Trust Shares 4.44 4.54 4.43
Institutional Shares 4.30 4.39 4.28
Investor A Shares 4.30 3.39 4.28
Money Market
Trust Shares 4.78 4.90 4.79
Institutional Shares 4.65 4.76 4.66
Investor A Shares 4.65 4.76 4.66
Investor B Shares 3.90 3.98 3.91
Tax-Exempt Money Market
Trust Shares 3.29 3.34 3.04
Investor A Shares 3.08 3.13 2.83
</TABLE>
Based on the foregoing calculations, the tax-equivalent yields
and tax-equivalent effective yields of the Tax-Exempt Money Market Portfolio
for the same 7-day and 30-day periods were as follows (assuming payment of
federal income tax at a rate of 39.60%):
<TABLE>
<CAPTION>
7-Day Tax- 30-Day Tax-
7-Day Tax-Equivalent Equivalent Equivalent
Portfolio Yield Effective Yield Yield
--------- ----- --------------- ----------
<S> <C> <C> <C>
Tax-Exempt Money Market
Trust Shares 5.45 5.53 5.03
Investor A Shares 5.10 5.18 4.69
</TABLE>
In addition, as described in the applicable Prospectuses, the
Treasury Money Market Portfolio may calculate a 7 day "state tax-exempt yield,"
which is computed by dividing the portion of the Portfolio's yield (calculated
as above) that is exempt from state income tax by one minus a state income tax
rate. Based upon the same calculations, the Portfolio's 30 day state
tax-exempt yield may also be quoted.
A Portfolio's quoted yield is not indicative of future yields
and depends upon factors such as portfolio maturity, the Portfolio's expenses,
and the types of instruments held by the Portfolio. Any account fees imposed
by financial institutions, Service Organizations, or broker-dealers would
reduce a Portfolio's effective yield.
THE EQUITY AND BOND PORTFOLIOS
An Equity and Bond Portfolio's 30 day "yield" described in the
Prospectuses is calculated separately for Trust Shares, Institutional Shares,
Investor A Shares and/or Investor B Shares
-46-
<PAGE> 55
of a Portfolio by dividing the Portfolio's net investment income per share
earned during a 30-day period by the maximum offering price per share (the
"maximum offering price") with respect to Investor A Shares and the net asset
value per share with respect to Trust shares, Institutional shares and Investor
B Shares on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power
of six, subtracting one from the result and then doubling the difference. A
Portfolio's net investment income per share (irrespective of series) earned
during the period is based on the average daily number of shares outstanding
during the period entitled to receive dividends and includes income dividends
and interest earned during the period minus expenses accrued for the period,
net of reimbursements. This calculation can be expressed as follows:
a-b
Yield = 2 [(-------)(6) - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding that were
entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining interest earned during the period (variable
"a" in the formula), dividend income on equity securities held by a Portfolio is
recognized by accruing 1/360 of the stated dividend rate of the security each
day that the security is in that Portfolio. A Portfolio calculates interest
earned on any debt obligation held in its portfolio by computing the yield to
maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30 day period, or, with respect to obligations
purchased during the 30 day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30 day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call
-47-
<PAGE> 56
date on which the obligation reasonably may be expected to be called or, if
none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market values of such debt obligations.
Interest earned on Municipal Obligations of the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios that are issued without original issue discount and have a
current market discount is calculated by using the coupon rate of interest
instead of the yield to maturity. In the case of Municipal Obligations that
are issued with original issue discount but which have discounts based on
current market value that exceed the then-remaining portion of the original
issue discount (market discount), the yield to maturity is the imputed rate
based on the original issue discount calculation. On the other hand, in the
case of Municipal Obligations that are issued with original issue discount but
which have discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Portfolio to all shareholder accounts
in proportion to the length of the base period and the Portfolio's mean (or
median) account size. Investor A Shares, Investor B Shares, Institutional
Shares and Trust Shares each bear separate fees applicable to the particular
class of shares. Undeclared earned income will not be subtracted from the
maximum offering price per share (variable "d" in the formula). Undeclared
earned income is net investment income which, at the end of the base period,
has not been declared and paid as a dividend, but is reasonably expected to be
and is declared and paid as a dividend shortly thereafter.
The Short-Intermediate Municipal, Missouri Tax-Exempt Bond and
National Municipal Bond Portfolios' "tax-equivalent" yield for each class of
shares is computed by dividing the portion of a Portfolio's yield (calculated
as above) that is exempt from federal income tax by one minus a stated federal
income tax rate and adding that figure to that portion, if any, of the
Portfolio's yield that is not exempt from federal income tax. Similarly, the
Missouri Tax-Exempt Bond Portfolio's "Missouri tax-equivalent" yields for each
class of shares is calculated by dividing the portion of a Portfolio's yield
(calculated as above) that is exempt from federal tax and the portion that is
exempt from Missouri personal income tax by one minus a stated tax rate and
adding such figure to that portion,
-48-
<PAGE> 57
if any, of the Portfolio's yield that is not exempt from federal or state
income tax.
The Fund currently calculates 30-day yields for its Bond
Portfolios but not for its Equity Portfolios. For the 30-day period ended
November 30, 1996 (March 31, 1997 with respect to the National Municipal Bond
Portfolio), the yields on the Bond Portfolios (other than the Intermediate
Corporate Bond and Bond Index Portfolios which had not commenced operations as
of November 30, 1996) were as follows:
<TABLE>
<CAPTION>
Portfolio 30-Day Yield
--------- ------------
<S> <C>
U.S. Government Securities
Trust Shares 5.57
Institutional Shares 5.27
Investor A Shares 5.03
Investor B Shares 4.57
Government & Corporate Bond
Trust Shares 5.82
Institutional Shares 5.52
Investor A Shares 5.26
Investor B Shares 4.82
Short-Intermediate Municipal
Trust Shares 3.97
Investor A Shares 3.63
Missouri Tax Exempt Bond
Trust Shares 4.50
Investor A Shares 4.11
Investor B Shares 3.50
National Municipal Bond
Trust Shares 5.16
Investor A Shares 4.73
Investor B Shares 4.28
Balanced
Trust Shares 2.89
Institutional Shares 2.60
Investor A Shares 2.48
Investor B Shares 1.92
</TABLE>
For the same 30-day period, the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' tax-equivalent
yields (assuming payment of federal income taxes at a rate of 39.60%) and the
Missouri Tax-Exempt Bond Portfolio's Missouri tax-equivalent yield (assuming
Missouri state income taxes at a rate of 43.20%) were as follows:
-49-
<PAGE> 58
<TABLE>
<CAPTION>
30-Day Tax- 30-Day Missouri
Portfolio Equivalent Yield Tax-Equivalent Yield
--------- ---------------- --------------------
<S> <C> <C>
Short-Intermediate Municipal
Trust Shares 6.57 6.99
Investor A Shares 6.16 6.55
Missouri Tax-Exempt Bond
Trust Shares 7.45 7.92
Investor A Shares 7.12 7.57
Investor B Shares 5.79 6.16
National Municipal Bond
Trust Shares 8.54 9.08
Investor A Shares 7.83 8.33
Investor B Shares 7.09 7.54
</TABLE>
A Portfolio computes its "average annual total return" for each
series of that Portfolio by determining the average annual compounded rate of
return during specified periods that would equate the initial amount invested in
a particular series to the ending redeemable value of such investment in the
series by dividing the ending redeemable value of a hypothetical $1,000 payment
by $1,000 (representing a hypothetical initial payment) and raising the quotient
to a power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the 1, 5 or 10 year
(or other) periods (or a fractional portion thereof)
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in terms of
years
A Portfolio computes its aggregate total returns separately
for each series by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
-50-
<PAGE> 59
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a non-money market Portfolio's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Investor A Shares and the deduction of any applicable contingent deferred
sales charge with respect to Investor B Shares.
Based on the foregoing calculations, the average annual total
returns for the year/period ended November 30, 1996 (March 31, 1997, with
respect to the National Municipal Bond Portfolio), the average annual total
returns for the 5-year period ended November 30, 1996 (where applicable) and
the average annual total returns for the period from commencement of operations
were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the 5 Since
For the Year Years Ended Commencement
Portfolio Ended 11/30/96 11/30/96 of Operations
--------- -------------- ------------ -------------
<S> <C> <C> <C>
U.S. Government Securities
Trust Shares(1) 4.88 6.81 8.15
Institutional Shares(7) 4.55 6.43 7.89
Investor A Shares(1) -0.13 5.52 7.35
Investor B Shares(4) -1.07 5.85 7.64
Government & Corporate Bond
Trust Shares(5) 4.82 7.16 8.04
Institutional Shares(2) 4.51 6.85 7.82
Investor A Shares(5) -0.23 5.86 7.24
Investor B Shares(4) -1.12 6.41 7.65
Short-Intermediate Municipal
Trust Shares(17) 4.15 N/A 4.52
Investor A Shares(18) 1.41 N/A 1.57
Missouri Tax-Exempt Bond(19)
Trust Shares(20) 4.62 7.32 8.14
Investor A Shares(21) -0.26 6.13 7.38
Investor B Shares(4) -1.50 6.51 7.70
</TABLE>
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<PAGE> 60
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the 5 Since
For the Year Years Ended Commencement
Portfolio Ended 11/30/96* 11/30/96* of Operations
--------- -------------- ------------ -------------
<S> <C> <C> <C>
National Municipal Bond(23)
Trust Shares N/A N/A 0.09
Investor A Shares N/A N/A 4.48
Investor B Shares N/A N/A 5.16
Growth & Income Equity
Trust Shares(1) 23.45 16.73 15.07
Institutional Shares(2) 23.08 16.55 14.97
Investor A Shares(1) 17.44 15.48 14.35
Investor B Shares(4) 17.29 16.17 14.81
Small Cap Equity
Trust Shares(9) 8.72 N/A 15.30
Institutional Shares(2) 8.39 N/A 15.09
Investor A Shares(10) 3.51 N/A 13.97
Investor B Shares(4) 2.68 N/A 14.56
International Equity
Trust Shares(14) 12.33 N/A 7.56
Institutional Shares(14) 11.91 N/A 7.26
Investor A Shares(15) 6.92 N/A 5.49
Investor B Shares(4) 6.11 N/A 5.81
Balanced
Trust Shares(12) 15.56 N/A 11.12
Institutional Shares(12) 15.08 N/A 10.86
Investor A Shares(12) 9.92 N/A 9.56
Investor B Shares(4) 9.35 N/A 9.88
</TABLE>
_____________________
through March 31, 1997 with respect to the National Municipal
Bond Portfoilio.
(1) Commenced operations on June 2, 1988.
(2) Initial public offering commenced on January 4, 1994.
(3) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(4) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to
such date represent the performance for Investor A Shares of
the Portfolio which has been restated to reflect the contingent
deferred sales charges payable by holders of Investor B Shares
that redeem within six years of the date of purchase. Investor
B Shares are also subject to distribution and services fees at
a maximum annual rate of 1.00%. Had those distribution and
services fees been reflected, performance would have been
reduced.
(5) Commenced operations on June 15, 1988.
(6) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(7) Commenced operations on June 7, 1994.
(8) Reflects combined performance of Institutional Shares which
were initially offered to the public on June 7, 1994 and
Investor A Shares for the period prior to January 4, 1994.
(9) Commenced operations on May 1, 1992.
(10) Initial public offering commenced on May 6, 1992.
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<PAGE> 61
(11) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period May 1, 1992 through January
3, 1994.
(12) Commenced operations on April 1, 1993.
(13) Reflects combined performance of Institutional Shares which
were initially offered to the public on January 4, 1994 and
Investor A Shares for the period April 1, 1993 through January
3, 1994.
(14) Commenced operations on April 4, 1994.
(15) Initial public offering commenced on May 2, 1994.
(16) Reflects combined performance of Institutional Shares which
were initially offered to the public on April 24, 1994 and
Investor A Shares for the period April 4, 1994 through April
23, 1994.
(17) Commenced operations on July 10, 1995.
(18) Commenced operations on July 10, 1995.
(19) Commenced operations on July 15, 1988 as a portfolio of The
ARCH Tax-Exempt Trust. On October 2, 1995, the Portfolio was
reorganized as a new Portfolio of the Fund.
(20) Commenced operations on July 15, 1988.
(21) Initial public offering commenced on September 28, 1990.
(22) Portfolio had not commenced operations as of November 30,
1996.
(23) Commenced operations on November 18, 1996.
Based on the foregoing calculations, the aggregate total
returns for the Equity and Bond Portfolios from their respective dates of
commencement of operations through November 30, 1996 (March 31, 1997 with
respect to the National Municipal Bond Portfolio) (other than the
Intermediate Corporate Bond, Bond Index, Equity Income and Equity Index
Portfolios which had not commenced operations as of November 30, 1996) were as
follows:
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<PAGE> 62
<TABLE>
<CAPTION>
Aggregate Total Return
Since Commencement
Portfolio of Operations
--------- ----------------------
<S> <C>
U.S. Government Securities
Trust Shares 94.83
Institutional Shares(1) 90.62
Investor A Shares 82.65
Investor B Shares(2) 86.86
Government & Corporate Bond
Trust Shares 90.51
Institutional Shares(1) 87.20
Investor A Shares 78.79
Investor B Shares(2) 84.74
Short-Intermediate Municipal
Trust Shares 6.66
Investor A Shares 2.45
Missouri Tax-Exempt Bond
Trust Shares 92.38
Investor A Shares 81.24
Investor B Shares(2) 85.60
National Municipal Bond
Trust Shares 0.90
Investor A Shares 0.00
Investor B Shares -0.26
Growth & Income Equity
Trust Shares 239.52
Institutional Shares(1) 236.74
Investor A Shares 221.61
Investor B Shares(2) 232.46
Small Cap Equity
Trust Shares 98.93
Institutional Shares(1) 96.92
Investor A Shares 88.55
Investor B Shares(2) 92.94
International Equity
Trust Shares 20.87
Institutional Shares(1) 19.85
Investor A Shares 14.66
Investor B Shares(2) 15.40
Balanced
Trust Shares 49.14
Institutional Shares(1) 47.93
Investor A Shares 41.55
Investor B Shares(2) 42.98
- ------------------------------
</TABLE>
(1) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A Shares for
the period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such date
represent the performance for Investor A Shares of the Portfolio which has
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<PAGE> 63
been restated to reflect the contingent deferred sales charges payable by
holders of Investor B Shares that redeem within six years of the date of
purchase. Investor B Shares are also subject to distribution and services fees
at a maximum annual rate of 1.00%. Had those distribution and services fees
been reflected, performance would have been reduced.
