<PAGE> 1
As filed with the Securities and Exchange Commission on August 12, 1997
Registration No. _______________
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___ Post-Effective Amendment No. ___
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter:
THE ARCH FUND, INC.
Area Code and Telephone Number:
1-800-551-3731
Address of Principal Executive Offices:
3435 Stelzer Road
Columbus, Ohio 43219
Name and Address of Agent for Service:
W. BRUCE McCONNEL, III
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective under the Securities Act of 1933.
It is proposed that this filing will become effective on September 11, 1997
pursuant to Rule 488 under the Securities Act of 1933.
Calculation of Registration Fee under the Securities Act of 1933: No filing fee
is required because an indefinite number of shares have previously been
registered on Form N-1A (Registration Nos. 2-79285, 811-3567) pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Registrant is filing as an
exhibit to this Registration Statement a copy of its earlier declaration under
Rule 24f-2. Pursuant to Rule 429, this Registration Statement relates to the
aforesaid Registration Statement on Form N-1A.
<PAGE> 2
THE ARCH FUND
FORM N-14
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a)
<TABLE>
<CAPTION>
ITEM NO. HEADING
- -------- -------
Part A
<S> <C>
1. Beginning of Registration Statement
and Outside Front Cover Page......... Cover Page
2. Beginning and Outside
Back Cover Page...................... Table of Contents
3. Fee Table, Synopsis Information
and Risk Factors..................... Summary; Comparative Fee Tables; Risk
Factors; Comparison of Investment
Policies and Risk Factors
4. Information About the Transaction.... Summary; Risk Factors; Information
Relating to the Proposed
Reorganization; Comparison
of Investment Policies and Risk
Factors
5. Information About the Registrant..... Summary; Risk Factors; Comparison of
Investment Policies and Risk Factors;
Additional Information About Arch;
Additional Information About Arrow
5A. Management's Discussion of
Fund Performance..................... Appendix II
6. Information About the Company
Being Acquired....................... Summary; Risk Factors; Comparison of
Investment Policies and Risk Factors;
Additional Information About Arch;
Additional Information About Arrow
7. Voting Information................... Summary; Information Relating to
Voting Matters
8. Interest of Certain Persons
and Experts.......................... Additional Information About Arch;
Additional Information About Arrow
9. Additional Information Required
for Reoffering by Persons Deemed
to be Underwriters................... Inapplicable
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. HEADING
- -------- -------
Part B
<S> <C>
10. Cover Page........................... Statement of Additional Information
Cover Page
11. Table of Contents.................... Table of Contents
12. Additional Information
About the Registrant................. Statement of Additional Information
of The ARCH Fund, Inc. dated
February 28, 1997 (as revised May
28, 1997)*
13. Additional Information
About the Company Being
Acquired............................. Combined Statement of Additional
Information of Arrow Funds' Equity,
Fixed Income and Municipal Income
Portfolios dated November 30, 1996*
14. Financial Statements................ Financial Statements*; Pro Forma
Financial Statements
</TABLE>
Part C
Items 15-17. Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Registration Statement.
* Incorporated by reference thereto.
-ii-
<PAGE> 4
Dear Arrow Fund Shareholder:
The Board of Trustees of Arrow Funds has called a special meeting to consider a
proposal that could improve the level of services available to shareholders. At
this meeting, shareholders of the Arrow Equity, Arrow Fixed Income and Arrow
Municipal Income Portfolios (the "Arrow Portfolios") will be asked to approve a
proposal to combine the Arrow Portfolios with The ARCH Fund, Inc. - a $3 billion
mutual fund complex managed by Mississippi Valley Advisors Inc.
After carefully studying the merits of the proposal, the Board of Trustees has
determined that a consolidation between the two fund families will provide
substantial value for Arrow Portfolio shareholders. To move forward, however, a
majority of the shareholders of the Arrow Portfolios must first vote in favor of
the transaction. Accordingly, enclosed you'll find a proxy card for the upcoming
shareholder meeting scheduled to be held on November 12, 1997. IT IS IMPORTANT
THAT YOU COMPLETE, SIGN AND RETURN YOUR CARD AS SOON AS POSSIBLE TO ENSURE YOUR
VOTE IS COUNTED AT THE MEETING.
The Arrow Fund Board of Trustees unanimously endorses the proposed
reorganization that is discussed in detail in the combined proxy statement and
fund prospectus we've sent you. The consolidation of the Arrow Portfolios with
The ARCH Fund, Inc. will benefit shareholders in two key ways:
1. Shareholders will now be able to choose from 18 investment portfolios
versus the 4 investment portfolios that are now available through
Arrow Funds. The wide array of additional investment options will
include international, asset allocation and market index funds.
Shareholders will also be able to exchange from one portfolio to
another without incurring any transaction charges.
2. By combining the assets of the Arrow Portfolios and the ARCH Funds,
fund expense ratios may decline, which would ultimately translate
into better returns for fund shareholders.
The reorganization of the Arrow Portfolios into The ARCH Fund, Inc., pending
shareholder approval, is slated for late November 1997. In connection with the
reorganization, you should note the following:
- Trust shareholders will be able to continue to invest on a no
load basis.
- The reorganization will be a tax free event.
- Two Arrow portfolios - the Arrow Fixed Income Portfolio and the Arrow
Municipal Income Portfolio - will be combined into comparable ARCH
portfolios with similar
<PAGE> 5
investment objectives and policies and that are managed by the same
investment professionals at Mississippi Valley Advisors Inc. One
Arrow portfolio - the Arrow Equity Portfolio - will be reorganized
into a newly created portfolio within The ARCH Fund, Inc. and that
will continue to be managed by Carl Enloe who has managed the Arrow
Equity Portfolio since its inception. The remaining Arrow portfolio
- the Arrow Government Money Market Portfolio - will be liquidated
prior to the reorganization.
- The value of your investment will not change as a result of the
reorganization.
The enclosed materials should provide you with the necessary details to make an
informed decision about the proposal.
We are truly excited about the reorganization and the potential benefits it
provides to current shareholders who invest in the Arrow Portfolios. Hopefully,
you will agree by voting "yes" and returning your proxy card as soon as
possible.
Sincerely,
Chairman, Arrow Funds
<PAGE> 6
THE ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on November 12, 1997
To Arrow Shareholders:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders
("Shareholders") of the Fixed Income Portfolio, Municipal Income Portfolio and
Equity Portfolio (each, an "Arrow Portfolio") of Arrow Funds ("Arrow") will be
held at Federated Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh,
Pennsylvania 15222-3779 on November 12, 1997 at 2:00 p.m. Eastern Time for the
following purposes:
ITEM 1. With respect to each Arrow Portfolio:
To consider and act upon a proposal to approve an Agreement and Plan
of Reorganization (the "Reorganization Agreement") and the
transactions contemplated thereby, including (a) the transfer of
substantially all of the assets and liabilities of Arrow's Fixed
Income, Municipal Income and Equity Portfolios to corresponding
investment portfolios (the "Arch Portfolios") of The ARCH Fund, Inc.
in exchange for shares of the Arch Portfolios; (b) the distribution
of the Arch Portfolios' shares so received to shareholders of the
Arrow Portfolios; and (c) the termination under state law of Arrow.
ITEM 2. With respect to each Arrow Portfolio:
To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
The proposed reorganization and related matters are described in the
attached Combined Proxy Statement/Prospectus. Appendix I to the Combined Proxy
Statement/Prospectus is a copy of the Reorganization Agreement.
Shareholders of record as of the close of business on _________, 1997 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment(s)
thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY ARROW'S BOARD
OF TRUSTEES. THIS IS IMPORTANT TO
<PAGE> 7
ENSURE A QUORUM AT THE SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME
BEFORE THEY ARE EXERCISED BY SUBMITTING TO ARROW A WRITTEN NOTICE OF REVOCATION
OR A SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING
IN PERSON.
------------------------
Secretary
September ___, 1997
-2-
<PAGE> 8
COMBINED PROXY STATEMENT/PROSPECTUS
DATED SEPTEMBER __, 1997
ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
1-800-866-6040
THE ARCH FUND, INC.
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-452-ARCH (2724)
This Combined Proxy Statement/Prospectus is furnished in connection with
the solicitation of proxies by the Board of Trustees of Arrow Funds ("Arrow") in
connection with a Special Meeting (the "Meeting") of Shareholders
("Shareholders") of Arrow's Fixed Income, Municipal Income and Equity Portfolios
to be held on November 12, 1997 at 2:00 p.m. Eastern Time at Federated Investors
Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania 15222-3799, at
which Shareholders will be asked to consider and approve a proposed Agreement
and Plan of Reorganization dated __________, 1997 (the "Reorganization
Agreement"), by and between Arrow and The Arch Fund, Inc. ("Arch") and the
matters contemplated therein. A copy of the Reorganization Agreement is attached
as Appendix I.
Arrow and Arch are open-end, series, management investment companies. As a
result of the recent merger of Mark Twain Bancshares, Inc., the parent of
Arrow's former investment adviser, Mark Twain Bank, and Mercantile
Bancorporation Inc. (the "Holding Company Merger"), Mississippi Valley Advisors
Inc. ("MVA") and its affiliates are now providing investment advisory and other
services to both Arch and Arrow. MVA and its affiliates are subsidiaries of
Mercantile Bancorporation Inc. In reviewing the proposed reorganization (the
"Reorganization"), the Arrow Board considered the consummation of the Holding
Company Merger; the recommendation of MVA that Arrow and Arch be consolidated in
an effort to promote more efficient operations, eliminate duplicative costs and
enhance the distribution of shares by eliminating market overlap; the fact that
the Reorganization would constitute a tax-free reorganization; and the fact that
the interests of Shareholders would not be diluted as a result of the
Reorganization.
The Reorganization Agreement provides that initially each of the following
two investment portfolios of Arrow (collectively, the "Reorganizing Portfolios")
will transfer substantially all its assets and known liabilities to the existing
Arch investment
<PAGE> 9
portfolio (collectively, the "Existing Arch Portfolios")
identified below opposite its name:
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate
Bond Portfolio
Municipal Income Portfolio National Municipal Bond
Portfolio
</TABLE>
The Reorganization Agreement also provides that the following investment
portfolio of Arrow (the "Continuing Portfolio") will subsequently transfer all
its assets and known liabilities to the newly-organized Arch investment
portfolio (the "New Arch Portfolio") identified below opposite its name:
<TABLE>
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
In exchange for the transfers of these assets and liabilities, Arch will
issue shares in the three Arch investment portfolios listed above (collectively,
the "Arch Portfolios") to the corresponding Arrow investment portfolios listed
above (collectively, the "Arrow Portfolios"). The initial transaction between
the Reorganizing Portfolios and the Existing Arch Portfolios is referred to
herein as the "Reorganizing Portfolios Transaction" and the subsequent
transaction between the Continuing Portfolio and the New Arch Portfolio is
referred to herein as the "Continuing Portfolio Transaction." The transactions
are expected to occur on or after November 14, 1997 and November 21, 1997,
respectively.
Prior to the Reorganizing Portfolios Transaction, it is expected that all
of the shareholders in the Arrow Government Money Market Portfolio will redeem
their shares in that portfolio.
The Arrow Portfolios have one class of shares outstanding. The Arch
Government & Corporate Bond and Arch Growth Equity Portfolios have four classes
of shares outstanding (Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares) and the Arch National Municipal Bond Portfolio has three
classes of shares outstanding (Trust Shares, Investor A Shares and Investor B
Shares). Holders of shares of an Arrow Portfolio will receive Investor A Shares
(which are similar to shares of the Arrow Portfolios) of the corresponding Arch
Portfolio as set forth in the table on page ___ under "Information Relating to
the Proposed Reorganization -- Description of the Reorganization Agreement."
-2-
<PAGE> 10
The Arrow Portfolios will make liquidating distributions of the Arch
Portfolios' shares to the Shareholders of the Arrow Portfolios, so that a holder
of shares in an Arrow Portfolio will receive Investor A Shares of the
corresponding Arch Portfolio with the same aggregate net asset value as the
Shareholder had in the Arrow Portfolio immediately before the transaction.
Following the Reorganization, Shareholders of the Arrow Portfolios will be
shareholders of the corresponding Arch Portfolios, and Arrow will be
deregistered as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act") and its existence will be terminated under state
law.
At [record date], 1997, Mercantile Bank National Association ("Mercantile
Bank"), an affiliate of MVA, owned of record with the power to vote
approximately _____% of the outstanding shares of the Arrow Portfolios on behalf
of customers maintaining fiduciary, employee benefit, retirement plan or other
qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
recognize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The Existing Arch Portfolios currently are conducting investment
operations as described in this Combined Proxy Statement/Prospectus. The New
Arch Portfolio has recently been organized for the purpose of continuing the
investment operations of the Arrow Equity Portfolio.
This Combined Proxy Statement/Prospectus sets forth the information that a
Shareholder of an Arrow Portfolio should know before voting on the
Reorganization Agreement (and related transactions), and should be retained for
future reference. The Prospectus relating to Investor A Shares of the Existing
Arch Portfolios dated March 31, 1997 (as supplemented May 28, 1997), which
describes the operations of those Portfolios, accompanies this Combined Proxy
Statement/Prospectus. Additional information is set forth in the Statements of
Additional Information relating to those Portfolios and this Combined Proxy
Statement/Prospectus, which are dated March 31, 1997 (as revised May 28, 1997)
and August 30, 1997, respectively, and in the Prospectus dated November 30, 1996
(as supplemented April 25, 1997) and Combined Statement of Additional
Information dated November 30, 1996, relating to the Arrow Portfolios. Each of
these documents is on file with the Securities and Exchange Commission (the
"SEC"), and is available without charge upon oral or written request by writing
or calling either Arrow or Arch at the respective addresses or telephone numbers
indicated above. The information contained in the Prospectus dated November 30,
1996 (as supplemented April 25, 1997) and Combined Statement of Additional
-3-
<PAGE> 11
Information dated November 30, 1996, relating to the Arrow Portfolios is
incorporated herein by reference.
This Combined Proxy Statement/Prospectus constitutes the Proxy Statement
of Arrow for the Meeting of its Shareholders, and Arch's Prospectus for the
Investor A Shares of the Existing Arch Portfolios that have been registered with
the SEC and are to be issued in connection with the Reorganization. Because the
operations of the Arrow Equity Portfolio will be carried on by the New Arch
Portfolio, this Combined Proxy Statement/Prospectus does not constitute a
prospectus for the Investor A Shares of the New Arch Portfolio that will be
issued in the Continuing Portfolio Transaction.
This Combined Proxy Statement/Prospectus is expected to first be sent to
Shareholders on or about September __, 1997.
THE SECURITIES OF THE ARCH PORTFOLIOS HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ARROW OR ARCH.
SHARES OF THE ARCH PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, MERCANTILE BANK NATIONAL ASSOCIATION OR ANY OF ITS AFFILIATES.
SHARES OF THE ARCH PORTFOLIOS ARE NOT FEDERALLY INSURED BY, GUARANTEED BY,
OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE WILL VARY AS A RESULT
OF MARKET CONDITIONS OR OTHER FACTORS SO THAT SHARES OF THE ARCH PORTFOLIOS,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AN INVESTMENT
IN THE ARCH PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
-4-
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................................................
Proposed Reorganization.........................................
Reasons for Reorganization......................................
Federal Income Tax Consequences.................................
Overview of the Arrow Portfolios and
Arch Portfolios...............................................
Voting Information..............................................
Risk Factors....................................................
Information Relating to the Proposed Reorganization...................
Description of the Reorganization Agreement.....................
Capitalization..................................................
Federal Income Tax Consequences.................................
Comparison of Investment Policies and Risk Factors....................
Arrow Fixed Income Portfolio and Arch Government &
Corporate Bond Portfolio......................................
Arrow Municipal Income Portfolio and Arch
National Municipal Bond Portfolio.............................
Investment Policies and Risks -- General........................
Investment Limitations..........................................
Purchase and Redemption Information, Exchange
Privileges, Distribution and Pricing..........................
Other Information...............................................
Information Relating to Voting Matters................................
General Information.............................................
Shareholder and Board Approvals.................................
Appraisal Rights................................................
Quorum..........................................................
Annual Meetings.................................................
Additional Information about Arch.....................................
Additional Information about Arrow....................................
Litigation............................................................
Financial Statements..................................................
Other Business........................................................
Shareholder Inquiries.................................................
Appendix I - Agreement and Plan of Reorganization..................... I-1
Appendix II - Management's Discussion of Fund Performance ............ II-1
Appendix III - Shareholder Transactions and Services................. III-1
</TABLE>
<PAGE> 13
SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the related transactions, and is
qualified by reference to the more complete information contained elsewhere in
this Combined Proxy Statement/Prospectus, the Prospectuses and Statements of
Additional Information of Arrow and Arch, and the Reorganization Agreement
attached to this Combined Proxy Statement/Prospectus as Appendix I. Arrow's
Combined Annual Report to Shareholders and the most recent Combined Semi-Annual
Report to Shareholders may be obtained free of charge by calling 1-800-866-6040
(Texas residents call 1-800-618-8573) or by writing to Arrow c/o Federated
Investors, Federated Investors Tower, 19th Floor, 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779. Arch's Annual Report to Shareholders and
the most recent Semi-Annual Report to Shareholders may be obtained free of
charge by calling 1-800-452-ARCH (2724) or by writing to Arch at 3435 Stelzer
Road, Columbus, Ohio 43219-3085.
PROPOSED REORGANIZATION. Based upon their evaluation of the relevant information
presented to them, and in light of their fiduciary duties under federal and
state law, Arrow's and Arch's Boards of Trustees and Directors, respectively,
including their members who are not "interested persons" within the meaning of
the 1940 Act, have determined that the proposed Reorganization is in the best
interests of Arrow's and Arch's Shareholders, respectively, and that the
interests of existing Shareholders of Arrow and Arch, respectively, will not be
diluted as a result of such Reorganization.
The Cover Page and pages ___-___ hereof summarize the proposed
Reorganization.
REASONS FOR THE REORGANIZATION. The primary reason for the Reorganization is the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. Consummation of the Holding Company Merger on April 25, 1997
resulted in the automatic termination of the existing investment advisory
agreement between the Arrow Portfolios and Mark Twain Bank, a wholly-owned
subsidiary of Mark Twain Bancshares, Inc. In anticipation of the Holding Company
Merger and to provide continuity in investment advisory services to the Arrow
Portfolios, shareholders of the Arrow Portfolios approved a new investment
advisory agreement with MVA, a wholly-owned subsidiary of Mercantile Bank and an
indirect wholly-owned subsidiary of Mercantile Bancorporation Inc., effective
April 25, 1997.
MVA has recommended that each of the Arrow Portfolios be reorganized as
described in this Combined Proxy Statement/Prospectus in an effort to promote
more efficient operations, eliminate duplicative costs and enhance the
distribution of shares by eliminating market overlap. In light of this
recommendation, after consideration of the reasons
<PAGE> 14
therefor and the proposed operations of the combined portfolios after the
Reorganization, and in consideration of the fact that the Reorganization will be
tax-free and will not dilute the interests of Arrow Shareholders, the Board of
Trustees of Arrow has authorized the Agreement and Plan of Reorganization and
recommended approval of the Reorganization by Shareholders.
FEDERAL INCOME TAX CONSEQUENCES. Shareholders of the Arrow Portfolios will
recognize no gain or loss for federal income tax purposes on their receipt of
Investor A Shares of the Arch Portfolios. Shareholders of the Arch Portfolios
will have no federal tax consequences from the Reorganization. The Arch
Portfolios will incur no federal tax consequences from their issuance of
Investor A Shares in the Reorganization. See "Information Relating to the
Proposed Reorganization -- Federal Income Tax Consequences."
OVERVIEW OF THE ARROW PORTFOLIOS AND ARCH PORTFOLIOS. There are no material
differences between the investment objectives and policies of the Continuing
Portfolio and the New Arch Portfolio. The investment objectives and policies of
the Reorganizing Portfolios are similar to those of the corresponding Existing
Arch Portfolios.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The Arrow Fixed Income Portfolio's investment objective is current income.
The Arch Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital.
Each Portfolio pursues its objective by investing in a diversified portfolio of
U.S. Government and investment grade corporate debt securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Arrow Municipal Income Portfolio's investment objective is current
income which is exempt from federal regular income tax. The Arch National
Municipal Bond Portfolio's investment objective is to seek as high a level of
current income exempt from regular federal income tax as is consistent with
conservation of capital. Each Portfolio pursues its objective by investing at
least 80% of its total assets in a diversified portfolio of municipal
securities.
See "Comparison of Investment Policies and Risk Factors" below and the
Arrow Prospectus for the Arrow Portfolios and the Arch Prospectus for Investor A
Shares of the Existing Arch Portfolios, which are incorporated herein by
reference, for a description of the similarities and differences between the
investment objectives and policies of the Reorganizing Portfolios and the
Existing Arch Portfolios.
-2-
<PAGE> 15
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARROW PORTFOLIOS. MVA serves as
investment adviser for Arrow and is entitled to receive advisory fees from the
Arrow Portfolios, computed and paid daily, at the following annual rates,
expressed as a percentage of average daily net assets:
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR
ENDED SEPTEMBER 30, 1996
ARROW PORTFOLIOS ADVISORY FEE (AFTER FEE WAIVERS)*
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income Portfolio .60% .59%
Municipal Income Portfolio .70% .11%
Equity Portfolio .75% .72%
============================================================================================
</TABLE>
* Paid to Mark Twain Bank pursuant to the investment advisory
agreement then in effect.
Pursuant to the Arrow investment advisory agreement, MVA provides
investment research and supervision to the Arrow Portfolios and conducts a
continuous program of investment evaluation and of appropriate sale or other
disposition of each Arrow Portfolio's assets. MVA also directs the investments
of the Arrow Portfolios in accordance with the Portfolios' investment
objectives, policies and limitations, and creates and maintains all necessary
books and records.
Administrative services are provided to the Arrow Portfolios by Federated
Administrative Services ("Federated"), a subsidiary of Federated Investors. For
its services, Federated receives a fee, calculated and paid daily, at the annual
rate of .15% of the average aggregate daily net assets of all investment
portfolios of Arrow up to $250 million of such aggregate assets, .125% of the
next $250 million of such aggregate assets, .10% of the next $250 million of
such aggregate assets, and .075% of such aggregate assets in excess of $750
million. The minimum annual administration fee for each investment portfolio of
Arrow is $50,000. For the fiscal year ended September 30, 1996, Federated
received administration fees at the effective annual rates of .17%, .29% and
.15% of the average daily net assets of the Fixed Income, Municipal Income and
Equity Portfolios, respectively.
Federated Services Company, a subsidiary of Federated Investors, serves as
Arrow's transfer agent, dividend disbursing agent and portfolio recordkeeper.
Mercantile Bank provides custodial services to each Arrow Portfolio.
Federated Securities Corp. ("FSC"), a subsidiary of
Federated Investors, is the principal distributor for Arrow.
-3-
<PAGE> 16
Under the distribution agreement, FSC acts as the agent of Arrow in connection
with the offering of shares of each Arrow Portfolio.
Arrow has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act (the "Arrow 12b-1 Plan"). Under the Arrow 12b-1 Plan, the shares of
each Arrow Portfolio bear the expense of distribution fees payable to FSC at an
annual rate of up to .25% of the average daily net asset value of such
Portfolio's outstanding shares to finance activities which are principally
intended to result in the sale of shares subject to the Arrow 12b-1 Plan. FSC
may enter into agreements with financial institutions which provide distribution
and/or administrative services as agents for their customers who beneficially
own shares. Administrative services provided by such financial institutions may
include, without limitation: providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The Arrow 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arrow Portfolios under
the Arrow 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by FSC for distribution purposes. FSC may earn a profit from
payments made by Arrow Portfolios under the Arrow 12b-1 Plan.
For the fiscal year ended September 30, 1996, FSC was entitled to receive
fees from the Arrow Portfolios pursuant to the Arrow 12b-1 Plan in the aggregate
amount of $238,312, all of which was voluntarily waived. Such fees represent
.25% of the average daily net assets of the Arrow Portfolios during such period.
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARCH PORTFOLIOS. MVA serves as
investment adviser for Arch and is entitled to receive advisory fees from the
Arch Portfolios, computed daily and paid monthly, at the following annual rates,
expressed as a percentage of average daily net assets:
-4-
<PAGE> 17
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR/PERIOD*
ENDED NOVEMBER 30, 1996
ARCH PORTFOLIO ADVISORY FEE (AFTER WAIVERS)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Government & Corporate
Bond Portfolio .45% .45%
National Municipal Bond
Portfolio .55% .00%
Growth Equity Portfolio .75% .00%**
============================================================================================
</TABLE>
* For the period November 18, 1996 (commencement of operations) through
November 30, 1996 with respect to the Arch National Municipal Bond
Portfolio.
** The Arch Growth Equity Portfolio has not yet commenced operations.
As investment adviser, MVA manages the investments of each Arch Portfolio,
makes decisions with respect to and places orders for all purchases and sales of
each Portfolio's securities, and maintains certain records relating to such
purchases and sales.
See "Management of the Fund--Investment Adviser and Sub-Adviser" in Arch's
Prospectus for Investor A Shares of the Existing Arch Portfolios, which
accompanies this Combined Proxy Statement/Prospectus and which is incorporated
herein by reference, for additional information on MVA.
Administrative services are provided to the Arch Portfolios by BISYS Fund
Services Ohio, Inc. ("BISYS Ohio"), a subsidiary of The BISYS Group, Inc. For
its services, BISYS Ohio is entitled to receive a fee from each Arch Portfolio,
computed daily and payable monthly, at the annual rate of 0.20% of each
Portfolio's average daily net assets. For the fiscal year ended November 30,
1996, BISYS Ohio received administration fees (net of fee waivers) at the
effective annual rate of 0.10% of the average daily net assets of the Arch
Government & Corporate Bond Portfolio and 0.05% of the average daily net assets
of the Arch National Municipal Bond Portfolio. See "Management of the Fund --
Administrator" in Arch's Prospectus for Investor A Shares of the Existing Arch
Portfolios which accompanies this Combined Proxy/Prospectus and which is
incorporated herein by reference, for additional information on Arch's
administrator.
BISYS Ohio also serves as Arch's transfer and dividend disbursing agent.
See "Management of the Fund -- Custodian, SubCustodian and Transfer Agent" in
Arch's Prospectus for Investor A
-5-
<PAGE> 18
Shares of the Existing Arch Portfolios, which accompanies this Combined
Proxy/Prospectus and which is incorporated herein by reference, for additional
information on Arch's transfer and dividend disbursing agent.
Custodial services are provided to Arch by Mercantile Bank. See
"Custodian, Sub-Custodian and Transfer Agent" in Arch's Prospectus for Investor
A Shares of the Existing Arch Portfolios, which accompanies this Combined Proxy
Statement/Prospectus which is incorporated herein by reference, for additional
information about Arch's custodian.
BISYS Fund Services ("BISYS"), an affiliate of BISYS Ohio, serves as
distributor of the shares of Arch's investment portfolios.
Arch has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Arch 12b-1 Plan") with respect to Investor A Shares of
its investment portfolios. Under the Arch 12b-1 Plan, Investor A Shares of each
of the Arch Portfolios bear the expense of (i) distribution fees paid to BISYS
at an annual rate of up to .10% of the average daily net assets of such
Portfolio's outstanding Investor A Shares in consideration for distribution
services and the assumption of related expenses primarily intended to result in
the sale of Investor A Shares, and (ii) shareholder servicing fees paid to
securities brokers, dealers and other such organizations ("Service
Organizations") for administrative support services provided to their customers
who are the beneficial owners of Investor A Shares at the annual rate of up to
.20% of the average daily net asset value of such Portfolio's Investor A Shares
beneficially owned by such customers. The Arch 12b-1 Plan authorizes Arch to
enter into servicing agreements with Service Organizations that require the
Service Organizations receiving such compensation to perform certain services
with respect to the beneficial owners of Investor A Shares of an Arch Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries regarding their
investments.
The Arch 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arch Portfolios under
the Arch 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by BISYS for distribution purposes. BISYS may earn a profit
from payments made by the Arch Portfolios under the Arch 12b-1 Plan.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to BISYS and other broker-dealers pursuant to the Arch 12b-1 Plan in
the aggregate amount of $15,982, which represents .30% of the average net assets
of the Existing Arch Portfolios' Investor A Shares during that period subject
to the Arch 12b-1 Plan.
-6-
<PAGE> 19
Arch has adopted an Administrative Services Plan (the "Arch Services
Plan") with respect to Trust Shares of its investment portfolios. Under the Arch
Services Plan, Trust Shares of each of the Arch Portfolios bear the expense of
shareholder servicing fees paid to Service Organizations for administrative
services provided to their customers who are the beneficial owners of Trust
Shares at the annual rate of up to .30% of the average daily net asset value of
such Portfolio's Trust Shares beneficially owned by such customers. Like the
Arch 12b-1 Plan, the Arch Services Plan authorizes Arch to enter into servicing
agreements with Service Organizations that require the Service Organizations
receiving such compensation to perform certain services with respect to the
beneficial owners of Trust Shares of an Arch Portfolio. These services are the
same services which Service Organizations are required to provide under the Arch
12b-1 Plan described above.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to Service Organizations pursuant to the Arch Services Plan in the
aggregate amount of $157 which represents .30% of the average daily net assets
of the Existing Arch Portfolios' Trust Shares during that period subject to the
Plan.
COMPARATIVE FEE TABLES. Set forth in the tables below is information regarding
(i) the fees and expenses paid by shares of each Arrow Portfolio as of its most
recent fiscal year, restated to reflect the fees and expenses that each Arrow
Portfolio expects to incur during the current fiscal year, (ii) the fees and
expenses paid by each Existing Arch Portfolio as of its most recent fiscal year,
restated in the case of the Arch National Municipal Bond Portfolio to reflect
the fees and expenses which that Portfolio expects to incur during the current
fiscal year, or, in the case of the New Arch Portfolio, the fees and expenses
which that Portfolio expects to incur during the current fiscal year, and (iii)
estimated fees and expenses on a pro forma basis giving effect to the proposed
Reorganization.
-7-
<PAGE> 20
COMPARATIVE FEE TABLES
<TABLE>
<CAPTION>
===================================================================================================================================
Arch
Arrow Government &
Fixed Income Corporate Bond Pro Forma Combined
Portfolio Portfolio Portfolio
------------ ---------------------------------- ------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .60% .45% .45% .45% .45%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .65% .20%(5)(6) .20%(5)(6) .20%(5)(6) .20%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.25%(3) .95%(6) .65%(6) .95%(6) .65%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Fixed Income Portfolio can pay up to 0.25% of its average daily
net assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive
all 12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Fixed Income Portfolio in the
table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.27% for the fiscal year ended September 30, 1996. The
Total Operating Expenses for the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 1.50% absent the voluntary waivers
detailed in note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Government &
Corporate Bond Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.30% and .30% for Investor A Shares and Trust Shares, respectively, of the
Arch Government & Corporate Bond Portfolio, and Total Operating Expenses
would be 1.05% and 1.05% for Investor A Shares and Trust Shares,
respectively, of the Arch Government & Corporate Bond Portfolio.
-8-
<PAGE> 21
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Fixed Income Portfolio(1) $47 $73 $101 $181
Arch Government & Corporate
Bond Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
Pro Forma Combined Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-9-
<PAGE> 22
<TABLE>
<CAPTION>
===================================================================================================================================
Arrow Arch
Municipal Income National Municipal Pro Forma Combined
Portfolio Portfolio Portfolio
----------------- ---------------------------------- ----------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(5) None 4.50%(5) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
----
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .11%(2) .00%(6) .00%(6) .00%(6) .00%(6)
12b-1 Fees (after fee waivers) .00%(3) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) 1.21% .12%(7)(8) .12%(7)(8) .12%(7)(8) .12%(7)(8)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.32%(4) .42%(8) .12%(8) .42%(8) .12%(8)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) Without fee waivers, the Advisory Fee for the Arrow Municipal Income
Portfolio would be .70%.
(3) The Arrow Municipal Income Portfolio can pay up to 0.25% of its average
daily net assets as a 12b-1 fee. For the foreseeable future, FSC plans to
waive all 12b-1 fees.
(4) The Annual Operating Expenses for the Arrow Municipal Income Portfolio in
the table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.20% for the fiscal year ended September 30, 1996. The
Total Operating Expenses of the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 2.16% absent the voluntary waivers
detailed in notes (2) and (3).
(5) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(6) Without fee waivers, Advisory Fees for the Arch National Municipal Bond
Portfolio would be .55%.
(7) Without fee waivers, administration fees for the Arch National Municipal
Bond Portfolio would be .20%.
(8) Without fee waivers and/or expense reimbursements, Other Expenses would be
.22% and .57% for Investor A Shares and Trust Shares, respectively, of the
Arch National Municipal Bond Portfolio and Total Operating Expenses would
be 1.07% and 1.07% for Investor A Shares and Trust Shares, respectively,
of the Arch National Municipal Bond Portfolio.
-10-
<PAGE> 23
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Municipal Income $48 $75 $105 $188
Portfolio(1)
Arch National Municipal
Bond Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-11-
<PAGE> 24
<TABLE>
<CAPTION>
==================================================================================================================================
Arrow Arch
Equity Growth Equity Pro Forma Combined
Portfolio Portfolio Portfolio
--------- ---------------------------------- ----------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees .75% .75% .75% .75% .75%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .39% .23%(5)(6) .23%(5)(6) .23%(5)(6) .23%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.14%(3) 1.28%(6) .98%(6) 1.28%(6) .98%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Equity Portfolio can pay up to 0.25% of its average daily net
assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive all
12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Equity Portfolio in the table
above are based on expenses expected to be incurred during the fiscal year
ending September 30, 1997. The Total Operating Expenses for the Portfolio
were 1.17% for the fiscal year ended September 30, 1996. The Total
Operating Expenses of the Portfolio during the fiscal year ended September
30, 1997 are expected to be 1.39% absent the voluntary waivers detailed in
note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Growth Equity
Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.35% and .65% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio and Total Operating Expenses would be 1.40%
and 1.40% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio.
-12-
<PAGE> 25
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Equity Portfolio(1) $46 $70 $96 $169
Arch Growth Equity Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $45 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $31 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-13-
<PAGE> 26
EXPENSE RATIOS -- ARROW PORTFOLIOS. The following table sets forth (i) the
ratios of operating expenses to average net assets of the Arrow Portfolios for
the fiscal year ended September 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arrow
Portfolios for the six-month period ended March 31, 1997 (a) after fee waivers
and expense reimbursements and (b) absent fee waivers and expense
reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.27% 1.53%
Municipal Income Portfolio 1.20% 2.04%
Equity Portfolio 1.17% 1.45%
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MARCH 31, 1997
-------------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.32% 1.57%
Municipal Income Portfolio 1.37% 2.21%
Equity Portfolio 1.14% 1.39%
</TABLE>
-14-
<PAGE> 27
EXPENSE RATIOS -- ARCH PORTFOLIOS. The following tables set forth (i) the ratios
of operating expenses to average net assets of the Arch Portfolios for the
fiscal year ended November 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arch
Portfolios for the six-month period ended May 31, 1997 (a) after fee waivers and
expense reimbursements and (b) absent fee waivers and expense reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, 1996
-----------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% .75%
National Municipal Bond
Portfolio
Investor A Shares .42%* 1.12%*
Trust Shares .12%* .82%*
Growth Equity Portfolio
Investor A Shares ** **
Trust Shares ** **
</TABLE>
* Annualized
** Had not commenced operations at November 30, 1996.
-15-
<PAGE> 28
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MAY 31, 1997
-----------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% 1.05%
National Municipal Bond
Portfolio
Investor A Shares .42% 1.07%
Trust Shares .12% 1.07%
Growth Equity Portfolio
Investor A Shares N/A N/A
Trust Shares N/A N/A
</TABLE>
* Had not commenced operations at May 31, 1997.
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with a Special Meeting of Shareholders to be held at Federated
Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania, on
Wednesday, November 12, 1997 at 2:00 p.m. Eastern Time (such meeting and any
adjournments thereof hereinafter referred to as the "Meeting"). Only
Shareholders of record at the close of business on __________, 1997 will be
entitled to notice of and to vote at the Meeting. Each share or fraction thereof
is entitled to one vote or fraction thereof and all shares will vote separately
by Portfolio. Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon, or if no specification is made, the
persons named as proxies will vote in favor of each proposal set forth in the
Notice of Meeting. Proxies may be revoked at any time before they are exercised
by submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person. For additional
information, including a description of the Shareholder vote required for
approval of the Reorganization Agreement and related transactions contemplated
thereby, see "Information Relating to Voting Matters."
RISK FACTORS. The following discussion highlights the principal risk factors
associated with an investment in the Reorganizing Portfolios and the Existing
Arch Portfolios and is qualified in
-16-
<PAGE> 29
its entirety by the more extensive discussion of risk factors in "Comparison of
Investment Policies and Risk Factors."
Because of the similarities of the investment objectives and policies of
the Reorganizing Portfolios and the corresponding Existing Arch Portfolios,
management believes that an investment in an Existing Arch Portfolio involves
risks that are similar to those of the corresponding Reorganizing Portfolio.
These investment risks include those typically associated with investing in a
diversified portfolio of government or investment grade corporate bonds in the
case of the Arrow Fixed Income Portfolio and in a diversified portfolio of
municipal securities in the case of the Arrow Municipal Income Portfolio.
There are differences, however, between the Reorganizing Portfolios and
the Existing Arch Portfolios, as described below under "Comparison of Investment
Policies and Risk Factors." These differences can result in different risks. For
example, the Arrow Fixed Income Portfolio will only invest in investment grade
debt securities, i.e. securities rated in one of the four highest rating
categories assigned by one or more rating agencies or, if unrated, determined by
MVA to be of comparable quality. The Arch Government & Corporate Bond Portfolio
also will only invest in investment grade debt securities, provided, however,
that at least 65% of its assets will be invested in debt securities rated within
the three highest rating categories assigned by one or more rating agencies or,
if unrated, determined by MVA to be of comparable quality. Similarly, the Arrow
Municipal Income Portfolio will only invest in investment grade municipal
securities. The Arch National Municipal Bond Portfolio also will only invest in
investment grade municipal securities, provided, however, that at least 65% of
its assets will be invested in municipal securities rated in one of the three
highest rating categories assigned by one or more rating agencies or, if
unrated, determined by MVA to be of comparable quality. Debt securities,
including municipal securities, rated in the lowest investment grade rating
category do not have outstanding investment characteristics and may have
speculative characteristics as well.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in
investment grade debt securities of foreign issuers. The Arch Government &
Corporate Bond Portfolio may invest up to 10% of its total assets in
dollar-denominated debt obligations of foreign issuers, either directly or
indirectly through American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). Investments in the securities of foreign issuers, whether
made directly or indirectly, carry certain risks not ordinarily associated with
investments in the securities of domestic issuers.
The ARCH Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase put and call options listed on a national securities
exchange and issued by the
-17-
<PAGE> 30
Options Clearing Corporation and write covered call options (and covered put
options in the case of the Arrow Fixed Income Portfolio) listed on a national
securities exchange and issued by the Options Clearing Corporation. Unlike the
Arch Government & Corporate Bond Portfolio, the Arrow Fixed Income Portfolio may
also purchase and write unlisted over-the-counter options which are not subject
to the protections afforded by the Options Clearing Corporation. The Arrow
Municipal Income Portfolio may purchase and write listed and unlisted options as
described above, whereas the Arch National Municipal Bond Portfolio may not
enter into options transactions.
The Arch Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase mortgage-related asset-backed securities. Unlike the
Arrow Fixed Income Portfolio, the Arch Government & Corporate Bond Portfolio may
purchase non-mortgage-related asset-backed securities, which involve certain
risks that are not presented by mortgage-related asset-backed securities arising
primarily from the nature of the underlying collateral (i.e. credit card
receivables and automobile loan receivables as opposed to real estate
mortgages).
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may enter into repurchase agreements and reverse repurchase
agreements. Default by a counterparty to a repurchase agreement could expose a
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by a Portfolio
will decline below the repurchase price which the Portfolio is obligated to pay.
The per share price of the Reorganizing Portfolios and the Existing
Portfolios will fluctuate with changes in the value of the investments held by
each Portfolio. Generally, the market value of debt securities will vary
inversely to changes in prevailing interest rates. There is no assurance that
any Portfolio will achieve its investment objective.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
Arrow has entered into an agreement whereby its investment portfolios
(other than the Arrow Government Money Market Portfolio) are to be acquired by
investment portfolios of Arch. Significant provisions of the Reorganization
Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Reorganization Agreement, a copy of which is
attached as Appendix I to this Combined Proxy Statement/Prospectus.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. There are four separate Arrow
investment portfolios. Prior to the consummation of the transactions
contemplated by the Reorganization Agreement,
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<PAGE> 31
it is anticipated that shareholders of the Arrow Government Money Market
Portfolio will redeem their shares in that portfolio. The initial transaction in
the Reorganization is that the assets of the two Arrow Reorganizing Portfolios
will be acquired by two similar investment portfolios currently offered by Arch.
Afterwards, the Arrow Continuing Portfolio will be acquired by the new Arch
portfolio which has been organized to continue its operations.
The Reorganization Agreement provides, first, that substantially all of
the assets and liabilities of the Reorganizing Portfolios will be transferred to
the Existing Arch Portfolios identified in the table below. Not less than seven
calendar days thereafter, substantially all of the assets and liabilities of the
Continuing Portfolio will be transferred to the New Arch Portfolio identified in
the table below. The holders of shares of an Arrow Portfolio will receive
Investor A Shares of the corresponding Arch Portfolio identified in the table.
The number of Investor A Shares to be issued by each Arch Portfolio will have an
aggregate net asset value equal to the aggregate net asset value of the shares
of the corresponding Arrow Portfolio as of the regular close of the New York
Stock Exchange, currently 4:00 p.m. Eastern Time, on the same business day on
which each transaction will be consummated. The number of Investor A Shares
received by an Arrow shareholder may be different from the number of Arrow
shares previously held, but the value of such shares in the aggregate will equal
the aggregate value held previously by such shareholders. Arrow shareholders
will not pay a sales charge in connection with their receipt of Investor A
Shares of the Arch Portfolios.
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio
Municipal Income Portfolio National Municipal Bond Portfolio
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
The Reorganization Agreement provides that Arrow will declare a dividend
or dividends prior to the Reorganizing Portfolios Transaction which, together
with all previous dividends, will have the effect of distributing to the
Shareholders of each of the Reorganizing Portfolios all undistributed ordinary
income earned and net capital gains realized up to and including the effective
time of the Reorganizing Portfolios Transaction.
Following the transfers of assets and liabilities from the Arrow
Portfolios to the Arch Portfolios, and the issuances of
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<PAGE> 32
Investor A Shares by the Arch Portfolios to the Arrow Portfolios, each of the
Arrow Portfolios will distribute the Investor A Shares of the Arch Portfolios
pro rata to the holders of shares of the Arrow Portfolios as described above in
liquidation of the Arrow Portfolios. Each holder of shares of an Arrow Portfolio
will receive an amount of Investor A Shares of the corresponding Arch Portfolio
of equal value, plus the right to receive any declared and unpaid dividends or
distributions. Following the Reorganization, Shareholders of the Arrow
Portfolios will be shareholders of the corresponding Arch Portfolios, and Arrow
will be deregistered as an investment company under the 1940 Act and its
existence terminated under state law.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of customers maintaining fiduciary, employee benefit, retirement plan or
other qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
realize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The stock transfer books of Arrow will be permanently closed after the
Reorganization. If any Arrow Portfolio shares held by a former Arrow Portfolio
shareholder are represented by share certificates, the certificate must be
surrendered to Arch's transfer agent for cancellation before the Arch Portfolio
shares issued to the shareholder in the Reorganization may be redeemed. Arch
will not issue share certificates with respect to the Arch Portfolio shares
issued in connection with the Reorganization.
The Reorganization is subject to a number of conditions, including
approval of the Reorganization Agreement and the transactions contemplated
thereby as described in this Combined Proxy Statement/Prospectus by the
Shareholders of the Arrow Portfolios; the receipt of certain legal opinions
described in the Reorganization Agreement; the receipt of certain certificates
from the parties concerning the continuing accuracy of the representations and
warranties in the Reorganization Agreement and other matters; and the parties'
performance in all material respects of their agreements and undertakings in the
Reorganization Agreement. Assuming satisfaction of the conditions in the
Reorganization Agreement, the Reorganizing Portfolios Transaction is expected to
occur on or after November 14, 1997 and the Continuing Portfolio Transaction is
expected to occur on or after November 21, 1997.
______________ will be responsible for the payment of expenses incurred in
connection with the Reorganization.
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<PAGE> 33
It is estimated that such expenses will be approximately $___.
The Reorganization may be terminated at any time prior to its consummation
by Arch or Arrow if the conditions specified in the Reorganization Agreement are
not satisfied or by the mutual consent of Arch and Arrow. The Reorganization
Agreement provides further that at any time prior to or (to the fullest extent
permitted by law) after approval of the Reorganization Agreement by the
Shareholders of Arrow (a) the parties thereto may, by written agreement approved
by their respective Boards of Trustees or Directors or authorized officers and
with or without the approval of their shareholders, amend any of the provisions
of the Reorganization Agreement; and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations with or without the approval of such party's shareholders.
Section 15(f) of the 1940 Act provides that when a change in the control
of an investment adviser occurs, the investment adviser or any of its affiliated
persons may receive any amount or benefit in connection therewith under certain
conditions. One condition is that for three years thereafter, at least 75% of
the board of directors of the surviving investment company are not "interested
persons" of the company's investment adviser or of the investment adviser of the
terminating investment company. Another condition is that no "unfair burden" is
imposed on the investment company as a result of the transaction relating to the
change of control, or any express or implied terms, conditions or understandings
applicable thereto. The term "unfair burden" as defined in the 1940 Act includes
any arrangement during the two-year period after the transaction whereby the
investment adviser (or predecessor or successor adviser), or any "interested
person" of any such adviser, receives or is entitled to receive any
compensation, directly or indirectly, from the investment company or its
security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Arch intends to
comply with the conditions set forth in Section 15(f).
In its consideration and approval of the Reorganization at a meeting on
August 18, 1997, the Board of Trustees of Arrow considered the effect of the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. on Arrow; the recommendation of MVA with respect to the
proposed consolidation of Arrow and Arch; the tax-free nature of the
Reorganization; and the fact that the interests of Shareholders would not be
diluted as a result of the Reorganization.
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<PAGE> 34
After consideration of all of the foregoing factors, together with certain
other factors and information considered to be relevant, Arrow's Board of
Trustees unanimously approved the Reorganization Agreement and directed that it
be submitted to Shareholders for approval. ARROW'S BOARD OF TRUSTEES RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE REORGANIZATION AGREEMENT.
The Board of Trustees of Arrow has not determined what action it will take
in the event the Shareholders of any Arrow Portfolio fail to approve the
Reorganization Agreement or for any reason the Reorganization is not
consummated. In either such event, the Trustees may choose to consider
alternative dispositions of the Arrow Portfolios' assets, including the sale of
assets to, or merger with, another investment company, or the possible
liquidation of any of the Arrow Portfolios.
At a meeting held on June 17, 1997, the Arch Board of Directors considered
the proposed Reorganization. Based upon their evaluation of the relevant
information provided to them, and in light of their fiduciary duties under
federal and state law, the Board of Directors unanimously determined that the
proposed Reorganization was in the best interests of the Arch Portfolios and
their respective shareholders and that the interests of existing shareholders of
the Arch Portfolios would not be diluted as a result of effecting the
transaction.
CAPITALIZATION. Because the Reorganizing Portfolios will be combined in
the Reorganization with the Existing Arch Portfolios, the total capitalization
of each of the Existing Arch Portfolios after the Reorganization is expected to
be greater than the current capitalization of the corresponding Reorganizing
Portfolios. The following table sets forth (i) the capitalization of each of the
Reorganizing Portfolios as of May 31, 1997; (ii) the capitalization of each of
the Existing Arch Portfolios as of May 31, 1997; and (iii) the pro forma
capitalization of each of the Existing Arch Portfolios as adjusted to give
effect to the Reorganization. If consummated, the capitalization of each
Portfolio is likely to be different at the time of the Reorganizing Portfolios
Transaction as a result of daily share purchase and redemption activity in the
Portfolios.
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<PAGE> 35
<TABLE>
<CAPTION>
===================================================================================================
ARCH
ARROW GOVERNMENT &
FIXED INCOME CORPORATE BOND PRO FORMA
PORTFOLIO PORTFOLIO COMBINED PORTFOLIO
===================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $28,125,845 $4,606,807 $32,732,652
Trust Shares N/A $141,220,745 $141,220,745
Shares Outstanding
Shares/Investor A Shares 2,898,396 458,760 3,260,224
Trust Shares N/A 14,062,830 14,062,830
Net Asset Value Per Share
Shares/Investor A Shares $9.59 $10.04 $10.04
Trust Shares N/A $10.04 $10.04
===================================================================================================
</TABLE>
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<PAGE> 36
<TABLE>
<CAPTION>
====================================================================================================
ARROW ARCH
MUNICIPAL INCOME NATIONAL MUNICIPAL PRO FORMA
PORTFOLIO BOND PORTFOLIO COMBINED PORTFOLIO
====================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $13,450,961 $542,574 $13,993,535
Trust Shares N/A $325,883,666 $325,883,666
Shares Outstanding
Shares/Investor A Shares 1,304,417 54,515 1,406,385
Trust Shares N/A 32,725,131 32,725,131
Net Asset Value Per Share
Shares/Investor A Shares $10.31 $9.95 $9.95
Trust Shares N/A $9.96 $9.96
====================================================================================================
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. Consummation of the Reorganization is subject
to the condition that Arrow and Arch receive an opinion from Drinker Biddle &
Reath LLP, based on certain factual assumptions and in reliance on certain
factual representations by the management of Arrow and Arch, to the effect that
for federal income tax purposes: (i) the transfer of all of the assets and
liabilities of each of the Arrow Portfolios to the corresponding Arch Portfolio
in exchange for Investor A Shares of the corresponding Arch Portfolio and the
liquidating distribution to Shareholders of the Arrow Portfolio of the Investor
A Shares of the Arch Portfolio so received, as described in the Reorganization
Agreement, will constitute a reorganization within the meaning of Section
368(a)(1)(C), Section 368(a)(1)(D) or Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, and both the Arrow Portfolio and the Arch
Portfolio will be considered "a party to the reorganization" within the meaning
of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Arrow Portfolios as a result of such transactions; (iii) no gain or loss will be
recognized by the Arch Portfolios as a result of such transactions; (iv) no gain
or loss will be recognized by the Shareholders of any Arrow Portfolio on the
distribution to them of Investor A Shares of the corresponding Arch Portfolio in
exchange for their shares of the Arrow Portfolio; (v) the aggregate basis of the
Investor A Shares of an Arch Portfolio received by a Shareholder of an Arrow
Portfolio will be the same as the aggregate basis of the Shareholder's Arrow
Portfolio shares immediately prior to the Reorganization; (vi) the basis of each
Arch Portfolio in the assets of the corresponding Arrow Portfolio received
pursuant to the Reorganization will be the same as the basis of the assets in
the hands of the Arrow Portfolio immediately before the Reorganization; (vii) a
Shareholder's holding period for Investor A Shares of an Arch Portfolio will be
determined by including the period for which the Shareholder held the Arrow
Portfolio shares exchanged therefor, provided that the Shareholder held such
Arrow Portfolio shares as a capital asset; and (viii) each Arch Portfolio's
holding period with respect to the assets received in the Reorganization will
include the period for which such assets were held by the corresponding Arrow
Portfolio.
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<PAGE> 37
Arch and Arrow have not sought a tax ruling from the Internal Revenue
Service ("IRS"), but are acting in reliance upon the opinion of counsel
discussed in the previous paragraph. That opinion is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders should
consult their own advisers concerning the potential tax consequences to them,
including state and local income taxes.
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The investment objectives and policies of the Reorganizing Portfolios are,
in many respects, similar to those of the corresponding Existing Arch
Portfolios. There are, however, certain differences. The following discussion
summarizes some of the more significant similarities and differences in the
investment policies and risk factors of the Reorganizing Portfolios and their
corresponding Existing Arch Portfolios and is qualified in its entirety by the
discussion elsewhere herein, and in the Prospectuses and Statements of
Additional Information of the Reorganizing Portfolios and the Existing Arch
Portfolios incorporated herein by reference.
INVESTMENT POLICIES AND RISK -- GENERAL
The investment objective of each of the Reorganizing Portfolios and of
each of the Existing Arch Portfolios is fundamental, meaning that it may not be
changed without the vote of the holders of a majority of the Portfolio's
outstanding shares (as defined in the 1940 Act). Unless otherwise indicated, the
investment policies of the Reorganizing Portfolios and Existing Arch Portfolios
are not fundamental and may be changed by the respective Boards of Trustees or
Directors.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The investment policies of the Portfolios are similar, but not identical.
Both Portfolios invest at least 65% of their respective assets (under normal
conditions, in the case of the Arrow Fixed Income Portfolio) in U.S. Government
and investment grade corporate debt securities. Both Portfolios will only invest
in investment grade securities, i.e. securities rated at the time of purchase in
the four highest rating categories assigned by a rating agency or, if unrated,
determined by MVA to be of comparable quality, although the Arch Government &
Corporate Bond Portfolio must (i) invest a minimum of 65% of its assets in
securities rated in the three highest rating categories assigned by a rating
agency or, if unrated, determined by MVA to be of comparable quality, and (ii)
maintain a dollar-weighted average portfolio quality of at least "A" or higher.
Debt securities with the lowest investment grade rating do not have outstanding
investment characteristics and may have speculative characteristics as well.
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<PAGE> 38
The debt securities in which each Portfolio may invest include fixed and
variable rate bonds, debentures, notes, and securities convertible into or
exchangeable for common stock (the Arrow Portfolio may also invest in securities
convertible into or exchangeable for preferred stock). The Arrow Fixed Income
Portfolio may also invest in preferred stock and units, which are debt
securities with stock or warrants to buy stock attached.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in the
debt securities of foreign issuers. Such securities include the securities of
foreign governments, foreign governmental agencies or supranational
organizations or investment grade debt securities of foreign corporations. The
Arch Government & Corporate Bond Portfolio may invest up to 10% of its total
assets in dollar-denominated debt obligations of foreign issuers, either
directly or indirectly through ADRs and EDRs. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of foreign issuers. Such
risks include future political and economic developments and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
The Arrow Fixed Income Portfolio may invest in mortgage-related
asset-backed securities, including collateralized mortgage obligations ("CMOs"),
rated in one of the three highest rating categories assigned by one or more
rating agencies or determined to be of comparable quality by MVA. The Arch
Government & Corporate Bond Portfolio may invest in investment grade
mortgage-related asset-backed securities, including CMOs, as well as
non-mortgage-related asset-backed securities, although investments in
non-mortgage-related asset-backed securities will not exceed 25% of the
Portfolio's total assets at the time of purchase. The average life of
asset-backed securities varies with the underlying instruments or assets and
market conditions, which in the case of mortgages have maximum maturities of
forty years. The average life of a mortgage-backed instrument, in particular, is
likely to be substantially less than the original maturity of the mortgages
underlying the securities as the result of unscheduled principal payments and
mortgage prepayments. The relationship between mortgage prepayment and interest
rates may give some high-yielding mortgage-backed securities less potential for
growth in value than conventional bonds with comparable maturities. In addition,
in periods of falling interest rates, the rate of mortgage prepayments tends to
increase. During such periods, the reinvestment of prepayment proceeds by a
Portfolio will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. When interest rates rise, the value of
an asset-backed security generally will decline; however, when interest rates
decline, the value of an
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<PAGE> 39
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict. The collateral
supporting non-mortgage-related asset-backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Non-mortgage-related asset-backed securities involve certain risks that are not
presented by mortgage-backed securities arising primarily from the nature of the
underlying assets (i.e., credit card and automobile loan receivables as opposed
to real estate mortgages). For example, credit card receivables are generally
unsecured and the repossession of automobiles and other personal property upon
the default of the debtor may be difficult or impracticable in some cases. The
Arch Government & Corporate Bond Portfolio may also invest in first mortgage
loans, income participation loans and participations in certificates of pools of
mortgages.
Each Portfolio may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation, provided,
however, that the Arch Government & Corporate Bond Portfolio will not invest
more than 10% of its net assets in such options. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Each Portfolio may
also write covered call options (and covered put options in the case of the
Arrow Fixed Income Portfolio) listed on a national securities exchange and
issued by the Options Clearing Corporation, limited in amount with respect to
the Arch Government & Corporate Bond Portfolio to not more than 20% of the value
of the Portfolio's net assets. The Arrow Fixed Income Portfolio may also
purchase and write unlisted over-the-counter options which are not subject to
the protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members which fail to perform
them in connection with the purchase or sale of options.
Each Portfolio may purchase and sell futures contracts and options on
futures contracts as a hedge against anticipated changes in interest rates or
market conditions. Neither Portfolio will purchase or sell futures contracts or
related options for hedging purposes if, immediately after purchase, the
aggregate initial margin deposits and premiums paid by a Portfolio on its open
futures and options positions exceeds 5% of the Portfolio's total assets. When
futures and related options are used as a hedging device, there is a risk that
the prices of the securities subject to the futures contract may not correlate
with the prices of a Portfolio's investment securities. This may cause the
futures contract and any related options to react differently than the
Portfolio's investment securities to market changes.
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<PAGE> 40
The Arch Government & Corporate Bond Portfolio may hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such time and
in such proportions as, in the opinion of MVA, prevailing market or economic
conditions warrant. Such short-term obligations may include commercial paper,
bankers acceptances, certificates of deposit, demand and time deposits of
domestic and foreign banks and savings and loan associations, and obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Arrow Fixed Income Portfolio may invest in commercial
paper rated in the top two rating categories assigned by one or more rating
agencies; time and savings deposits (including certificates of deposit) in
certain domestic banks and certificates of deposit and other time deposits
issued by the foreign branches of such domestic banks; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Each Portfolio may purchase "stripped" securities limited, with respect to
the Arch Government & Corporate Bond Portfolio, to stripped U.S. Treasury and
agency obligations. Stripped securities are issued at a discount to their face
value and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
Each Portfolio may purchase "when-issued" securities, and the Arch
Government & Corporate Bond Portfolio may also purchase and sell securities on a
forward commitment or delayed settlement basis. Both Portfolios may enter into
repurchase and reverse repurchase agreement transactions, lend their portfolio
securities and invest in the securities of other investment companies. Neither
Portfolio will invest more than 15% of the value of its net assets in illiquid
securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Portfolios have similar, but not identical, investment policies. As a
matter of fundamental policy, each Portfolio invests at least 80% of its total
assets in municipal securities, primarily bonds (at least 65% under normal
market conditions) with respect to the Arch National Municipal Bond Portfolio.
Each Portfolio purchases only investment grade municipal securities, i.e.
securities rated in the top four rating categories assigned by one or more
rating agencies or, if unrated, determined by MVA to be of comparable quality,
provided, however, that (i) the Arch National Municipal Bond Portfolio will
invest, under normal conditions, at least 65% of its assets in municipal
securities that are rated at the time of purchase in one of the three highest
rating categories assigned by one or more rating agencies or, if unrated,
determined by MVA to be of comparable quality, and (ii) the Arrow Municipal
Income Portfolio may invest in
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<PAGE> 41
short-term municipal securities rated in the highest rating category by one or
more rating agencies.
The Arch National Municipal Bond Portfolio may invest 25% or more of its
net assets in (i) municipal securities whose issuers are in the same state, (ii)
municipal securities the interest on which is paid solely from revenues of
similar projects, and (ii) private activity bonds. The Arrow Municipal Income
Portfolio may invest more than 25% of the value of its assets in industrial
development bonds. Both Portfolios may invest in participation interests (the
Arch Portfolio may also invest in other tax-exempt derivative instruments) and
variable and floating rate municipal securities.
During temporary defensive periods, the Arch National Municipal Bond
Portfolio (i) may invest in taxable obligations, such as obligations of the U.S.
Government, its agencies and instrumentalities, including "stripped securities",
and debt securities (including commercial paper) of issuers having, at the time
of purchase, a quality rating within the two highest rating categories assigned
by one or more rating agencies, and (ii) may hold without limit uninvested cash
reserves which do not earn income pending investment.