As stated in the Prospectuses relating to Investor A Shares and
Investor B Shares, a Portfolio may also calculate total return figures for that
Portfolio without deducting the maximum sales charge imposed on purchases or
redemptions. The effect of not deducting the sales charge will be to increase
the total return reflected.
Investors may judge the performance of the Portfolios by
comparing them to the performance of other mutual funds or mutual fund
portfolios with comparable investment objectives and policies. Such
comparisons may be made by referring to market indices such as those prepared
by Dow Jones & Co., Inc., Russell, Salomon Brothers, Inc., Lehman Brothers or
Standard & Poor's Ratings Group or any of their affiliates, the Consumer Price
Index, the EAFE Index, the NASDAQ Composite, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. Such comparisons may also be made by
referring to data prepared by Lipper Analytical Services, Inc., (a widely
recognized independent service which monitors the performance of mutual funds)
Indata, Frank Russell, CDA, and the Bank Rate Monitor (which reports average
yields for money market accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas). Other
similar yield data, including comparisons to the performance of Mercantile
repurchase agreements, or the average yield data for similar asset classes
including but not limited to Treasury bills, notes and bonds, may also be used
for comparison purposes. Comparisons may also be made to indices or data
published in the following national financial publications: IBC/Donoghue's
Money Fund Report(R), MorningStar, CDA/Wiesenberger, Money Magazine, Forbes,
Fortune, Barron's, The Wall Street Journal, The New York Times, Business Week,
American Banker, Fortune, Institutional Investor, U.S.A. Today and publications
of Ibbotson Associates, Inc. and other publications of a local or regional
nature. In addition to performance information, general information about the
Portfolios that appears in a publication such as those mentioned above may be
included in advertisements, supplemental sales literature and in reports to
Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles
(such as the effects of
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<PAGE> 64
inflation, the power of compounding and the benefits of dollar-cost averaging);
(2) discussions of general economic trends; (3) presentations of statistical
data to supplement such discussions; (4) descriptions of past or anticipated
portfolio holdings for one or more of the Portfolios within the Fund; (5)
descriptions of investment strategies for one or more of such Portfolios; (6)
descriptions or comparisons of various investment products, which may or may
not include the Portfolios; (7) comparisons of investment products (including
the Portfolios) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of rankings or ratings by recognized rating
organizations.
In addition, with respect to the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios the benefits of
tax-free investments may be communicated in advertisements or communications to
shareholders. For example, the tables below present the approximate yield that
a taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 4.50% to
7.00%. The yields below are for illustration purposes only and are not
intended to represent current or future yields for the Portfolios, which may be
higher or lower than those shown. The tax brackets shown below will be indexed
for inflation for years after 1997. Investors should consult their tax advisor
with specific reference to their own tax situation.
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
SINGLE RETURN
<TABLE>
<CAPTION>
--------Tax-Exempt Yields---------
<S> <C> <C> <C> <C> <C> <C>
Sample Taxable Federal
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
FROM
$0 TO
$24,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$24,000 TO
$58,150 28.00% 6.25% 6.64% 7.64% 9.03% 9.72%
FROM
$58,150 TO
$121,300 31.00% 6.52% 7.25% 7.97% 9.42% 10.41%
FROM
$121,300 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 65
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY
----------Tax-Exempt Yields-----------
<S> <C> <C> <C> <C> <C> <C>
Sample Taxable Federal
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
FROM
$0 TO
$40,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$40,000 TO
$96,900 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
FROM
$96,900 TO
$147,700 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
FROM
$147,700 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 66
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
SINGLE RETURN Combined
Federal and
Sample Taxable Missouri ---------------Tax-Exempt Yields--------------
Income Marginal Marginal Marginal Tax
(1997) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$24,000 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$24,000 TO
$58,150 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
FROM
$58,150 TO
$121,300 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
FROM
$121,300 TO
$263,750 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
OVER
$263,750 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
</TABLE>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY Combined
Federal and ---------------Tax-Exempt Yields--------------
Sample Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1997) Tax Rate Tax Rate Rate 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$40,000 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$40,000 TO
$96,900 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
FROM
$96,900 TO
$147,700 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
FROM
$147,700 TO
$263,750 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
OVER
$263,750 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
</TABLE>
Such data are for illustrative purposes only and are not intended to indicate
past or future performance results of a Portfolio. Actual performance of the
Portfolios' may be more or less than that noted in the hypothetical
illustrations.
Since performance will fluctuate, performance data for the Portfolios
cannot necessarily be used to compare an investment in
-58-
<PAGE> 67
Portfolios' shares with bank deposits, savings accounts, and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses, and market conditions. The
current yield and performance of the Portfolios may be obtained by calling the
Fund at: INVESTOR A OR INVESTOR B SHARES - 1-800-452-ARCH; OR TRUST OR
INSTITUTIONAL SHARES - 1-800-452-4015.
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-seven classes of shares
representing interests in one of seventeen investment Portfolios: the Treasury
Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, Kansas Tax-Exempt
Bond (not described in this Statement of Additional Information), National
Municipal Bond, Equity Income, Equity Index, Growth & Income Equity, Small Cap
Equity, International Equity and Balanced Portfolios. Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares in each Portfolio
(except the Treasury Money Market, Intermediate Corporate Bond, Bond Index and
Equity Index Portfolios, which do not offer Investor B Shares, the Tax-Exempt
Money Market and Short-Intermediate Municipal Portfolios, which do not offer
Institutional or Investor B Shares and the Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios, which do not offer Institutional Shares) are
offered through separate prospectuses to different categories of investors.
Portfolio shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectuses, the shares will be fully paid and nonassessable.
Except as noted in the Prospectuses with respect to certain
sub-transfer agency expenses borne by Institutional Shares and below with
respect to the Administrative Services Plans for Trust Shares and Institutional
Shares and the Distribution and Services Plans for Investor A Shares and
Investor B Shares, shares of the Portfolios bear the same types of ongoing
expenses with respect
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to the Portfolio to which they belong. In addition, Investor A Shares (other
than Investor A Shares of the Money Market Portfolios) are subject to a
front-end sales charge and Investor B Shares are subject to a contingent
deferred sales charge as described in the Prospectuses. The classes also have
different exchange privileges, and Investor B Shares are subject to conversion
as described in the Prospectus for those shares.
In the event of a liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation,
except that Trust Shares of a particular Portfolio will be solely responsible
for that Portfolio's payments pursuant to the Administrative Services Plan for
those shares, Institutional Shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative
Service Plan for those shares, Investor A Shares of a particular Portfolio will
be solely responsible for that Portfolio's payments pursuant to the
Distribution and Services Plan for those shares and Investor B Shares of a
particular Portfolio will be solely responsible for that Portfolio's payments
pursuant to the Distribution and Services Plan for those shares. In addition,
Institutional Shares will be solely responsible for the payment of certain
sub-transfer agency fees attributable to those shares.
Holders of all outstanding shares of a particular Portfolio
will vote together in the aggregate and not by class, except that only Trust
Shares of a Portfolio will be entitled to vote on matters submitted to a vote
of shareholders pertaining to a Portfolio's Administrative Services Plan for
Trust Shares, only Institutional Shares of a Portfolio's will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Administrative Services Plan for Institutional Shares, only
Investor A Shares of a Portfolio will be entitled to vote on matters submitted
to a vote of shareholders pertaining to such Portfolio's Distribution and
Services Plan for Investor A Shares and only Investor B Shares of a Portfolio
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to such Portfolio's Distribution and Services Plan for Investor B
Shares. Further, shareholders of all of the Portfolios, irrespective of class,
will vote in the aggregate and not separately on a Portfolio-by-Portfolio
basis, except as otherwise required by law or when the Board of Directors
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular Portfolio or class of shares. Rule
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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 a fundamental investment objective or 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 Portfolio or class.
Shares in the Fund's Portfolios will be issued without
certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses are not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisors with specific reference to their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate
entity under the Code. Each Portfolio intends to qualify each year as a
regulated investment company. In order to so qualify for a taxable year under
the Code, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain other requirements set forth
below.
At least 90% of the gross income for a taxable year of each
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the
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Portfolio's business of investing in such stock, securities or currencies (the
"Gross Income Requirement")
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 "Short-Short
Gain Test"). Interest (including original issue discount and accrued market
discount) received by a Portfolio upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any income that is attributable to real market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Portfolio and net gains from closing
purchase transactions are treated as short-term capital gains for federal income
tax purposes, and losses on closing purchase transactions are short-term capital
losses. With respect to forward contracts, futures contracts, options on futures
contracts, and other financial instruments subject to the mark-to-market rules
described below under "Taxation of Certain Financial Instruments," the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a contract, option or financial instrument will be treated as being derived
from a security held for three months or more (regardless of the actual period
for which the contract, option or instrument is held) if the gain arises as a
result of a constructive sale under the mark-to-market rules, and will be
treated as being derived from a security held for less than three months only if
the contract, option or instrument is terminated (or transferred) during the
taxable year (other than by reason of mark-to-market) and less than three months
have elapsed between the date the contract, option or instrument is acquired and
the termination date. Increases and decreases in the value of a Portfolio's
forward contracts, futures contracts, options on futures contracts and other
investments that qualify as part of a "designated hedge," as defined in Section
851(g) of the Code, may be netted for purposes of determining whether the
Short-Short Gain 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 to individuals is taxable at a maximum marginal
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%.
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
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<PAGE> 72
accumulated earnings and profits and would be eligible for the dividends
received deduction allowed to corporations.
THE TAX-EXEMPT PORTFOLIOS
The policy of each Tax-Exempt Portfolio is to pay to its
shareholders each year as exempt-interest dividends substantially all of its
Municipal Obligation interest income net of certain deductions. In order for a
Tax-Exempt Portfolio to pay exempt-interest dividends for any taxable year, at
the close of each quarter of its taxable year at least 50% of the aggregate
value of the Portfolio's assets must consist of exempt-interest obligations.
Exempt-interest dividends may be treated by the shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by a Tax-Exempt Portfolio and designated as an
exempt-interest dividend in a written notice mailed to shareholders not later
than forty-five days (with respect to Missouri income tax) and sixty days (with
respect to federal income tax) after the close of the Portfolio's taxable year.
However, the aggregate amount of dividends so designated by the Portfolio
cannot exceed the excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Portfolio during the taxable year over
any amounts disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid for any taxable year which
qualifies as exempt-interest dividends will be the same for all shareholders
receiving dividends from the Portfolio during such year, regardless of the
period for which the Shares were held.
Shareholders who might be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any
of the tax-exempt obligations held by a Tax-Exempt Portfolio, are advised to
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a). A "substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person (i) who
regularly uses a part of such facilities in his trade or business and (ii)(A)
whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users
of such facilities, (B) who occupies more than 5% of the usable area of such
facilities or (C) for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, partnerships and its
partners, and S corporations and their shareholders.
Interest on indebtedness incurred by a shareholder to purchase
or carry shares of the Tax-Exempt Portfolios generally
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<PAGE> 73
is not deductible for federal income tax purposes. In addition, if a
shareholder holds Portfolio Shares for six months or less, any loss on the sale
or exchange of those Shares will be disallowed to the extent of the amount of
exempt-interest dividends received with respect to the Shares. The Treasury
Department, however, is authorized to issue regulations reducing the six months
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of
financial instruments that may be held by the U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Equity
Income, Equity Index, Growth & Income Equity, Small Cap Equity, International
Equity or Balanced 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 Gross Income Requirement, and on a Portfolio's ability to comply with
the Short-Short Gain 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
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<PAGE> 74
forming part of the straddle will (if they have not been held for the long-term
holding period) be deemed not to begin prior to termination of the straddle.
With respect to certain futures contracts and related options, deductions for
interest and carrying charges may not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell and related options
which are properly identified as such, a Portfolio may make an election which
will exempt (in whole or in part) those identified futures contracts and
options from being treated for federal income tax purposes as sold on the last
business day of the Portfolio's taxable year, but gains and losses will be
subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from positions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and
losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, the 40-60 rule will apply to the net gain or
loss attributable to the futures contracts and options, but in the case of a
mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term.
Certain foreign currency contracts (including forward foreign
currency exchange contracts) entered into by the International Equity Portfolio
may be subject to the mark-to-market rules described above. To receive such
treatment, a foreign currency contract must meet the following conditions: (1)
the contract must require delivery of a foreign currency of a type in which
regulated futures contracts are traded or upon which the settlement value of
the contract depends; (2) the contract must be entered into at arm's length at
a price determined by reference to the price in the interbank market; and (3)
the contract must be traded in the interbank market. The Treasury Department
has broad authority to issue regulations under these provisions. As of the
date of this Statement of Additional Information, the Treasury Department had
not issued any such regulations. Other foreign currency contracts entered into
by the Portfolio may result in the creation of one or more straddles for
federal income tax purposes, in which case certain loss deferral, short sales,
and wash sales rules and the requirement to capitalize interest and carrying
charges may apply.
Some of the non-U.S. dollar denominated investments that
certain of the taxable Portfolios may make, such as non-U.S.
dollar-denominated debt securities and obligations and preferred stock, as well
as some of the foreign currency contracts the
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International Equity Portfolio may enter into, may be subject to the provisions
of Subpart J of the Code, which govern the federal income tax treatment of
certain transactions denominated in terms of a currency other than the U.S.
dollar or determined by reference to the value of one or more currencies other
than the U.S dollar. The types of transactions covered by these provisions
include the following: (1) the acquisition of, or becoming the obligor under,
a bond or other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (2) the accruing of certain trade receivables
and payables; and (3) the entering into or acquisition of any forward contract,
futures contract, option and similar financial instrument. The disposition of
a currency other than the U.S. dollar by a U.S. taxpayer also is treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options generally
are not subject to the special currency rules if they are or would be treated
as sold for their fair market value at year-end under the mark-to-market rules,
unless an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and
normally is taxable as ordinary gain or loss. A Portfolio may elect to treat
as capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the Portfolio and which are not part of a straddle. In
accordance with Treasury Regulations, certain transactions subject to the
special currency rules that are part of a "Section 988 hedging transaction" (as
defined in the Code and Treasury regulations) will be integrated and treated as
a single transaction or otherwise treated consistently for purposes of the
Code. "Section 988 hedging transactions" are not subject to the mark-to-market
or loss deferral rules under the Code. Gain or loss attributable to the
foreign currency component of transactions engaged in by a Portfolio which are
not subject to the special currency rules (such as foreign equity investments
other than certain preferred stocks) is treated as capital gain or loss and is
not segregated from the gain or loss on the underlying transaction.
CONCLUSIONS
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisors
concerning the application of state and local taxes.
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<PAGE> 76
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers 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* Chairman of Treasurer, St. Louis
St. Louis University The Board; University, August 1996
3500 Lindell President and to present; Treasurer,
Fitzgerald Hall Director Washington University,
St. Louis, MO 63131 1981 to 1995
Age: 53
Robert M. Cox, Jr. Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co. since November P.O. Box 4100 1990.
St. Louis, MO 63136-8506
Age: 51
Joseph J. Hunt Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and Orna-
3544 Watson Road mental Iron Workers (Interna-
St. Louis, MO 63139 tional Labor Union), January 1994
Age: 54 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 softgoods)
Chesterfield, MO 63017 since 1975; Vice Chairman,
Age: 61 Kellwood Company since May
1989.
</TABLE>
________________________
* Mr. Woodham is an "interested person" of the Fund as defined in the 1940
Act.
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<PAGE> 77
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Lyle L. Meyer Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation (manu-
Corporation facturer of paperboard and
8182 Maryland Avenue packaging materials), April
St. Louis, MO 63105 1989 to present; President,
Age: 60 Smurfit Pension & Insurance Services
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, LLP Philadelphia,
Philadelphia, PA 19107 Pennsylvania Since 1977.
Age: 54
Walter B. Grimm* Assistant From June, 1992 to present,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, OH 43219 Services; From 1989 to June, 1992
Age: 51 President of Leigh
Investments Consulting/
Investments (investment
firm).
Stephen G. Mintos* Vice President From April, 1987 to present,
3435 Stelzer Road and Assistant employee of BISYS Fund
Columbus, OH 43219 Treasurer Services.
Age: 43
</TABLE>
* Messrs. Grimm, Winney, and Mintos are "interested persons" of the Fund as
defined in the 1940 Act.
Each Director receives an annual fee of $10,000 plus
reimbursement of expenses incurred as a Director. The Chairman of the Board
and President of the Fund receives an additional annual fee of $5,000 for his
services in these capacities. For
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the fiscal year ended November 30, 1996, the Fund paid or accrued for the
account of its directors as a group, for services in all capacities, a total of
$76,082.90. Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Fund. As of the date of this Statement
of Additional Information, the directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
The following chart provides certain information about the
fees received by the Fund's directors for their services as members of the
Board of Directors and committees thereof for the fiscal year ended November
30, 1996:
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT TOTAL
COMPENSATION AS PART OF FUND COMPENSATION
NAME OF DIRECTOR FROM THE FUND EXPENSE FUND COMPLEX*
---------------- ------------- --------------- -------------
<S> <C> <C> <C>
Jerry V. Woodham $15,000 N/A $15,000.00
Robert M. Cox, Jr. $10,166.35 N/A $10,166.35
Joseph J. Hunt $10,000 N/A $10,000.00
James C. Jacobsen $10,266.60 N/A $10,266.60
Donald E. Kiernan** $10,101.55 N/A $10,101.55
Lyle L. Meyer $10,287.60 N/A $10,287.60
Ronald D. Winney $10,260.60 N/A $10,260.60
</TABLE>
* The "Fund Complex" consists solely of the Fund.
** Mr. Kiernan resigned as a director of the Fund on April 3, 1997.
INVESTMENT ADVISORY, SUB-ADVISORY AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to each Portfolio. In
addition, Clay Finlay serves as sub-adviser to the International Equity
Portfolio. Pursuant to the advisory and sub-advisory agreements, MVA and Clay
Finlay have agreed to provide investment advisory and sub-investment advisory
services, respectively, as described in the Portfolios' Prospectuses. MVA and
Clay Finlay have agreed to pay all expenses incurred by them in connection with
their activities under their respective agreements other than the cost of
securities, including brokerage commissions, if any, purchased for the
Portfolios.
The investment advisory agreement (and sub-advisory agreement
for the International Equity Portfolio) provide that MVA and Clay Finlay,
respectively, shall not be liable for any
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<PAGE> 79
error of judgment or mistake of law or for any loss suffered in connection with
the performance of their respective agreements, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their duties or from reckless disregard by
them of their duties and obligations thereunder.
Under its administration agreement with the Fund, BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator. The
Administrator has agreed to maintain office facilities for the Portfolios,
furnish the Portfolios with statistical and research data, clerical,
accounting, and certain bookkeeping services, stationery and office supplies,
and certain other services required by the Portfolios, and to compute the net
asset value and net income of the Portfolios. The Administrator prepares
annual and semi-annual reports to the SEC on Form N-SAR, compiles data for and
prepares federal and state tax returns and required tax filings other than
those required to be made by the Fund's custodian and transfer agent, prepares
the Fund's compliance filings with state securities commissions, maintains the
registration or qualification of shares for sale under the securities laws of
any state in which the Fund's shares shall be registered, assists in the
preparation of annual and semi-annual reports to shareholders of record,
participates in the periodic updating of the Fund's Registration Statement,
prepares and assists in the timely filing of notices to the SEC required
pursuant to Rule 24f-2 under the 1940 Act, arranges for and bears the cost of
processing share purchase, exchange and redemption orders, keeps and maintains
the Portfolios' financial accounts and records including calculation of daily
expense accruals, monitors compliance procedures for each of the classes of the
Fund's Portfolios with each Portfolio's investment objective, policies and
limitations, tax matters, and applicable laws and regulations, and generally
assists in all aspects of the Portfolios' operations. The Administrator bears
all expenses in connection with the performance of its services, except that a
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities. (See "Net Asset Value -- Equity and
Bond Portfolios" above).
From time to time, MVA and the Administrator may voluntarily
waive a portion or all of their respective fees otherwise payable to them with
respect to the Fund's Portfolios in order to increase the net income available
for distribution to shareholders. For the fiscal year or period ended November
30, 1996, MVA was paid advisory fees, after waivers, as follows:
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<PAGE> 80
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $882,177 $179,300
The ARCH Money Market Portfolio $2,787,213 $628,005
The ARCH Tax-Exempt Money Market Portfolio $334,446 $47,714
The ARCH U.S. Government Securities Portfolio $280,649 $0
The ARCH Government & Corporate Bond Portfolio $674,595 $0
The ARCH Short-Intermediate Municipal Portfolio $0 $147,782
The ARCH Missouri Tax-Exempt Bond Portfolio $327,773 $0
The ARCH National Municipal Bond Portfolio $0 $70,262
The ARCH Growth & Income Equity Portfolio $2,231,228 $0
The ARCH Small Cap Equity Portfolio $1,556,817 $62
The ARCH International Equity Portfolio $393,668 $140,840
The ARCH Balanced Portfolio $950,916 $0
</TABLE>
For the fiscal year or period ended November 30, 1995, MVA was
paid advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $795,911 $124,279
The ARCH Money Market Portfolio $2,202,658 $314,865
The ARCH Tax-Exempt Money Market Portfolio(1) $161,659 $23,094
The ARCH U.S. Government Securities Portfolio $208,179 $0
The ARCH Government & Corporate Bond Portfolio $660,877 $0
The ARCH Short-Intermediate Municipal Portfolio(2) $0 $38,167
The ARCH Missouri Tax-Exempt Bond(1) Portfolio $156,100 $0
The ARCH Growth & Income Equity Portfolio $1,736,792 $0
The ARCH Small Cap Equity Portfolio $962,984 $0
The ARCH International Equity Portfolio $239,167 $78,752
The ARCH Balanced Portfolio $775,992 $0
</TABLE>
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<PAGE> 81
________________________
(1) For the six-month period ended November 30, 1995.
(2) For the period from commencement of operations (July 10, 1995) through
November 30, 1995.
For the fiscal year or period ended November 30, 1994, MVA was
paid advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $676,057 $353,812
The ARCH Money Market Portfolio $2,158,091 $311,198
The ARCH U.S. Government Securities Portfolio $200,493 $209
The ARCH Government & Corporate Bond Portfolio $668,999 $2,128
The ARCH Growth & Income Equity Portfolio $1,441,612 $9,612
The ARCH Small Cap Equity Portfolio $577,534 $2,815
The ARCH International Equity Portfolio(1) $73,083 $42,943
The ARCH Balanced Portfolio $685,226 $14,157
The ARCH Missouri Tax-Exempt Bond Portfolio $230,777 $91,762
</TABLE>
(1) For the period from commencement of operations (April 4, 1994) through
November 30, 1994.
For the years ended May 31, 1995 and 1994, the Predecessor
Tax-Exempt Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios
paid MVA advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
The Predecessor Tax-Exempt Money Market
Portfolio $327,584 $440,267 $93,173 $146,756
The Predecessor Missouri Tax-Exempt Bond
Portfolio $230,777 $123,192 $91,762 $193,555
</TABLE>
For the fiscal year or period ended November 30, 1996, the
Administrator was paid administration fees, after waivers, as follows:
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<PAGE> 82
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $304,595 $196,144
The ARCH Money Market Portfolio $1,055,556 $652,053
The ARCH Tax-Exempt Money Market Portfolio $95,540 $0
The ARCH U.S. Government Securities Portfolio $62,335 $62,398
The ARCH Government & Corporate Bond Portfolio $149,866 $149,916
The ARCH Short-Intermediate Municipal Portfolio $26,854 $26,878
The ARCH Missouri Tax-Exempt Bond Portfolio $72,831 $72,846
The ARCH National Municipal Bond Portfolio $7,016 $18,530
The ARCH Growth & Income Equity Portfolio $405,497 $405,859
The ARCH Small Cap Equity Portfolio $207,502 $207,666
The ARCH International Equity Portfolio $80,098 $26,804
The ARCH Balanced Portfolio $126,789 $126,784
</TABLE>
For the fiscal year or period ended November 30, 1995, the
Administrator was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $230,049 $230,045
The ARCH Money Market Portfolio $629,331 $629,431
The ARCH Tax-Exempt Money Market Portfolio(1) $46,188 $0
The ARCH U.S. Government Securities Portfolio $46,262 $46,322
The ARCH Government & Corporate Bond Portfolio $146,859 $147,087
The ARCH Short-Intermediate Municipal Portfolio(2) $6,965 $6,914
The ARCH Missouri Tax-Exempt Bond Portfolio(1) $34,689 $34,808
The ARCH Growth & Income Equity Portfolio $315,754 $316,168
</TABLE>
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<PAGE> 83
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Small Cap Equity Portfolio $128,398 $128,825
The ARCH International Equity Portfolio $47,635 $15,949
The ARCH Balanced Portfolio $103,465 $103,589
- ---------------
</TABLE>
(1) For the six-month period ended November 30, 1995.
(2) For the period from commencement of operations (July 10, 1995) through
November 30, 1995
For the fiscal year or period ended November 30, 1994, the
Administrator was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $257,468 $257,467
The ARCH Money Market Portfolio $616,597 $618,047
The ARCH U.S. Government Securities Portfolio $44,554 $44,647
The ARCH Government & Corporate Bond Portfolio $148,667 $149,612
The ARCH Growth & Income Equity Portfolio $262,112 $265,606
The ARCH Small Cap Equity Portfolio $77,005 $77,755
The ARCH International Equity Portfolio(1) $17,350 $5,855
The ARCH Balanced Portfolio $91,363 $95,139
</TABLE>
________________________
(1) Commenced operations April 4, 1994.
For the years ended May 31, 1995 and 1994, the Predecessor Tax-Exempt
Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios paid the
Administrator administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- ------------- -------
1995 1994 1995 1994
-------- ------- ------- --------
<S> <C> <C> <C> <C>
The Predecessor Tax-Exempt Money Market
Portfolios $105,189 $146,756 $0 $0
</TABLE>
-75-
<PAGE> 84
<TABLE>
<S> <C> <C> <C> <C>
The Predecessor Missouri Tax-Exempt Bond
Portfolio $143,351 $70,367 $71,654 $70,449
</TABLE>
The Intermediate Corporate Bond, Bond Index, Equity Income and Equity
Index Portfolios had not commenced operations as of November 30, 1996.
CUSTODIAN AND TRANSFER AGENT
Mercantile is Custodian of the Portfolios' assets pursuant to
a Custodian Agreement. Under the Custodian Agreement, Mercantile has agreed to
(i) maintain a separate account or accounts in the name of each Portfolio; (ii)
receive and disburse money on behalf of each Portfolio; (iii) collect and
receive all income and other payments and distributions on account of each
Portfolio's portfolio securities; (iv) respond to correspondence relating to
its duties; and (v) make periodic reports to the Fund's Board of Directors
concerning the operations of each Portfolio. Mercantile may, at its own
expense, open and maintain a custody account or accounts on behalf of each
Portfolio with other banks or trust companies, provided that Mercantile shall
remain liable for the performance of all of its custodial duties under the
Custodian Agreement, notwithstanding any delegation. Mercantile is authorized
to select one or more banks or trust companies to serve as sub-custodian on
behalf of the Portfolios, provided that Mercantile shall remain responsible for
the performance of all of its duties under the Custodian Agreement and shall
hold the Fund harmless from the acts and omissions of any bank or trust company
servicing as sub-custodian.