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may purchase listed and unlisted put and call options and write
listed and unlisted covered call options and covered put options. See
"Comparison of Investment Policies and Risk Factors -- Arrow Fixed Income
Portfolio and Arch Government & Corporate Bond Portfolio" above.
The Arrow Municipal Income Portfolio may enter into repurchase agreements
and reverse repurchase agreements, whereas the Arch National Municipal Bond
Portfolio may not. Each Portfolio may purchase "when-issued" securities and the
Arch National Municipal Bond Portfolio may also purchase and sell securities on
a forward commitment or delayed settlement basis and enter into stand-by
commitments. Each Portfolio may lend its portfolio securities and invest in the
securities of other investment companies. While both Portfolios may invest up to
15% of their respective net assets in illiquid securities, the Arrow Municipal
Income Portfolio may only invest up to 10% of its net assets in restricted
municipal securities.
INVESTMENT LIMITATIONS
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
change their fundamental investment limitations without the affirmative vote of
the holders of a majority of the outstanding shares (as defined in the 1940 Act)
of the particular Reorganizing Portfolio or Existing Arch Portfolio. The
investment limitations of the Reorganizing Portfolios and the corresponding
Existing Arch Portfolios are similar, but not identical.
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<PAGE> 42
Each of the Reorganizing Portfolios and each of the Existing Arch
Portfolios is a "diversified" investment portfolio and, therefore, has a
fundamental policy limiting investments in securities of any one issuer (other
than cash, cash items or securities issued by the U.S. Government, its agencies
and instrumentalities and, with respect to the Reorganizing Portfolios,
repurchase agreements collateralized by such securities) to 5% of the value of a
Portfolio's total assets, except that up to 25% of the value of a Portfolio's
total assets may be invested without regard to this 5% limitation. In addition,
none of the Reorganizing Portfolios or the Existing Arch Portfolios may acquire
more than 10% of the outstanding voting securities of any one issuer, except
that the Existing Arch Portfolios may invest up to 25% of their respective total
assets without regard to such 10% limitation.
The Reorganizing Portfolios may not issue senior securities, except that
each Portfolio may borrow money directly or through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, for temporary purposes. The Existing Arch Portfolios may
not borrow money or issue senior securities, except that each Portfolio may
borrow from banks and the Arch Government & Corporate Bond Portfolio may enter
into reverse repurchase agreements for temporary purposes in amounts not in
excess of 10% of the Portfolio's total assets at the time of such borrowing.
Neither a Reorganizing Portfolio nor an Existing Arch Portfolio will purchase
securities while its borrowings, including reverse repurchase agreements, exceed
5% of the total assets of such Portfolio.
The Reorganizing Portfolios and the Existing Arch Portfolios may mortgage,
pledge or hypothecate their assets only to secure permitted indebtedness, and
then may only pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15%, in the case of the Reorganizing Portfolios,
or 10% in the case of the Existing Arch Portfolios, of the value of the
Portfolio's total assets.
The investment limitations described in the foregoing paragraphs regarding
diversification and borrowing are fundamental with respect to both the
Reorganizing Portfolios and Existing Arch Portfolios. The limitation with
respect to pledging portfolio assets is fundamental as to the Existing Arch
Portfolios, but not fundamental as to the Reorganizing Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
make loans, except that: (i) the Reorganizing Portfolios may lend portfolio
securities up to one-third of the value of their respective total assets; and
(ii) the Reorganizing Portfolios may purchase or hold certain debt instruments
and may enter into repurchase agreements; and (iii) each Existing Arch Portfolio
may purchase or hold debt instruments, lend portfolio
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<PAGE> 43
securities, and, except for the Arch National Municipal Bond Portfolio, enter
into repurchase agreements. The foregoing limitations on securities lending are
fundamental limitations for both the Reorganizing Portfolios and the Existing
Arch Portfolios.
The Reorganizing Portfolios and the Existing Arch Portfolios may not
invest 25% or more of the value of their respective total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the Reorganizing Funds,
(i) there is no limitation concerning cash, certain money market instruments, or
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities and repurchase agreements collateralized by such securities
and (ii) no more than 25% of the Arrow Municipal Income Portfolio's total assets
may be invested in a governmental subdivision of any one state, territory or
possession of the United States; (b) with respect to the Arch Government &
Corporate Bond Portfolio, (i) there is no limitation with respect to (i)
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered to be
in the industry of their parents if their activities are primarily related to
financing the activities of their parents; and (iii) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry); and
(c) with respect to the Arch National Municipal Bond Portfolio, there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the U.S. Government, the
District of Columbia, or any of their authorities, agencies, instrumentalities
or political subdivisions. The foregoing investment limitations with respect to
industry concentration of investments are fundamental investment limitations as
to both the Reorganizing Portfolios and the Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase or sell real estate, except that the Portfolios may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate. The foregoing limitations on investments in
real estate are fundamental as to both the Reorganizing Portfolios and the
Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
act as an underwriter of securities within the meaning of the Securities Act of
1933, except to the extent that the purchase of obligations directly from the
issuer thereof, or the disposition of securities, in accordance with a
Portfolio's investment objective, policies and limitations may be deemed to be
underwriting. The foregoing limitation on underwriting is fundamental as to both
the Reorganizing Portfolios and Existing Arch Portfolios.
-31-
<PAGE> 44
The Existing Arch Portfolios may not purchase securities of companies for
the purpose of exercising control. The foregoing limitation is fundamental as to
such Portfolios. The Reorganizing Portfolios are not subject to a similar
limitation.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase securities on margin, make short sales of securities or maintain a
short position, except that (i) each Portfolio may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
portfolio securities, (ii) this limitation shall not apply to the Arch
Government & Corporate Bond Portfolio's transactions in options and futures
contracts and related options, and (iii) with respect to the Arrow Fixed Income
Portfolio, the deposit or payment of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin. The foregoing limitation is
fundamental as to both the Reorganizing Portfolios and the Existing Arch
Portfolios.
The Reorganizing Portfolios may not purchase or sell commodities,
commodity contracts, or commodities futures contracts. The Existing Arch
Portfolios may not purchase or sell commodities contracts, or invest in oil, gas
or mineral exploration or development programs.
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTION AND
PRICING. The purchase, redemption, exchange privileges and distribution policies
of the Arrow Portfolios and the Arch Portfolios are discussed below in Appendix
III to this Combined Proxy Statement/Prospectus.
OTHER INFORMATION. Arrow and Arch are registered as open-end, series, management
investment companies under the 1940 Act. Currently, Arrow offers four investment
portfolios and Arch offers seventeen investment portfolios.
Arrow is organized as a Massachusetts business trust and is subject to the
provisions of its Declaration of Trust and By-Laws. Arch is organized as a
Maryland corporation and is subject to the provisions of its Articles of
Incorporation and By-Laws. Although the rights of shareholders of a Maryland
corporation vary in certain respects from the rights of shareholders of a
Massachusetts business trust, the attributes of a share of common stock in Arch
are comparable to those of a share of beneficial interest in Arrow. Shares of
both Arrow and Arch: (i) are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held; (ii) will vote in
the aggregate and not by class except as otherwise expressly required by law or
when class voting is permitted by the respective Boards of Trustees or
Directors; and (iii) are entitled to participate equally in the dividends and
distributions that are declared with respect to a particular class and in the
net distributable assets of such class on
-32-
<PAGE> 45
liquidation. Shares of the Arch Portfolios have a par value of $.001, while the
shares of the Arrow Portfolios have no par value. In addition, shares of the
Arrow Portfolios and Arch Portfolios have no preemptive rights and only such
conversion and exchange rights as the respective Boards of Trustees or Directors
may grant in their discretion. When issued for payment as described in their
respective Prospectuses, Arrow Portfolio shares and Arch Portfolio shares are
validly issued, fully paid and non-assessable by such entities except as
required under Massachusetts law with respect to Arrow, and Maryland law with
respect to Arch. Arch is not required under Maryland General Corporation Law to
hold annual shareholder meetings and intends to do so only if required by the
1940 Act. Shareholders have the right to remove Directors. To the extent
required by law, Arch will assist in shareholder communications in such matters.
The foregoing is only a summary. Shareholders may obtain copies of the
Declaration of Trust and By-Laws of Arrow and the Articles of Incorporation and
By-laws of Arch upon written request at the addresses shown on the cover page of
this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with the Meeting. It is expected that the solicitation of proxies
will be primarily by mail. Officers and service contractors of Arrow may also
solicit proxies by telephone, telegraph, facsimile or personal interview. Any
shareholder giving a proxy may revoke it at any time before it is exercised by
submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on __________, 1997
will be entitled to vote at the Meeting. On that date there were outstanding and
entitled to be voted ___________ shares of the Arrow Fixed Income Portfolio,
__________ shares of the Arrow Municipal Income Portfolio, __________ shares of
the Arrow Equity Portfolio. Each share or fraction thereof is entitled to one
vote or fraction thereof, and all shares will vote separately by Fund.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of its customers. Arrow and Arch have been advised by Mercantile Bank
that it intends to vote the shares of each Arrow Portfolio over which it has
voting power "FOR" the Reorganization.
If the accompanying proxy is executed and returned in time for the
Meeting, the shares covered thereby will be voted in
-33-
<PAGE> 46
accordance with the proxy on all matters that may properly come before the
Meeting or any adjournment thereof. For information on adjournment of the
meeting, see "Quorum" below.
SHAREHOLDER AND BOARD APPROVALS. The Reorganization Agreement (and the
transactions contemplated thereby) is being submitted for approval at the
Meeting by the holders of a majority of the outstanding shares of the Arrow
Fixed Income Portfolio, the Arrow Municipal Income Portfolio and the Arrow
Equity Portfolio in accordance with the provisions of Arrow's Declaration of
Trust and the requirements of the 1940 Act. The term "majority of the
outstanding shares" of an Arrow Portfolio as used herein means the lesser of (a)
67% of the shares of the particular Arrow Portfolio present at the Meeting if
the holders of more than 50% of the outstanding shares of the Arrow Portfolio
are present in person or by proxy, or (b) more than 50% of the outstanding
shares of such Arrow Portfolio.
In tallying shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a proposal
because instructions have not been received from the beneficial owners) will be
counted for purposes of determining whether or not a quorum is present for
purposes of convening the meeting. On the Reorganization proposal, abstentions
and broker non-votes will be considered to be a vote against the Reorganization
proposal.
The approval of the Reorganization by the shareholders of the
corresponding Arch Portfolios is not being solicited because their approval or
consent is not necessary for the Reorganization to be consummated.
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Reorganizing Portfolios and the percentage of Investor A Shares of the
corresponding Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
REORGANIZING INVESTOR A SHARES
PORTFOLIO'S OF EXISTING ARCH
REORGANIZING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Continuing Portfolio are listed below. Prior to the Continuing Portfolio
Transaction, the New Arch Portfolio will have only nominal assets. The persons
who owned of record 5% or more of the outstanding shares of the Continuing
-34-
<PAGE> 47
Portfolio will not materially change upon consummation of the Continuing
Portfolio Transaction.
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
CONTINUING INVESTOR A SHARES
PORTFOLIO'S OF NEW ARCH
CONTINUING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the trustees and officers of Arrow, as a group,
owned less than 1% of the outstanding shares of each of the Arrow Portfolios. At
[record date], 1997, the directors and officers of Arch owned less than 1% of
the outstanding shares of each of the Arch Portfolios.
At [record date], 1997, the name, address, and share ownership of the
persons who owned of record 5% or more of the Trust Shares or Investor A Shares
of the Existing Arch Portfolios and the percentage of Trust Shares or Investor A
Shares of the Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
==================================================================================================
PERCENTAGE OF
EXISTING ARCH
EXISTING CLASS OF PERCENTAGE OF PORTFOLIO'S PERCENTAGE OF
ARCH SHARES CLASS OWNED ON SHARES OWNED ON CLASS OWNED ON
PORTFOLIO NAME AND ADDRESS OWNED RECORD DATE RECORD DATE CONSUMMATION
==================================================================================================
<S> <C> <C> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share appraisal
under Arrow's Declaration of Trust or under the laws of the Commonwealth of
Massachusetts in connection with the Reorganization. Shareholders have, however,
the right to redeem from Arrow their Arrow Portfolio shares at net asset value
until the effective time of the Reorganization with respect to each Arrow
Portfolio, and thereafter shareholders may redeem the Investor A Shares of the
Arch Portfolios acquired by them in the Reorganization at net asset value.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement and the transactions contemplated thereby are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of a majority of those shares affected by the
adjournment that are represented at
-35-
<PAGE> 48
the Meeting in person or by proxy. If a quorum is present, the persons named as
proxies will vote those proxies which they are entitled to vote FOR the
Reorganization Agreement, in favor of such adjournments, and will vote those
proxies required to be voted AGAINST such proposal against any adjournment. A
shareholder vote may be taken with respect to one or more Arrow Portfolios prior
to any such adjournment if sufficient votes have been received for approval with
respect to any such Arrow Portfolio. A quorum is constituted with respect to an
Arrow Portfolio by the presence in person or by proxy of the holders of more
than 50% of the outstanding shares of the Portfolio entitled to vote at the
Meeting. Arrow proxies properly executed and marked with a negative vote or an
abstention will be considered to be present at the Meeting for the purposes of
determining the existence of a quorum for the transaction of business.
ANNUAL MEETINGS. Arch does not presently intend to hold annual meetings of
shareholders for the election of directors and other business unless and until
such time as less than a majority of the directors holding office have been
elected by the shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Shareholders have
the right to call a meeting of shareholders to consider the removal of one or
more directors or for other matters and such meetings will be called when
requested in writing by the holders of record of 25% or more of Arch's
outstanding shares of common stock. To the extent required by law, Arch will
assist in shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT ARCH
Information about the Existing Arch Portfolios is included in the
Prospectus for Investor A Shares accompanying this Combined Proxy
Statement/Prospectus, which is incorporated by reference herein. Additional
information about these Portfolios is included in the Statement of Additional
Information relating to this Combined Proxy Statement/Prospectus and in these
Portfolios' Statement of Additional Information dated March 31, 1997 (as revised
May 28, 1997) which has been filed with the SEC. A copy of either Statement of
Additional Information may be obtained without charge by writing to Arch at 3435
Stelzer Road, Columbus, Ohio 43219, or by calling Arch at 1-800-452-ARCH (2724).
Arch is subject to the informational requirements of the Securities Exchange Act
of 1934 and the 1940 Act, as applicable, and, in accordance with such
requirements, files proxy materials, reports and other information with the SEC.
These materials can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Arch's offices listed above and at the SEC's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained
-36-
<PAGE> 49
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549, at
prescribed rates.
The current directors and officers of Arch (other than Lyle L. Meyer who
has indicated that he intends to resign from the Board of Directors on or about
September 16, 1997) will continue as directors and officers following the
Reorganization. Additionally, subject to the approval of Arch's shareholders,
Arch expects to add two additional directors to the Board of Directors either
prior to or shortly after the Reorganization. As of the date of this Combined
Proxy Statement/Prospectus, no nominees to serve as such additional directors
have been recommended by the Board of Directors for submission to shareholders.
The name and address of the current directors and officers, as well as
information concerning his or her principal occupations during the past five
years are set forth below.
<TABLE>
<CAPTION>
=======================================================================================================
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS
WITH ARCH DURING PAST 5 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham* 53 Chairman of Board; Treasurer, St. Louis
St. Louis President and University, August 1996 to
University Director present; Treasurer, Washington
3500 Lindell University, 1981 to 1995.
Fitzgerald Hall
St. Louis, MO 63131
- -------------------------------------------------------------------------------------------------------
Robert M. Cox, Jr. 51 Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co.
P.O. Box 4100
St. Louis, MO 63136-8506
- -------------------------------------------------------------------------------------------------------
Joseph J. Hunt 54 Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and
3544 Watson Road Ornamental Iron Workers
St. Louis, MO 63139 (International Labor Union),
January 1994 to present;
General Organizer, International
Association of Bridge,
Structural and Ornamental
Iron Workers, September 1983
to December 1993.
- -------------------------------------------------------------------------------------------------------
James C. Jacobsen 61 Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping
Chesterfield, MO 63017 softgoods); Vice Chairman,
Kellwood Company.
- -------------------------------------------------------------------------------------------------------
Lyle L. Meyer 60 Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation
Corporation (manufacturer of paperboard
8182 Maryland Avenue and packaging materials);
St. Louis, MO 63105 President, Smurfit Pension &
Insurance Services Company.
- -------------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE> 50
<TABLE>
<S> <C> <C> <C>
Ronald D. Winney* 54 Director and Treasurer, Ralston Purina
Ralston Purina Company Treasurer Company.
Checkerboard Square
St. Louis, MO 63164
- -------------------------------------------------------------------------------------------------------
W. Bruce McConnel, III 54 Secretary Partner of the law firm of
Suite 1100 Drinker Biddle & Reath LLP,
1345 Chestnut Street Philadelphia, Pennsylvania.
Philadelphia, PA 19107
- -------------------------------------------------------------------------------------------------------
Walter B. Grimm* 51 Vice President and Employee of BISYS Fund
3435 Stelzer Road Assistant Treasurer Services.
Columbus, OH 43219
- -------------------------------------------------------------------------------------------------------
David Bunstine* 32 Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services.
Columbus, OH 43219
=======================================================================================================
</TABLE>
- ------------------------
* Messrs. Woodham, Winney, McConnel, Grimm and Bunstine are "interested persons"
of the Fund as defined in the 1940 Act.
ADDITIONAL INFORMATION ABOUT ARROW
Information about the Arrow Portfolios is incorporated herein by reference
to its Prospectuses dated November 30, 1996 (as supplemented April 25, 1997) and
Statement of Additional Information dated November 30, 1996, copies of which may
be obtained without charge by writing or calling Arrow at the address and
telephone number shown on the cover page of this Combined Proxy
Statement/Prospectus. Reports and other information filed by Arrow can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
The name and address of each trustee and officer of Arrow as well as
information concerning his or her principal occupations during the past five
years are as follows:
-38-
<PAGE> 51
<TABLE>
<CAPTION>
=======================================================================================================
Date of Position(s) held Principal Occupations During Past
Name and Address Birth with Arrow 5 Years**
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John F. Donahue@* 7/28/24 Chairman and Chairman and Trustee, Federated
Federated Investors Tower Trustee Investors, Federated Advisers,
Pittsburgh, PA Federated Management, Federated
Research; Chairman and Director,
Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.;
Chief Executive Officer and
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Thomas G. Bigley 2/3/34 Trustee Chairman of the Board, Children's
One Oxford Centre Hospital of Pittsburgh; formerly,
28th Floor Senior Partner, Ernst & Young LLP;
Pittsburgh, PA Director MED 3000 Group, Inc.;
Member of Executive Committee,
University of Pittsburgh; Director
or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. 6/23/37 Trustee President, Investment Properties
Wood/IPC Commercial Corporation; Senior Vice
Department President, John R. Wood and
John R. Wood & Associates, Inc., Realtors;
Associates, Realtors Partner or Trustee in private real
3255 Tamiami Trail North estate ventures in Southwest
Naples, FL Florida; formerly, President,
Naples Property Management, Inc.
and Northgate Village Development
Corporation; Director or Trustee
of the Funds.
- -------------------------------------------------------------------------------------------------------
William J. Copeland 7/4/18 Trustee Director and Member of the
One PNC Plaza Executive Committee, Michael
23rd Floor Baker, Inc; formerly, Vice
Pittsburgh, PA Chairman and Director, PNC Bank,
N.A. and PNC Bank Corp.; Director,
Ryan Homes, Inc.; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
James E. Dowd 5/18/22 Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.* 10/11/32 Trustee Professor of Medicine, University
3471 Fifth Avenue of Pittsburgh; Medical Director,
Suite 1111 University of Pittsburgh Medical
Pittsburgh, PA Center - Downtown; Member, Board
of Directors, University of
Pittsburgh Medical Center;
formerly, Hematologist,
Oncologist, and Internist,
Presbyterian and Montefiore
Hospitals; Director or Trustee of
the Funds.
- -------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@ 6/18/24 Trustee Attorney of Counsel, Miller,
Miller, Ament, Henry & Ament, Henny & Kochuba; Director,
Kochuba Eat'N Park Restaurants, Inc.;
205 Ross Street formerly, Counsel, Horizon
Pittsburgh, PA Financial, F.A., Western Region;
Director or Trustee of the Funds.
</TABLE>
-39-
<PAGE> 52
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Edward C. Gonzales* 10/22/30 President, Vice Chairman, Treasurer and
Federated Investors Tower Treasurer and Trustee, Federated Investors; Vice
Pittsburgh, PA Trustee President, Federated Advisers,
Federated Management, Federated
Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd; Executive Vice
President and Director, Federated
Securities Corp.; Trustee,
Federated Shareholder Services
Company; Trustee or Director of
some of the Funds; President,
Executive Vice President and
Treasurer of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Peter E. Madden 3/16/42 Trustee Consultant; Former State
One Royal Palm Way Representative, Commonwealth of
100 Royal Palm Way Massachusetts; formerly,
Palm Beach, FL President, State Street Bank and
Trust Company and State Street
Boston Corporation;
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Gregor F. Meyer 10/6/26 Trustee Attorney, Retired Member of
203 Kensington Court Miller, Ament, Henny & Kochuba;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants,
Inc.; Director or Trustee of the
Funds.
- -------------------------------------------------------------------------------------------------------
John E. Murray, Jr., J.D., 12/20/32 Trustee President, Law Professor, Duquesne
S.J.D. University; Consulting Partner,
President Mollica and Murray; Director or
Duquesne University Trustee of the Funds.
Pittsburgh, PA
- -------------------------------------------------------------------------------------------------------
Wesley W. Posvar 9/14/25 Trustee Professor, International Politics;
1202 Cathedral of Learning Management Consultant; Trustee,
University of Pittsburgh Carnegie Endowment for
Pittsburgh, PA International Peace, RAND
Corporation, Online Computer
Library Center, Inc., National
Defense University, and U.S. Space
Foundation; President Emeritus,
University of Pittsburgh; Founding
Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency
Management Advisory Board; and Czech
Management Center, Prague; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Marjorie P. Smuts 6/21/35 Trustee Public Relations/ Marketing/
4905 Bayard Street Conference Planning; Director or
Pittsburgh, PA Trustee of the Funds.
</TABLE>
-40-
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
J. Christopher Donahue 4/11/49 Executive President and Trustee, Federated
Federated Investors Tower Vice President Investors, Federated Advisers,
Pittsburgh, PA Federated Management and Federated
Research; President and Director,
Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.; Trustee, Federated
Shareholder Services Company and
Federated Shareholder Services;
Director, Federated Services
Company; President or Executive
Vice President of the Funds;
Director or Trustee of some of the
Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and
Trustee of the Company.
- -------------------------------------------------------------------------------------------------------
John W. McGonigle 10/26/38 Executive Executive Vice President,
Federated Investors Tower Vice President Secretary and Trustee, Federated
Pittsburgh, PA and Investors; Trustee, Federated
Secretary Advisers, Federated Management,
and Federated Research; Director,
Federated Research Corp. and
Federated Global Research Corp.;
Trustee, Federated Shareholder
Services Company; Director,
Federated Services Company;
President and Trustee, Federated
Shareholder Services; Director,
Federated Securities Corp.;
Executive Vice President and
Secretary of the Funds; Treasurer
of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Richard B. Fisher 5/17/23 Vice President Executive Vice President and
Federated Investors Tower Trustee, Federated Investors;
Pittsburgh, PA Chairman and Director, Federated
Securities Corp.; President or
Vice President of some of the
Funds; Director or Trustee of
some of the Funds.
- -------------------------------------------------------------------------------------------------------
Charles L. Davis, Jr. 3/23/60 Vice President Vice President and Assistant
Federated Investors Tower and Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
=======================================================================================================
</TABLE>
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
** As used in the above, "the Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series:
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA
Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust;
-41-
<PAGE> 54
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federal Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; WesMark Funds and World Investment Series, Inc.
LITIGATION
Neither Arrow nor Arch is involved in any litigation that would have any
material adverse financial effect upon either the Arrow Portfolios or the Arch
Portfolios.
FINANCIAL HIGHLIGHTS
ARROW FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for shares of the Arrow Portfolios for the six-month period ended
March 31, 1997. This information is derived from the Arrow Portfolios' unaudited
financial statements for the six-month period ended March 31, 1997. The data
should be read in conjunction with the unaudited financial statements and
related notes which are contained in the Arrow Portfolios' Semi-Annual Report to
Shareholders dated March 31, 1997 and incorporated by reference into the
Statement of Additional Information related to this Combined Proxy
Statement/Prospectus. The financial highlights for the Arrow Portfolios for
prior periods are contained in Arrow's Prospectus dated November 30, 1996 (as
supplemented April 25, 1997) for the Arrow Portfolios and the financial
statements for prior periods are contained in the Arrow Portfolios' Annual
Report to Shareholders dated September 30, 1996 and are incorporated by
reference into Arrow's Combined Statement of Additional Information with respect
to the Arrow Portfolios dated November 30, 1996, which Prospectus and Combined
Statement of Additional Information are incorporated herein by reference.
-42-
<PAGE> 55
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Fixed Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ............... $ 9.70
Income from investment operations
Net investment income ............................ 0.33
Net realized and unrealized
gain/loss on investments ....................... (0.11)
----------
Total from investment operations ................. 0.22
Less Distributions
Distributions from net investment
income ......................................... (0.33)
Distributions from net realized
gains on investments ........................... --
----------
Total distributions .............................. (0.33)
----------
Net asset value, end of period ..................... $ 9.59
----------
Total return(a) .................................... 2.21%
Ratios to average net assets
Expenses ......................................... 1.32%*
Net investment income ............................ 5.74%*
Expense waiver/reimbursement(b) .................. 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) .......... $ 28,229
Portfolio turnover ............................... 25%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-43-
<PAGE> 56
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Municipal Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................... $ 10.26
Income from investment operations
Net investment income ................................ 0.22
Net realized and unrealized
gain/loss on investments ........................... (0.04)
----------
Total from investment operations ..................... 0.18
Less Distributions
Distributions from net investment
income ............................................. (0.22)
Distributions from net realized
gains on investments ............................... --
----------
Total distributions .................................. (0.22)
----------
Net asset value, end of period ......................... $ 10.22
----------
Total return(a) ........................................ 1.76%
Ratios to average net assets
Expenses ............................................. 1.37%*
Net investment income ................................ 4.29%*
Expense waiver/reimbursement(b) ...................... 0.84%*
Supplemental Data
Net assets, end of period (000 omitted) .............. $ 13,795
Portfolio turnover ................................... 7%
=================================================================================
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-44-
<PAGE> 57
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Equity Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................. $ 15.06
Income from investment operations
Net investment income .............................. 0.06
Net realized and unrealized
gain/loss on investments ......................... 1.14
------------
Total from investment operations ................... 1.20
Less Distributions
Distributions from net investment
income ........................................... (0.05)
Distributions from net realized
gains on investments ............................. (1.05)
------------
Total distributions ................................ 1.10
------------
Net asset value, end of period ....................... $ 15.16
------------
Total return(a) ...................................... 7.98%
Ratios to average net assets
Expenses ........................................... 1.14%*
Net investment income .............................. 0.50%*
Expense waiver/reimbursement(b) .................... 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) ............ $ 58,555
Average commission rate paid(c) .................... $ 0.0905
Portfolio turnover ................................. 7%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
-45-
<PAGE> 58
ARCH FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for the six-month period ended May 31, 1997 for Investor A Shares
and Trust Shares of the Existing Arch Portfolios. This information is derived
from the Existing Arch Portfolios' unaudited financial statements for the
six-month period ended May 31, 1997. The data should be read in conjunction with
the unaudited financial statements and related notes which are contained in
Arch's Semi-Annual Report to Shareholders dated May 31, 1997 and incorporated by
reference into the Statement of Additional Information related to this Combined
Proxy Statement/Prospectus. The financial highlights for the Investor A Shares
and Trust Shares of the Existing Arch Portfolios for prior periods are contained
in Arch's Prospectuses for Investor A Shares and Trust Shares dated March 31,
1997 (as supplemented May 28, 1997), and the financial statements for the
Existing Arch Portfolios for prior periods are contained in Arch's Annual Report
to Shareholders dated November 30, 1996 and are incorporated by reference into
Arch's Statement of Additional Information dated March 31, 1997 (as revised May
28, 1997), which Prospectuses and Statement of Additional Information are
incorporated herein by reference.
-46-
<PAGE> 59
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
====================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
------------------------------
Investor A Trust
Shares Shares
- ------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.34 $ 10.34
----------- -----------
Income Activities
Net investment income .................. 0.28 0 .30
Net realized and unrealized gains
(losses) from investments ............ (0.30) (0.30)
----------- -----------
Total from Investment Activities ..... (0.02) --
----------- -----------
Distributions
Net investment income .................. (0.28) (0.30)
----------- -----------
Total Distributions .................. (0.28) (0.30)
----------- -----------
Net asset value, End of Period ........... $ 10.04 $ 10.04
=========== ===========
Total Returns ............................ (0.14%)(b)(c) 0.01%(c)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 4,607 $ 141,221
Ratio of expenses to average net
assets (including waivers) ........... $ 0.95%(d) 0.65%(d)
Ratio of net investment income to
average net assets (including waivers) 5.64%(d) 5.93%(d)
Ratio of expenses to average net
assets (before waivers)* ............. 1.05%(d) 0.75%(d)
Ratio of net investment income to
average net assets (before waivers)* . 5.54%(d) 5.83%(d)
Portfolio turnover ..................... 77% 77%
========================================================================================
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
shares as "Investor Shares". In addition, on February 1, 1991, the
Portfolio issued a second series of shares which were designated as "Trust
Shares". On September 27, 1994, the Portfolio redesignated the Investor
Shares as "Investor A" Shares.
(b) Excludes sales charge.
(c) Not Annualized.
(d) Annualized.
-47-
<PAGE> 60
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch National Municipal Bond Portfolio
<TABLE>
<CAPTION>
========================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
---------------------------------
Investor A Trust
Shares Shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.05 $ 10.05
----------- -----------
Income Activities
Net investment income .................. 0.27 .28
Net realized and unrealized gains
(losses) from investments ............ (0.10) (0.09)
----------- -----------
Total from Investment Activities ..... 0.17 0.19
----------- -----------
Distributions
Net investment income .................. (0.27) (0.28)
----------- -----------
Total Distributions .................. (0.27) (0.28)
----------- -----------
Net asset value, End of Period ........... $ 9.95 $ 9.96
=========== ===========
Total Returns ............................ 1.69%(a)(b) 1.91%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 543 $ 325,884
Ratio of expenses to average net
assets (including waivers) ........... 0.33%(c) 0.13%(c)
Ratio of net investment income to
average net assets (including waivers) 5.34%(c) 5.61%(c)
Ratio of expenses to average net
assets (before waivers)* ............. .82%(c) 0.73%(c)
Ratio of net investment income to
average net assets (before waivers)* . 4.85%(c) 5.01%(c)
Portfolio turnover ..................... 51% 51%
========================================================================================
</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) Excludes sales charge.
(b) Not Annualized.
(c) Annualized.
-48-
<PAGE> 61
FINANCIAL STATEMENTS
The financial highlights for the Arrow Portfolios for the fiscal year
ended September 30, 1996 included in Arrow's Prospectus with respect to the
Arrow Portfolios dated November 30, 1996 (as supplemented April 25, 1997) and
the financial statements for the Arrow Portfolios for the fiscal year ended
September 30, 1996 contained in Arrow's Annual Report to Shareholders dated
September 30, 1996 for the Arrow Portfolios and incorporated by reference into
the Combined Statement of Additional Information for the Arrow Portfolios dated
November 30, 1996, which Prospectus and Combined Statement of Additional
Information are incorporated by reference into this Combined Proxy/Prospectus,
have been incorporated herein in reliance on the reports of KPMG Peat Marwick
LLP, independent auditors, given on the authority of that firm as experts in
accounting and auditing.
The financial highlights for the Investor A Shares and Trust Shares of the
Existing Arch Portfolios for the fiscal year ended November 30, 1996 included in
Arch's Prospectuses for Investor A Shares and Trust Shares of the Existing Arch
Portfolios dated March 31, 1997 (as supplemented May 28, 1997) and the financial
statements for the Existing Arch Portfolios contained in Arch's Annual Report to
Shareholders dated November 30, 1996 and incorporated by reference into Arch's
Statement of Additional Information dated March 31, 1997 (as revised May 28,
1997), which Prospectuses and Supplement of Additional Information are
incorporated by reference into this Combined Proxy Statement/ Prospectus, have
been incorporated herein in reliance on the reports of KPMG Peat Marwick LLP,
independent auditors, given on the authority of that firm as experts in
accounting and auditing.
OTHER BUSINESS
Arrow's Board knows of no other business to be brought before the Meeting.
However, if any other matters come before the Meeting, it is the intention that
proxies which do not contain specific restrictions to the contrary will be voted
on such matters in accordance with the judgment of the persons named in the
enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to Arrow in writing at the address
on the cover page of this Combined Proxy Statement/Prospectus or by telephoning
1-800-866-6040.
* * *
-49-
<PAGE> 62
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
-50-
<PAGE> 63
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
THE ARCH FUND(R), INC.
AND
ARROW FUNDS
_____________________, 1997
I-1
<PAGE> 64
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C> <C>
I. Transfer of Assets of Arrow Funds............................. I-7
II. Liquidating Distributions and Termination of
Arrow......................................................... I-10
III. Effective Times of the Reorganization......................... I-12
IV. Certain Representations, Warranties and
Agreements of Arrow........................................... I-12
V. Certain Representations, Warranties and
Agreements of Arch............................................ I-20
VI. Shareholder Action on Behalf of the Acquired
Portfolios.................................................... I-25
VII. N-14 Registration Statement and Proxy
Solicitation Materials........................................ I-26
VIII. Delivery of Assets and Shares. . . . ......................... I-27
IX. Arch Conditions............................................... I-27
X. Arrow Conditions.............................................. I-35
XI. Tax Documents................................................. I-40
XII. Finder's Fees................................................. I-40
XIII. Announcements................................................. I-40
XIV. Further Assurances............................................ I-41
XV. Termination of Representations and
Warranties.................................................... I-41
XVI. Termination of Agreement...................................... I-41
XVII. Amendment and Waiver.......................................... I-43
XVIII. Governing Law................................................. I-43
XIX. Successors and Assigns........................................ I-43
XX. Beneficiaries................................................. I-44
XXI. Arrow Liability............................................... I-44
XXII. Arch Liability................................................ I-45
XXIII. Notices....................................................... I-45
XXIV. Expenses...................................................... I-46
XXV. Entire Agreement.............................................. I-47
XXVI. Counterparts.................................................. I-47
</TABLE>
I-2
<PAGE> 65
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of
__________, 1997 between THE ARCH FUND(R), INC., a Maryland corporation
("Arch"), and ARROW FUNDS, a Massachusetts business trust ("Arrow").
WHEREAS, Arrow currently consists of four investment portfolios,
i.e. the Arrow Government Money Market Portfolio, the Arrow Fixed Income
Portfolio, the Arrow Municipal Income Portfolio and the Arrow Equity Portfolio;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio, the Arrow Municipal
Income Portfolio and the Arrow Equity Portfolio as of the Effective Time of the
Reorganization (as defined in Article III) with respect to each such Portfolio
be transferred to, and be acquired and assumed by, certain Arch portfolios in
exchange for Investor A Shares of the Arch portfolios which shall thereafter be
distributed by Arrow to the holders of the shares of its portfolios, all as
described in this Agreement (the "Reorganization");
WHEREAS, the parties intend that one of the Arch portfolios, the
ARCH Growth Equity Portfolio, will have nominal assets and liabilities before
the Reorganization and will
<PAGE> 66
continue the investment operations of the Arrow Equity Portfolio (the
"Continuing Portfolio") after the Reorganization;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio and the Arrow Municipal
Income Portfolio (the "Reorganizing Portfolios" and, together with the
Continuing Portfolio, the "Acquired Portfolios") shall be acquired and assumed
by the Arch Government & Corporate Bond Portfolio and the Arch National
Municipal Bond Portfolio, respectively;
WHEREAS, the parties intend that the Reorganization with respect to
the Reorganizing Portfolios will occur on a date that is prior to the
Reorganization with respect to the Continuing Portfolio;
WHEREAS, the parties have been advised that the shareholders of the
Arrow Government Money Market Portfolio will redeem their shares in that
portfolio prior to the Effective Time of the Reorganization with respect to the
Reorganizing Portfolios;
WHEREAS, the parties intend that the transfers of assets,
assumptions of liabilities, and distributions of Investor A Shares be treated as
tax-free reorganizations under Section
I-4
<PAGE> 67
368(a)(1)(C), (D) or (F) of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the parties intend that in connection with the
Reorganization each of the Acquired Portfolios shall be terminated and Arrow
shall be deregistered as an investment company and dissolved under state law as
described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
and intending to be legally bound hereby, Arch and Arrow agree as follows:
I. TRANSFER OF ASSETS OF ARROW FUNDS.
1.01 At the Effective Time of the Reorganization (as defined in Article
III) with respect to each of the Acquired Portfolios, all property of every
description, and all interests, rights, privileges and powers of such Acquired
Portfolio other than cash in an amount necessary to pay any unpaid dividends and
distributions as provided in Article IV, Section 4.01(h) (such assets, the
"Acquired Portfolio Assets"), shall be transferred and conveyed by such Acquired
Portfolio to Arch on behalf of one of its portfolios as set forth in Article I,
Section 1.02 (each, an "Acquiring Portfolio"), and shall be accepted by Arch on
behalf of such Acquiring Portfolio, and Arch, on behalf of such Acquiring
Portfolio, shall assume all known liabilities, whether
I-5
<PAGE> 68
accrued, absolute, contingent or otherwise, of such Acquired Portfolio reflected
in the calculation of such Acquired Portfolio's net asset value (the "Acquired
Portfolio Liabilities"), so that at and after the Effective Time of the
Reorganization with respect to such Acquired Portfolio: (i) all assets of such
Acquired Portfolio shall become and be the assets of its Acquiring Portfolio;
and (ii) all known liabilities of such Acquired Portfolio reflected as such in
the calculation of such Acquired Portfolio's net asset value shall attach to its
Acquiring Portfolio as aforesaid and may thenceforth be enforced against such
Acquiring Portfolio to the extent as if the same had been incurred by it.
Without limiting the generality of the foregoing, the Acquired Portfolio Assets
shall include all property and assets of any nature whatsoever, including,
without limitation, all cash, cash equivalents, securities, claims and
receivables (including dividend and interest receivables) owned by an Acquired
Portfolio, and any deferred or prepaid expenses shown as an asset on an Acquired
Portfolio's books, at the Effective Time of the Reorganization of such Acquired
Portfolio, and all good will, all other intangible property and all books and
records belonging to an Acquired Portfolio. Recourse by any person for the
Acquired Portfolio Liabilities assumed by an Acquiring Portfolio shall, at and
after the Effective Time of the Reorganization of such Acquired Portfolio, be
limited to such Acquiring Portfolio.
I-6
<PAGE> 69
1.02 The assets of each Acquired Portfolio shall be acquired by the
Acquiring Portfolio identified below opposite its name:
<TABLE>
<CAPTION>
Arrow Portfolios Arch Portfolios
- ---------------- ---------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio (Class D Common Stock)
Municipal Income Portfolio National Municipal Bond Portfolio
(Class N Common Stock)
Equity Portfolio Growth Equity Portfolio
(Class S Common Stock)
</TABLE>
1.03 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, Arch shall simultaneously
issue at the applicable Effective Time of the Reorganization to each Acquired
Portfolio a number of full and fractional (to the third decimal place) Investor
A Shares of the Acquiring Portfolio specified in Article I, Section 1.02, all
determined and adjusted as provided in this Agreement. The number of Investor A
Shares of each Acquiring Portfolio so issued will have an aggregate net asset
value equal to the net value of the Acquired Portfolio Assets that are
represented by the shares of the Acquired Portfolio, the holders of which shall
receive Investor A Shares of the Acquiring Portfolio, as specified in Article I,
Section 1.02, all determined and adjusted as provided in this Agreement.
1.04 The net asset value of the Investor A Shares of the Acquiring
Portfolios and the net asset value of the shares of the Acquired Portfolios
shall be determined as of the applicable
I-7
<PAGE> 70
Effective Time of the Reorganization with respect to each Acquired Portfolio.
1.05 The net asset value of the Investor A Shares of each Acquiring
Portfolio shall be computed in the manner set forth in such Acquiring
Portfolio's then current prospectuses under the Securities Act of 1933, as
amended (the "1933 Act"). In determining the value of the securities transferred
by the Acquired Portfolios to the Acquiring Portfolios, each security shall be
priced in accordance with the policies and procedures of Arch described in its
then current prospectuses and statements of additional information and adopted
by Arch's Board of Directors. For such purposes, price quotations and the
security characteristics relating to establishing such quotations shall be
determined by Arch, such determination being subject to the approval of Arrow,
and shall be subject to adjustment by the amount, if any, agreed to by the
parties hereto.
II. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF ARROW. Immediately after
the Effective Time of the Reorganization with respect to each Acquired
Portfolio, such Acquired Portfolio shall distribute in complete liquidation pro
rata to the record holders of its shares at the applicable Effective Time of the
Reorganization the Investor A Shares of the Acquiring Portfolio identified in
Article I, Section 1.02, to be received by the record holders of the shares of
such Acquired Portfolio. In addition, each shareholder of record of an Acquired
Portfolio
I-8
<PAGE> 71
shall have the right to receive any unpaid dividends or other distributions
which were declared before the applicable Effective Time of the Reorganization
with respect to the shares of such Acquired Portfolio that are held by the
shareholder at the applicable Effective Time of the Reorganization. In
accordance with instructions it receives from Arrow, Arch shall record on its
books the ownership of Investor A Shares of each Acquiring Portfolio by the
record holders of the shares of the Acquired Portfolio identified in Article I,
Section 1.02. No redemption or repurchase of any Acquiring Portfolio shares
credited to Arrow shareholders of record with respect to the Acquired Portfolio
shares represented by share certificates shall be permitted until such
certificates have been surrendered to Arch's transfer agent for cancellation.
All of the issued and outstanding shares of each Acquired Portfolio shall be
cancelled on the books of Arrow at the Effective Time of the Reorganization of
such Acquired Portfolio and shall thereafter represent only the right to receive
the Investor A Shares of the Acquiring Portfolio identified in Article I,
Section 1.02, following which the Acquired Portfolio's transfer books shall be
closed permanently. As soon as practicable after the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall make all filings
and take all other steps as shall be necessary and proper to effect its complete
dissolution, and shall file an application pursuant to Section 8(f) of the
Investment Company Act of 1940, as amended (the "1940 Act") for an order
declaring
I-9
<PAGE> 72
that it has ceased to be an investment company. After the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall not conduct any
business except in connection with its liquidation, dissolution, and
deregistration.
III. EFFECTIVE TIMES OF THE REORGANIZATION. The Effective Time of the
Reorganization with respect to the Reorganizing Portfolios shall be 4:00 p.m.,
Eastern Time, on November 14, 1997, or on such other date as may be agreed to in
writing by the duly authorized officers of both parties hereto. The Effective
Time of the Reorganization with respect to the Continuing Portfolio shall be
4:00 p.m., Eastern Time, on November 21, 1997, or on such other date as may be
agreed to in writing by the duly authorized officers of both parties hereto.
IV. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARROW.
4.01 Arrow, on behalf of itself and each Acquired Portfolio, represents
and warrants to, and agrees with, Arch as follows:
4.01 (a) Arrow is a Massachusetts business trust duly created
pursuant to its Declaration of Trust for the purpose of acting
as a management investment company under the 1940 Act and is
validly existing
I-10
<PAGE> 73
under the laws of, and duly authorized to transact business
in, the Commonwealth of Massachusetts. It is registered with
the Securities and Exchange Commission (the "SEC") as an
open-end, management investment company under the 1940 Act and
such registration is in full force and effect.
4.01 (b) Arrow has power to own all of its properties and assets and,
subject to the approvals of shareholders referred to herein,
to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted
and to consummate the transactions contemplated by this
Agreement.
4.01 (c) This Agreement has been duly authorized, executed and
delivered by Arrow, and represents Arrow's valid and binding
contract, enforceable in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights and
to general principles of equity. The execution and delivery of
this Agreement does not and will not, and the
I-11
<PAGE> 74
consummation of the transactions contemplated by this
Agreement will not, violate Arrow's Declaration of Trust or
By-Laws or any agreement or arrangement to which it is a party
or by which it is bound.
4.01 (d) Each Acquired Portfolio has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of the Code, as of and since its first taxable
year; has been a regulated investment company under such Part
of the Code at all times since the end of its first taxable
year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company until the Effective
Time of the Reorganization with respect to such Acquired
Portfolio.
4.01 (e) All federal, state, local and foreign income, profits,
franchise, sales, withholding, customs, transfer and other
taxes, including interest, additions to tax and penalties
(collectively, "Taxes") relating to the Acquired Portfolio
Assets due or properly shown to be due on any return filed by
or on behalf of any Acquired Portfolio with respect to taxable
periods ending on or prior
I-12
<PAGE> 75
to, and the portion of any interim period up to, the date
hereof have been fully and timely paid or provided for; and
there are no levies, liens, or other encumbrances relating to
Taxes existing, threatened or pending with respect to the
Acquired Portfolio Assets. At the Effective Time of the
Reorganization with respect to each Acquired Portfolio, all
returns and reports of Arrow and such Acquired Portfolio
respecting Taxes required by law to have been filed by such
time shall have been filed.
4.01 (f) The financial statements of each Acquired Portfolio for its
fiscal year ended September 30, 1996, examined by KPMG Peat
Marwick LLP, copies of which have been previously furnished to
Arch, present fairly the financial position of each Acquired
Portfolio as of such date and the results of its operations
for the year then ended, in conformity with generally accepted
accounting principles.
4.01 (g) The unaudited financial statements of each Acquired
Portfolio for the six-month period ended March 31, 1997,
copies of which have been previously furnished to Arch,
present fairly the
I-13
<PAGE> 76
financial position of each Acquired Portfolio as of such date
and the results of its operations for the six-month period
then ended, in conformity with generally accepted accounting
principles.
4.01 (h) Prior to the Effective Time of the Reorganization
applicable to the Reorganizing Portfolios, each of
the Reorganizing Portfolios shall have declared a
dividend, with a record date and ex-dividend date
prior thereto, which, together with all previous
dividends, shall have the effect of distributing
to its shareholders all of its net investment
company income, if any, for the taxable year ended
on September 30, 1997 and for the period from said
date to and including the Effective Time of the
Reorganization applicable to the Reorganizing
Portfolios (computed without regard to any
deduction for dividends paid), and all of its net
capital gain, if any, realized in such taxable
year and period.
4.01 (i) At the Effective Time of the Reorganization with respect
to each Acquired Portfolio, there shall be no known
liabilities of such Acquired Portfolio, whether accrued,
absolute, contingent or
I-14
<PAGE> 77
otherwise, not reflected in the net asset value per share of
its outstanding shares.
4.01 (j) There are no legal, administrative or other proceedings
pending or, to Arrow's knowledge, threatened against Arrow or
an Acquired Portfolio which could result in liability on the
part of Arrow or an Acquired Portfolio.
4.01 (k) Subject to the approvals of shareholders referred to herein,
at the Effective Time of the Reorganization with respect to
each Acquired Portfolio, Arrow shall have full right, power
and authority to sell, assign, transfer and deliver the
Acquired Portfolio Assets of such Acquired Portfolio and, upon
delivery and payment for the Acquired Portfolio Assets as
contemplated herein, an Acquiring Portfolio shall acquire good
and marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership
or transfer thereof (except as imposed by federal or state
securities laws).
4.01 (l) No consent, approval, authorization or order of any court or
governmental authority is required
I-15
<PAGE> 78
for the consummation by Arrow of the transactions contemplated
by this Agreement, except such as may be required under the
1933 Act, the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act, the rules and regulations under
those Acts, and state securities laws.
4.01 (m) Insofar as the following relate to Arrow, the registration
statement filed by Arch on Form N-14 relating to the shares of
certain Acquiring Portfolios that will be registered with the
SEC pursuant to this Agreement, which, without limitation,
shall include a proxy statement of Arrow and the prospectus of
Arch with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the
"N-14 Registration Statement"), on the effective date of the
N-14 Registration Statement, at the time of any shareholders'
meetings referred to herein and at each Effective Time of the
Reorganization: (i) shall comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act,
the rules and regulations thereunder, and state securities
laws, and (ii) shall not contain any untrue
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statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading.
4.01 (n) All of the issued and outstanding shares of each Acquired
Portfolio have been duly and validly issued, are fully paid
and non-assessable, and were offered for sale and sold in
conformity with all applicable federal and state securities
laws, and no shareholder of an Acquired Portfolio has any
preemptive right of subscription or purchase in respect of
such shares.
4.01 (o) Arrow shall not sell or otherwise dispose of any shares of
an Acquiring Portfolio to be received in the transactions
contemplated herein, except in distribution to its
shareholders as contemplated herein.
4.01 (p) Arrow has valued, and will continue to value, its
portfolio securities and other assets in accordance with
applicable legal requirements.
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V. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARCH.
5.01 Arch, on behalf of itself and each Acquiring Portfolio, represents
and warrants to, and agrees with, Arrow as follows:
5.01 (a) Arch is a corporation duly organized and validly
existing under the laws of the State of Maryland. It
is registered with the SEC as an open-end, management
investment company under the 1940 Act and such
registration is in full force and effect.
5.01 (b) Arch has power to own all of its properties and
assets and to carry out and consummate the
transactions contemplated herein, and has all
necessary federal, state and local authorizations
to carry on its business as now being conducted
and to consummate the transactions contemplated by
this Agreement.
5.01 (c) This Agreement has been duly authorized, executed
and delivered by Arch, and represents Arch's valid
and binding contract, enforceable in accordance with
its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization,
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arrangement, moratorium, and other similar laws of
general applicability relating to or affecting
creditors' rights and to general principles of
equity. The execution and delivery of this Agreement
does not and will not, and the consummation of the
transactions contemplated by this Agreement will not,
violate Arch's Article of Incorporation or By-Laws or
any agreement or arrangement to which it is a party
or by which it is bound.
5.01 (d) Each Acquiring Portfolio has elected or will elect
to qualify as a regulated investment company under
Part I of Subchapter M of the Code, and each of
the first two Acquiring Portfolios listed in
Article I, Section 1.02, has so qualified as of
and at all times since the end of its first
taxable year and intends to continue to so
qualify.
5.01 (e) The financial statements of each of the first two
Acquiring Portfolios listed in Article I, Section
1.02, for its fiscal year or period ended November
30, 1996, examined by KPMG Peat Marwick LLP, copies
of which have been previously furnished to Arrow,
present fairly the financial
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position of each such Acquiring Portfolio as of such
date and the results of its operations for the year
or period then ended, in conformity with generally
accepted accounting principles.
5.01 (f) The unaudited financial statements of each of the
first two Acquiring Portfolios listed in
Article I, Section 1.02, for the six-month period
ended May 31, 1997, copies of which have been
previously furnished to Arrow, present fairly the
financial position of each such Acquiring
Portfolio as of such date and the results of its
operations for the six-month period then ended, in
conformity with generally accepted accounting
principles.
5.01 (g) At the Effective Time of the Reorganization with
respect to each Acquiring Portfolio, there shall
be no known liabilities applicable to the Investor
A Shares of such Acquiring Portfolio, whether
accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of such
Acquiring Portfolio's Investor A Shares.
5.01 (h) There are no legal, administrative or other
proceedings pending or, to Arch's knowledge,
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threatened against Arch or an Acquiring Portfolio
which could result in liability on the part of Arch
or an Acquiring Portfolio.
5.01 (i) No consent, approval, authorization or order of
any court or governmental authority is required
for the consummation by Arch of the transactions
contemplated by this Agreement, except such as may
be required under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01 (j) Insofar as the following relate to Arch, the N-14
Registration Statement on its effective date, at
the time of any shareholders' meetings referred to
herein and at each Effective Time of the
Reorganization: (i) shall comply in all material
respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws,
and (ii) shall not contain any untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading.
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5.01 (k) The Investor A Shares of each Acquiring Portfolio
to be issued and delivered to an Acquired
Portfolio for the account of record holders of
shares of such Acquired Portfolio pursuant to the
terms hereof, shall have been duly authorized as
of the Effective Time of the Reorganization
applicable to such Acquiring Portfolio and, when
so issued and delivered, shall be duly and validly
issued, fully paid and non-assessable, and no
shareholder of Arch shall have any preemptive
right of subscription or purchase in respect
thereto.
5.01 (l) Arch has valued, and will continue to value, its
portfolio securities and other assets in
accordance with applicable legal requirements.
5.01 (m) The Board of Directors of Arch complies with the
requirements of Section 15(f)(1)(A) of the 1940
Act as of the date hereof. If its Board of
Directors ceases to comply with such requirements
at any time within three years after the Effective
Time of the Reorganization with respect to the
Continuing Portfolio, Arch will take such action
as is necessary to restore such compliance as soon
as is reasonably practicable.
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VI. SHAREHOLDER ACTION ON BEHALF OF THE ACQUIRED PORTFOLIOS.
6.01 As soon as practicable after the effective date of the N-14
Registration Statement, but in any event prior to the Effective Time of the
Reorganization applicable to the Reorganizing Portfolios and as a condition to
the Reorganization, Arrow shall hold a meeting of the shareholders of the
Acquired Portfolios for the purpose of considering and voting upon:
6.01 (a) Approval of this Agreement and the transactions
contemplated hereby, including, without
limitation:
(i) The transfer of the Acquired Portfolio Assets
belonging to each Acquired Portfolio to an
Acquiring Portfolio, and the assumption by such
Acquiring Portfolio of the Acquired Portfolio
Liabilities of such Acquired Portfolio, in
exchange for Investor A Shares of such
Acquiring Portfolio, as set forth in Article I,
Section 1.02.
(ii) The liquidation of each Acquired Portfolio
through the distribution to its record
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holders of Investor A Shares of an Acquiring
Portfolio as described in this Agreement.
6.01 (b) Such other matters as may be determined by the
parties hereto.
6.02 Approval of this Agreement and the transactions contemplated
herein by the shareholders of the Acquired Portfolios shall constitute the
waiver of the application of any fundamental policy of such Acquired Portfolios
that might be deemed to prevent them from taking the actions necessary to
effectuate the Reorganization as described, and such policies, if any, shall be
deemed to have been amended accordingly.
VII. N-14 REGISTRATION STATEMENT AND PROXY SOLICITATION MATERIALS. Arch
shall file the N-14 Registration Statement under the 1933 Act, and Arrow shall
file the combined prospectus/proxy statement contained therein under the 1934
Act and 1940 Act proxy rules, with the SEC as promptly as practicable. Each of
Arch and Arrow has cooperated and shall continue to cooperate with the other,
and has furnished and shall continue to furnish the other with the information
relating to itself that is required by the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under each of those Acts and state securities laws, to
be included in the N-14 Registration Statement.
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VIII. DELIVERY OF ASSETS AND SHARES. Delivery of the Acquired Portfolio
Assets and the Investor A Shares of each Acquiring Portfolio to be issued
pursuant to Article I shall occur at the Effective Time of the Reorganization
applicable to such Acquired Portfolio, or on such other date, and at such place
and time, as may be determined by the President or any Vice President of each
party hereto. To the extent any Acquired Portfolio Assets are, for any reason,
not transferred at the applicable Effective Time of the Reorganization, Arrow
shall cause such Acquired Portfolio Assets to be transferred in accordance with
this Agreement at the earliest practicable date thereafter.
IX. ARCH CONDITIONS.
9.01 The obligations of Arch hereunder with respect to each Acquiring
Portfolio shall be subject to the following conditions precedent:
9.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
shareholders of each Acquired Portfolio, in the
manner required by law.
9.01 (b) Arrow shall have duly executed and delivered to
Arch such bills of sale, assignments, certificates
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and other instruments of transfer ("Transfer
Documents") as may be necessary or desirable to
transfer all right, title and interest of Arrow and
such Acquired Portfolio in and to the Acquired
Portfolio Assets of such Acquired Portfolio. The
Acquired Portfolio Assets shall be accompanied by all
necessary state stock transfer stamps or cash for the
appropriate purchase price therefor.
9.01 (c) All representations and warranties of Arrow made
in this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of such Acquired Portfolio since September 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
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9.01 (d) Arch shall have received an opinion of Dickstein,
Shapiro, Morin & Oshinsky LLP, addressed to Arch
in form reasonably satisfactory to Arch and dated
the Effective Time of the Reorganization
applicable to each Acquired Portfolio, substan-
tially to the effect that: (i) Arrow is a
Massachusetts business trust duly organized and
validly existing under the laws of the
Commonwealth of Massachusetts; (ii) the shares of
each Acquired Portfolio outstanding at the
applicable Effective Time of the Reorganization
are duly authorized, validly issued, fully paid
and non-assessable by such Acquired Portfolio, and
to such counsel's knowledge no shareholder of such
Acquired Portfolio has any option, warrant or pre-
emptive right to subscription or purchase in
respect thereof; (iii) this Agreement and the
Transfer Documents have been duly authorized,
executed and delivered by Arrow and represent its
legal, valid and binding contracts or instruments,
enforceable against Arrow in accordance with their
terms, subject to the effect of bankruptcy,
insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors'
rights generally and court decisions with respect
thereto, and such counsel shall not be required to
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express an opinion with respect to the application of
equitable principles in any proceeding, whether at
law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for
particular matters to an Acquired Portfolio and its
assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the
transactions contemplated by this Agreement will not,
violate the Declaration of Trust or By-Laws of Arrow
or any material agreement known to such counsel to
which Arrow is a party or by which Arrow is bound;
and (v) to such counsel's knowledge, no consent,
approval, authorization or order of any court or
governmental authority is required for the
consummation by Arrow of the transactions
contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those Acts,
and such as may be required under state securities
laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion,
provided such other counsel is reasonably acceptable
to Arch.
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9.01 (e) Arch shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, substantially to the
effect that for federal income tax purposes
(i) the transfer by each Acquired Portfolio of all
of its Acquired Portfolio Assets and Acquired
Portfolio Liabilities to the corresponding
Acquiring Portfolio, in exchange for Investor A
Shares of such Acquiring Portfolio, and the
distribution of said Investor A Shares to the
shareholders of such Acquired Portfolio, as
provided in this Agreement, will each constitute a
reorganization within the meaning of Section
368(a)(1)(C), (D) or (F) of the Code and with
respect to each reorganization, the Acquired
Portfolio and the Acquiring Portfolio will each be
considered "a party to a reorganization" within
the meaning of Section 368(b) of the Code; (ii) in
accordance with Sections 361(a), 361(c)(1) and
357(a) of the Code, no gain or loss will be
recognized by any Acquired Portfolio as a result
of such transactions; (iii) in accordance with
Section 1032(a) of the Code, no gain or loss will
be recognized by an Acquiring Portfolio as a
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result of such transactions; (iv) in accordance with
Section 354(a)(1) of the Code, no gain or loss will
be recognized by the shareholders of any Acquired
Portfolio on the distribution to them by such
Acquired Portfolio of Investor A Shares of an
Acquiring Portfolio in exchange for their shares of
such Acquired Portfolio; (v) in accordance with
Section 358(a)(1) of the Code, the aggregate basis of
Investor A Shares of an Acquiring Portfolio received
by each holder of shares of an Acquired Portfolio
will be the same as the aggregate basis of the
shareholder's Acquired Portfolio shares immediately
prior to the transactions; (vi) in accordance with
Section 362(b) of the Code, the basis of the Acquired
Portfolio Assets to each Acquiring Portfolio will be
the same as the basis of such Acquired Portfolio
Assets in the hands of an Acquired Portfolio
immediately prior to the exchange; (vii) in
accordance with Section 1223 of the Code, a
shareholder's holding period for Investor A Shares of
an Acquiring Portfolio will be determined by
including the period for which the shareholder held
the shares of an Acquired Portfolio exchanged
therefor, provided that the shareholder held such
shares of an Acquired Portfolio as a capital asset;
(viii) in accordance
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with Section 1223 of the Code, the holding period of
an Acquiring Portfolio with respect to the Acquired
Portfolio Assets will include the period for which
such Acquired Portfolio Assets were held by an
Acquired Portfolio; and (ix) in accordance with
Section 381(a) of the Code, each Acquiring Portfolio
will succeed to the tax attributes of the
corresponding Acquired Portfolio described in Section
381(c) of the Code.