In the opinion of the staff of the SEC, since the Custodian is
an affiliate of the investment adviser, the Fund and the Custodian are subject
to the requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and
the Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each
Portfolio pays Mercantile an annual fee. For each Money Market Portfolio this
fee is paid monthly and calculated daily at the rate of $.125 for each $1,000
of each such Portfolio's average daily net assets plus, in the case of the
Tax-Exempt Money Market Portfolio only, $50 for each interest collection or
claim item. For the Equity and Bond Portfolios (except the International
Equity Portfolio), this fee, which is paid monthly, is calculated as the
greater of $6,000 or $.30. For the International Equity Portfolio, this fee,
which is calculated daily and paid monthly, is .17% of the Portfolio's average
daily net assets for the first $50 million; .155% of the Portfolio's average
daily net assets for the next $50 million; .13% of the Portfolio's average
daily
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<PAGE> 85
net assets for the next $150 million; and .105% of the Portfolio's average
daily net assets thereafter. Each Equity and Bond Portfolio also pays $15.00
for each purchase, sale or delivery of a security upon its maturity date,
$50.00 for each interest collection or claim item, $20.00 for each transaction
involving GNMA, tax-free or other non-depository registered items with monthly
dividends or interest, $30.00 for each purchase, sale or expiration of an
option contract, $50.00 for each purchase, sale or expiration of a futures
contract, and $15.00 for each repurchase trade with an institution other than
Mercantile. In addition, each Portfolio pays Mercantile's incremental costs in
providing foreign custody services for any foreign-denominated and foreign-held
securities and reimburses Mercantile for out-of-pocket expenses related to such
services.
BISYS Fund Services Ohio, Inc. also serves as the Fund's
transfer agent and dividend disbursing agent (in those capacities, the
"Transfer Agent") pursuant to a Transfer Agency Agreement. Under the
Agreement, the Transfer Agent has agreed to (i) process shareholder purchase
and redemption orders; (ii) maintain shareholder records for each of the
Portfolios' shareholders; (iii) process transfers and exchanges of shares of
the Portfolios; (iv) issue periodic statements for each of the Portfolios'
shareholders; (v) process dividend payments and reinvestments; (vi) assist in
the mailing of shareholder reports and proxy solicitation materials; and (vii)
make periodic reports to the Fund's Board of Directors concerning the
operations of each Portfolio.
DISTRIBUTION AND SERVICE ORGANIZATIONS
BISYS Fund Services (the "Distributor"), an affiliate of the
Administrator, serves as the Distributor of the Portfolios' shares pursuant to
a Distribution Agreement. Under the Distribution Agreement, the Distributor,
as agent, sells shares of the Portfolios on a continuous basis. The
Distributor has agreed to use appropriate efforts to solicit orders for the
sale of shares. With respect to each Portfolio's Trust Shares and
Institutional Shares, no compensation is payable by the Fund to the Distributor
for distribution services. The Distributor is entitled to the payment of a
front-end sales charge on the sale of Investor A Shares of the Equity and Bond
Portfolios as described in the Prospectus for such shares. For the fiscal
years ended November 30, 1996, 1995 and 1994, the Distributor received
front-end sales charges in connection with Investor A share purchases as
follows: U.S. Government Securities Portfolio -- $823, $6,238 and $26,300,
respectively; Government & Corporate Bond Portfolio -- $4655, $10,250 and
$12,979, respectively; Missouri Tax-Exempt Bond Portfolio, $23,210, $45,981 and
$96,782, respectively; Growth & Income Equity Portfolio -- $74,288, $96,851 and
$95,623, respectively; Small
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<PAGE> 86
Cap Equity Portfolio $18,763, $60,626 and $87,769, respectively; and Balanced
Portfolio -- $2,705, $7,442 and $24,483, respectively. For the fiscal years
ended November 30, 1996 and 1995 and the period May 2, 1994 (commencement of
operations) through November 30, 1994, the Distributor received front-end sales
charges in connection with Investor A share purchases of the International
Equity Portfolio of $11,417, $14,251 and $11,880. For the fiscal year ended
November 30, 1996 and the period July 10, 1995 (commencement of operations)
through November 30, 1995, the Distributor received front-end sales charges in
connection with Investor A Share purchases of the Short-Intermediate Municipal
Portfolio of $0. For the period November 18, 1996 (commencement of operations)
through November 30, 1996, the Distributor received front-end sales charges in
connection with Investor A Share purchases of the National Municipal Bond
Portfolio of $0. Of these amounts, the Distributor retained $126, $784 and
$3,318, respectively, and MVA and affiliates retained $385, $2,101 and $10,456,
respectively, with respect to the U.S. Government Securities Portfolio; the
Distributor retained $0, $1,354 and $1,720, respectively, and MVA and
affiliates retained $3535, $8,711 and $5,834, respectively, with respect to the
Government & Corporate Bond Portfolio; the Distributor retained $416, $6,400
and $13,608, respectively, and MVA and affiliates retained $5850, $9,735 and
$8,954, respectively, with respect to the Missouri Tax-Exempt Bond Portfolio;
the Distributor retained $1850, $11,647 and $11,846, respectively, and MVA and
affiliates retained $27,769, $27,761 and $21,021, respectively, with respect to
the Growth & Income Equity Portfolio; the Distributor retained $192, $7,085 and
$10,476 respectively, and MVA and affiliates retained $10,277, $15,259 and
$22,854 with respect to Small Cap Equity Portfolio; the Distributor retained
$92, $871 and $3,466, respectively, and MVA and affiliates retained $1,311,
$2,721 and $8,755, respectively, with respect to the Balanced Portfolio; the
Distributor retained $1, $1,626 and $1,441, respectively, and MVA and
affiliates retained $8226, $5,431 and $1,952, respectively, with respect to the
International Equity Portfolio; the Distributor retained $0 and $0,
respectively, and MVA and affiliates retained $0 and $0, respectively, with
respect to the Short-Intermediate Municipal Portfolio; and the Distributor
retained $0 and MVA and affiliates retained $0 with respect to the National
Municipal Bond Portfolio.
The Distributor is also entitled to the payment of contingent
deferred sales charges upon the redemption of Investor B Shares of the
Portfolios. For the fiscal year ended November 30, 1996 and the period from
March 1, 1995 (date of their initial public offering) through November 30,
1995, the Distributor received contingent deferred sales charges in connection
with Investor B share redemptions as follows: Money Market Portfolio -- $0 and
$0; U.S. Government Securities
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<PAGE> 87
Portfolio -- $3,640 and $135; Government and Corporate Bond Portfolio -- $4,258
and $1,246; Missouri Tax-Exempt Bond Portfolio -- $1,763 and $7; Growth and
Income Equity Portfolio -- $30,345 and $209; Small Cap Equity Portfolio --
$7,267 and $253; International Equity Portfolio -- $5763 and $0; and Balanced
Portfolio -- $1,216. For the period November 18, 1996 (commencement of
operations) through November 30, 1996, the Distributor received $0 in
contingent deferred sales charges in connection with Investor B Share
Redemption of the National Municipal Bond Portfolio. All such amounts were
assigned to MVA pursuant to the financing arrangement between the Distributor
and MVA described below under "The Plans -- Distribution and Services Plans."
The following table shows all sales charges, commissions and
other compensation received by the Distributor directly or indirectly from the
Fund's Portfolios during the fiscal year ended November 30, 1996:
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio Commissions(1) Repurchase(2) Transactions Compensation(3)
--------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Treasury Money $0.00 $0.00 $0.00 $0.00
Market
Money Market $0.00 $416.00 $0.00 $0.00
Tax-Exempt Money $0.00 $0.00 $0.00 $0.00
Market
U.S. Government $125.99 $0.00 $125.99 $0.00
Securities
Government & $0.00 $10.78 $0.00 $171.00
Corporate Bond
Short-Intermediate $0.00 $0.00 $0.00 $0.00
Municipal
Missouri Tax- $416.00 $0.00 $416.00 $968.00
Exempt Bond
National Municipal Bond $0.00 $0.00 $0.00 $0.00
Growth & Income $1850.34 $729.33 $1,850.34 $2,343.00
Income Equity
Small Cap Equit $192.00 $73.77 $192.00 $1,453.00
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio Commissions(1) Repurchase(2) Transactions Compensation(3)
--------- ----------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
International $1.00 $3.92 $1.00 $1,105.00
Equity
Balanced $92.00 $21.56 $92.00 $235.00
</TABLE>
_________________________
(1) Represents amounts received from front-end sales charges on Investor A
Shares and commissions received in connection with sales of Investor B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Investor B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Investor B Shares. All such
amounts were assigned to MVA pursuant to the financing arrangements
between the Distributor and MVA described below.
(3) Represents payments made under the Administrative Services Plans and
Distribution and Services Plans that have been adopted by the Fund
(see discussion below).
(4) The Intermediate Corporate Bond, Bond Index, Equity Income and Equity
Index Portfolios had not commenced operations as of November 30, 1996.
THE PLANS
DISTRIBUTION AND SERVICES PLANS. As described in the
Prospectuses, the Fund has adopted separate Distribution and Services Plans
with respect to Investor A and Investor B Shares of the Portfolios pursuant to
the 1940 Act and Rule 12b-1 thereunder. Any material amendment to either of
these Plans or arrangements with the Distributor or Service Organizations
(which may include affiliates of the Fund's Adviser) must be approved by a
majority of the Board of Directors, including a majority of the directors who
are not "interested persons" of the Fund as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Directors") and by a majority of the Investor A Shares or Investor B Shares,
respectively, of the Portfolio. Pursuant to the Plans, the Fund may enter into
Servicing Agreements with broker-dealers and other organizations ("Servicing
Agreements") that purchase Investor A or Investor B Shares of a Portfolio. The
Servicing Agreements provide that the Servicing Organizations will render
certain shareholder administrative support services to their customers who are
the record or beneficial owners of Investor A or Investor B Shares. Services
provided pursuant to the Servicing Agreements may include such services as
providing information periodically to customers showing their positions in
Investor A or Investor B Shares and monitoring services for their customers who
have invested in Investor A or Investor B Shares, including the
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<PAGE> 89
operation of telephone lines for daily quotations of return information.
Service Organizations and other broker/dealers receive
commissions from the Distributor for selling Investor B Shares, which are paid
at the time of the sale. These commissions approximate the commissions payable
with respect to sales of Investor A Shares. The distribution fees payable
under the Distribution and Services Plan for Investor B Shares (at an annual
rate of .75%) are intended to cover the expense to the Distributor of paying
such up-front commissions, and the contingent deferred sales charge is
calculated to charge the investor with any shortfall that would occur if
Investor B Shares are redeemed prior to the expiration of the eight year
period, after which Investor B Shares automatically convert to Investor A
Shares. To provide funds for the payment of up-front sales commissions, the
Distributor has entered into an agreement with MVA pursuant to which MVA
provides funds for the payment of commissions and other fees payable to Service
Organizations and broker/dealers who sell Investor B Shares. Under the terms
of that agreement, the Distributor has assigned to MVA the fees which may be
payable from time to time to the Distributor under the Distribution and
Services Plan for Investor B Shares and the contingent deferred sales charges
payable to the Distributor with respect to Investor B Shares.
ADMINISTRATIVE SERVICES PLANS. As stated in the applicable
Prospectuses, separate Administrative Services Plans have been adopted with
respect to Trust shares and Institutional shares of the Portfolios. Pursuant
to each Plan and the Distribution and Services Plans described above, the Fund
may enter into Servicing Agreements with banks, trust departments, and other
financial institutions ("Trust Servicing Agreements") and with broker-dealers
and other organizations ("Servicing Agreements") that purchase Trust shares,
Institutional shares, Investor A Shares or Investor B Shares of a Portfolio,
respectively. The Servicing Agreements provide that the Service Organizations
will render certain shareholder administrative support services to their
customers who are the record or beneficial owners of Trust Shares,
Institutional shares, Investor A Shares or Investor B Shares, respectively.
Services provided pursuant to the Servicing Agreements may include some or all
of the following services: (i) processing dividend and distribution payments
from the Portfolios on behalf of customers; (ii) providing information
periodically to customers showing their positions in Trust, Institutional,
Investor A Shares or Investor B Shares; (iii) arranging for bank wires; (iv)
responding to routine customer inquiries relating to services performed by the
particular Service Organization; (v) providing sub-accounting with respect to
shares owned of record or beneficially by customers or the information
necessary for sub-accounting; (vi)
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<PAGE> 90
as required by law, forwarding shareholder communications (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (vii) forwarding to customers proxy
statements and proxies containing any proposals regarding Servicing Agreements
or the related Plan; (viii) aggregating and processing purchase, redemption,
and exchange requests from customers and placing net purchase and redemption
orders with the Fund's Distributor; (ix) providing customers with a service
that invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (x) maintaining records relating to each
customer's share transactions; or (xi) other similar services if requested by
the Fund and permitted by law. In addition, Service Organizations may also
provide dedicated facilities and equipment in various local locations to serve
the needs of investors, including walk-in facilities, 800 numbers, and
communication systems to handle shareholder inquiries, and in connection with
such facilities, provide on-site management personnel and monitoring services
for their customers who have invested in Investor A or Investor B Shares,
including the operation of telephone lines for daily quotations of return
information.
For the fiscal year or period ended November 30, 1996,
pursuant to the Distribution and Services Plan for Investor A Shares, the
Portfolios (other than the Intermediate Corporate Bond, Bond Index, Equity
Income and Equity Index Portfolios, which had not commenced operations as of
November 30, 1996) were charged the following amounts:
DISTRIBUTION AND SERVICES PLAN - INVESTOR A SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market $24,086 $0 $0 $1,266
Treasury Money Market $9,337 $0 $0 $1,627
Money Market $177,403 $0 $0 $15,254
Government & Corporate Bond $15,982 $171 $0 $13,764
Missouri Tax-Exempt Bond $49,325 $968 $0 $25,344
National Municipal Bond $0 $0 $0 $0
Growth & Income Equity $93,577 $2,342 $0 $570,505
Small Cap Equity $40,775 $1,453 $0 $21,908
International Equity $6,144 $1,105 $0 $2,047
Balanced $24,704 $235 $0 $19,050
U.S. Government Securities $22,999 $449 $0 $18,329
</TABLE>
All amounts paid under the Distribution and Services Plan for
Investor A Shares for the fiscal year/period ended
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<PAGE> 91
November 30, 1996 were attributable to payments to broker-dealers. For the
fiscal year ended November 30, 1996, no brokers of record waived fees.