9.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
9.01 (g) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
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9.01 (h) Arrow shall have delivered or caused to be
delivered to Arch each account, book, record or
other document of Arrow applicable to such
Acquired Portfolio which is required to be
maintained by Section 31(a) of the 1940 Act and
Rule 31a-1 to 31a-3 thereunder (regardless of what
person possesses the same), and a copy of all
agreements and instruments to which Arrow is a
party or signatory. Arrow has instructed its
service contractors to provide Arch upon request
with access to and copies of all documents
belonging to Arrow. Arrow shall have delivered to
Arch a list of the tax costs of the securities of
each Acquired Portfolio by lot and the holding
periods of such securities, as of the Effective
Time of the Reorganization applicable to each
Acquired Portfolio.
9.01 (i) The President or any Vice President of Arrow shall
have certified that Arrow has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
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9.01 (j) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., as described in
the Agreement and Plan of Merger dated as of
October 27, 1996, shall have been consummated.
9.01 (k) The Acquired Portfolio Assets to be transferred to
an Acquiring Portfolio under this Agreement shall
include no assets which such Acquiring Portfolio
may not properly acquire pursuant to its
investment objective, policies or limitations, or
may not otherwise lawfully acquire.
9.01 (l) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both of
the Reorganizing Portfolios shall have been
consummated.
X. ARROW CONDITIONS.
10.01 The obligations of Arrow hereunder with respect to each Acquired
Portfolio shall be subject to the following conditions precedent:
10.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
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shareholders of each Acquired Portfolio in the
manner required by law.
10.01 (b) All representations and warranties of Arch made in
this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of its Acquiring Portfolio since November 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
10.01 (c) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arrow in form
reasonably satisfactory to it and dated the Effective
Time of the Reorganization applicable to each
Acquired Portfolio, substantially to the effect that:
(i) Arch is a corporation duly
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organized and validly existing under the laws of the
State of Maryland; (ii) the Investor A Shares of each
Acquiring Portfolio to be delivered at such time to
an Acquired Portfolio as provided for by this
Agreement are duly authorized and upon delivery will
be validly issued, fully paid and non-assessable by
such Acquiring Portfolio, and to such counsel's
knowledge no shareholder of an Acquiring Portfolio
has any option, warrant or pre-emptive right to
subscription or purchase in respect thereof; (iii)
this Agreement has been duly authorized, executed and
delivered by Arch and represents its legal, valid and
binding contract, enforceable against Arch in
accordance with its terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with
respect thereto, and such counsel shall not be
required to express an opinion with respect to the
application of equitable principles in any
proceeding, whether at law or in equity, or with
respect to the provisions of this Agreement intended
to limit liability for particular matters to an
Acquiring Portfolio and its assets; (iv) the
execution and delivery of this Agreement did not,
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and the consummation of the transactions contemplated
by this Agreement will not, violate the Articles of
Incorporation or By-Laws of Arch, or any material
agreement known to such counsel to which Arch is a
party or by which Arch is bound; and (v) to such
counsel's knowledge no consent, approval,
authorization or order of any court or governmental
authority is required for the consummation by Arch of
the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act,
the 1934 Act, the 1940 Act, the rules and regulations
under those Acts and such as may be required under
state securities laws. Such opinion may rely on the
opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is
reasonably acceptable to Arrow.
10.01 (d) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, with respect to the matters
specified in Article IX, Section 9.01(e).
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10.01 (e) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted, or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
10.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
10.01 (g) The President or any Vice President of Arch shall
have certified that Arch has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
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10.01 (h) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., described in the
Agreement and Plan of Reorganization dated as of
October 27, 1996, shall have been consummated.
10.02 (i) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both
of the Reorganizing Portfolios shall have been
consummated.
XI. TAX DOCUMENTS. Arrow shall deliver to Arch at each Effective Time
of the Reorganization confirmations or other adequate evidence as to the
adjusted tax basis of the Acquired Portfolio Assets delivered to an Acquiring
Portfolio in accordance with the terms of this Agreement.
XII. FINDER'S FEES. Each party represents and warrants to each of the
other parties hereto that there is no person who is entitled to any finder's or
other similar fee or commission arising out of the transactions contemplated by
this Agreement.
XIII. ANNOUNCEMENTS. Any announcements or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be at
such time and in such manner as the parties shall agree; provided, that nothing
herein shall prevent either party upon notice to the other party from making
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such public announcements as such party's counsel may consider advisable in
order to satisfy the party's legal and contractual obligations.
XIV. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments, and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
XV. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Arrow and Arch set forth in this Agreement shall terminate
upon the consummation of the Reorganization.
XVI. TERMINATION OF AGREEMENT.
16.01 This Agreement may be terminated as to one or more investment
portfolios by a party at any time at or prior to (i) the Effective Time of the
Reorganization of the Reorganizing Portfolios, or (ii) with respect to the
Continuing Portfolio and the corresponding Acquired Portfolio, at any time at or
prior to the Effective Time of the Reorganization of the Continuing
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Portfolio, by its Board of Trustees, in the case of Arrow, or its Board of
Directors, in the case of Arch, as provided below:
(a) By Arch if the conditions set forth in Article IX
are not satisfied as specified in said Article;
(b) By Arrow if the conditions set forth in Article X
are not satisfied as specified in said Article; or
(c) By the mutual consent of the parties.
16.02 If a party terminates this Agreement as to one or more investment
portfolios because one or more of the conditions precedent have not been
fulfilled, or if this Agreement is terminated by mutual consent, this Agreement
will become null and void without any liability of either party or any of their
investment portfolios to the other; provided, however, that if such termination
is by Arch pursuant to Section 16.01(a) as a result of a breach by Arrow of any
of its representations, warranties or covenants in this Agreement, or such
termination is by Arrow pursuant to Section 16.01(b) as a result of a breach by
Arch of any of its representations, warranties or covenants in this Agreement,
nothing herein shall affect the non-breaching party's right to damages on
account of such other party's breach.
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XVII. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Arrow, (a) the parties hereto may, by written agreement authorized by the Board
of Directors of Arch and the Board of Trustees of Arrow or their authorized
officers and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations (such waiver to be in writing and authorized by the President or any
Vice President of the waiving party with or without the approval of such party's
shareholders).
XVIII. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Maryland, without giving effect to the conflicts of law principles
otherwise applicable therein.
XIX. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
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XX. BENEFICIARIES. Nothing contained in this Agreement shall be deemed
to create rights in or eliminate liabilities of persons not parties hereto,
other than the successors and permitted assigns of the parties.
XXI. ARROW LIABILITY.
21.01 The names "Arrow Funds" and "Board of Trustees of Arrow Funds"
refer, respectively, to the trust created and the trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated July 1, 1992, which is hereby referred to and a copy of which is on
file at the office of the State Secretary of the Commonwealth of Massachusetts
and at the principal office of Arrow. The obligations of Arrow entered into in
the name or on behalf thereof by any of the trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the trustees, shareholders or representatives of Arrow personally, but bind
only the trust property, and all persons dealing with any series of shares of
Arrow must look solely to the trust property belonging to such series for the
enforcement of any claims against Arrow.
21.02 Both parties specifically acknowledge and agree that any
liability of Arrow under this Agreement with respect to an Acquired Portfolio,
or in connection with the transactions
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contemplated herein with respect to an Acquired Portfolio, shall be discharged
only out of the assets of that Acquired Portfolio and that no other portfolio of
Arrow shall be liable with respect thereto.
XXII. ARCH LIABILITY. Both parties specifically acknowledge and agree
that any liability of Arch under this Agreement with respect to an Acquiring
Portfolio, or in connection with the transactions contemplated herein with
respect to an Acquiring Portfolio, shall be discharged only out of the assets of
that Acquiring Portfolio and that no other portfolio of Arch shall be liable
with respect thereto.
XXIII. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to a nationally recognized
overnight courier service, in each case properly addressed to the party entitled
to receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in writing
by notice similarly given by one party to the other party hereto:
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If to Arch:
Jerry V. Woodham, Chairman of the Board
The ARCH Fund, Inc.
Saint Louis University
Fitzgerald Hall
3500 Lindell Blvd.
St. Louis, MO 63131
Telecopier Number: (314) 977-2298
With a copy to:
Henry S. Hilles, Jr., Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2878
If to Arrow:
Arrow Funds
c/o Gail Cagney, Esq.
Federated Investors
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Telecopier Number: (412) 288-8141
With a copy to:
Matthew G. Maloney, Esq.
Dickstein, Shapiro, Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, DC 20037
Telecopier Number: (202) 887-0689
XXIV. EXPENSES. _________ shall be responsible for the payment of all
expenses incurred in connection with this Agreement and the transactions
contemplated hereby.
I-44
<PAGE> 107
XXV. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXVI. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers designated below as of the date
first written above.
THE ARCH FUND, INC.
ATTEST:
___________________________ By: _______________________
ARROW FUNDS
ATTEST:
____________________________ By: ________________________
I-45
<PAGE> 108
APPENDIX II
MANAGEMENT'S DISCUSSION
OF FUND PERFORMANCE
<PAGE> 109
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
Q. How will you manage this new Portfolio?
A. The Fund was launched on November 18, 1996, and invests in high-quality
municipal securities in various municipalities across the country. It will
maintain an average credit quality of around AA1 under present conditions. One
reason for this is that the municipal market generally has not paid much in
additional yield to investors who take on the added risk in lower-quality
issues. The Portfolio's average maturity initially will be approximately ten
years. However, that will change as market conditions warrant. The Portfolio's
income may be subject to certain state and local taxes and, depending on an
investor's tax status, the federal alternative minimum tax.
II-1
<PAGE> 110
- --------------------------------------------------------------------------------
Value of a $10,000 Investment
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Investor A Investor A Investor B Investor B Lehman Brothers Aggregate
(No Load) (Load)* (CDSC)** (No CDSC) Bond Index
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,266 9,805 9,770 10,266 10,265
11/89 11,476 10,960 11,076 11,476 11,738
11/90 12,045 11,504 11,754 12,045 12,627
11/91 13,586 12,976 13,286 13,586 14,447
11/92 14,647 13,989 14,447 14,647 15,727
11/93 16,145 15,367 16,045 16,145 17,441
11/94 15,609 14,857 15,609 15,609 16,907
11/95 18,104 17,232 17,994 17,994 19,889
11/96 18,920 18,070 18,675 18,675 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
Investor A * -0.23% 5.86% 7.24%
- -------------------------------------------------------------------------
Investor B (No CDSD) 3.79% 6.57% 7.65%
- -------------------------------------------------------------------------
Investor B (CDSC) ** -1.12% 6.41% 7.65%
- -------------------------------------------------------------------------
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
Value of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
Lehman Brothers
Aggregate
Trust Institutional Bond Index
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,266 10,266 10,265
11/89 11,476 11,476 11,738
11/90 12,045 12,045 12,627
11/91 13,616 13,586 14,447
11/92 14,724 14,647 15,727
11/93 16,278 16,145 17,441
11/94 15,785 15,609 16,907
11/95 18,359 18,104 19,889
11/96 19,244 18,920 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Trust 4.82% 7.16% 8.04%
- -------------------------------------------------------------------------
Institutional 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
</TABLE>
The ARCH Government & Corporate Bond Portfolio is measured against the Lehman
Brothers Aggregate Bond Index, an unmanaged Index comprised of the Lehman
Brothers Government-Corporate Bond Index and two Lehman Brothers asset-backed
securities Indices. Investors cannot purchase the Index directly, although they
can invest in the underlying securities. The performance of the Index does not
reflect the deduction of expenses associated with a mutual fund, such as sales
charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the taxable bond market during the 12 months
ended November 30, 1996?
A. The bond market has been volatile. The ten-year Treasury bond started the
period yielding 5.70%. That yield rose to 7.10% around mid-year, then fell to
6.10%. Investors worried that the Federal Reserve would raise short-term
interest rates around the middle of the summer, because the economy had grown so
quickly in the first quarter. Then the Fed didn't do anything, and the fear
receded--so bond prices started to rise again. We started to see another rally
toward the end of the 12-month period.
Q. How did you structure the Portfolio to address those conditions?
A. We invested about 75% of the Portfolio in Treasuries, with the rest in
mortgage-backed securities. Corporate bonds seemed very expensive to us, with
yields only about 12 one-hundredths of a percentage point higher than Treasury
yields--and they have much more credit risk than Treasury or agency debt. Thus,
we used mortgage-backed issues instead of corporates to enhance the Portfolio's
yield.
The Portfolio's average maturity rose from 8.6 years to 10.8 years during the
period. We increased the maturity to take advantage of higher interest rates. We
implemented the change by selling some of our shorter Treasuries and buying
five- to ten-year mortgages. Such securities recently provided 0.75 to 1.25
percentage points of extra yield over Treasuries of comparable maturities. In
fact, we increased our Portfolio's mortgage-backed exposure from 26% to 35%,
currently*.
Q. How did you manage credit risk in the Portfolio?
A. We currently have an average quality rating of AAA, the same rating that we
had at the beginning of the year. The Portfolio's holdings currently are
comprised almost entirely of United States Treasury and agency- guaranteed
mortgage debt. The Portfolio holds almost no corporate issues because we believe
that the small current yield advantage of corporates over Treasuries does not
justify corporate debt's additional credit risk.
Q. Where are you finding the best values in the bond market?
A. Mortgage-backed securities clearly offer the most value in our securities
universe. Our intent is to continue to increase the Portfolio's mortgage
exposure from the current 35% to the 40% to 45% level. Corporates will remain on
our watch list, and we will increase the Portfolio's corporate exposure when
their yields improve relative to yields on Treasury issues.*
Q. What is your outlook for the bond market and the Portfolio?
A. We're neutral on the market right now. We don't see anything fundamental
about the economy that would cause rates to rise or fall in the immediate
future. But we will pay close attention to the psychology of the market, which
can be a very different matter. People's expectations have a large effect on the
bond market, and we'll pay close attention to changes in those expectations.
That way, we'll be prepared to make changes in the Portfolio to reflect such
psychological factors.
ARROW FIXED INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The Arrow Fixed Income Portfolio had total net assets of $28.7 million as of
September 30, 1996. The fund had an average maturity of 11.5 years, with 36% of
the fund's assets invested in U.S. Treasury and Government Agency issues, and
57% invested in investment grade corporate bonds.
Interest rates, after moving substantially higher in the first quarter of the
year, settled into a trading range environment in the second and third quarter.
Thirty-year Treasury securities spent most of the period fluctuating in a range
of 7.20% on the high side, to 6.70% on the low side, closing at a 6.92% yield on
September 30, 1996. Stronger economic data in the second quarter caused yields
to rise, while weaker numbers in the third quarter resulted in declining rates.
Inflation in the U.S. economy continues to be moderate. The Consumer Price Index
core rate (the CPI less food and energy prices), has risen 2.8% year to date
through September versus 3% for all of 1995. While 1996 has not been favorable
for the bond market, a continued slowing in the economy and favorable inflation
numbers should eventually result in lower long-term interest rates.
ARROW FIXED INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW FIXED INCOME PORTFOLIO
II-2
<PAGE> 111
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Fixed Income Portfolio (the "Fund") from January 3, 1993 (start of performance)
to September 30, 1996, compared to the Lehman Brothers Government/Corporate
Total Index ("LBGCTI").
The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Fixed
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
Government/Corporate Total Index ("LBGCTI"). is represented by a broken dotted
line. The line graph is a visual representation of a comparison of change in
value of a hypothetical investment in the Fixed Income Portfolio and the LBGCTI
for the period from January 3, 1993 to September 30, 1996. The "y" axis
reflects the cost of the investment. The "x" axis reflects computation periods
from the ending value of the hypothetical investment in the Fixed Income
Portfolio as compared to the LBGCTI; the ending values are $11,694 and $12,760,
respectively. Beneath the list of the components that correspond to the line
graph are the following total return data for the Fixed Income Portfolio: total
return figures for the 1 year, and start of performance. The corresponding
total figures are as follows: -1.41%; and 4.28%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic presentation.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBGCTI is adjusted to reflect reinvestment of dividends
on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBGCTI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
ARROW MUNICIPAL INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
Interest rates increased beginning in the first quarter of 1996 on concerns of
fears of rising inflation due to higher commodity prices and stronger economic
growth. This continued until the latter part of the third quarter when signs of
economic strength began to ease. Thus far, inflation has remained subdued.
Municipal supply remains somewhat low in many areas. This has enabled municipal
prices to remain firm, and thus municipals have outperformed taxables for most
of the year. Going forward, the economic signals are mixed as to whether the
economy will strengthen or weaken further going into 1997.
Therefore, the fund remains somewhat defensive with emphasis being placed on
intermediate average maturities and short to intermediate duration, along with
preference for premium coupon issues.
ARROW MUNICIPAL INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW MUNICIPAL INCOME PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Municipal Income Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Lehman Brothers State
General Obligations Bond Index ("LBSGOBI").
The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Municipal
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
State General Obligations Bond Index ("LBSGOBI") is represented by a broken
dotted line. The line graph is a visual representation of a comparison of
change in value of a hypothetical investment in the Municipal Income Portfolio
and the LBSGOBI for the period from January 3, 1993 to September 30, 1996. The
"y" axis reflects the cost of the investment. The "x" axis reflects computation
periods from the ending value of the hypothetical investment in the Municipal
Portfolio as compared to the LBSGOBI; the ending values are $11,740 and
$13,255, respectively. Beneath the list of the components that correspond to
the line graph are the following total return data for the Municipal Portfolio:
total return figures for the 1 year, and start of performance. The
corresponding total figures are as follows: 1.37%; and 4.48%, respectively. The
performance disclaimer and footnotes are listed directly under the graphic
presentation.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBSGOBI is adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBSGOBI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
II-3
<PAGE> 112
APPENDIX III
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services that
are available in connection with: (1) Investor A Shares and Trust Shares of the
Arch Portfolios, and (2) shares of the Arrow Portfolios.
A. GENERAL
1. SALES CHARGES AND EXEMPTIONS
Arch Portfolios -- Investor A Shares and Trust Shares
(a) Investor A Shares of each Arch Portfolio are sold with a
maximum 4.50% front-end sales charge.
(b) The Arch Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) directors and officers of Arch and the
immediate family members of such individuals; (2) directors, current and retired
employees and participants in employee benefit/retirement plans (future and
current annuitants) of Mercantile Bancorporation Inc. or any of its affiliates
or BISYS or its affiliates and the immediate family members of such individuals;
(3) brokers, dealers, and agents who have a sales agreement with BISYS, and
their employees (and the immediate family members of such individuals); (4)
customers who purchase pursuant to a wrap fee program offered by any
broker-dealer or other financial institution or financial planning organization;
(5) individuals who purchase Investor A Shares with the proceeds of Trust Shares
or Institutional Shares redeemed in connection with a rollover of benefits paid
by a qualified retirement or employee benefit plan or distribution on behalf of
any other qualified account administered by Mercantile Bank or its affiliated or
correspondent banks, within 60 days of receipt of such payment; (6) investors
who purchase Investor A Shares through a payroll deduction program; (7)
employees of any sub-adviser to Arch; (8) former holders of Southwestern Bell
Visa cards that had been issued by Mercantile Bank of Illinois, N.A. and who
participated in the Automatic Investment Program (credit cards may not be used
for the purchase of Shares); (9) investors exchanging Trust Shares of a
Portfolio received from the distribution of assets held in a qualified trust,
agency or custodian account with the trust department of Mercantile Bank or any
of its affiliated or correspondent banks; or (10) other investment companies
distributed by BISYS or its affiliates.
The sales charge will not apply to purchases of Investor A
Shares made through the reinvestment of dividends and distributions on Investor
A Shares. The sales charge also will
III-1
<PAGE> 113
not apply to exchanges between Arch's portfolios to the extent that a
shareholder has a credit for previously paid sales charges on purchases of
Investor A Shares of Arch's portfolios.
(c) The Arch Portfolios also offer rights of accumulation,
quantity discounts, letter of intent programs and a reinvestment privilege that
can reduce or eliminate the sales charge payable on Investor A Share purchases.
(d) Trust Shares of the Arch Portfolios are sold without any
sales charge.
Arrow Portfolios
(a) Shares of the Arrow Portfolios are sold with a maximum
3.50% front-end sales charge.
(b) The Arrow Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) current and retired employees of
Mercantile Bancorporation Inc. (formerly Mark Twain Bancshares, Inc.) and its
subsidiaries; (2) Arrow's Trustees and their spouses and children under 21; (3)
participants in all qualified retirement plans administered by Mercantile Bank
(formerly Mark Twain Bank); (4) investors who purchase shares through the
Mercantile Bank (formerly Mark Twain Bank) trust department; and (5) investors
purchasing pursuant to a Mercantile Investment Services, Inc. (formerly Mark
Twain Brokerage Services, Inc.) wrap fee program.
The sales charge will not apply to purchases of shares made
through the reinvestment of dividends and distributions. The sales charge also
will not apply to exchanges between Arrow's portfolios to the extent that a
shareholder has previously paid a sales charge on purchasing shares of any of
Arrow's portfolios.
(c) The Arrow Portfolios also offer rights of accumulation,
quantity discounts, concurrent purchase programs, letter of intent programs and
a reinvestment privilege that can reduce or eliminate the sales charge payable
on share purchases.
III-2
<PAGE> 114
B. PURCHASE POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Minimum Initial Investor A Shares - $1,000 for $1,000 for initial
Investments initial purchases of ($5,000 for purchases ($500 for
initial purchases in connection with initial purchases by
the Automatic Exchange Program, $50 employees of Mercantile
for initial purchases in connection Bancorporation, Inc.
with Automatic Investment Program, (formerly Mark Twain
no minimums for initial purchases Bancshares, Inc.) and
via a sweep program at a financial its subsidiaries and
institution, through a payroll their spouses and
deduction program or through a wrap children under 21 and
fee program). $250 for initial
purchases in connection
Trust Shares - None with an IRA).
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Subsequent Investor A Shares - $100 ($50 for $100 minimum for any
Investments subsequent purchases through an investor.
Automatic Investment Program, $25 for
subsequent purchases through a payroll
deduction program, no minimums for subsequent
purchases through a sweep or wrap fee
program).
Trust Shares - None
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Investor A Shares - Shares may be Shares may be purchased
Investment Plan purchased monthly through automatic on a regular basis once
deductions of at least $50 from a an account has been
shareholder's checking account. opened through automatic
deductions from a
Trust Shares - None shareholder's checking
account in the minimum
amount of $100.
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase Methods Investor A Shares - Shares are sold Shares are sold to
through broker/dealers or other customers of Mercantile
organizations acting on behalf of Bancorporation Inc.
their customers by telephone or by (formerly Mark Twain
mail. Bancshares, Inc.)
through an appropriate
Trust Shares - Shares are sold to subsidiary.
financial institutions acting on
their own behalf or on behalf of
certain qualified accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment methods Investor A Shares - By check, bank By check or federal
draft, money order or federal funds. funds.
Trust Shares - By federal funds.
===================================================================================================================================
</TABLE>
An Arrow shareholder who, at the effective time of the Reorganization
with respect to a particular Arrow Portfolio, meets the Arrow, but not the Arch,
minimum investment requirement, will not be required to redeem the Arch Investor
A Shares received in connection with the Reorganization, unless the
III-3
<PAGE> 115
balance in the shareholder's account drops below the Arrow
minimum as a result of redemptions.
The Arch Portfolios and Arrow Portfolios each reserve the right to
reject any purchase order.
C. REDEMPTION POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption Methods Investor A Shares - By mail or Through Mercantile
telephone through the same Bancorporation Inc.
broker/dealer organization that (formerly Mark Twain
placed the purchase order. Bancshares, Inc.) by
mail or telephone.
Trust Shares - By mail or telephone
through the same financial institution
that placed the purchase order.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment Methods Investor A Shares - By check or By check or wire.
wire to the broker/dealer Payment is normally made
organization that placed the within 7 days, but Arrow
purchase order. Payment is attempts to honor
normally made within three business requests received by
days, but Arch may take up to 7 mail within one business
days to honor redemption requests. day and requests
received by telephone
Trust Shares - By wire. Payment is within 5 business days.
normally made the next business
day.
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Investor A Shares - Yes ($10,000 Yes ($10,000 minimum
Plan minimum balance/$50 minimum per balance/$100 minimum per
transaction). transaction).
Trust Shares - None
===================================================================================================================================
</TABLE>
A shareholder of record may be required to redeem Investor A Shares or
Trust Shares in any Arch Portfolio upon 60 days' written notice if the balance
in the shareholder's account in that Portfolio drops below $500 as the result of
a redemption request. The Arrow Portfolios, upon thirty days' written notice,
may redeem shares in any account if the account balance falls below $1,000. The
Arch Portfolios and the Arrow Portfolios may also redeem shares involuntarily
when appropriate in light of their responsibilities under the 1940 Act, and may
make payment for redemptions in securities in lieu of cash.
III-4
<PAGE> 116
D. SHARE EXCHANGES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
===================================================================================================================================
<S> <C> <C>
By Mail Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
By Telephone Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Investor A Shares - At least equal At least equal to minimum
to minimum required for the required for the Portfolio
Portfolio for which shares are for which shares are
exchanged. exchanged.
Trust Shares - None
===================================================================================================================================
</TABLE>
Investor A Shares of the Arch Portfolio may be exchanged for Investor A
Shares of another portfolio offered by Arch or for Trust Shares or Institutional
Shares in the same Portfolio if the shareholder has a qualified trust, agency or
custodian account with the trust department of Mercantile Bank or any of its
affiliated or correspondent banks and the Trust Shares or Institutional Shares
are to be held in that account. Trust Shares of an Arch Portfolio may be
exchanged for Trust Shares of another portfolio offered by Arch or for Investor
A Shares of the same portfolio in connection with the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile Bank or any of its affiliated or correspondent banks.
Shareholders who exchange into any portfolio of Arch or Arrow that
imposes a sales charge may be subject to such sales charge if applicable and not
previously paid. Exchanges are only available in states where exchanges can
lawfully be made from one portfolio to another, and must satisfy the
requirements relating to the minimum initial investment in a portfolio. Arch and
Arrow reserve the right to reject any telephone exchange request and to modify
or terminate the exchange privilege (1) in the case of Arch, upon sixty days'
written notice to shareholders, or (ii) in the case of Arrow, with respect to
any shareholder who makes more than six exchanges in a year or more than three
exchanges in a calendar quarter, upon prior notification.
Arch also offers an Automatic Exchange Program enabling Investor A
shareholders to automatically exchange Investor A Shares of one portfolio for
Investor A Shares of another portfolio.
III-5
<PAGE> 117
E. RESPONSIBILITY FOR TELEPHONE INSTRUCTIONS
The Arch Portfolios and Arrow Portfolios and their respective service
contractors may be liable for losses due to unauthorized or fraudulent telephone
instructions if they do not follow reasonable procedures to verify the
authenticity of such instructions.
II. DIVIDENDS AND DISTRIBUTIONS
All Arch Portfolios and Arrow Portfolios distribute their net capital
gains to shareholders at least annually. The following table shows the
Portfolios' policies concerning the declaration and payment of dividends from
net investment income.
DIVIDENDS DECLARED DAILY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Government & Corporate Fixed Income Portfolio
Bond Portfolio
National Municipal Bond Portfolio Municipal Income Portfolio
DIVIDENDS DECLARED MONTHLY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Growth Equity Portfolio None
DIVIDENDS DECLARED AND PAID QUARTERLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
None Equity Portfolio
III-6
<PAGE> 118
PART B
<PAGE> 119
ARROW FUNDS
19TH FLOOR
1001 LIBERTY AVENUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
ARCH FUND, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
STATEMENT OF ADDITIONAL INFORMATION
(1997 SPECIAL MEETING OF SHAREHOLDERS OF
ARROW FUNDS)
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Combined Proxy Statement/Prospectus dated
September __, 1997 for the Special Meeting of Shareholders of the Fixed Income
Portfolio, Municipal Income Portfolio and Equity Portfolio of Arrow Funds, to be
held on November 12, 1997. Copies of the Combined Proxy Statement/Prospectus may
be obtained at no charge by calling Arrow Funds at 1-800-866-6040.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Proxy Statement/Prospectus.
Further information about Investor A Shares and Trust Shares of the
Existing Arch Portfolios is contained in and incorporated by reference to Arch's
Statement of Additional Information with respect to the Existing Arch Portfolios
dated March 31, 1997 (as revised May 28, 1997), a copy of which is included
herewith. The audited financial statements and related independent accountant's
report for the Existing Arch Portfolios contained in Arch's Annual Report to
Shareholders dated November 30, 1996, and the unaudited financial statements for
the Existing Arch Portfolios contained in Arch's Semi-Annual Report to
Shareholders dated May 31, 1997 are incorporated herein by reference. No other
parts of the Annual or Semi-Annual Reports are incorporated by reference herein.
Further information about shares of the Arrow Portfolios is contained
in and incorporated by reference to Arrow's Combined Statement of Additional
Information dated November 30, 1996, a copy of which is included herewith. The
audited financial statements and related independent accountant's report for
the Arrow Portfolios contained in Arrow's Annual Report to Shareholders dated
November 30, 1996, and the unaudited financial statements for the Arrow
Portfolios contained in Arrow's Semi-Annual Report to Shareholders dated March
31, 1997 are
B-1
<PAGE> 120
incorporated herein by reference. No other parts of the Annual or Semi-Annual
Reports are incorporated by reference herein.
The date of this Statement of Additional Information is September __,
1997.
B-2
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information....................................................... B-4
Pro Forma Financial Statements............................................ PFS-1
</TABLE>
B-3
<PAGE> 122
GENERAL INFORMATION
The Shareholders of the Fixed Income Portfolio, Municipal Income
Portfolio and Equity Portfolio (collectively, the "Arrow Portfolios") of Arrow
Funds ("Arrow") are being asked to approve or disapprove an Agreement and Plan
of Reorganization (the "Reorganization Agreement") dated as of ___________, 1997
between Arrow and The Arch Fund, Inc. ("Arch"), and the transactions
contemplated thereby. The Reorganization Agreement contemplates the transfer of
substantially all of the assets and liabilities of the Arrow Portfolios to
corresponding portfolios of Arch (collectively, the "Arch Portfolios") in
exchange for full and fractional Investor A Shares representing interests in
such corresponding Arch Portfolios. The Investor A Shares issued by Arch will
have an aggregate net asset value equal to the aggregate net asset value of the
shares of the respective Arrow Portfolios that are outstanding immediately
before the effective time of the Reorganization with respect to each Arrow
Portfolio.