For the fiscal year ended November 30, 1996, pursuant to the
Distribution and Services Plan for Investor B Shares of the CDSC Portfolios,
the CDSC Portfolios (other than the Equity Income Portfolio, which had not
commenced operations as of November 30, 1996) were charged the following
amounts:
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<PAGE> 92
DISTRIBUTION AND SERVICES PLAN - INVESTOR B SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED DISTRIBUTOR TO MVA OF MVA
---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $2,321 $0 $0 $2,321
Money Market $928 $0 $0 $928
Tax-Exempt Money Market
U.S. Government Securities $0 $0 $0 $0
Government & Corporate Bond $3,184 $0 $0 $3,184
Short-Intermediate Municipal $0 $0 $0 $0
Missouri Tax-Exempt Bond $5,815 $0 $0 $5,815
National Municipal Bond $0 $0 $0 $0
Growth & Income Equity $20,870 $0 $0 $20,870
Small Cap Equity $9,440 $0 $0 $9,440
International Equity $2,543 $0 $0 $2,543
Balanced $1,988 $0 $0 $1,988
</TABLE>
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<PAGE> 93
For the fiscal year or period ended November 30, 1996,
pursuant to the Administrative Services Plan for Trust Shares, the Portfolios
(other than the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios which had not commenced operations as of November 30,
1996) were charged the following amounts:
ADMINISTRATIVE SERVICES PLAN - TRUST SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $151,479 $0 $0 $151,479
Money Market $565,091 $0 $0 $517,174
Tax-Exempt Money Market $19,823 $0 $0 $19,823
U.S. Government Securities $0 $0 $0 $0
Government & Corporate Bond $157 $0 $0 $157
Short-Intermediate Municipal $0 $0 $0 $0
Missouri Tax-Exempt Bond $0 $0 $0 $0
National Municipal Bond $0 $0 $0 $0
Growth & Income Equity $546 $0 $0 $546
Small Cap Equity $0 $0 $0 $0
International Equity $0 $0 $0 $0
Balanced $40 $0 $0 $40
</TABLE>
For the fiscal year ended November 30, 1996, pursuant to the
Administrative Services Plan for Institutional shares, the Portfolios (other
than the Intermediate Corporate Bond, Bond Index, Equity Income and Equity
Index Portfolios which had not commenced operations as of November 30, 1996)
paid the following amounts:
ADMINISTRATIVE SERVICES PLAN - INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $13,166 $0 $0 $13,166
Money Market $49,165 $0 $0 $49,165
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities $4,441 $0 $0 $4,441
Government & Corporate Bond $34,976 $0 $0 $34,976
Growth & Income Equity $157,199 $0 $0 $157,199
Small Cap Equity $66,514 $0 $0 $66,514
International Equity $11,858 $0 $0 $11,858
Balanced $133,169 $0 $0 133,969
</TABLE>
For the fiscal year ended November 30, 1996, the
Administrator, MVA and/or various service organizations waived no fees with
respect to the Administrative Services Plans.
OTHER PLAN INFORMATION. The Board of Directors has approved
each Plan and its respective arrangements with the Distributor, Service
Organizations and broker-dealer based on information provided by the Fund's
service contractors that there is a reasonable likelihood that these Plans and
arrangements will benefit the Portfolios and their shareholders. Pursuant to
each Plan, the Board of Directors reviews, at least quarterly, a written report
of the amounts of distribution fees and servicing fees expended pursuant to
each Plan and the Service Organizations and the purposes for which the
expenditures were made. So long as the Fund has one or more of the above
described Plans in effect, the selection and nomination of the members of the
Board of Directors who are not "interested persons" (as defined in the 1940
Act) of the Fund will be committed to the discretion of such Disinterested
Directors.
Depending upon the terms governing the particular customer
accounts, Service Organizations and other institutions may also charge their
customers directly for cash management and other services provided in
connection with the accounts, including, for example, account maintenance fees,
compensating balance requirements, or fees based upon account transactions,
assets, or income. An investor should therefore read the Prospectuses and this
Statement of Additional Information in light of the terms of his or her account
with a Service Organization, or other institution before purchasing shares of a
Portfolio.
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
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<PAGE> 95
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. 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.
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<PAGE> 96
INDEPENDENT AUDITORS
For the fiscal year or period ended November 30, 1996, KPMG
Peat Marwick LLP, certified public accountants, with offices at Two Nationwide
Plaza, Columbus, Ohio 43215-2577 served as independent auditors for the Fund.
KPMG Peat Marwick LLP performs an annual audit of the Fund's financial
statements. Reports of its activities are provided to the Fund's Board of
Directors. The financial statements dated November 30, 1996, which are
incorporated by reference into this Statement of Additional Information, have
been audited by KPMG Peat Marwick LLP, whose report thereon is incorporated
herein by reference.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III,
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 May 3, 1997, Mercantile held of record 97.640% and
72.149% of the outstanding Institutional and Trust shares, respectively, in the
Treasury Money Market Portfolio; 95.050% and 66.888% of the outstanding
Institutional and Trust shares, respectively, in the Money Market Portfolio;
83.784% of the outstanding Trust shares in the Tax-Exempt Money Market
Portfolio; 95.377% and 94.901% of the outstanding Institutional and Trust
shares, respectively, in the U.S. Government Securities Portfolio; 99.990% of
the outstanding Trust shares in the Intermediate Corporate Bond Portfolio;
96.384% and 98.821% of the outstanding Institutional and Trust shares,
respectively, in the Government & Corporate Bond Portfolio; 96.130% of the
outstanding Trust shares in the Short-Intermediate Municipal Portfolio; 99.222%
of the outstanding Trust shares in the Missouri Tax- Exempt Bond Portfolio;
99.941% of the outstanding Trust shares in the National Municipal Bond
Portfolio; 96.620% and 96.298% of the outstanding Institutional and Trust
shares, respectively, in the Growth & Income Equity Portfolio; 99.574% and
49.263% of the outstanding Institutional and Trust shares, respectively, in the
Small Cap Equity Portfolio; 95.774% and 93.914% of the outstanding Institutional
and Trust shares, respectively, in the International Equity Portfolio; and
97.210% and 99.832% of the outstanding Institutional and Trust shares,
respectively, in the Balanced Portfolio, as fiduciary or agent on behalf of its
customers. Mercantile is a wholly owned subsidiary of Mercantile Bancorporation
Inc., a Missouri corporation. Under the 1940 Act, Mercantile may be deemed to be
a controlling person of the Fund.
As of the same date, the following institutions also owned of
record 5% or more of the Treasury Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Hawaiian Trust
Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI 96802-3170
(17.907%); Investor A Shares - BHC Securities Inc., Attn: Cash Balance Sweep
Dept., 1 Commerce Square, 11th Floor, 2005 Market Street, Philadelphia, PA
19103-0000 (43.519%); Mercantile Bank of St. Louis, NA Custodian Richard E.
Crippa, Rollover IRA, 2948 Castleford Dr., Florissant, MO 63033-0000 (7.849%);
St. Louis Regional Medical Center, Attn: Sharon Edison, 5535 Delmar Blvd., St.
Louis, MO 63112 (40.561%).
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 - Hawaiian Trust
Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI 96802-3170
(14.947%); Investor A Shares - BHC Securities Inc., Attn: Cash Balance Sweep
Dept., 1 Commerce Square, 11th Floor, 2005 Market St., Philadelphia, PA
19103-0000 (85.887%); Investor B Shares Mercantile Bank of St. Louis, NA
Custodian Pheba A. Steinmeyer,
<PAGE> 97
IRA, HC 3 Box 1266, Rocky Mt., MO 65072-9042 (5.482%); Alberta Buenemann and
Ernie W. Buenemann Trust, Alberta Buenemann Revocable Living Trust, 1649 Sand
Run Road, Troy, MO 63379 (7.366%); Mercantile Bank of St. Louis, NA Custodian
Wayne D. Matheis, Rollover IRA, RR 2 Box 142, Russellville, MO 65074 (12.047%);
Merlin R. Burke and Mary Alice Burke, 2516 Highland, Sedalia, MO 65301 (5.132%);
Mercantile Bank of St. Louis, NA Custodian Edwin C. Hogrebe, IRA, 5537 Goethe,
St. Louis, MO 63109 (5.006%); Homer R. Turner and Edna M. Turner Trust, Edna M.
Turner Trust, 33409 E. Pink Hill Rd., Grain Valley, MO 64029 (7.827%).
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 - Mark Twain
Bank, Trust Operations, P.O. Box 14259 A, St. Louis, MO 63178 (8.273%); Investor
A Shares - BHC Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce
Square, 11th Floor, 2005 Market St., Philadelphia, PA 19103-0000 (95.953%).
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: Investor A Shares -
BHC Securities Inc., Trade House Account, Attn: Mutual Fund Dept., 1 Commerce
Square, 2005 Market St., Philadelphia, PA 19103-0000 (12.954%); Mercantile Bank
of St. Louis, NA Custodian Edmund C. Albrecht, Jr., IRA, 236 Carlyle Lake Dr.,
St. Louis, MO 63141 (5.726%); Investor B Shares - BHC Securities Inc., FAO
24130191, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite
1200, Philadelphia, PA 19103 (11.978%); BHC Securities Inc., FAO 24275966, Attn:
Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200,
Philadelphia, PA 19103 (7.707%); BHC Securities Inc., FAO 24335526, Attn: Mutual
Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA
19103 (6.199%).
As of the same date, the following institutions also owned of
record 5% or more of the Intermediate Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Institutional Shares
- - BISYS Fund Services OH Inc., Attn: Admin. & Regulatory Services, 3435 Stelzer
Rd., Columbus, OH 43219 (100.00%); Investor A Shares - BISYS Fund Services OH
Inc., Attn: Admin. & Regulatory Services, 3435 Stelzer Rd., Columbus, OH 43219
(100.00%).
As of the same date, the following institutions also owned of
record 5% or more of the Bond Index Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Institutional Shares - BISYS Fund
Services OH Inc., Attn: Admin. & Regulatory Services, 3435 Stelzer Rd.,
Columbus, OH 43219 (100.00%); Investor A Shares - Mary Ann Butler and
<PAGE> 98
Pamela Butler Masson, 100 Choctaw Place, Mandeville, LA 70471- 0000 (48.655%);
Kathyrn Koenig Smith, Ed Jones Account, 876 Lariat Loop, Galt, CA 95632-8378
(46.003%).
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: Investor A Shares -
BHC Securities Inc., Attn: Mutual Fund Dept., 1 Commerce Square, 2005 Market
St., Philadelphia, PA 19103-0000 (13.165%); Mercantile Bank of St. Louis, NA
Custodian Eugene F. Tucker, IRA Rollover, 70 Berkshire, St. Louis, MO 63117
(6.016%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian Gerald
C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507 (5.584%); BHC Securities Inc.,
FAO 24294267, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St.,
Philadelphia, PA 19103 (5.001%); Mercantile Bank of St. Louis, NA Custodian
Wayne D. Matheis, Rollover IRA, RR 2 Box 142, Russelville, MO 65074 (7.168%);
BHC Securities Inc., FAO 24297770, Attn: Mutual Funds Dept., 1 Commerce Square,
2005 Market St., Suite 1200, Philadelphia, PA 19103 (10.590%); BHC Securities
Inc., FAO 24337035, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market
St., Suite 1200, Philadelphia, PA 19103 (5.758%).
As of the same date, the following institutions also owned of
record 5% or more of the Short-Intermediate Municipal Bond Portfolio's
outstanding shares as fiduciary or agent on behalf of their customers: Investor
A Shares - Audrey Fredrick Borchardt c/o/ Prudential Securities, P.O. Box 7,
Camp Hill, PA 17001-0000 (73.669%); Laurie Baker Noble c/o A G Edwards & Sons,
Inc., P.O. Box 14985, St. Louis, MO 63178-0000 (12.727%); Lane P. Baker and
Madelynn A. Baker, P.O. Box 979, Essex, CT 06426-0000 (12.714%).
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: Investor A Shares - BHC
Securities Inc., Trade House Account, Attn: Mutual Fund Dept., 1 Commerce
Square, 2005 Market St., Philadelphia, PA 19103-0000 (33.172%); Investor B
Shares - BHC Securities Inc., FAO 24293705, Attn: Mutual Funds Dept., 1 Commerce
Square, 2005 Market St., Philadelphia, PA 19103 (5.292%); BHC Securities Inc.,
FAO 24126820, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St.,
Suite 1200, Philadelphia, PA 19103 (6.644%); BHC Securities Inc., FAO 2429054,
Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200,
Philadelphia, PA 19103 (11.334%); BHC Securities Inc., FAO 24286677, Attn:
Mutual Funds Dept., 1 Commerce Square, Suite 1200, Philadelphia, PA 19103
(6.818%); Corelink Financial, Inc., P.O. Box 4054, Concord, CA 94524 (24.390%).
<PAGE> 99
As of the same date, the following institutions also owned of
record 5% or more of the National Municipal Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Investor A Shares - Audrey
Fredrick Borchardt c/o Prudential Securities, 2030 North Providence Rd., Media
PA 19063 (32.577%); Lane P. Baker and Madelynn A. Baker, P.O. Box 979, Essex, CT
06426-0000 (7.312%); Laurie Baker Noble c/o A G Edwards & Sons, Inc., P.O. Box
14985, St. Louis, MO 63178-0000 (7.312%); Gail P. Ruga, Stifel Nicolaus & Co.,
Inc., 500 North Broadway, St. Louis , MO 63102 (16.581%); Kim P. Wheeler, Stifel
Nicolaus & Co., Inc., 500 North Broadway, St. Louis, MO 63102 (16.581%); BHC
Securities Inc., Trade House Account, Attn: Mutual Funds Dept., 1 Commerce
Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103 (18.997%); Investor
B Shares - BISYS Fund Services OH Inc., Seed Account, 3435 Stelzer Rd., Suite
1000, Columbus, OH 43219-0000 (100.00%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Income Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Institutional Shares - BISYS
Fund Services OH Inc., Attn: Admin. & Regulatory Services, 3435 Stelzer Rd.,
Columbus, OH 43219 (100.00%); Investor A Shares - Mary Helen Schaeffer, 5801
Quantrell Ave., No. L3, Alexandria, VA 22312 (13.654%); Mary Ann Butler and
Pamela Butler Masson, 100 Choctaw Place, Mandeville, LA 70471-0000 (83.877%);
Investor B Shares - BISYS Fund Services OH, Inc., Attn: Admin. & Regulatory
Services, 3435 Stelzer Rd., Columbus, OH 43219 (14.751%); Corelink Financial
Inc., P.O. Box 4054, Concord, CA 94524 (85.248%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Index Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Institutional Shares - BISYS
Fund Services, Att: Admin. & Regulatory Services, 3435 Stelzer Rd., Columbus, OH
43219 (100.000%); Investor A Shares - Walter B. Grimm, 5425 Stockton Ct.,
Powell, OH 43065-0000 (50.000%); BISYS Fund Services, Attn: Admin. & Regulatory
Services, 3435 Stelzer Rd., Columbus, OH 43219 (50.000%).
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: Investor A Shares - BHC
Securities Inc., Trade House Account, Attn: Mutual Fund Dept., 1 Commerce
Square, 2005 Market St., Philadelphia, PA 19103-0000 (37.224%).
As of the same date, the following institutions also owned of
record 5% or more of the Small Cap Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - State Street
Bank & Trust Co., Trust Pioneer Hi-Bred International Savings Plan Trust, 1
Enterprise
<PAGE> 100
Dr., Mail Stop D13, North Quincy, MA 02171 (16.635%); Boatmens Trust Co., Trust
Carpenters Pension Trust Fund, Attn: William Grayson, 100 N. Broadway, St.
Louis, MO 63102-0000 (7.598%); American Bar Endowment, 750 N. Lake Shore Dr.,
Chicago, IL 60611 (7.086); Investor A Shares - BHC Securities Inc., Trade House
Account, Attn: Mutual Fund Dept., 1 Commerce Square, 2005 Market St.,
Philadelphia, PA 19103-0000 (41.916%).
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 - Boat & Co., P.O.
Box 14737, St. Louis, MO 63178-4737 (5.886%); Investor A Shares - BHC Securities
Inc., Trade House Account, 2005 Market St., Philadelphia, PA 19103-0000
(44.045%); Frances Dakers, 200 E. 89th St. 28D, New York, NY 10128 (12.070%).
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: Investor A Shares - BHC Securities Inc.,
Trade House Account, Attn: Mutual Fund Dept., 1 Commerce Square 2005 Market St.,
Philadelphia, PA 19103-0000 (19.395%); Mercantile Bank of St. Louis, NA
Custodian Robert W. Davis, Rollover IRA, 818 Broadway, Elsberry, MO 63343
(5.065%); Investor B Shares Mercantile Bank of St. Louis, NA Custodian Edmund
Frances Codr, Rollover IRA, 2820 S. 42nd St., St. Joseph, MO 64503 (6.146%); BHC
Securities Inc., FAO 24176688, Attn: Mutual Funds Dept., 1 Commerce Square, 2005
Market St., Philadelphia, PA 19103 (9.906%); BHC Securities Inc., FAO 24123548,
Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Philadelphia, PA
19103 (5.102%); Mercantile Bank of St. Louis, NA Custodian David J. Neumann,
IRA, 2330 Goff Ave., St. Joseph, MO 64505 (5.319%); BHC Securities Inc., FBO
24273057, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite
1200, Philadelphia, PA 19103 (6.787%); Mercantile Bank of St. Louis, NA
Custodian Richard Dell Woods, SEP IRA, 3114 Pickett Rd., St. Joseph, MO 64503
(7.741%); Mercantile Bank of St. Louis, NA Custodian Gerald C. Pasch, IRA, 2817
Duncan, St. Joseph, MO 64507 (6.442%).
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.
<PAGE> 101
FINANCIAL STATEMENTS
The unaudited financial statements for the National Municipal
Bond Portfolio for the Period December 1, 1996 through March 31, 1997 are
included in this Statement of Additional Information.
The Fund's Annual Report to Shareholders for the fiscal year
or period ended November 30, 1996 has been filed with the Securities and
Exchange Commission. The financial statements in such Annual Report (the
"Financial Statements") are incorporated by reference into this Statement of
Additional Information. The Financial Statements included in such Annual
Report have been audited by the Fund's independent accountants, KPMG Peat
Marwick LLP, whose report thereon also appears in such Annual Report and is
incorporated herein by reference. The Financial Statements in such Annual
Report have been incorporated herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
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<PAGE> 102
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE> 103
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
A-2
<PAGE> 104
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
A-3
<PAGE> 105
interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
A-4
<PAGE> 106
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating
A-5
<PAGE> 107
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
A-6
<PAGE> 108
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
A-7
<PAGE> 109
probable credit stature upon completion of construction or elimination of basis
of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
A-8
<PAGE> 110
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
A-9
<PAGE> 111
principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by Thomson
BankWatch to long-term debt and indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited
A-10
<PAGE> 112
incremental risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment
of principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable
A-11
<PAGE> 113
Moody's Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following summarizes the
ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of
an investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 114
APPENDIX B
The U.S. Government Securities, Intermediate Corporate Bond, Bond Index,
Government & Corporate Bond, Equity Income, Equity Index, Growth & Income
Equity, Small Cap Equity, International Equity and Balanced Portfolios may
enter into futures contracts and options for hedging purposes in furtherance of
their respective investment objectives as stated in the Prospectuses. Such
transactions are described further in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost
and without changing the rate of interest being earned by the Portfolio,
through using futures contracts. A Portfolio would engage in an interest rate
futures contract sale to maintain the income advantage from continued holding
of a long-term bond while endeavoring to avoid part or all of the loss in
market value that would otherwise accompany a decline in long-term securities
prices. A Portfolio would engage in an interest rate futures contract purchase
when it is not fully invested in long-term bonds but wishes to defer for a time
the purchase of long-term bonds in light of the availability of advantageous
interim investments, for example,
B-1
<PAGE> 115
shorter-term securities whose yields are greater than those available on
long-term bonds.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by the Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Portfolio is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Portfolio realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Portfolio realizes a
loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges - principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
B-2
<PAGE> 116
II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the
value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio will
decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange
B-3
<PAGE> 117
rates between the U.S. dollar and other currencies arising from multi-national
transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no price is paid or
received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-market. For example, when a Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where a Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. At any time prior to expiration of
the futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend to use
interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options
B-4
<PAGE> 118
contracts which are currently traded or which may subsequently become available
for trading. Such instruments may be employed in connection with the
Portfolios' hedging strategies if, in the judgment of the adviser, transactions
therein are necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
B-5
<PAGE> 119
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL BONDS (104.1%):
Alabama (1.9%):
2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $1,997,500
3,000,000 Birmingham, Series A, 5.90%, 6/1/18 2,955,000
1,000,000 Tuscaloosa, 6.88%, 7/1/11 1,066,250
----------
6,018,750
----------
Alaska (0.3%):
1,000,000 State Housing Finance Corp. Series A, 5.70%, 12/1/11 1,003,750
----------
Arizona (3.4%):
1,000,000 Mohave County Unified School District #1, Lake Havasu, Series A, 5.90%, 7/1/15 1,016,250
1,000,000 Pima County University School District, School District No. 1, Tuscon, Series D, 6.10%, 7/1/10 1,045,000
6,400,000 Salt River Project Agricultural Impact, Power District Electrical Systems Revenue, Series C 6.20%, 1/1/12 6,576,000
1,000,000 Salt River Project Agriculture, 6.00%, 1/1/13 1,021,250
1,000,000 State Transportation Board Excise Tax, Maricopa County Regulated Area, Series B, 5.75%, 7/1/05 1,046,250
----------
10,704,750
----------
California (0.9%):
2,000,000 Southern California Public Power Authority, Series A, 5.00%, 7/1/15 1,820,000
1,000,000 State, 6.00%, 9/1/09 1,062,500
----------
2,882,500
----------
Colorado (2.9%):
6,655,000 Adams County School District, 5.40%, 12/15/13 6,480,306
1,000,000 Fort Collins, Series C, 6.00%, 12/1/09 1,032,500
1,000,000 Jefferson County School District No. R001, 5.90%, 12/15/05 1,047,500
500,000 Summit County School District No. Re1, 9.80%, 12/1/97 518,915
----------
9,079,221
----------
Connecticut (4.0%):
8,785,000 State, 5.25%, 3/1/13 8,422,619
1,000,000 State, Series A, 6.50%, 3/15/10 1,086,250
3,000,000 State, Series C, 5.80%, 3/15/07 3,105,000
----------
12,613,869
----------
Florida (5.7%):
2,000,000 Brevard County 6.00%, 9/1/11 2,052,500
8,000,000 Palm Beach County Solid Waste Authority, 5.38%, 10/1/11 7,790,000
1,000,000 State Pollution Control, Series Y, 6.50%, 7/1/11 1,061,250
1,000,000 State Board of Education Capital Outlay, 6.13%, 6/1/10 1,042,500
1,000,000 State Board of Education Capital Outlay, Series A, 5.88%, 6/1/16 1,007,500
5,000,000 State Environment 5.50%, 7/1/13 4,981,250
----------
17,935,000
----------
</TABLE>
See notes to financial statements.
<PAGE> 120
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Georgia (0.7%):
1,000,000 Atlanta, Series A, 6.10%, 12/1/19 $1,028,750
1,000,000 State, Series B, 6.30%, 3/1/09 1,091,250
----------
2,120,000
----------
Guam (0.3%):
1,000,000 Guam Government Water System Revenue, 7.00%, 7/1/09 1,071,250
----------
Hawaii (4.4%):
5,815,000 Honolulu City & County, 6.00%, 1/1/09 6,127,556
6,000,000 State, 5.50%, 3/1/14 7,818,800
----------
13,946,356
----------
Illinois (11.3%):
1,000,000 Arlington Heights, Series B, 5.88%, 12/1/12 1,013,750
3,000,000 Chicago, 6.00%, 1/1/11 3,090,000
1,000,000 Chicago, Metropolitan Water Reclamation, 5.40%, 12/1/06 1,017,500
1,000,000 Chicago, Metropolitan Water Reclamation, 5.50%, 12/1/06 1,016,250
1,000,000 Chicago, Metropolitan Water Reclamation, 6.30%, 12/1/09 1,066,250
2,000,000 Cook County, 5.90%, 11/15/16 2,000,000
1,000,000 Edwardsville, Waterworks, 6.00%, 2/1/17 1,026,250
1,000,000 Evanston, 6.13%, 12/1/11 1,035,000
1,000,000 State, 6.80%, 4/1/06 1,029,080
1,000,000 State, 6.00%, 10/1/01 1,048,750
1,000,000 State, 6.25%, 10/1/11 1,050,000
1,000,000 State, 5.88%, 6/1/09 1,022,500
3,000,000 State, 5.88%, 8/1/12 3,045,000
2,000,000 State, 5.625%, 7/1/13 1,972,500
1,000,000 State, 5.75%, 7/1/16 988,750
1,000,000 State Mbia-Ibc Insured, 5.75%, 4/1/12 1,003,750
2,000,000 State Mbia-Ibc Insured, 5.50%, 8/1/14 1,935,000
8,400,000 State, 5.25%, 2/1/13 7,969,500
1,000,000 Kane County Public Building, Series B, 6.40%, 12/1/03 1,030,000
1,000,000 Lake County Water & Sewer Systems, Series A, 6.70%, 12/1/06 1,078,750
1,000,000 Lake County Water & Sewer Systems, Series A, 5.50%, 12/1/09 998,750
----------
35,437,330
----------
Indiana (5.3%):
5,000,000 Goshen-Chandler School Building, 5.75%, 1/15/10 5,043,750
3,000,000 Hammond Multi-School Building Corporation, 5.80%, 1/15/15 2,966,250
5,000,000 Hammond Multi-School Building Corp., 5.85%, 1/15/20 4,937,500
1,000,000 Transportation Finance Authority, Highway Revenue, Series A 5.75%, 6/1/12 1,017,500
1,000,000 Indianapolis Local Public Improvements, Series C, 6.50%, 2/1/08 1,057,500
1,500,000 Whitko Middle School Building Corp., 5.88%, 07/15/12 1,518,750
----------
16,541,250
----------
Kansas (0.5%):
1,000,000 Douglas County School District No. 497, 6.00%, 9/1/11 1,051,250
500,000 Johnson County School District No. 233, 6.10%, 3/1/99 603,465
----------
1,554,715
----------
</TABLE>
See notes to financial statements.
<PAGE> 121
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Louisiana (0.9%):
2,900,000 Calcasleu Parish, Daily Floater, 2/1/16, LOC Wachovia Bank $2,900,000
----------
Michigan (1.4%):
335,000 Gratiot County Economic Development, 9.25%, 10/1/00 337,399
1,000,000 Greenville Public Schools, 5.75%, 5/1/11 1,015,000
1,000,000 Johannesburg-Lewistown Area Schools, 5.00%, 5/1/13 927,500
2,000,000 Redford School District, 5.95%, 5/1/15 2,035,000
----------
4,314,899
----------
Minnesota (2.5%):
1,000,000 Minneapolis Special School District, Series A, 5.70%, 2/1/09 1,026,250
6,000,000 Monticello Independent Schools, 5.40%, 2/1/15 5,797,500
1,000,000 Northern Municipal Power Agency,
Minneapolis Electric System Revenue, Series A
5.90%, 1/1/08 1,035,250
----------
7,860,000
----------
Mississippi (0.3%):
1,000,000 State, 6.20%, 2/1/08 1,058,750
----------
Missouri (3.8%):
250,000 Blue Springs, Waterworks & Sewer Revenue, 6.10%, 9/1/98 252,245
300,000 Blue Springs, Waterworks & Sewer Revenue, 6.20%, 9/1/99 302,568
1,000,000 Independence, Electrical Utility Revenue, 7.10%, 6/1/04 1,040,000
1,000,000 Kansas City, 6.50%, 3/1/06 1,050,000
1,200,000 State Health & Educational Facilities,
St. Louis University, Series A,
7.75%, 6/1/07 1,230,180
1,000,000 State Health & Education Facilities,
SSM Health Care, Series Aa,
6.25%, 6/1/07 1,065,000
1,000,000 State Health & Educational Facilities, Barnes Hospital, 7.13%, 12/15/12 1,102,500
1,500,000 State Health & Education Facilities,
SSM Health Care Projects, Series B,
7.00%, 6/1/05 1,646,250
1,000,000 St. Louis County, 7.20%, 2/1/05 1,085,000
2,000,000 Springfield School District R12 Series A, 6.75%, 03/01/11 2,147,500
1,000,000 Springfield School District R12, 6.38%, 3/1/12 1,061,250
----------
11,982,493
----------
Nebraska (0.7%):
1,000,000 Public Power District Revenue, Series A, 5.50%, 1/1/13 982,500
1,000,000 Omaha Public Power District Electric Rev, Series B, 6.00%, 2/1/07 1,065,000
----------
2,047,500
----------
Nevada (1.0%):
3,000,000 State, 6.50%, 12/1/12 3,225,000
----------
</TABLE>
See notes to financial statements.