Following the exchange, the Arrow Portfolios will make a liquidating
distribution of the corresponding Arch Portfolios' Investor A Shares to their
shareholders. Each shareholder owning shares of a particular Arrow Portfolio at
the effective time of the Reorganization with respect to that Portfolio will
receive Investor A Shares of the corresponding Arch Portfolio of equal value,
plus the right to receive any unpaid dividends and distributions that were
declared before the effective time of the Reorganization on Arrow Portfolio
shares. Upon completion of the Reorganization, Arrow will be terminated under
state law and deregistered as an investment company under the Investment Company
Act of 1940, as amended.
The Special Meeting of Shareholders of the Arrow Portfolios to consider
the Reorganization Agreement and the related transactions will be held on
November 12, 1997 at 2:00 p.m. Eastern Time at Federated Investors Tower, 1001
Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania 15222-3779. For further
information about the transaction, see the Combined Proxy Statement/Prospectus.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities such as shares
of the Arch Portfolios, but do not prohibit such a bank holding company or its
affiliates or banks generally 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 Bank, MVA
B-4
<PAGE> 123
and financial intermediaries which agree to provide shareholder support services
that are banks or bank affiliates are subject to such banking laws and
regulations. Should legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with their services to
the Arch Portfolios, Arch might be required to alter materially or discontinue
its arrangement with such companies and change its method of operation. It is
anticipated, however, that any resulting change in Arch's method of operation
would not affect an Arch Portfolio's net asset value per share or result in
financial loss to any shareholder.
B-5
<PAGE> 124
ARROW MUNICIPAL INCOME PORTFOLIO
ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The pro forma combined statement of assets and liabilities, including the pro
forma combined schedule of investments reflect the accounts of the Arrow
Municipal Income Portfolio and the accounts of the Arch National Municipal Bond
Portfolio as of May 31, 1997 and the related pro forma combined statement of
operations and for the period November 18, 1996 (commencement of operations of
the Arch National Municipal Bond Portfolio) through May 31, 1997.
The pro forma combined financial statements give effect to the proposed transfer
of the assets and liabilities of the Arrow Municipal Income Portfolio in
exchange for shares of the Arch National Municipal Bond Portfolio. Under the
terms of the Agreement and Plan of Reorganization between Arrow Funds and The
Arch Fund, Inc. (the "Plan"), the combination of the Arrow Municipal Income
Portfolio and the Arch National Municipal Bond Portfolio will be treated as a
tax-free business combination. Accordingly, the historical cost of investment
securities will be carried forward to the surviving portfolio and the results of
operations of the surviving portfolio for the pre-combining periods will not be
restated. The pro forma combined financial statements do not reflect the
expenses of the Arrow and Arch Portfolios in carrying out their obligations
under the Plan as these expenses are immaterial to the financial statements.
Each Portfolio has a similar investment objective which will remain unchanged as
a result of the combination.
The pro forma financial statements should be read in conjunction with the
historical financial statements of each Portfolio incorporated by reference to
the respective prospectuses or statements of additional information. The pro
forma combined statement of assets and liabilities has been prepared as if the
combination had taken place at May 31, 1997. Certain amounts have been
reclassified to conform to current presentation.
2. PRO FORMA OPERATIONS
The pro forma combined statement of operations assumes similar rates of gross
investment income from the investments of each Portfolio. Accordingly, the
combined gross investment income is equal to the sum of the gross investment
income of each Portfolio.
Pro forma operating expenses reflect the expected expenses of the Arch National
Municipal Bond Portfolio after combination. As such, pro forma fees for
investment advisory, administration, distribution, custodian and
-2-
<PAGE> 125
2. PRO FORMA OPERATIONS (CONTINUED)
accounting services, director and trustee, and legal and audit were calculated
based on the fee schedules in effect at May 31, 1997 for the Arch National
Municipal Bond Portfolio.
3. SURVIVING ENTITY
The Arch National Municipal Bond Portfolio will be the surviving entity for
accounting purposes. This determination was based upon the relative size of each
Portfolio and that the surviving portfolio will be managed by the Arch National
Municipal Bond Portfolio's current adviser employing current investment
objectives, policies and restrictions.
<PAGE> 126
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS (101.21%):
ALABAMA (1.48%):
-- $2,000,000 $2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $0 $2,027,500
-- 3,000,000 3,000,000 Birmingham, Series A, 5.90%, 6/1/18 -- 3,015,000
----------------------------------
Total -- 5,042,500
----------------------------------
ALASKA (0.30%):
-- 1,000,000 1,000,000 State Housing Finance Corp.,
Series A, 5.70%, 12/1/11 -- 1,011,250
----------------------------------
ARIZONA (2.89%):
-- 1,000,000 1,000,000 Mohave County Unified School District
No. 1, Series A, 5.90%, 7/1/15 -- 1,036,250
-- 6,400,000 6,400,000 Salt River Project Agricultural Impact,
Series C, 6.20%, 1/1/12 -- 6,696,000
-- 1,000,000 1,000,000 Salt River Project Agriculture Impact,
6.00%, 1/1/13 -- 1,032,500
-- 1,000,000 1,000,000 State Transportation Board Excise Tax,
Series B, 5.75%, 7/1/05 -- 1,057,500
----------------------------------
Total -- 9,822,250
----------------------------------
CALIFORNIA (1.08%):
-- 1,000,000 1,000,000 California State, 6.00%, 9/1/09 -- 1,082,500
700,000 -- 700,000 Long Beach CA, Harbor Revenue Bonds,
Series A, 7.25%, 5/15/19 732,165 --
-- 2,000,000 2,000,000 Southern California Public Power
Authority, Series A, 5.00%, 7/1/15 -- 1,855,000
----------------------------------
Total 732,165 2,937,500
----------------------------------
COLORADO (1.97%):
-- 6,655,000 6,655,000 Adams County Colorado School District, 5.40%,
12/15/13 -- 6,679,956
----------------------------------
CONNECTICUT (3.45%):
-- 3,000,000 3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 -- 3,135,000
-- 8,785,000 8,785,000 Connecticut State, Series A, 5.25%, 3/1/13 -- 8,587,338
----------------------------------
Total -- 11,722,338
----------------------------------
FLORIDA (6.32%):
-- 2,000,000 2,000,000 Brevard County, 6.00%, 9/1/11 -- 2,075,000
-- 5,525,000 5,525,000 Florida State Department of Transportation,
5.25%, 7/1/17 -- 5,379,969
-- 5,000,000 5,000,000 Florida State Environmental, 5.50%, 7/1/13 -- 5,062,500
-- 8,000,000 8,000,000 Palm Beach County Solid Waste Authority, 5.38%,
10/1/11 -- 7,940,000
-- 1,000,000 1,000,000 State Board of Education Capital Outlay Pub.
Ed., Series A, 5.88%, 6/1/16 -- 1,022,500
----------------------------------
Total -- 21,479,969
----------------------------------
GEORGIA (0.80%):
500,000 -- 500,000 Appling County, GA Development Authority, PCR,
Refunding, Oglethorpe Power Corp. Hatch
Project, MBIA Insured, 7.00%, 1/1/12 550,980 --
-- 1,000,000 1,000,000 Atlanta, Series A, 6.10%, 12/1/19 -- 1,041,250
-- 1,000,000 1,000,000 Georgia State, Series B, 6.30%, 3/1/09 -- 1,113,750
----------------------------------
Total 550,980 2,155,000
----------------------------------
HAWAII (4.18%):
-- 8,000,000 8,000,000 Hawaii State, Series CN, 5.50%, 3/1/14,
Insured by FGIC -- 8,000,000
-- 5,815,000 5,815,000 Honolulu City & County, 6.00%, 1/1/09 -- 6,214,781
----------------------------------
Total -- 14,214,781
----------------------------------
ILLINOIS (10.72%):
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.40%,
12/1/06 -- 1,027,500
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.50%,
12/1/08 -- 1,031,250
-- 3,000,000 3,000,000 Chicago, 6.00%, 1/1/11, Insured by AMBAC -- 3,146,250
-- 2,000,000 2,000,000 Cook County, 5.90%, 11/15/16, Insured by FGIC -- 2,040,000
-- 9,090,000 9,090,000 Cook County, 6.25%, 11/15/12 9,885,375
-- 1,000,000 1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 -- 1,040,000
500,000 -- 500,000 Illinois Housing Development Authority,
Mortgage Revenue, Series D-1,
6.40%, 8/1/17 514,625 --
-- 1,000,000 1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA -- 1,016,250
-- 3,000,000 3,000,000 Illinois State, 5.88%, 8/1/12 -- 3,082,500
-- 8,400,000 8,400,000 Illinois State, 5.25%, 2/1/13 -- 8,127,000
-- 2,000,000 2,000,000 Illinois State, 5.63%, 7/1/13 -- 2,010,000
-- 2,000,000 2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA -- 1,975,000
-- 1,000,000 1,000,000 Illinois State, 5.75%, 7/1/16 -- 1,006,250
485,000 -- 485,000 Waukegan, GO UT, 6.80%, 12/30/07 526,041 --
----------------------------------
Total 1,040,666 35,387,375
----------------------------------
INDIANA (5.54%):
500,000 -- 500,000 Ball State University, University Revenue,
Series G, 6.13%, 7/1/14, Insured by FGIC 517,515 --
-- 5,000,000 5,000,000 Goshen-Chandler School Building, 5.75%,
1/15/10 -- 5,093,750
-- 3,000,000 3,000,000 Hammond Multi-School Building Corp., 5.80%,
1/15/15 0 3,018,750
-- 5,000,000 5,000,000 Hammond Multi-School Building Corp., 5.85%,
1/15/20 -- 5,031,250
-- 3,500,000 3,500,000 Transportation Finance Authority, Series A,
5.75%, 6/1/12 -- 3,622,500
-- 1,500,000 1,500,000 Whitko Middle School Building Corp., 5.88%,
7/15/12 -- 1,543,125
----------------------------------
Total 517,515 18,309,375
----------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (101.21%):
ALABAMA (1.48%):
-- $2,000,000 $2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $2,027,500
-- 3,000,000 3,000,000 Birmingham, Series A, 5.90%, 6/1/18 3,015,000
---------------
Total 5,042,500
---------------
ALASKA (0.30%):
-- 1,000,000 1,000,000 State Housing Finance Corp.,
Series A, 5.70%, 12/1/11 1,011,250
---------------
ARIZONA (2.89%):
-- 1,000,000 1,000,000 Mohave County Unified School District
No. 1, Series A, 5.90%, 7/1/15 1,036,250
-- 6,400,000 6,400,000 Salt River Project Agricultural Impact,
Series C, 6.20%, 1/1/12 6,696,000
-- 1,000,000 1,000,000 Salt River Project Agriculture Impact,
6.00%, 1/1/13 1,032,500
-- 1,000,000 1,000,000 State Transportation Board Excise Tax,
Series B, 5.75%, 7/1/05 1,057,500
---------------
Total 9,822,250
---------------
CALIFORNIA (1.08%):
-- 1,000,000 1,000,000 California State, 6.00%, 9/1/09 1,082,500
700,000 -- 700,000 Long Beach CA, Harbor Revenue Bonds,
Series A, 7.25%, 5/15/19 732,165
-- 2,000,000 2,000,000 Southern California Public Power
Authority, Series A, 5.00%, 7/1/15 1,855,000
---------------
Total 3,669,665
---------------
COLORADO (1.97%):
-- 6,655,000 6,655,000 Adams County Colorado School District, 5.40%,
12/15/13 6,679,956
---------------
CONNECTICUT (3.45%):
-- 3,000,000 3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 3,135,000
-- 8,785,000 8,785,000 Connecticut State, Series A, 5.25%, 3/1/13 8,587,338
---------------
Total 11,722,338
---------------
FLORIDA (6.32%):
-- 2,000,000 2,000,000 Brevard County, 6.00%, 9/1/11 2,075,000
-- 5,525,000 5,525,000 Florida State Department of Transportation,
5.25%, 7/1/17 5,379,969
-- 5,000,000 5,000,000 Florida State Environmental, 5.50%, 7/1/13 5,062,500
-- 8,000,000 8,000,000 Palm Beach County Solid Waste Authority, 5.38%,
10/1/11 7,940,000
-- 1,000,000 1,000,000 State Board of Education Capital Outlay Pub.
Ed., Series A, 5.88%, 6/1/16 1,022,500
---------------
Total 21,479,969
---------------
GEORGIA (0.80%):
500,000 -- 500,000 Appling County, GA Development Authority, PCR,
Refunding, Oglethorpe Power Corp. Hatch
Project, MBIA Insured, 7.00%, 1/1/12 550,980
-- 1,000,000 1,000,000 Atlanta, Series A, 6.10%, 12/1/19 1,041,250
-- 1,000,000 1,000,000 Georgia State, Series B, 6.30%, 3/1/09 1,113,750
---------------
Total 2,705,980
---------------
HAWAII (4.18%):
-- 8,000,000 8,000,000 Hawaii State, Series CN, 5.50%, 3/1/14,
Insured by FGIC 8,000,000
-- 5,815,000 5,815,000 Honolulu City & County, 6.00%, 1/1/09 6,214,781
---------------
Total 14,214,781
---------------
ILLINOIS (10.72%):
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.40%,
12/1/06 1,027,500
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.50%,
12/1/08 1,031,250
-- 3,000,000 3,000,000 Chicago, 6.00%, 1/1/11, Insured by AMBAC 3,146,250
-- 2,000,000 2,000,000 Cook County, 5.90%, 11/15/16, Insured by FGIC 2,040,000
-- 9,090,000 9,090,000 Cook County, 6.25%, 11/15/12 9,885,375
-- 1,000,000 1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 1,040,000
500,000 -- 500,000 Illinois Housing Development Authority,
Mortgage Revenue, Series D-1,
6.40%, 8/1/17 514,625
-- 1,000,000 1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA 1,016,250
-- 3,000,000 3,000,000 Illinois State, 5.88%, 8/1/12 3,082,500
-- 8,400,000 8,400,000 Illinois State, 5.25%, 2/1/13 8,127,000
-- 2,000,000 2,000,000 Illinois State, 5.63%, 7/1/13 2,010,000
-- 2,000,000 2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA 1,975,000
-- 1,000,000 1,000,000 Illinois State, 5.75%, 7/1/16 1,006,250
485,000 -- 485,000 Waukegan, GO UT, 6.80%, 12/30/07 526,041
---------------
Total 36,428,041
---------------
INDIANA (5.54%):
500,000 -- 500,000 Ball State University, University Revenue,
Series G, 6.13%, 7/1/14, Insured by FGIC 517,515
-- 5,000,000 5,000,000 Goshen-Chandler School Building, 5.75%,
1/15/10 5,093,750
-- 3,000,000 3,000,000 Hammond Multi-School Building Corp., 5.80%,
1/15/15 3,018,750
-- 5,000,000 5,000,000 Hammond Multi-School Building Corp., 5.85%,
1/15/20 5,031,250
-- 3,500,000 3,500,000 Transportation Finance Authority, Series A,
5.75%, 6/1/12 3,622,500
-- 1,500,000 1,500,000 Whitko Middle School Building Corp., 5.88%,
7/15/12 1,543,125
---------------
Total 18,826,890
---------------
</TABLE>
<PAGE> 127
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
IOWA (0.35%):
$500,000 -- $500,000 Iowa Student Loan Liquidity Corporation,
Student Loan Revenue Bonds, Series B,
6.75%, 3/1/04 $530,260 --
650,000 -- 650,000 Ottumwa, IA, Community School District,
GO UT Bonds, 5.60%, 6/1/10, CGIC Insured 663,761 --
------------------------------
Total 1,194,021 --
------------------------------
KENTUCKY (1.88%):
350,000 -- 350,000 Kentucky Higher Education Student Loan
Corporation, Insured Student Loan
Revenue Bonds, Series D, 7.10%, 12/1/11 376,464 --
-- 6,000,000 6,000,000 Daviess County Kentucky, 4.15%*, 6/2/97 -- 6,000,000
------------------------------
Total 376,464 6,000,000
------------------------------
LOUISIANA (0.21%):
-- 700,000 700,000 Calcasieu Parish, 4.00% 2/1/16 -- 700,000
------------------------------
MASSACHUSETTS (3.63%):
-- 4,975,000 4,975,000 Massachusetts Bay Transportation Authority,
5.40%, 3/1/08 -- 5,118,031
-- 7,115,000 7,115,000 Massachusetts State Water Pollution
Abatement Trust, 5.63%, 2/1/15 -- 7,212,831
------------------------------
Total -- 12,330,862
------------------------------
MICHIGAN (1.19%):
-- 1,000,000 1,000,000 Greenville Public Schools, 5.75%, 5/1/11 -- 1,027,500
-- 1,000,000 1,000,000 Johannesburg-Lewistown Area Schools, 5.00%,
5/1/13 -- 947,500
-- 2,000,000 2,000,000 Redford School District, 5.95%, 5/1/15 -- 2,067,500
------------------------------
Total -- 4,042,500
------------------------------
MINNESOTA (2.36%):
-- 1,000,000 1,000,000 Minneapolis Special School District,
Series A, 5.70%, 2/1/09 -- 1,038,750
-- 6,000,000 6,000,000 Monticello Minnesota Independent Schools,
5.40%, 2/1/15 -- 5,925,000
-- 1,000,000 1,000,000 Northern Municipal Power Agency, Series A,
5.90%, 1/1/08 -- 1,046,250
------------------------------
Total -- 8,010,000
------------------------------
MISSISSIPPI (0.48%):
500,000 -- 500,000 Mississippi Higher Education Student Loan
Revenue Bonds, Series C,
7.50%, 9/1/09 538,800 --
-- 1,000,000 1,000,000 Mississippi State, 6.20%, 2/1/08 -- 1,075,000
------------------------------
Total 538,800 1,075,000
------------------------------
MISSOURI (2.09%):
-- 1,000,000 1,000,000 Independence Electrical Utility Revenue,
7.10%, 6/1/04, Prerefunded 12/1/98 @ 100 -- 1,038,750
340,000 -- 340,000 Kansas City, Sewer Authority Refunding Revenue
Bonds, 6.40%, 3/1/10 354,831 --
500,000 -- 500,000 State Environmental Improvement & Energy
Authority, Refunding Revenue,
5.50%, 12/1/10 508,315 --
-- 1,500,000 1,500,000 State Health & Education Facilities,
Series B, 7.00%, 6/1/05 -- 1,665,000
-- 1,200,000 1,200,000 State Health & Educational Facilities, 7.75%,
6/1/07 -- 1,244,196
300,000 -- 300,000 State HEFA Revenue, St. Louis University,
6.50%, 8/1/16, AMBAC Insured 324,021 --
740,000 -- 740,000 State Housing Development Commission, SFM
Revenue, Series A, 6.63%,12/1/17,
GNMA Insured 765,278 --
120,000 -- 120,000 State Housing Development Commission, SFM
Revenue, Series A, 6.00%, 6/1/15,
GNMA Insured 121,571 --
1,000,000 -- 1,000,000 State, Third State Building, GO UT, Series
B, 6.30%,11/1/12 1,065,390 --
------------------------------
Total 3,139,406 3,947,946
------------------------------
NEBRASKA (0.61%):
-- 1,000,000 1,000,000 Omaha Public Power District Electric Revenue,
Series B, 6.00%, 2/1/07 -- 1,080,000
-- 1,000,000 1,000,000 Public Power District Revenue, Series A, 5.50%,
1/1/13 -- 993,750
------------------------------
Total -- 2,073,750
------------------------------
NEVADA (4.04%):
500,000 -- 500,000 Clark County, Pollution Control, Refunding Revenue,
Series B, 6.60%, 6/1/19 540,640 0
-- 5,000,000 5,000,000 Clark County Nevada School District, 5.50%, 6/15/11 -- 5,037,500
-- 5,000,000 5,000,000 Nevada State Water Utility Improvements, 5.13%,
9/1/11 -- 4,881,250
-- 3,000,000 3,000,000 Nevada State Water Utility Improvements, 6.50%,
12/1/12 -- 3,258,750
------------------------------
Total 540,640 13,177,500
------------------------------
NEW HAMPSHIRE (0.31%):
-- 1,000,000 1,000,000 Concord, 6.15%, 10/15/10 -- 1,065,000
------------------------------
NEW JERSEY (3.17%):
-- 2,000,000 2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 -- 2,120,000
-- 8,000,000 8,000,000 New Jersey State, Series E, 6.00%, 7/15/09 -- 8,660,000
------------------------------
Total -- 10,780,000
------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
IOWA (0.35%):
$500,000 -- $500,000 Iowa Student Loan Liquidity Corporation,
Student Loan Revenue Bonds, Series B,
6.75%, 3/1/04 $530,260
650,000 -- 650,000 Ottumwa, IA, Community School District,
GO UT Bonds, 5.60%, 6/1/10, CGIC Insured 663,761
------------
Total 1,194,021
------------
KENTUCKY (1.88%):
350,000 -- 350,000 Kentucky Higher Education Student Loan
Corporation, Insured Student Loan
Revenue Bonds, Series D, 7.10%, 12/1/11 376,464
-- 6,000,000 6,000,000 Daviess County Kentucky, 4.15%*, 6/2/97 6,000,000
------------
Total 6,376,464
------------
LOUISIANA (0.21%):
-- 700,000 700,000 Calcasieu Parish, 4.00% 2/1/16 700,000
------------
MASSACHUSETTS (3.63%):
-- 4,975,000 4,975,000 Massachusetts Bay Transportation Authority,
5.40%, 3/1/08 5,118,031
-- 7,115,000 7,115,000 Massachusetts State Water Pollution
Abatement Trust, 5.63%, 2/1/15 7,212,831
------------
Total 12,330,862
------------
MICHIGAN (1.19%):
-- 1,000,000 1,000,000 Greenville Public Schools, 5.75%, 5/1/11 1,027,500
-- 1,000,000 1,000,000 Johannesburg-Lewistown Area Schools, 5.00%,
5/1/13 947,500
-- 2,000,000 2,000,000 Redford School District, 5.95%, 5/1/15 2,067,500
------------
Total 4,042,500
------------
MINNESOTA (2.36%):
-- 1,000,000 1,000,000 Minneapolis Special School District,
Series A, 5.70%, 2/1/09 1,038,750
-- 6,000,000 6,000,000 Monticello Minnesota Independent Schools,
5.40%, 2/1/15 5,925,000
-- 1,000,000 1,000,000 Northern Municipal Power Agency, Series A,
5.90%, 1/1/08 1,046,250
------------
Total 8,010,000
------------
MISSISSIPPI (0.48%):
500,000 -- 500,000 Mississippi Higher Education Student Loan
Revenue Bonds, Series C,
7.50%, 9/1/09 538,800
-- 1,000,000 1,000,000 Mississippi State, 6.20%, 2/1/08 1,075,000
------------
Total 1,613,800
------------
MISSOURI (2.09%):
-- 1,000,000 1,000,000 Independence Electrical Utility Revenue,
7.10%, 6/1/04, Prerefunded 12/1/98 @ 100 1,038,750
340,000 -- 340,000 Kansas City, Sewer Authority Refunding Revenue
Bonds, 6.40%, 3/1/10 354,831
500,000 -- 500,000 State Environmental Improvement & Energy
Authority, Refunding Revenue,
5.50%, 12/1/10 508,315
-- 1,500,000 1,500,000 State Health & Education Facilities,
Series B, 7.00%, 6/1/05 1,665,000
-- 1,200,000 1,200,000 State Health & Educational Facilities, 7.75%,
6/1/07 1,244,196
300,000 -- 300,000 State HEFA Revenue, St. Louis University,
6.50%, 8/1/16, AMBAC Insured 324,021
740,000 -- 740,000 State Housing Development Commission, SFM
Revenue, Series A, 6.63%,12/1/17,
GNMA Insured 765,278
120,000 -- 120,000 State Housing Development Commission, SFM
Revenue, Series A, 6.00%, 6/1/15,
GNMA Insured 121,571
1,000,000 -- 1,000,000 State, Third State Building, GO UT, Series
B, 6.30%,11/1/12 1,065,390
------------
Total 7,087,352
------------
NEBRASKA (0.61%):
-- 1,000,000 1,000,000 Omaha Public Power District Electric Revenue,
Series B, 6.00%, 2/1/07 1,080,000
-- 1,000,000 1,000,000 Public Power District Revenue, Series A, 5.50%,
1/1/13 993,750
------------
Total 2,073,750
------------
NEVADA (4.04%):
500,000 -- 500,000 Clark County, Pollution Control, Refunding Revenue,
Series B, 6.60%, 6/1/19 540,640
-- 5,000,000 5,000,000 Clark County Nevada School District, 5.50%, 6/15/11 5,037,500
-- 5,000,000 5,000,000 Nevada State Water Utility Improvements, 5.13%,
9/1/11 4,881,250
-- 3,000,000 3,000,000 Nevada State Water Utility Improvements, 6.50%,
12/1/12 3,258,750
------------
Total 13,718,140
------------
NEW HAMPSHIRE (0.31%):
-- 1,000,000 1,000,000 Concord, 6.15%, 10/15/10 1,065,000
------------
NEW JERSEY (3.17%):
-- 2,000,000 2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 2,120,000
-- 8,000,000 8,000,000 New Jersey State, Series E, 6.00%, 7/15/09 8,660,000
------------
Total 10,780,000
------------
</TABLE>
<PAGE> 128
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
NORTH CAROLINA (3.25%):
-- $2,000,000 $2,000,000 Eastern Municipal Power Agency, Series B, 6.00%,
1/1/13 -- $2,045,000
-- 1,000,000 1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 -- 1,003,750
-- 8,000,000 8,000,000 North Carolina State School Improvements, 5.20%,
3/1/13 -- 7,980,000
------------------------------
Total -- 11,028,750
------------------------------
OHIO (0.62%):
-- 2,000,000 2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%,
5/1/13 -- 2,095,000
------------------------------
OKLAHOMA (0.31%):
-- 1,000,000 1,000,000 Tulsa, 6.25%, 6/1/11 -- 1,052,500
------------------------------
PENNSYLVANIA (4.75%):
-- 1,000,000 1,000,000 Allegheny County Series C-40, 5.90%, 5/1/07 -- 1,055,000
-- 1,500,000 1,500,000 Burrell School District, 5.65%, 11/15/16 -- 1,515,000
545,000 -- 545,000 Delaware County, GO UT Refunding, 6.00%, 11/15/02 580,234 --
155,000 -- 155,000 Delaware County, PA, Refunding Bonds, 6.00%,
11/15/14 159,084 --
-- 1,000,000 1,000,000 Easttown Township, Public/Highway Improvements,
5.65%, 8/1/17 -- 1,005,000
-- 9,000,000 9,000,000 Pennsylvania State, 5.13%, 9/15/11, Insured by
AMBAC -- 8,786,250
-- 2,000,000 2,000,000 State Higher Education Facilities, Series A,
5.88%, 1/1/15 -- 2,037,500
-- 1,000,000 1,000,000 State Higher Education Facilities, Series B,
5.88%, 1/1/15 -- 1,018,750
------------------------------
Total 739,318 15,417,500
------------------------------
TENNESSEE (0.91%):
-- 1,000,000 1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 -- 1,043,750
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 5.75%, 1/1/15 -- 1,006,250
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 6.13%, 5/15/19 -- 1,036,250
------------------------------
Total -- 3,086,250
------------------------------
TEXAS (12.50%):
-- 3,000,000 3,000,000 Austin Independent School District, 5.75%, 8/1/15 -- 3,045,000
-- 3,400,000 3,400,000 Harris County Health Facilities, Series B, 4.05%,
2/15/16 -- 3,400,000
-- 2,500,000 2,500,000 Harris County Texas Health Care Facilities, 4.05%*,
6/2/97 -- 2,500,000
-- 8,000,000 8,000,000 Harris County Texas Health, 5.50%, 6/1/17 -- 7,800,000
-- 1,000,000 1,000,000 Humble Independent School District, 6.25%, 2/1/07 -- 1,072,500
-- 1,000,000 1,000,000 Manor Independent School District, 5.70%, 8/1/10 -- 1,030,000
500,000 -- 500,000 North Texas State Higher Education Authority,
Student Loan Revenue, Refunding,
Series D, 6.30%, 4/1/10 507,815 --
-- 1,000,000 1,000,000 Royse City Independent School District, 5.50%,
2/15/15 -- 1,000,000
-- 1,000,000 1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 -- 1,017,500
-- 3,000,000 3,000,000 State Public Finance Authority, Series A, 5.95%,
10/1/15 -- 3,101,250
-- 1,000,000 1,000,000 State Public Financing Authority, Series A, 5.70%,
10/1/07 -- 1,031,250
-- 6,750,000 6,750,000 Texas State Water Development, 5.40%, 8/1/21 -- 6,513,750
1,000,000 -- 1,000,000 Texas State, GO UT Water Development, Series A, 7.00%,
8/1/11 1,081,740 --
155,000 -- 155,000 Texas State, GO UT, Series A, Veterans Housing
Assistance Fund, 6.60%, 12/1/16 158,877 --
-- 7,500,000 7,500,000 University of Texas, Series B, 5.10%, 8/15/13 -- 7,190,625
-- 2,000,000 2,000,000 Water Development Board Revenue Series A, 5.75%,
7/15/15 -- 2,032,500
------------------------------
Total 1,748,432 40,734,375
------------------------------
UTAH (1.50%):
-- 4,000,000 4,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/12 -- 4,095,000
-- 1,000,000 1,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/15 -- 1,000,090
------------------------------
Total -- 5,095,090
------------------------------
VIRGINIA (2.84%):
-- 1,000,000 1,000,000 Newport News, Series A, 6.13%, 6/1/10 -- 1,058,750
-- 2,200,000 2,200,000 Peninsula Port Authority Revenue - Shell Co.,
4.00%*, 6/2/97 -- 2,200,000
-- 1,000,000 1,000,000 State Public School Authority, 5.90%, 7/15/11 -- 1,037,500
550,000 -- 550,000 State, Housing Development Authority Revenue,
Series B, 6.55%, 1/1/11 584,496 --
-- 4,920,000 4,920,000 Virginia State Trust Brd., 5.13%, 5/15/12 -- 4,772,400
------------------------------
Total 584,496 9,068,650
------------------------------
WASHINGTON (10.04%):
-- 1,000,000 1,000,000 Grant County Public Utility, Series F, 5.70%,
1/1/15 -- 1,002,500
-- 1,000,000 1,000,000 King County Library System, 6.05%, 12/1/07 -- 1,072,500
-- 1,500,000 1,500,000 King County School District No. 415, 5.75%, 6/1/11 -- 1,543,125
-- 2,000,000 2,000,000 King County School District No. 415, 5.88%, 6/1/16 -- 2,035,000
725,000 -- 725,000 King County, School District #415 Kent, GO UT,
(Series B), 6.00%, 12/1/08 779,622 --
-- 1,000,000 1,000,000 King County, Series A, 6.00%, 12/1/09 -- 1,041,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.20%,
7/1/06 -- 1,086,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.25%,
7/1/07 -- 1,082,500
-- 3,000,000 3,000,000 Snohomish County Public Utility District 001,
6.00%, 1/1/13 -- 3,082,500
-- 1,000,000 1,000,000 Snohomish County Public Utility District 001,
6.45%, 1/1/06 -- 1,105,000
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
NORTH CAROLINA (3.25%):
-- $2,000,000 $2,000,000 Eastern Municipal Power Agency, Series B, 6.00%,
1/1/13 $2,045,000
-- 1,000,000 1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 1,003,750
-- 8,000,000 8,000,000 North Carolina State School Improvements, 5.20%,
3/1/13 7,980,000
--------------
Total 11,028,750
--------------
OHIO (0.62%):
-- 2,000,000 2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%,
5/1/13 2,095,000
--------------
OKLAHOMA (0.31%):
-- 1,000,000 1,000,000 Tulsa, 6.25%, 6/1/11 1,052,500
--------------
PENNSYLVANIA (4.75%):
-- 1,000,000 1,000,000 Allegheny County Series C-40, 5.90%, 5/1/07 1,055,000
-- 1,500,000 1,500,000 Burrell School District, 5.65%, 11/15/16 1,515,000
545,000 -- 545,000 Delaware County, GO UT Refunding, 6.00%, 11/15/02 580,234
155,000 -- 155,000 Delaware County, PA, Refunding Bonds, 6.00%,
11/15/14 159,084
-- 1,000,000 1,000,000 Easttown Township, Public/Highway Improvements,
5.65%, 8/1/17 1,005,000
-- 9,000,000 9,000,000 Pennsylvania State, 5.13%, 9/15/11, Insured by
AMBAC 8,786,250
-- 2,000,000 2,000,000 State Higher Education Facilities, Series A,
5.88%, 1/1/15 2,037,500
-- 1,000,000 1,000,000 State Higher Education Facilities, Series B,
5.88%, 1/1/15 1,018,750
--------------
Total 16,156,818
--------------
TENNESSEE (0.91%):
-- 1,000,000 1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 1,043,750
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 5.75%, 1/1/15 1,006,250