<PAGE> 122
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
New Hampshire (1.6%):
1,000,000 Concord, 6.15%, 10/15/01 $1,051,250
1,000,000 State Capital Improvements, Series B, 6.45%, 11/1/08 1,081,250
3,000,000 State Turnpike System Revenue, 6.00%, 4/1/13 3,030,000
----------
5,162,500
----------
New Jersey (3.4%):
8,000,000 State, 6.00%, 7/15/09 8,559,840
2,000,000 State, Series D, 5.90%, 2/15/08 2,087,500
----------
10,647,340
----------
North Carolina (3.4%):
2,000,000 Eastern Municipal Power Agency, Series B, 6.00%, 1/1/13 2,027,500
1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 987,500
8,000,000 State, 5.20%, 3/1/13 7,780,000
----------
10,795,000
----------
Ohio (1.3%):
1,000,000 Columbus Sewer Improvement No. 27-E-U, 6.30%, 2/15/12 1,048,750
2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%, 5/1/13 2,072,500
1,000,000 Hamilton City Electric, Series A, 6.00%, 10/15/12 1,036,250
----------
4,157,500
----------
Oklahoma (0.5%):
500,000 Oklahoma City, New Public Housing, 5.75%, 5/1/98 508,590
1,000,000 Tulsa, 6.25%, 6/1/11 1,045,000
----------
1,553,590
----------
Pennsylvania (4.8%):
1,000,000 Allegheny County, Series C-40, 5.90%, 5/1/07 1,045,000
1,500,000 Burrell School District, 5.85%, 11/15/16 1,490,625
1,000,000 Easttown Township, 5.65%, 8/1/17 988,750
9,000,000 State, 5.13%, 9/15/11 8,617,500
1,000,000 State Higher Education Facility, 5.88%, 1/1/15 1,003,750
2,000,000 State Higher Educational Facilities,
University of Pennsylvania, Series B
5.88%, 1/1/15 2,007,500
----------
15,153,125
----------
Tennessee (1.6%):
1,000,000 Bradley County, Tennessee, Vm, 11/01/17* 1,000,000
1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 1,037,500
1,000,000 Metropolitan Government Nashville & Davidson, 6.13%, 5/15/19 1,026,250
1,000,000 Metropolitan Government Nashville & Davidson Cnty,
Water & Sewer 5.75%, 1/1/15 992,500
1,000,000 Shelby County, Series B, 5.88%, 3/1/12 1,025,000
----------
5,081,250
----------
</TABLE>
See notes to financial statements.
<PAGE> 123
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Texas (12.9%):
3,000,000 Austin Independent School District, 5.75%, 8/1/15 $3,003,750
1,000,000 Fort Worth Water & Sewer Revenue, Series B, 6.05%, 2/15/06 1,058,750
8,000,000 Harris County Health, 5.50%, 6/1/17 7,530,000
3,500,000 Harris County Health Care Facilities,
Frn, 12/01/25 Methodist Hospital, LOC Morgan Guaranty Trust 3,500,000
715,000 Houston, Series C, 6.25%, 3/1/12 738,238
1,000,000 Humble Independent School District, 6.25%, 2/1/07 1,063,750
1,000,000 Manor Independent School District, 5.70%, 8/1/10 1,017,500
1,000,000 Royse City Independent School District, 5.50%, 2/15/15 980,000
1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 1,003,750
1,000,000 State Public Financing Authority, Series A, 5.70%, 10/1/07 1,027,500
3,000,000 State Public Finance Authority, Series A, 5.95%, 10/1/15 3,063,750
6,750,000 State Water, 5.40%, 8/1/21 6,353,438
2,000,000 Water Development Board Revenue, Series A, 5.75%, 7/15/15 1,990,000
1,000,000 University of Texas, Permanent University Fund, Series A, 6.25%, 7/1/13 1,032,500
7,500,000 University of Texas, Series B 5.10%, 8/15/13 7,040,625
----------
40,403,551
----------
Utah (2.3%):
1,000,000 Davis County School District, 7.00%, 6/1/04 1,067,500
1,000,000 Davis County School District, 6.65%, 6/1/04 1,077,500
4,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/12 4,055,000
1,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/15 999,970
----------
7,199,970
----------
Virginia (2.8%):
1,000,000 Newport News, Series A, 6.13%, 6/1/10 1,051,250
2,000,000 Richmond Public Improvement, Series-B, 6.25%, 1/15/18 2,055,000
1,000,000 State Public School Authority, 5.90%, 7/15/11 1,023,750
4,920,000 State, 5.13%, 5/15/12 4,680,150
----------
8,810,150
----------
Washington (12.1%):
1,000,000 Grant County Public Utility, District No. 002 Electric Revenue, Series F, 5.70%, 1/1/15 982,500
1,000,000 King County, Series A, 6.00%, 12/1/09 1,040,000
1,000,000 King County Library System, 6.05%, 12/1/07 1,063,750
1,500,000 King County School District #415 Kent, 5.75%, 6/1/11 1,522,500
2,000,000 King County School District #415 Kent, 5.88%, 6/1/16 2,007,500
1,000,000 Seattle Municipal Light & Power Revenue, 6.20%, 7/1/06 1,073,750
1,000,000 Seattle Municipal Light & Power Revenue, 6.25%, 7/1/07 1,070,000
1,000,000 Snohomish County Public Utility,
District No. 001 Electrical Revenue, Series A 6.90%, 1/1/06 1,077,500
1,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.45%, 1/1/06 1,085,000
3,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.00%, 1/1/13 3,063,750
2,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.50%, 1/1/12 2,112,500
1,000,000 Snohomish County School District #2, Everett, Series A, 6.80%, 12/1/03 1,077,500
1,000,000 Snohomish County School District #2, 6.20%, 12/1/12 1,048,750
1,000,000 Spokane, 6.13%, 1/1/09 1,035,000
3,000,000 Spokane Regular Solid Waste Management, 5.50%, 12/1/10 2,985,000
</TABLE>
See notes to financial statements.
<PAGE> 124
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Washington, continued:
4,190,000 State, 5.50%, 1/01/17 $4,022,400
8,000,000 State Motor Vehicle Fuel Tax, Series D, 5.38%, 1/1/22 7,620,000
1,000,000 State, Series Dd-14 & Series B, 5.75%, 9/1/07 1,031,250
1,000,000 State, Series R92-A, 6.25%, 9/1/09 1,045,000
1,000,000 Tacoma Electrical System Revenue, 6.13%, 1/1/11 1,051,250
1,000,000 Tacoma Electric System, 6.25%, 1/1/15 1,032,500
------------
38,047,400
------------
West Virginia (2.5%)
7,940,000 School Building, 5.40%, 7/01/10 7,840,750
------------
Wisconsin (2.6%):
1,000,000 Dane County, Series A, 5.65%, 3/1/12 1,003,750
1,000,000 Green Bay Area Public School District, Series A, 5.50%, 4/1/12 991,250
3,000,000 Kenosha, Series B, 5.85%, 12/1/11 3,052,500
3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 3,071,250
------------
8,118,750
-----------
Total Municipal Bonds 327,268,259
------------
INVESTMENT COMPANIES (0.0%):
27,000 Federated Tax-Free Trust Mutual Fund 27,000
1,000 Nuveen Tax Exempt Money Market Fund 1,000
------------
Total Investment Companies 28,000
------------
Total Cost $324,440,065 $327,296,259
============
- ---------
</TABLE>
Percentages indicated are based on net assets of $314,293,528.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $5,440,055
Unrealized Depreciation......................... 2,583,861
----------
$2,856,194
==========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rates reflected on the Schedule of Portfolio
Investments is the rate in effect at March 31, 1997.
- - Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods less than one year.
See notes to financial statements.
<PAGE> 125
THE ARCH FUND, INC.
Statement of Assets and Liabilities
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
National
Municipal
Bond
Portfolio
------------
<S> <C>
ASSETS:
Investments at Value (Cost 324,440,065) $327,296,259
------------
Total Investments 327,296,259
Cash 408
Interest and dividends receivable 4,116,845
Unamortized Organization Costs 29,795
Prepaid expenses and other assets 74,421
------------
TOTAL ASSETS 331,517,728
------------
LIABILITIES:
Dividends payable 1,504,196
Payable to brokers for investments purchased 15,689,040
Accrued expenses and other payables:
Administrative fees 2,853
Distribution and services fees 76
Custodian fees 473
Transfer Agent fees 6,451
Other 21,111
------------
TOTAL LIABILITIES 17,224,200
------------
NET ASSETS:
Capital 306,296,212
Net unrealized appreciation from investments 2,856,194
Accumulated undistributed net realized gains from
investment transactions 5,141,122
------------
NET ASSETS $314,293,528
============
Net Assets
Investor A Shares $ 499,422
Investor B Shares 993
Trust Shares 313,793,113
------------
Total $314,293,528
============
Outstanding units of beneficial interest (shares)
Investor A Shares 50,968
Investor B Shares 101
Trust Shares 32,009,572
------------
Total 32,060,641
============
Net asset value
Investor A Shares-redemption price per share $ 9.80
Investor B Shares-offering price per share* 9.80
Trust Shares-offering and redemption price per share 9.80
============
Maximum Sales Charge: Investor A Shares 4.50%
------------
Maximum Offering Price (100%/(100%) - Maximum Sales Charge)
of net asset value adjusted to nearest cent) per share:
Investor A Shares $ 10.26
============
</TABLE>
- -------
* Redemption price of Investor B Shares varies based on length of time held.
<PAGE> 126
THE ARCH FUND, INC.
Statements of Operations
For the four month period ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
National
Municipal
Bond
Portfolio
------------
<S> <C>
INVESTMENT INCOME:
Interest income $ 5,946,947
Dividend income 56,784
------------
Total income 6,003,731
------------
EXPENSES:
Investment advisory fees 570,287
Administration fees 103,687
Distribution and services fees (Investor A Shares) 174
Distribution and services fees (Investor B Shares) 4
Custodian and accounting fees 3,423
Legal and audit fees 12,778
Organization Costs 2,122
Directors' fees and expenses 3,248
Transfer agent fees 18,684
Registration and filing fees 25,984
Printing costs 11,123
Other 2,088
------------
Total Expenses 753,602
Less: fee waivers and expense reimbursements (617,005)
------------
Net Expenses 136,597
------------
Net Investment Income 5,867,134
------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains from investment transactions 5,025,797
Change in unrealized appreciation (depreciation) from investments (12,725,042)
------------
Net realized/unrealized gains (losses)from investments (7,699,245)
------------
Change in net assets resulting from operations $ (1,832,111)
============
- ---------
</TABLE>
<PAGE> 127
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
National
Municipal
Bond Portfolio
---------------------------------
Four Month
Period Ended November 18,
March 31, 1996 to
1997 November 30,
(Unaudited) 1996 (a)
----------- ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 5,867,134 $ 735,988
Net realized gains (losses) on investment
transactions 5,025,797 115,325
Net change in unrealized appreciation
(depreciation) from investments (12,725,042) 1,278,075
------------ ------------
Change in net assets resulting from operations (1,832,111) 2,129,388
------------ ------------
DISTRIBUTIONS TO INVESTOR A SHAREHOLDERS:
From net investment income (3,194) (4)
DISTRIBUTIONS TO INVESTOR B SHAREHOLDERS:
From net investment income (16) (3)
DISTRIBUTIONS TO TRUST SHAREHOLDERS:
From net investment income (5,863,932) (735,973)
------------ ------------
Change in net assets from shareholder distributions (5,867,142) (735,980)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 16,003,452 314,008,996
Dividends reinvested 1,168 --
Cost of shares redeemed (4,426,482) (4,987,761)
------------ ------------
Change in net assets from share transactions 11,578,138 309,021,235
------------ ------------
Change in net assets 3,878,885 310,414,643
NET ASSETS:
Beginning of period 310,414,643 --
------------ ------------
End of period $314,293,528 $310,414,643
============ ============
Share Transactions:
Issued 1,604,613 31,400,289
Reinvested 118 --
Redeemed (446,195) (498,183)
------------ ------------
Change in shares 1,158,536 30,902,106
============ ============
</TABLE>
- -----------
(a) Period from commencement of operations.
<PAGE> 128
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
1. ORGANIZATION
The ARCH Fund, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. As of March 31, 1997, the Fund is authorized to offer the following
investment portfolios: Money Market, Treasury Money Market, Tax-Exempt Money
Market, Growth & Income Equity, Small Cap Equity, International Equity,
Balanced, Government & Corporate Bond, U.S. Government Securities, Short
Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Intermediate Corporate Bond, Bond Index, Equity Income and Kansas Tax-Exempt
Bond Portfolios. The Fund was organized as a Maryland corporation on September
9, 1982. The Kansas Tax-Exempt Bond Portfolio has not yet commenced operations.
The accompanying financial statements and financial highlights are those of the
National Municipal Bond Portfolio (the "Portfolio") only.
The Portfolio's investment objective is as follows. The National Municipal Bond
Portfolio seeks as high a level of interest income exempt from federal income
tax as is consistent with conservation of capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from these estimates.
SECURITIES VALUATION:
The Securities of the National Municipal Bond Portfolio that are traded on a
recognized exchange are valued at the last sale price on the national
-Continued-
<PAGE> 129
THE ARCH FUND,INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
securities market. Securities traded only on over-the-counter markets are valued
on the basis of market value when available. Securities for which there were no
transactions are valued at the mean of the most recent bid and asked prices.
Securities maturing in 60 days or less are valued at amortized cost. Securities,
including restricted securities, for which market quotations are not readily
available, are valued at fair market value by the investment adviser in
accordance with guidelines approved by the Fund's Board of Directors.
Investments in investment companies are valued at their respective net asset
values as reported by such companies. The differences between cost and market
values of the investments of the variable net asset portfolios are reflected as
unrealized appreciation or depreciation.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded on the trade date. Realized gains and
losses on investments sold are recorded on the identified cost basis. Interest
income is accrued on a daily basis. Dividend income is recorded on the
ex-dividend date. Realized and unrealized gains and losses are allocated based
upon relative net assets of each class of shares. Approximately $14,302,000 of
net unrealized appreciation was carried over upon conversion of the Mercantile
Common Trust Fund M (Common Trust Fund) to the National Municipal Bond Portfolio
on November 18, 1996. Thus, the decrease in net unrealized appreciation of
$12,725,042 as disclosed in the accompanying statement of operations includes a
decrease from the unrealized appreciation carried over from the Common Trust
Fund.
SECURITIES LENDING:
To increase return, the National Municipal Bond Portfolio may, from time to
time, lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities pursuant to agreements requiring that the loans be
continuously secured by collateral equal, at all times, in value to at least the
market value of the securities loaned. Collateral for such loans may include
cash, securities of the U.S. Government, or its agencies or instrumentalities,
irrevocable letters of credit, or any combination thereof. The collateral must
be valued daily, and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Portfolio. By lending its
securities, the Portfolio can increase its income by continuing to receive
interest or dividends on the loaned securities as well as either investing the
cash collateral in short-term instruments or obtaining yield in the form of
interest paid by the borrower when U.S. Government securities are used as
collateral. Loans are subject to termination by the Portfolio or the borrower at
any time. The risks, to the Portfolio, of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due. In addition, if cash collateral invested by the Portfolio
is less than the amount required to be returned to the borrower as a result of a
decrease in the value of the cash collateral investments, the Portfolio must
compensate the borrower for the deficiency. At March 31, 1997, the Portfolio did
not have any securities on loan.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends on each share of the Portfolio are determined in the same manner,
irrespective of class, except that shares of each class bear separate fees
under either a Distribution and Services Plan or an Administrative Services
Plan adopted for each class and enjoy certain exclusive voting rights on
matters relating to these fees. It is the policy of the National Municipal Bond
Portfolio to declare dividends daily from net investment income and to pay such
dividends no later than five business days after the end of the month. Net
realized capital gains for each Portfolio, if any, are distributed at least
annually. Additional distributions of net investment income and capital gains
may be made at the discretion of the Board of Directors in order to avoid the
4% excise tax to which a Portfolio is subject with respect to certain
undistributed amounts of net investment income and capital gains.
Dividends from net investment income and from net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for foreign currency transactions, expiring capital
loss carryforwards and deferrals of certain losses. Permanent book and tax
basis differences have been reclassified among the components of net assets.
<PAGE> 130
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
FEDERAL INCOME TAXES:
It is the policy of the Portfolio to qualify or to continue to qualify
as a regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially all,
federal income taxes.
ORGANIZATION COSTS:
The Portfolio bears all costs in connection with its organization, including
the fees and expenses of registering and qualifying shares for distribution
under Federal and state securities regulations. All such costs are amortized
using the straight-line method over a period of five years from the date the
Portfolio commenced operations, i.e., November 18, 1996 for the National
Municipal Bond Portfolio.
OTHER:
Operating expenses of the Fund not directly attributable to a particular
Portfolio or to any class of shares of a portfolio are prorated among the
portfolios based on the relative net assets of each portfolio or other
appropriate basis. Operating expenses directly attributable to a portfolio are
charged directly to that portfolio's operations. Fees paid under either a
Distribution and Services Plan or an Administrative Services Plan are borne by
the specific class of shares to which they apply.
3. SHARES OF COMMON STOCK
The Fund is authorized to issue three classes of shares in the Portfolio:
Investor A shares, Investor B shares and Trust shares. Investor A shares are
sold with a front-end sales charge. Investor B Shares may be subject to
contingent deferred sales charges ("CDSC") based on the lesser of the net asset
value of the shares on the redemption date or the original cost of the shares
redeemed. The following table sets forth the time schedule of redemptions of
Investor B Shares subject to CDSC:
<TABLE>
<CAPTION>
CDSC
(percentage of
Number of Years amount subject
Elapsed Since Purchase to the charge)
- ---------------------- --------------
<S> <C>
Less than one 5.0%
One, but less than two 4.0%
Two, but less than three 3.0%
Three, but less than four 3.0%
Four, but less than five 2.0%
Five, but less than six 1.0%
Six or more None
</TABLE>
Each class of shares in the Portfolio has identical rights and privileges except
with respect to the fees paid by the classes under either a Distribution and
Services Plan or an Administrative Services Plan, expenses allocable exclusively
to each class of shares, voting rights on matters affecting a single class of
shares, the exchange privilege of each class of shares, and the automatic
conversion of Investor B Shares of the Portfolio into Investor A Shares of the
Portfolio eight years after purchase.
As of November 30, 1996, the Fund's Articles of Incorporation authorize the
Board of Directors, in its discretion, to issue up to seven billion full and
fractional shares of capital stock, $0.001 par value per share, and to classify
or reclassify any unissued shares of the Fund into one or more additional
classes. Pursuant
<PAGE> 131
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
to such authority, as of November 30, 1996, the Fund had classified shares as
follows representing interests in the Portfolio:
<TABLE>
<CAPTION>
CLASS SHARES (000) REPRESENT INTERESTS IN:
- --------------------- ------------ --------------------------------
PORTFOLIO CLASS
--------------------------------
<S> <C> <C> <C>
Class N Shares...................... 25,000 National Municipal Bond Investor A
Class N--Special Series 1 Shares.... 50,000 National Municipal Bond Trust
Class N--Special Series 2 Shares.... 25,000 National Municipal Bond Investor B
</TABLE>
Each Portfolio share represents an equal, proportionate interest in the
Portfolio with respect to other shares outstanding, irrespective of series.
4. CAPITAL SHARE TRANSACTIONS
Transactions in portfolio shares of the Fund were as follows:
See TABLE 1, attached.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of securities (excluding short-term securities) during the
four month period ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -----
<S> <C> <C>
National Municipal Bond...... $136,871,365 $107,677,175
</TABLE>
6. RELATED PARTY TRANSACTIONS
Investment advisory services are provided to the Fund by Mississippi Valley
Advisors Inc. ("MVA"), a wholly owned subsidiary of Mercantile Bank National
Association ("Mercantile"), which in turn is a wholly owned subsidiary of
Mercantile Bancorporation Inc. Under the terms of the investment advisory
agreement, MVA is entitled to receive fees based on a percentage of the average
daily net assets of the Fund. Mercantile serves as custodian for the Fund.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS") is
an Ohio limited partnership. BISYS Fund Services Ohio, Inc. (the "Company"),
and BISYS are subsidiaries of The BISYS Group, Inc.
The Company, with whom certain officers of the Fund are affiliated, serves the
Fund as Administrator. Such officers are paid no fees directly by the Fund for
serving as officers of the Fund. Under the terms of the administration
agreement, the Company receives fees computed as 0.20% of the average daily net
assets of the Portfolio. The Company serves the Fund as Transfer Agent. BISYS
serves as the Funds' distributor and is entitled to receive commissions on sales
of Investor A Shares and Investor B Shares of the Portfolio.
With respect to Investor A Shares of the Portfolio, the Fund has adopted a
Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, the portfolio may pay (i) up to 0.10% of the average
daily net assets of the Portfolio's outstanding Investor A Shares to BISYS or
another organization for distribution services performed and expenses assumed
relating to the Portfolio's Investor A shares and (ii) up to 0.20% of the
average daily net assets of the Portfolio's outstanding Investor A Shares to
broker-dealers and other organizations for shareholder administrative services
provided pursuant to servicing agreements under the Plan.
Similarly, with respect to Investor B Shares, the Fund has adopted a
Distribution and Services Plan (the
<PAGE> 132
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
(Unaudited)
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Plan, the Portfolio may pay (i) up to 0.75% of the average daily net assets
of the Portfolio's outstanding Investor B Shares to BISYS or another
organization for distribution services performed and expenses assumed relating
to the Portfolio's Investor B Shares and (ii) up to 0.25% of the average daily
net assets of the Portfolio's Investor B Shares to broker-dealers and other
organizations for shareholder administrative services provided pursuant to
servicing agreements under the Plan.
With respect to Trust Shares of the Portfolio, the Fund has adopted an
Administrative Services Plan pursuant to which Trust Shares are sold to banks
and other financial institutions on behalf of their qualified accounts. The
Portfolio may pay these banks and other financial Institutions, which have
agreed to provide certain shareholder administrative services for their clients
or account holders, up to 0.30% of the average daily net assets of the
Portfolio's Trust Shares.
Fees may be voluntarily reduced to assist the Portfolio in maintaining
competitive expense ratios.
Information regarding these transactions is as follows for the four month
period ended March 31, 1997:
See Table 2, attached.
<PAGE> 133
Table 1
-------
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
(UNAUDITED)
TRANSACTIONS IN CAPITAL SHARES FOR THE GROUP WERE AS FOLLOWS:
<TABLE>
<CAPTION>
National Municipal
Bond Portfolio
-----------------------------------
Four month November 16
period ended 1996 to
March 31, November 30
1997 1996(a)
------------ ------------
<S> <C> <C>
CAPITAL TRANSACTIONS
Investor A Shares:
Proceeds from shares issued ............................... $ 726,236 $ 1,000
Dividends reinvested ...................................... 558 --
Shares redeemed ........................................... (219,306) --
----------- ------------
Change in net assets from Investor A share
transactions ............................................ $ 507,489 $ 1,000
=========== ============
Investor B Shares:
Proceeds from shares issued ............................... $ -- $ 1,000
Dividends reinvested ...................................... 13 --
Shares redeemed ........................................... -- --
----------- ------------
Change in net assets from Investor B share
transactions ............................................ $ 13 $ 1,000
=========== ============
Trust Shares:
Proceeds from shares issued ............................... $15,277,216 $314,006,996
Dividends reinvested ...................................... 596 --
Shares redeemed ........................................... (4,207,176) (4,987,761)
----------- ------------
Change in net assets from Trust share
transactions ............................................ $ 11,070,636 $309,019,235
============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued .................................................... 72,954 100
Reinvested ................................................ 58 --
Redeemed .................................................. (22,142) --
----------- ------------
Change in Investor A shares ............................... 50,868 100
=========== ============
Investor B Shares:
Issued .................................................... -- 100
Reinvested ................................................ 1 --
Redeemed .................................................. -- --
----------- ------------
Change in Investor B shares ............................... 1 100
=========== ============
Trust Shares:
Issued .................................................... 1,531,660 31,400,088
Reinvested ................................................ 60 --
Redeemed .................................................. (424,053) (498,183)
----------- ------------
Change in Trust Shares .................................... 1,107,667 30,901,905
=========== ============
(a) Period from commencement of operations.
</TABLE>
<PAGE> 134
TABLE 2
-------
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997
For the four-month period ended March 31, 1997:
(Unaudited)
<TABLE>
<CAPTION>
Investment Advisory Fees Administration Fees
------------------------------- -------------------
Annual fee
before Fund Transfer
Voluntary Voluntary Voluntary Custodian Accounting Agent
fee reductions fee reductions fee reductions Fees Fees Fees
-------------- -------------- -------------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
National Municipal
Bond Portfolio.......... 0.55% $570,287 $46,660 $867 $2,556 $18,684
</TABLE>
<PAGE> 135
THE ARCH FUND, INC.
National Municipal Bond
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Investor A Investor A
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.18 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
(0.07) 0.07
Total from Investment Activities
DISTRIBUTIONS
Net investment income (0.18) (0.02)
------ ------
Total Distributions (0.18) (0.02)
------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (Excludes sales charge) (0.72)%(b) 0.73%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 499 $ 1
Ratio of expenses to average net assets 0.33%(c) 0.37%(c)
Ratio of net investment income to average net assets 5.37%(c) 9.08%(c)
Ratio of expenses to average net assets* 1.02%(c) 1.07%(c)
Ratio of net investment income to average net assets* 4.68%(c) 8.38%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
<PAGE> 136
THE ARCH FUND, INC.
National Municipal Bond
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Investor B Investor B
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.16 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
Total from Investment Activities (0.09) 0.07
DISTRIBUTIONS
Net investment income (0.16) (0.02)
------ ------
Total Distributions (0.16) (0.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (Excludes sales charge) (0.95)%(b) 0.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 1 $ 1
Ratio of expenses to average net assets 1.09%(c) 1.10%(c)
Ratio of net investment income to average net assets 4.71%(c) 8.35%(c)
Ratio of expenses to average net assets* 1.09%(c) 1.80%(c)
Ratio of net investment income to average net assets* 4.71%(c) 7.65%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
<PAGE> 137
THE ARCH FUND, INC.
National Municipal Bond
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Trust Trust
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.19 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
Total from Investment Activities (0.06) 0.07
DISTRIBUTIONS
Net investment income (0.19) (0.02)
------ ------
Total Distributions (0.19) (0.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (0.64)%(b) 0.74%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at the end of period (000) $313,793 $310,413
Ratio of expenses to average net assets 0.13%(c) 0.12%(c)
Ratio of net investment income to average net assets 5.65%(c) 5.77%(c)
Ratio of expenses to average net assets* 0.73%(c) 0.82%(c)
Ratio of net investment income to average net assets* 5.06%(c) 5.07%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