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 6.13%, 5/15/19 1,036,250
--------------
Total 3,086,250
--------------
TEXAS (12.50%):
-- 3,000,000 3,000,000 Austin Independent School District, 5.75%, 8/1/15 3,045,000
-- 3,400,000 3,400,000 Harris County Health Facilities, Series B, 4.05%,
2/15/16 3,400,000
-- 2,500,000 2,500,000 Harris County Texas Health Care Facilities, 4.05%*,
6/2/97 2,500,000
-- 8,000,000 8,000,000 Harris County Texas Health, 5.50%, 6/1/17 7,800,000
-- 1,000,000 1,000,000 Humble Independent School District, 6.25%, 2/1/07 1,072,500
-- 1,000,000 1,000,000 Manor Independent School District, 5.70%, 8/1/10 1,030,000
500,000 -- 500,000 North Texas State Higher Education Authority,
Student Loan Revenue, Refunding,
Series D, 6.30%, 4/1/10 507,815
-- 1,000,000 1,000,000 Royse City Independent School District, 5.50%,
2/15/15 1,000,000
-- 1,000,000 1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 1,017,500
-- 3,000,000 3,000,000 State Public Finance Authority, Series A, 5.95%,
10/1/15 3,101,250
-- 1,000,000 1,000,000 State Public Financing Authority, Series A, 5.70%,
10/1/07 1,031,250
-- 6,750,000 6,750,000 Texas State Water Development, 5.40%, 8/1/21 6,513,750
1,000,000 -- 1,000,000 Texas State, GO UT Water Development, Series A, 7.00%,
8/1/11 1,081,740
155,000 -- 155,000 Texas State, GO UT, Series A, Veterans Housing
Assistance Fund, 6.60%, 12/1/16 158,877
-- 7,500,000 7,500,000 University of Texas, Series B, 5.10%, 8/15/13 7,190,625
-- 2,000,000 2,000,000 Water Development Board Revenue Series A, 5.75%,
7/15/15 2,032,500
--------------
Total 42,482,807
--------------
UTAH (1.50%):
-- 4,000,000 4,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/12 4,095,000
-- 1,000,000 1,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/15 1,000,090
--------------
Total 5,095,090
--------------
VIRGINIA (2.84%):
-- 1,000,000 1,000,000 Newport News, Series A, 6.13%, 6/1/10 1,058,750
-- 2,200,000 2,200,000 Peninsula Port Authority Revenue - Shell Co.,
4.00%*, 6/2/97 2,200,000
-- 1,000,000 1,000,000 State Public School Authority, 5.90%, 7/15/11 1,037,500
550,000 -- 550,000 State, Housing Development Authority Revenue,
Series B, 6.55%, 1/1/11 584,496
-- 4,920,000 4,920,000 Virginia State Trust Brd., 5.13%, 5/15/12 4,772,400
--------------
Total 9,653,146
--------------
WASHINGTON (10.04%):
-- 1,000,000 1,000,000 Grant County Public Utility, Series F, 5.70%,
1/1/15 1,002,500
-- 1,000,000 1,000,000 King County Library System, 6.05%, 12/1/07 1,072,500
-- 1,500,000 1,500,000 King County School District No. 415, 5.75%, 6/1/11 1,543,125
-- 2,000,000 2,000,000 King County School District No. 415, 5.88%, 6/1/16 2,035,000
725,000 -- 725,000 King County, School District #415 Kent, GO UT,
(Series B), 6.00%, 12/1/08 779,622
-- 1,000,000 1,000,000 King County, Series A, 6.00%, 12/1/09 1,041,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.20%,
7/1/06 1,086,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.25%,
7/1/07 1,082,500
-- 3,000,000 3,000,000 Snohomish County Public Utility District 001,
6.00%, 1/1/13 3,082,500
-- 1,000,000 1,000,000 Snohomish County Public Utility District 001,
6.45%, 1/1/06 1,105,000
</TABLE>
<PAGE> 129
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
WASHINGTON, CONTINUED:
-- $2,000,000 $2,000,000 Snohomish County Public Utility District 001,
6.50%, 1/1/12 -- 2,142,500
-- 1,000,000 1,000,000 Snohomish County School District No. 2,
6.20%, 12/1/12 -- 1,061,250
-- 3,000,000 3,000,000 Spokane Regular Solid Waste Management,
5.50%, 12/1/10 -- $3,033,750
-- 1,000,000 1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 -- 1,046,250
-- 8,000,000 8,000,000 Washington State Motor Vehicle Fuel Tax
Series, 5.38%, 1/1/22 -- 7,810,000
-- 4,190,000 4,190,000 Washington State Series, 5.50%, 1/1/17 -- 4,148,100
-- 1,000,000 1,000,000 Washington State, Series DD-14 & Series B,
5.75%, 9/1/07 -- 1,043,750
--------------------------------
Total 779,622 33,336,225
--------------------------------
WEST VIRGINIA (2.34%):
-- 7,940,000 7,940,000 West Virginia School Building, 5.40%, 7/1/10 -- 7,949,925
--------------------------------
WISCONSIN (2.49%):
255,000 -- 255,000 Madison, IDR, Madison Gas & Electric Co.,
Series A, 6.75%, 4/1/27 269,441 --
-- 1,000,000 1,000,000 Dane County, Series A, 5.65%, 3/1/12 -- 1,013,750
-- 1,000,000 1,000,000 Green Bay Area Public School District,
Series A, 5.50%, 4/1/12 -- 1,003,750
-- 3,000,000 3,000,000 Kenosha, Series B, 5.85%, 12/1/11 -- 3,082,500
-- 3,000,000 3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 -- 3,097,500
--------------------------------
Total 269,441 8,197,500
--------------------------------
WYOMING (0.65%):
-- 2,200,000 2,200,000 Uinta County Wyoming Chevron USA, 4.00%*,
6/2/97 -- 2,200,000
--------------------------------
Total Municipal Bonds 12,751,966 331,226,617
--------------------------------
INVESTMENT COMPANIES (1.84%):
-- 2,710,000 2,710,000 Federated Tax-Free Trust Mutual Fund -- 2,710,000
496,704 -- 496,704 Goldman Sachs & Co. 496,702 --
-- 3,029,000 3,029,000 Nuveen Tax-Exempt Money Market Fund -- 3,029,000
--------------------------------
Total Investment Companies 496,702 5,739,000
--------------------------------
Total (Cost -- Arrow $12,855,001,ARCH
$331,006,272)(a) $13,248,668 $336,965,617
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
WASHINGTON, CONTINUED:
-- $2,000,000 $2,000,000 Snohomish County Public Utility District 001,
6.50%, 1/1/12 2,142,500
-- 1,000,000 1,000,000 Snohomish County School District No. 2,
6.20%, 12/1/12 1,061,250
-- 3,000,000 3,000,000 Spokane Regular Solid Waste Management,
5.50%, 12/1/10 $3,033,750
-- 1,000,000 1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 1,046,250
-- 8,000,000 8,000,000 Washington State Motor Vehicle Fuel Tax
Series, 5.38%, 1/1/22 7,810,000
-- 4,190,000 4,190,000 Washington State Series, 5.50%, 1/1/17 4,148,100
-- 1,000,000 1,000,000 Washington State, Series DD-14 & Series B,
5.75%, 9/1/07 1,043,750
--------------
Total 34,115,847
--------------
WEST VIRGINIA (2.34%):
-- 7,940,000 7,940,000 West Virginia School Building, 5.40%, 7/1/10 7,949,925
--------------
WISCONSIN (2.49%):
255,000 -- 255,000 Madison, IDR, Madison Gas & Electric Co.,
Series A, 6.75%, 4/1/27 269,441
-- 1,000,000 1,000,000 Dane County, Series A, 5.65%, 3/1/12 1,013,750
-- 1,000,000 1,000,000 Green Bay Area Public School District,
Series A, 5.50%, 4/1/12 1,003,750
-- 3,000,000 3,000,000 Kenosha, Series B, 5.85%, 12/1/11 3,082,500
-- 3,000,000 3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 3,097,500
--------------
Total 8,466,941
--------------
WYOMING (0.65%):
-- 2,200,000 2,200,000 Uinta County Wyoming Chevron USA, 4.00%*,
6/2/97 2,200,000
--------------
Total Municipal Bonds 343,978,583
--------------
INVESTMENT COMPANIES (1.84%):
-- 2,710,000 2,710,000 Federated Tax-Free Trust Mutual Fund 2,710,000
496,704 -- 496,704 Goldman Sachs & Co. 496,702
-- 3,029,000 3,029,000 Nuveen Tax-Exempt Money Market Fund 3,029,000
--------------
Total Investment Companies 6,235,702
--------------
Total (Cost -- Arrow $12,855,001,ARCH
$331,006,272)(a) $350,214,285
--------------
</TABLE>
Percentages indicated are based on net assets of Arrow $13,450,961 and ARCH
$326,427,257, combined of $339,878,218
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
Arrow ARCH Combined
----- ---- --------
<S> <C> <C> <C>
Net unrealized appreciation $393,667 $5,959,345 $6,353,012
-------------------------------------
</TABLE>
The following acronyms are used throughout this portfolio:
AMBAC AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
CGIC CAPITAL GUARANTY INSURANCE CORPORATION
FGIC FINANCIAL GUARANTY INSURANCE COMPANY
FSA FINANCIAL SECURITY ASSURANCE, INC.
GNMA GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GO GENERAL OBLIGATION
HEFA HEALTH AND EDUCATION FACILITIES AUTHORITY
IDR INDUSTRIAL DEVELOPMENT REVENUE
MBIA MUNICIPAL BOND INVESTORS ASSURANCE
PCR POLLUTION CONTROL REVENUE
SFM SINGLE FAMILY MORTGAGE
UT UNLIMITED TAX
(See Notes which are an integral part of the Financial Statements)
<PAGE> 130
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1997
(Unaudited) (Unaudited)
ARCH National
Arrow Municipal Municipal Bond (PRO FORMA)
Income Portfolio Portfolio (Combined)
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Total investments, at value (Cost -- Arrow $12,855,001 and ARCH $331,006,272) $ 13,248,668 $336,965,617 $350,214,285
Cash 326 233 559
Income receivable 255,179 5,659,660 5,914,839
Receivable for portfolio shares issued -- 1,204 1,204
Deferred expenses 917 85,880 86,797
------------ ------------ ------------
Total assets 13,505,090 342,712,594 356,217,684
Liabilities:
Income distribution payable 47,139 1,496,540 1,543,679
Payable to brokers for investments purchased -- 14,730,870 14,730,870
Accrued expenses 6,990 57,927 64,917
------------ ------------ ------------
Total liabilities 54,129 16,285,337 16,339,466
============ ============ ============
Net Assets $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Net Assets
Paid in capital 13,386,775 313,384,564 326,771,339
Net unrealized appreciation (depreciation) from investments 393,667 5,959,345 6,353,012
Accumulated net realized loss on investments (329,481) 7,083,348 6,753,867
============ ============ ============
Total Net Assets $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Net Assets
Investor A Shares 13,450,961 542,574 13,993,535
Investor B Shares -- 1,017 1,017
Trust Shares -- 325,883,666 325,883,666
Institutional Shares -- -- --
============ ============ ============
Total $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Outstanding shares of common stock
Investor A Shares 1,304,417 54,515 1,406,370
Investor B Shares -- 102 102
Trust Shares -- 32,725,131 32,725,131
Institutional Shares -- -- --
============ ============ ============
Total 1,304,417 32,779,748 34,131,603
============ ============ ============
Net Asset Value:
Investor A Shares 10.31 9.95 9.95
Investor B Shares -- 9.96 9.96
Trust Shares -- 9.96 9.96
Institutional Shares -- -- --
============ ============ ============
Maximum Sales Charge : Investor A Shares 3.50% 4.50% 4.50%
============ ============ ============
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share: Investor A Shares
$ 10.69 $ 10.42 $ 10.42
============ ============ ============
</TABLE>
Redemption price of Investor B Shares varies based on length of time held.
Maximum redemption charge would be 5.0% (as a percentage of offering price).
(See Notes which are an integral part of the Financial Statements)
<PAGE> 131
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period of Period of
11/18/96 - 11/18/96 - Period ended Period ended
5/31/97 5/31/97 5/31/97 5/31/97
---------------------------------------------- ------------
Arrow ARCH
Municipal National (PRO
Income Municipal PRO FORMA FORMA)
Portfolio Bond Portfolio Adjustments (Combined)
---------------------------------------------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $ 0 $ 73,488 $ -- $ 73,488
Interest 396,959 9,698,803 -- 10,095,762
---------------------------------------------- ------------
Total income 396,959 9,772,291 -- 10,169,250
---------------------------------------------- ------------
Expenses:
Investment advisory fee $ 49,061 933,558 (10,513)(1) 972,106
Administrative personnel and services fee $ 24,953 182,509 (20,927)(2) 186,535
Custodian and accounting fees $ 25,075 5,656 (24,950)(3) 5,781
Transfer and dividend disbursing agent fees and expenses $ 14,847 31,973 -- 46,820
Directors'/Trustees' fees $ 997 4,956 (997)(4) 4,956
Legal and audit fees $ 7,480 20,116 (7,036)(5) 20,560
Organization costs -- 3,609 -- 3,609
Distribution services fee $ 17,521 415 (17,503)(6) 433
Share registration costs $ 6,389 39,648 -- 46,037
Printing and postage $ 3,241 19,191 -- 22,432
Insurance premiums $ 1,496 -- -- 1,496
Miscellaneous $ 4,404 3,231 -- 7,635
---------------------------------------------- ------------
Total expenses 155,464 1,244,862 (81,926) 1,318,400
---------------------------------------------- ------------
Expenses voluntarily reduced $ (58,872) (1,022,830) 40,561 (7) (1,041,141)
---------------------------------------------- ------------
Net expenses 96,592 222,032 (41,365) 277,259
---------------------------------------------- ------------
Net investment income 300,367 9,550,259 41,365 9,891,991
---------------------------------------------- ------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments $ 25,824 7,083,348 -- 7,109,172
Net change in unrealized depreciation of investments $ (114,620) (8,343,815) -- (8,458,435)
---------------------------------------------- ------------
Net realized and unrealized loss on investments (88,796) (1,260,467) -- (1,349,263)
---------------------------------------------- ------------
Change in net assets resulting from operations $ 211,571 $8,289,792 $ 41,365 $ 8,542,728
---------------------------------------------- ------------
</TABLE>
(1) To adjust Advisory fees to replace the ARCH Fund's fee structure for the
combined assets.
(2) To adjust Administration fees to replace the ARCH Fund's fee structure for
the combined assets.
(3) To adjust Custodian and Accounting fees to replace the ARCH Fund's fee
structure for the combined assets.
(4) To eliminate duplicate of Directors'/Trustees' fees.
(5) To eliminate duplicate of Legal and Audit fees.
(6) To adjust Distribution fees to replace the ARCH Fund's fee structure
for the combined assets.
(7) To adjust expenses voluntarily reduced for administration, custodian
and accounting fees per the ARCH Fund's fee structure for the combined
assets.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 132
ARROW FIXED INCOME PORTFOLIO
ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The pro forma combined statement of assets and liabilities, including the pro
forma combined schedule of investments, and the related pro forma combined
statement of operations reflect the accounts of the Arrow Fixed Income Portfolio
and the accounts of the Arch Government & Corporate Bond Portfolio as of May 31,
1997 and for the twelve month period then ended.
The pro forma combined financial statements give effect to the proposed transfer
of the assets and liabilities of the Arrow Fixed Income Portfolio in exchange
for shares of the Arch Government & Corporate Bond Portfolio. Under the terms of
the Agreement and Plan of Reorganization between Arrow Funds and The Arch Fund,
Inc. (the "Plan"), the combination of the Arrow Fixed Income Portfolio and the
Arch Government & Corporate Bond Portfolio will be treated as a tax-free
business combination. Accordingly, the historical cost of investment securities
will be carried forward to the surviving portfolio and the results of operations
of the surviving portfolio for the pre-combining periods will not be restated.
The pro forma combined financial statements do not reflect the expenses of the
Arrow and Arch Portfolios in carrying out their obligations under the Plan as
these expenses are immaterial to the financial statements.
Each Portfolio has a similar investment objective which will remain unchanged as
a result of the combination.
The pro forma financial statements should be read in conjunction with the
historical financial statements of each Portfolio incorporated by reference to
the respective prospectuses or statements of additional information. The pro
forma combined statement of assets and liabilities has been prepared as if the
combination had taken place at the end of the twelve month period ending May 31,
1997, while the statement of operations has been prepared for the preceding
twelve month period then ended. Certain amounts have been reclassified to
conform to current presentation.
2. PRO FORMA OPERATIONS
The pro forma combined statement of operations assumes similar rates of gross
investment income from the investments of each Portfolio. Accordingly, the
combined gross investment income is equal to the sum of the gross investment
income of each Portfolio.
Pro forma operating expenses reflect the expected expenses of the Arch
Government & Corporate Bond Portfolio after combination. As such, pro forma fees
for investment advisory, administration, distribution, custodian and
-2-
<PAGE> 133
2. PRO FORMA OPERATIONS (Continued)
accounting services, director and trustee, and legal and audit were calculated
based on the fee schedules in effect at May 31, 1997 for the Arch Government &
Corporate Bond Portfolio.
3. SURVIVING ENTITY
The Arch Government & Corporate Bond Portfolio will be the surviving entity for
accounting purposes. This determination was based upon the relative size of each
Portfolio and that the surviving portfolio will be managed by the Arch
Government & Corporate Bond Portfolio's current adviser employing current
investment objectives, policies and restrictions.
<PAGE> 134
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- ------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- ------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government &
Income & Corporate Bond (Combined) Income Portfolio Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS (1.59%):
AEROSPACE & DEFENSE (0.26%):
$500,000 -- $500,000 Rockwell International Corp.,
6.75%, 9/15/02 $497,825 $0 $497,825
-------------------------------------------------
BANKING (0.27%):
500,000 -- 500,000 BankAmerica Corp., 7.50%,
10/15/02 511,830 -- 511,830
-------------------------------------------------
FINANCE (0.26%):
500,000 -- 500,000 MBNA Corp., 6.88%, 10/1/99 501,495 -- 501,495
-------------------------------------------------
INDUSTRIAL (0.53%):
1,000,000 -- 1,000,000 WMX Technologies, Inc., 7.13%,
6/15/01 1,010,890 -- 1,010,890
-------------------------------------------------
UTILITIES (0.27%):
500,000 -- 500,000 United Telephone Co. of Florida,
7.25%, 12/15/04 505,865 -- 505,865
-------------------------------------------------
Total Corporate Bonds 3,027,905 0 3,027,905
-------------------------------------------------
GOVERNMENT BONDS (96.09%):
FOREIGN MUNICIPAL (0.27%):
500,000 -- 500,000 Province of Ontario, Canada,
7.38%, 1/27/03 512,620 -- 512,620
-------------------------------------------------
GOVERNMENT AGENCIES (32.39%):
FEDERAL HOME LOAN BANK:
500,000 -- 500,000 6.32%, 2/1/00 499,365 -- 499,365
FEDERAL HOME LOAN MORTGAGE CORP.:
-- 1,409,622 1,409,622 6.50%, 2/1/98 -- 1,397,724 1,397,724
-- 850,324 850,324 6.50%, 3/1/98 -- 843,147 843,147
-- 56,740 56,740 8.50%, 5/1/01 -- 58,336 58,336
-- 122,129 122,129 8.50%, 11/1/01 -- 125,105 125,105
-- 92,307 92,307 8.00%, 3/1/02 -- 93,951 93,951
-- 30,217 30,217 8.00%, 3/1/02 -- 30,755 30,755
-- 128,219 128,219 7.50%, 4/1/02 -- 128,658 128,658
-- 55,520 55,520 8.00%, 5/1/02 -- 56,509 56,509
-- 5,234 5,234 8.00%, 6/1/02 -- 5,327 5,327
-- 302,306 302,306 8.00%, 6/1/02 -- 307,690 307,690
-- 67,773 67,773 8.00%, 6/1/02 -- 68,980 68,980
-- 15,928 15,928 8.00%, 6/1/02 -- 16,211 16,211
-- 27,207 27,207 8.00%, 7/1/02 -- 27,692 27,692
-- 169,488 169,488 8.00%, 7/1/02 -- 172,506 172,506
-- 107,859 107,859 8.50%, 3/1/05 -- 110,487 110,487
-- 9,266 9,266 8.50%, 4/1/05 -- 9,492 9,492
-- 1,000,000 1,000,000 7.46%, 8/3/05(b) -- 998,620 998,620
-- 54,575 54,575 8.50%, 9/1/05 -- 55,905 55,905
-- 39,100 39,100 8.50%, 4/1/06 -- 40,431 40,431
934,474 -- 934,474 6.00%, 8/1/11, Pool #E20268 896,291 -- 896,291
-- 983,031 983,031 6.50%, 1/1/12 -- 959,989 959,989
-- 2,273,886 2,273,886 8.00%, 1/1/23 -- 2,318,636 2,318,636
-- 541,152 541,152 8.00%, 1/1/23 -- 551,802 551,802
FEDERAL NATIONAL MORTGAGE ASSOC.:
-- 1,337,627 1,337,627 6.00%, 11/1/00, Pool #190070 -- 1,292,897 1,292,897
1,000,000 -- 1,000,000 7.55%, 6/10/04 1,004,480 -- 1,004,480
-- 4,813,768 4,813,768 6.00%, 5/1/11, Pool #345652 -- 4,603,166 4,603,166
-- 4,808,849 4,808,849 7.00%, 7/1/11 -- 4,780,284 4,780,284
-- 947,714 947,714 6.50%, 12/1/11, Pool #367178F -- 924,609 924,609
-- 3,884,948 3,884,948 6.50%, 12/1/11, Pool #367838F -- 3,790,233 3,790,233
-- 986,384 986,384 6.00%, 1/1/12, Pool #366788 -- 943,230 943,230
-- 3,119,577 3,119,577 8.00%, 7/1/24 -- 3,175,136 3,175,136
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
-- 17,265 17,265 9.50%, 2/15/01 -- 18,317 18,317
-- 33,545 33,545 9.50%, 9/15/01 -- 35,589 35,589
-- 191,553 191,553 8.00%, 1/15/02 -- 196,998 196,998
-- 39,289 39,289 8.00%, 3/15/02 -- 40,406 40,406
-- 181,696 181,696 8.00%, 3/15/02 -- 186,861 186,861
-- 185,621 185,621 8.00%, 4/15/02 -- 190,898 190,898
-- 135,812 135,812 8.00%, 7/15/02 -- 139,673 139,673
-- 90,505 90,505 9.50%, 10/15/02 -- 96,020 96,020
-- 103,670 103,670 9.50%, 1/15/06 -- 109,986 109,986
-- 151,408 151,408 8.00%, 5/15/06 -- 155,713 155,713
-- 68,507 68,507 9.50%, 7/15/07 -- 72,681 72,681
-- 399,750 399,750 8.00%, 11/15/07 -- 411,115 411,115
-- 430,306 430,306 8.00%, 12/15/07 -- 442,540 442,540
-- 686,185 686,185 9.50%, 8/15/09, Pool #400219 -- 727,995 727,995
</TABLE>
<PAGE> 135
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- -------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- -------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government
Income & Corporate Bond (Combined) Income Portfolio & Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT BONDS, CONTINUED:
GOVERNMENT AGENCIES, CONTINUED:
GOVERNMENT NATIONAL MORTGAGE
ASSOC., CONTINUED
-- $198,426 $198,426 9.50%, 9/15/09 -- $210,516 $210,516
-- 742,790 742,790 9.50%, 2/15/10 -- 788,048 788,048
-- 41,877 41,877 8.00%, 5/15/10 -- 43,068 43,068
-- 175,264 175,264 6.50%, 8/15/10 -- 171,758 171,758
-- 203,138 203,138 8.00%, 9/15/10 -- 208,913 208,913
-- 1,023,551 1,023,551 8.00%, 11/12/10 -- 1,052,651 1,052,651
-- 263,240 263,240 8.00%, 11/15/10 -- 270,724 270,724
-- 326,889 326,889 8.00%, 11/15/10 -- 336,183 336,183
-- 425,640 425,640 6.50%, 3/15/11 -- 417,127 417,127
-- 118,651 118,651 6.50%, 3/15/11 -- 116,278 116,278
-- 368,996 368,996 6.50%, 4/15/11 -- 361,616 361,616
-- 113,575 113,575 6.50%, 4/15/11 -- 111,304 111,304
-- 475,555 475,555 6.50%, 4/15/11 -- 466,044 466,044
-- 659,613 659,613 6.50%, 5/15/11 -- 646,420 646,420
-- 469,131 469,131 6.50%, 5/15/11 -- 459,749 459,749
-- 78,412 78,412 6.50%, 5/15/11 -- 76,844 76,844
-- 604,833 604,833 6.50%, 6/15/11 -- 592,737 592,737
-- 112,563 112,563 6.50%, 6/15/11 -- 110,312 110,312
-- 315,697 315,697 6.50%, 6/15/11 -- 309,383 309,383
-- 756,450 756,450 6.50%, 6/15/11 -- 741,321 741,321
-- 354,167 354,167 6.50%, 7/15/11 -- 347,084 347,084
-- 414,020 414,020 6.50%, 8/15/11 -- 405,739 405,739
-- 2,504,885 2,504,885 8.50%, 4/15/17 -- 2,596,464 2,596,464
-- 1,539,276 1,539,276 8.00%, 4/15/22 -- 1,569,092 1,569,092
-- 3,741,402 3,741,402 7.50%, 1/15/23 -- 3,727,372 3,727,372
-- 2,221,940 2,221,940 8.00%, 1/15/23 -- 2,264,979 2,264,979
-- 1,016,638 1,016,638 7.50%, 4/15/23 -- 1,012,825 1,012,825
-- 1,480,163 1,480,163 9.00%, 3/15/25 -- 1,557,398 1,557,398
1,010,000 -- 1,010,000 6.50%, 4/15/26, Pool #422323 957,500 -- 957,500
1,009,999 -- 1,009,999 6.50%, 4/15/26, Pool #415721 957,499 -- 957,499
1,010,000 -- 1,010,000 6.50%, 5/15/26, Pool #417388 957,500 -- 957,500
-- 4,898,466 4,898,466 6.50%, 6/15/26 -- 4,633,606 4,633,606
-------------------------------------------------
Total U.S. Government Agencies 5,272,635 56,317,855 61,590,490
-------------------------------------------------
U.S. TREASURY BONDS (14.64%):
1,500,000 -- 1,500,000 7.50%, 5/15/02 1,563,105 -- 1,563,105
-- 1,375,000 1,375,000 9.25%, 2/15/16 -- 1,699,624 1,699,624
3,000,000 -- 3,000,000 7.50%, 11/15/16 3,163,590 -- 3,163,590
-- 1,675,000 1,675,000 8.75%, 5/15/17(b) -- 1,989,532 1,989,532
-- 2,865,000 2,865,000 8.88%, 8/15/17 -- 3,444,217 3,444,217
-- 4,150,000 4,150,000 8.88%, 2/15/19(b) -- 5,011,042 5,011,042
-- 2,183,000 2,183,000 8.75%, 8/15/20(b) -- 2,617,744 2,617,744
-- 7,600,000 7,600,000 6.25%, 8/15/23 -- 6,927,248 6,927,248
1,500,000 -- 1,500,000 6.50%, 11/15/26 1,413,930 -- 1,413,930
-------------------------------------------------
Total U.S. Treasury Bonds 6,140,625 21,689,407 27,830,032
-------------------------------------------------
U.S. TREASURY NOTES (48.79%):
-- 32,300,000 32,300,000 5.13%, 2/28/98(b) -- 32,141,085 32,141,085
-- 1,750,000 1,750,000 6.38%, 5/15/99(b) -- 1,755,460 1,755,460
-- 11,800,000 11,800,000 6.00%,10/15/99(b) -- 11,745,012 11,745,012
3,900,000 -- 3,900,000 6.75%, 4/30/00 3,941,067 -- 3,941,067
1,500,000 -- 1,500,000 6.38%, 5/15/00 1,501,395 -- 1,501,395
-- 7,500,000 7,500,000 6.13%, 7/31/00(b) -- 7,447,275 7,447,275
-- 2,000,000 2,000,000 5.63%, 2/28/01(b) -- 1,946,980 1,946,980
1,250,000 -- 1,250,000 8.00%, 5/15/01 1,316,413 -- 1,316,413
3,000,000 -- 3,000,000 6.63%, 4/30/02 3,014,160 -- 3,014,160
1,000,000 -- 1,000,000 5.88%, 2/15/04 962,040 -- 962,040
1,500,000 -- 1,500,000 6.25%, 2/15/07 1,458,165 -- 1,458,165
-- 25,600,000 25,600,000 6.63%, 5/15/07 -- 25,534,208 25,534,208
-------------------------------------------------
Total U.S. Treasury Notes 12,193,240 80,570,020 92,763,260
-------------------------------------------------
Total Government Bonds 24,119,120 158,577,282 182,696,402
-------------------------------------------------
</TABLE>
<PAGE> 136
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- ---------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- ---------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government &
Income & Corporate Bond (Combined) Income Portfolio Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MUTUAL FUND (1.91%):
-- $2,801,700 $2,801,700 Federated Money Market
Trust Fund -- $2,801,700 $2,801,700
838,421 -- 838,421 Goldman Sachs ILA Treasury
Money Market Fund 838,421 -- 838,421
---------------------------------------------------
838,421 2,801,700 3,640,121
---------------------------------------------------
---------------------------------------------------
Total Investments (Cost --
Arrow $28,140,060,
ARCH $161,041,875)(a) $27,985,446 $161,378,982 $189,364,428
---------------------------------------------------
</TABLE>
Percentages indicated are based on net assets of Arrow $28,125,846
and ARCH $162,011,503, combined of $190,137,349.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation (depreciation)of securities as follows:
<TABLE>
<CAPTION>
Arrow ARCH Combined
<S> <C> <C> <C>
Net unrealized appreciation
(depreciation) ($154,614) $337,107 $182,493
-------------------------------------------------
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 137
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Statement of Assets and Liabilities
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1997
(Unaudited) (Unaudited)
Government &
Arrow Fixed Corporate Bond (PRO FORMA)
Income Portfolio Portfolio (Combined)
------------- ------------- -------------
<S> <C> <C> <C>
Assets:
Investments, at value (Cost -- Arrow $28,140,060, ARCH $161,041,875) $ 27,985,446 $ 161,378,982 $ 189,364,428
Cash 15,607 -- 15,607
Income receivable 264,534 1,573,892 1,838,426
Deferred expenses 1,430 5,477 6,907
------------- ------------- -------------
Total assets 28,267,017 162,958,351 191,225,368
Liabilities:
Cash overdraft -- 68,012 68,012
Income distribution payable 130,480 776,572 907,052
Accrued expenses 10,691 102,264 112,955
------------- ------------- -------------
Total liabilities 141,171 946,848 1,088,019
------------- ------------- -------------
Net Assets $ 28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Net Assets:
Paid in capital 29,643,672 163,944,893 193,588,565
Undistributed net investment income -- 2,351 2,351
Net unrealized appreciation (depreciation) from investments (154,614) 337,107 182,493
Accumulated net realized loss on investments (1,363,212) (2,272,848) (3,636,060)
------------- ------------- -------------
Total Net Assets $28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Net Assets
Investor A Shares 28,125,846 4,606,807 32,732,653
Investor B Shares -- 575,562 575,562
Trust Shares -- 141,220,745 141,220,745
Institutional Shares -- 15,608,389 15,608,389
------------- ------------- -------------
Total $28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Outstanding shares of common stock
Investor A Shares 2,898,396 458,760 3,260,139
Investor B Shares -- 57,297 57,297
Trust Shares -- 14,062,830 14,062,830
Institutional Shares -- 1,554,202 1,554,202
------------- ------------- -------------
Total 2,898,396 16,133,089 18,934,468
============= ============= =============
Net Asset Value:
Investor A Shares $ 9.70 $ 10.04 $ 10.04
Investor B Shares -- $ 10.05 $ 10.05
Trust Shares -- $ 10.04 $ 10.04
Institutional Shares -- $ 10.04 $ 10.04
------------- ------------- -------------
Maximum Sale Charge: Investor A Shares 3.50% 4.50% 4.50%
============= ============= =============
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net $ 10.05 $ 10.51 $ 10.51
asset value adjusted to the nearest cent) per share: Investor A Shares
</TABLE>
Redemption price of Investor B Shares varies based on length of time held.
Maximum redemption charge would be 5.0% (as a percentage of offering price).
(See Notes which are an integral part of the Financial Statements)
<PAGE> 138
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
12 Month Period 12 Month Period 12 Month Period
ended 5/31/97 ended 5/31/97 ended 5/31/97
-------------------------------------------------- --------------
ARCH
Government &
Arrow Fixed Corporate Bond (PRO FORMA) (PRO FORMA)
Income Portfolio Portfolio Adjustments (Combined)
-------------------------------------------------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $ 63,661 $ 60,323 $ -- $ 123,984
Interest 1,995,379 10,678,415 -- 12,673,794
Income from security Lending -- 51,467 -- 51,467
-------------------------------------------------- ------------
Total income 2,059,040 10,790,205 -- 12,849,245
Expenses:
Investment advisory fee 172,608 714,580 (43,152)(1) 844,036
Administrative personnel and services fee 49,952 359,498 15,176 (2) 424,626
Custodian and accounting fees 72,880 62,424 (61,571)(3) 73,733
Transfer and dividend disbursing agent fees and expenses 38,113 47,161 -- 85,274
Directors'/Trustees' fees 2,994 4,225 (2,994)(4) 4,225
Legal and audit fees 14,949 18,738 (11,554)(5) 22,133
Distribution services fee 71,920 19,561 (68,376)(6) 23,105
Share registration costs 13,802 14,005 -- 27,807
Printing and postage 3,074 17,003 -- 20,077
Insurance premiums 3,635 -- -- 3,635
Miscellaneous 9,162 (3,330) -- 5,832
-------------------------------------------------- ------------
Total expenses 453,089 1,253,865 (172,471) 1,534,483
Expenses voluntarily reduced (75,159) (158,852) 65,292 (7) (168,719)
-------------------------------------------------- ------------
Net expenses 377,930 1,095,013 (107,179) 1,365,764
================================================== ============
Net investment income $ 1,681,110 $ 9,695,192 $ 107,179 $ 11,483,481
================================================== ============
Realized and Unrealized gain (loss) on Investments:
Net realized gain (loss) on investments (424,459) (916,929) -- (1,341,388)
Net change in unrealized depreciation of investments 750,047 (3,784,547) -- (3,034,500)
-------------------------------------------------- ------------
Net realized and unrealized loss on investments 325,588 (4,701,476) -- (4,375,888)
================================================== ============
Change in net assets resulting from operations $ 2,006,698 $ 4,993,716 $ 107,179 $ 7,172,885
================================================== ============
</TABLE>
(1) To adjust Advisory fees to replace the ARCH Fund's fee structure for the
combined assets.
(2) To adjust Administration fees to replace the ARCH Fund's fee structure for
the combined assets.
(3) To adjust Custodian and Accounting fees to replace the ARCH Fund's fee
structure for the combined assets.
(4) To eliminate duplicate of Directors'/Trustees' fees.
(5) To eliminate duplicate of Legal and Audit fees.
(6) To adjust Distribution fees to replace the ARCH Fund's fee structure
for the combined assets.
(7) To adjust expenses voluntarily reduced for administration, custodian and
accounting fees per the ARCH Fund's fee structure for the combined assets.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 139
PART C
<PAGE> 140
FORM N-14
Part C - Other Information
Item 15. Indemnification
Indemnification of Registrant's principal underwriter, custodian and
transfer agent against certain losses is provided for, respectively, in Sections
1.11 and 1.12 of the Distribution Agreement, incorporated herein by reference as
Exhibit (7)(a), and Sections 24 and 18, respectively, of the Custodian
Agreement, incorporated herein by reference as Exhibit (9)(a) and the Transfer
Agency Agreement incorporated herein by reference as Exhibit (13)(i). The
Registrant has obtained from a major insurance carrier a directors' and
officers' liability policy covering certain types of errors and omissions. In no
event will the Registrant indemnify any of its directors, officers, employees or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith or gross negligence in the
performance of his duties, or by reason of his reckless disregard of the duties
involved in the conduct of his office or under his agreement with the
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release 11330 under the Investment Company Act of 1940 in connection
with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 16. Exhibits
(1) (a) Articles of Incorporation dated September 9,
1982.(3)
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(b) Articles Supplementary to Registrant's
Articles of Incorporation dated October 28,
1982.(3)
(c) Articles Supplementary to Registrant's
Articles of Incorporation dated December 22,
1987.(3)
(d) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
October 30, 1990.(3)
(e) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
November 9, 1990.(3)
(f) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 19, 1991.(3)
(g) Certificate of Correction dated April 30,
1991 to Articles Supplementary dated as of
March 19, 1991.(3)
(h) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
June 25, 1991.(3)
(i) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
November 15, 1991.(3)
(j) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
January 26, 1993.(3)
(k) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 23, 1993.(3)
(l) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 7, 1994.(3)
(m) Certificate of Correction dated October 17,
1994 to Articles Supplementary dated as of
March 8, 1994 to Registrant's Articles of
Incorporation.(3)
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(n) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
February 22, 1995.(3)
(o) Articles Supplementary to Registrant's
Articles of Incorporation dated as of April
17, 1995.(3)
(p) Articles Supplementary to Registrant's
Articles of Incorporation dated June 27,
1995.(3)
(q) Articles Supplementary to Registrant's
Articles of Incorporation dated September
18, 1995.(3)
(r) Articles Supplementary to Registrant's
Articles of Incorporation dated August 30,
1996.(5)
(s) Articles Supplementary to Registrant's
Articles of Incorporation dated February 3,
1997.(7)
(t) Articles Supplementary to Registrant's
Articles of Incorporation dated June 17,
1997.
(u) Form of Articles Supplementary to
Registrant's Articles of Incorporation.(9)
(2) Restated and Amended By-Laws as approved and adopted
by Registrant's Board of Directors.(6)
(3) None.
(4) Agreement and Plan of Reorganization filed herewith
as Appendix I to the Combined Proxy
Statement/Prospectus
(5) None.
(6) (a) Amended and Restated Advisory Agreement
between Registrant and Mississippi Valley
Advisors Inc. dated April 1, 1991.(3)
(b) Addendum No. 1 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the ARCH Treasury Money Market
Portfolio, dated September 27, 1991.(3)
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(c) Addendum No. 2 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors, Inc. with
respect to the ARCH Small Cap Equity
(formerly Emerging Growth Portfolio), dated
April 1, 1992.(3)
(d) Addendum No. 3 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the ARCH Balanced Portfolio dated
April 1, 1993.(3)
(e) Addendum No. 4 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. dated March
15, 1994.(3)
(f) Addendum No. 5 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the Short-Intermediate Municipal
Portfolio dated July 10, 1995.(3)
(g) Addendum No. 6 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the Tax-Exempt Money Market,
Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios dated September
29, 1995.(3)
(h) Addendum No. 7 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the Equity Income, National
Municipal Bond and Intermediate Corporate
Bond (formerly Short-Intermediate Corporate
Bond Portfolios) dated November 15, 1996.(6)
(i) Addendum No. 8 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the Equity Index and Bond Index
Portfolios dated February 14, 1997.(7)
(j) Form of Addendum No. 9 to Amended and
Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors
Inc. with respect to the Small Cap Equity
Index Portfolio.(9)
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(k) Form of Addendum No. 10 to Amended and
Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors
Inc. with respect to the Growth Equity
Portfolio.(9)
(l) Sub-Advisory Agreement between Mississippi
Valley Advisors Inc. and Clay Finlay Inc.
dated August 29, 1996.(5)
(7) (a) Distribution Agreement between Registrant
and The Winsbury Company Limited Partnership
dated October 1, 1993 is incorporated herein
by reference to Exhibit (6)(a) of Post-
Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(b) Addendum No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (6)(b) of Post-Effective
Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(c) Addendum No. 2 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to Investor
B Shares of the non-money market Portfolios
dated March 1, 1995 is incorporated herein
by reference to Exhibit (6)(c) of
Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(d) Addendum No. 3 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the
Short-Intermediate Municipal Portfolio and
Investor B Shares of the Money Market
Portfolio is incorporated herein by
reference to Exhibit (6)(d) of
Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.
(e) Addendum No. 4 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the Tax-
Exempt Money Market, Missouri Tax-Exempt
Bond
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and Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
(f) Addendum No. 5 to Distribution Agreement
between Registrant and BISYS Fund Services
with respect to the Equity Income, National
Municipal Bond and Intermediate Corporate
Bond (formerly Short-Intermediate Corporate
Bond) Portfolios dated November 15, 1996.(6)
(g) Addendum No. 6 to Distribution Agreement
between Registrant and BISYS Fund Services
with respect to the Equity Index and Bond
Index Portfolios dated February 14, 1997.(7)
(h) Form of Addendum No. 7 to Distribution
Agreement between Registrant and BISYS Fund
Services with respect to the Growth Equity
and Small Cap Equity Index Portfolios.(9)
(i) Amendment No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership dated as of September
29, 1995.(1)
(8) None.
(9) (a) Custodian Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated as of April 1, 1992 is
incorporated herein by reference to Exhibit
(8)(a) of Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form
N-1A, filed March 31, 1992.
(b) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated April 1, 1995 is
incorporated herein by reference to Exhibit
(8)(b) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(c) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated July 10, 1995 is
incorporated herein by reference to Exhibit
(8)(c) of Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.
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<PAGE> 146
(d) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated September 29, 1995.(3)
(e) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated
November 15, 1996.(6)
(f) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated
February 14, 1997.(7)
(g) Form of Custody Fee Agreement between
Registrant and Mercantile Bank of St. Louis
National Association.(9)
(h) Global Sub-Custodian Agreement among Bankers
Trust Company of New York, Registrant and
Mercantile Bank of St. Louis, National
Association dated as of April 1, 1994 is
incorporated herein by reference to Exhibit
(8)(j) of Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(i) Securities Lending Amendment dated August 4,
1994 to Custodian Agreement dated April 1,
1992 between Registrant and Mercantile Bank
of St. Louis, National Association is
incorporated herein by reference to Exhibit
(8)(k) of Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(10) (a) (1) Distribution and Services Plan
(Investor A Shares) under Rule
12b-1 and Form of Agreement.(9)
(2) Distribution and Services Plan
(Investor B Shares) under Rule
12b-1 and Form of Agreement.(9)
(b) Amended and Restated Plan Pursuant to Rule
18f-3 for Operation of a Multi-Class
System.(9)
(11) Opinion of Drinker Biddle & Reath LLP that shares
will be validly issued, fully paid and non-assessable
(including consent of such firm).
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<PAGE> 147
(12) Opinion of Drinker Biddle & Reath LLP as to tax
matters and consequences (including consent of
such firm).
(13) (a) Administration Agreement between Registrant
and The Winsbury Service Corporation dated
October 1, 1993 is incorporated herein by
reference to Exhibit (9)(a) of
Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(b) Addendum No. 1 to Administration Agreement
between Registrant and The Winsbury Service
Corporation with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (9)(b) of Post-Effective
Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(c) Addendum No. 2 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. (formerly known as The Winsbury
Service Corporation) with respect to
Investor B Shares of the non-money market
Portfolios dated as of March 1, 1995 is
incorporated herein by reference to Exhibit
(9)(c) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(d) Addendum No. 3 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Short-
Intermediate Municipal Portfolio and
Investor B Shares of the Money Market
Portfolio dated July 10, 1995 is
incorporated herein by reference to Exhibit
(9)(d) of Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.3
(e) Addendum No. 4 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
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(f) Addendum No. 5 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity
Income, National Municipal Bond and
Intermediate Corporate bond (formerly
Short-Intermediate Corporate Bond)
Portfolios dated November 15, 1996.(6)
(g) Addendum No. 6 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Index
and Bond Index Portfolios dated February 14,
1997.(7)
(h) Form of Addendum No. 7 to Administration
Agreement between Registrant and BISYS Fund
Services Ohio, Inc. with respect to the
Growth Equity and Small Cap Equity Index
Portfolios.(9)
(i) Transfer Agency Agreement between Registrant
and The Winsbury Service Corporation dated
October 1, 1993 is incorporated herein by
reference to Exhibit (9)(c) of
Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(j) Addendum No. 1 to Transfer Agency Agreement
between Registrant and The Winsbury Service
Corporation with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (9)(d) of Post-Effective
Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(k) Addendum No. 2 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. (formerly known as The Winsbury
Service Corporation) with respect to
Investor B Shares of the non-money market
Portfolios dated as of March 1, 1995 is
incorporated herein by reference to Exhibit
(9)(g) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(l) Addendum No. 3 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
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<PAGE> 149
Ohio, Inc. with respect to the Short-
Intermediate Municipal Portfolio and
Investor B Shares of the Money Market
Portfolio is incorporated herein by
reference to Exhibit (9)(i) of
Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.
(m) Addendum No. 4 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
(n) Addendum No. 5 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity
Income, National Municipal Bond and
Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond)
Portfolios dated November 15, 1996.(6)
(o) Addendum No. 6 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Index
and Bond Index Portfolios dated February 14,
1997.(7)
(p) Form of Addendum No. 7 to Transfer Agency
Agreement between Registrant and BISYS Fund
Services Ohio, Inc. with respect to the
Growth Equity and Small Cap Equity Index
Portfolios.(9)
(q) Amendment No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated as of September 29,
1995.(1)
(r) Amendment No. 2 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated October 1, 1995.(3)
(s) (1) Administrative Services Plan (Trust
Shares) and Form of Agreement.(9)
(2) Administrative Services Plan
(Institutional Shares) and Form of
Agreement.(9)
(14) (a) Consent of KPMG Peat Marwick LLP.
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(b) Consent of Drinker Biddle & Reath LLP.
(15) None.
(16) Powers of attorney.
(17) (a) Declaration of Registrant pursuant to Rule
24f-2 under the Investment Company Act of
1940.
(b) Forms of Proxy.
(c) Proposed Prospectuses for Investor A Shares
and Trust Shares of Registrant's Growth
Equity Portfolio.
(d) Proposed Statement of Additional Information
for Registrant's Growth Equity Portfolio.
(e) Prospectuses for Investor A Shares and Trust
Shares of Registrant's Government &
Corporate Bond and National Municipal Bond
Portfolios dated March 31, 1997 (as
supplemented May 28, 1997).
(f) Statement of Additional Information for
Registrant's Government & Corporate Bond and
National Municipal Bond Portfolios dated
March 31, 1997 (as revised May 28, 1997).
(g) Prospectus for the Arrow Equity, Fixed
Income and Municipal Income Portfolios dated
November 30, 1996 (as supplemented April 25,
1997).
(h) Combined Statement of Additional Information
for the Arrow Equity, Fixed Income and
Municipal Income Portfolios dated November
30, 1996.
(i) Semi-Annual Report to Shareholders dated
May 31, 1997 for Registrant's Government &
Corporate Bond and National Municipal Bond
Portfolios.
(j) Annual Report to Shareholders dated November
30, 1996 for Registrant's Government &
Corporate Bond and National Municipal Bond
Portfolios.
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<PAGE> 151
(k) Semi-Annual Report dated March 31, 1997 for
Arrow Funds' Equity, Fixed Income and
Municipal Income Portfolios.
(l) Annual Report dated September 30, 1996 for
Arrow Funds' Equity, Fixed Income and
Municipal Income Portfolios.
1. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 2, 1996.
2. Filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice on
January 28, 1997.
3. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on February 28, 1996.
4. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 35 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 28, 1996.
5. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 36 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on October 8, 1996.
6. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 30, 1997.
7. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 38 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 31, 1997.
8. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 39 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on May 28, 1997.
9. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 40 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on June 18, 1997.
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<PAGE> 152
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by
any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act of 1933, as
amended, the reoffering prospectus will contain the
information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of
an amendment to the registration statement and will not be
used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a
new registration statement for the securities offered therein,
and the offering of the securities at that time shall be
deemed to be the initial bona fide offering of them.
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<PAGE> 153
SIGNATURES
As required by the Securities Act of 1933, as amended, this
Registration Statement has been signed on behalf of the Registrant, in the City
of St. Louis, State of Missouri, on the 8th day of August, 1997.
THE ARCH FUND(R), INC.
Registrant
/s/Jerry V. Woodham
------------------------------------
President
As required by the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jerry V. Woodham Chairman of the August 8, 1997
- ----------------------------- Board and President
Jerry V. Woodham
*/s/ James C. Jacobsen Director August 8, 1997
- -----------------------------
James C. Jacobsen
*/s/ Joseph J. Hunt Director August 8, 1997
- -----------------------------
Joseph J. Hunt
*/s/ Robert M. Cox, Jr. Director August 8, 1997
- -----------------------------
Robert M. Cox, Jr.
*/s/ Lyle L. Meyer Director August 8, 1997
- -----------------------------
Lyle L. Meyer
*/s/ Ronald D. Winney Director & Treasurer August 8, 1997
- -----------------------------
Ronald D. Winney
*By /s/ Jerry V. Woodham
--------------------------
Jerry V. Woodham
Attorney-in-fact
</TABLE>
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<PAGE> 154
N-14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
(1)(t) Articles Supplementary to Registrant's Articles of
Incorporation dated June 17, 1997.
(11) Opinion of Drinker Biddle & Reath LLP that shares will be
validly issued, fully paid and non-assessable (including
consent of such firm).
(12) Opinion of Drinker Biddle & Reath LLP as to tax matters and
consequences (including consent of such firm).
(14)(a) Consent of KPMG Peat Marwick LLP.
(14)(b) Consent of Drinker Biddle & Reath LLP.
(16) Powers of attorney.
(17)(a) Declaration of Registrant pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
(17)(b) Forms of Proxy.
(17)(c) Proposed Prospectuses for Investor A Shares and Trust Shares
of Registrant's Growth Equity Portfolio.
(17)(d) Proposed Statement of Additional Information for Registrant's
Growth Equity Portfolio.
(17)(e) Prospectuses for Investor A Shares and Trust Shares of
Registrant's Government & Corporate Bond and National
Municipal Bond Portfolios dated March 31, 1997 (as
supplemented May 28, 1997).
(17)(f) Statement of Additional Information for Registrant's
Government & Corporate Bond and National Municipal Bond
Portfolios dated March 31, 1997 (as revised May 28, 1997).
</TABLE>
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<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
(17)(g) Prospectus for the Arrow Equity, Fixed Income and Municipal
Income Portfolios dated November 30, 1996 (as supplemented
April 25, 1997).
(17)(h) Combined Statement of Additional Information for the Arrow
Equity, Fixed Income and Municipal Income Portfolios dated
November 30, 1996.
(17)(i) Semi-Annual Report to Shareholders dated May 31, 1997 for
Registrant's Government & Corporate Bond and National
Municipal Bond Portfolios.
(17)(j) Annual Report to Shareholders dated November 30, 1996 for
Registrant's Government & Corporate Bond and National
Municipal Bond Portfolios.
(17)(k) Semi-Annual Report dated March 31, 1997 for Arrow Funds'
Equity, Fixed Income and Municipal Income Portfolios.
(17)(l) Annual Report dated September 30, 1996 for Arrow Funds'
Equity, Fixed Income and Municipal Income Portfolios.
</TABLE>
C-16
<PAGE> 1
EXHIBIT 1(t)
ARTICLES SUPPLEMENTARY
OF
THE ARCH FUND, INC.
THE ARCH FUND, INC., a Maryland corporation having its
principal office in Maryland in the City of Baltimore, Maryland (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
Class F Common Stock-Special Series 1
FIRST: Pursuant to Section 2-208 of the Maryland General
Corporation Law, the Board of Directors of the Corporation has classified Twenty
Million (20,000,000) shares of authorized, unissued and unclassified capital
stock of the Corporation (par value One Mill ($0.001) per share) as Class F
Common Stock-Special Series 1 (par value One Mill ($0.001) per share), such that
there now exists a total of Thirty-Five Million (35,000,000) shares of capital
stock of the Corporation classified as Class F Common Stock-Special Series 1,
pursuant to the following resolution unanimously adopted by the Board of
Directors of the Corporation on June 17, 1997:
RESOLVED, that pursuant to Article VI of the
Corporation's Articles of Incorporation (the "Charter"), Twenty Million
(20,000,000) authorized, unissued and unclassified shares of capital
stock of the Corporation (of the par value of One Mill ($0.001) per
share and of the aggregate par value of Twenty Thousand Dollars
($20,000)) be, and hereby are, divided into and classified as Class F
Common Stock-Special Series 1, with all of the preferences, conversion
and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption set
forth in the Charter of the Corporation with respect to Class F Common
Stock-Special Series 1.
<PAGE> 2
General
SECOND: The shares of capital stock of the Corporation
classified pursuant to the resolution set forth in Article FIRST of these
Articles Supplementary have been classified by the Corporation's Board of
Directors under the authority contained in the Charter of the Corporation.
THIRD: These Articles Supplementary do not increase the
authorized number of shares of the Corporation or the aggregate par value
thereof. The total number of shares of capital stock which the Corporation is
presently authorized to issue remains Seven Billion (7,000,000,000) shares (of
the par value of One Mill ($.001) each and of the aggregate par value of Seven
Million Dollars ($7,000,000)) of Common Stock classified as follows:
<TABLE>
<CAPTION>
Number of Shares
Classification Authorized
-------------- ----------
<S> <C> <C>
Class A 550,000,000
Class A-Special Series 1 1,800,000,000
Class A-Special Series 2 300,000,000
Class A-Special Series 3 50,000,000
Class B 100,000,000
Class B-Special Series 1 1,000,000,000
Class B-Special Series 2 300,000,000
Class C 5,000,000
Class C-Special Series 1 50,000,000
Class C-Special Series 2 20,000,000
Class C-Special Series 3 50,000,000
Class D 5,000,000
Class D-Special Series 1 50,000,000
Class D-Special Series 2 20,000,000
Class D-Special Series 3 50,000,000
Class E 5,000,000
Class E-Special Series 1 15,000,000
Class E-Special Series 2 20,000,000
Class E-Special Series 3 50,000,000
Class F 5,000,000
Class F-Special Series 1 35,000,000
Class F-Special Series 2 20,000,000
Class F-Special Series 3 50,000,000
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Number of Shares
Classification Authorized
-------------- ----------
<S> <C> <C>
Class G 5,000,000
Class G-Special Series 1 15,000,000
Class G-Special Series 2 20,000,000
Class G-Special Series 3 50,000,000
Class H 10,000,000
Class H-Special Series 1 10,000,000
Class H-Special Series 2 10,000,000
Class H-Special Series 3 50,000,000
Class I 25,000,000
Class I-Special Series 1 25,000,000
Class J 50,000,000
Class J-Special Series 1 300,000,000
Class K 25,000,000
Class K-Special Series 1 25,000,000
Class K-Special Series 2 10,000,000
Class L 25,000,000
Class L-Special Series 1 25,000,000
Class L-Special Series 2 10,000,000
Class M 25,000,000
Class M-Special Series 1 50,000,000
Class M-Special Series 2 25,000,000
Class M-Special Series 3 25,000,000
Class N 25,000,000
Class N-Special Series 1 50,000,000
Class N-Special Series 2 25,000,000
Class O 25,000,000
Class O-Special Series 1 50,000,000
Class O-Special Series 2 25,000,000
Class P 25,000,000
Class P - Special Series 1 50,000,000
Class P - Special Series 2 25,000,000
Class Q 25,000,000
Class Q - Special Series 1 50,000,000
Class Q - Special Series 2 25,000,000
Unclassified 1,235,000,000
</TABLE>
IN WITNESS WHEREOF, The ARCH Fund, Inc. has caused these
presents to be signed in its name and on its behalf by its President and its
corporate seal to be hereunto affixed and attested by its Secretary on this 17th
day of June, 1997.
THE ARCH FUND, INC.
[SEAL] By:/s/Jerry V. Woodham
--------------------
Jerry V. Woodham
President
Attest:
/s/W. Bruce McConnell, III
- ---------------------------
W. Bruce McConnel, III
Secretary
-3-
<PAGE> 4
CERTIFICATE
THE UNDERSIGNED, President of THE ARCH FUND, INC., who
executed on behalf of said Corporation the attached Articles Supplementary of
said Corporation, of which this Certificate is made a part, hereby acknowledges,
in the name and on behalf of said Corporation, the attached Articles
Supplementary to be the corporate act of said Corporation, and certifies that to
the best of his knowledge, information and belief the matters and facts set
forth in the attached Articles Supplementary with respect to authorization and
approval are true in all material respects, under the penalties for perjury.
Dated: June 17, 1997 /s/Jerry V. Woodham
--------------------
Jerry V. Woodham
President
<PAGE> 1
EXHIBIT 11
Law Offices
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Telex: 834684
Fax: (215) 988-2757
August 12, 1997
The ARCH Fund, Inc.
3435 Stelzer Road
Columbus, OH 43219
Ladies and Gentlemen:
We have acted as counsel for The ARCH Fund, Inc., a Maryland
corporation ("Arch"), in connection with the following:
(i) the proposed acquisition of substantially all of the
assets and known liabilities of the Fixed Income
Portfolio of Arrow Funds, a Massachusetts business trust
("Arrow"), by the Arch Government & Corporate Bond
Portfolio in exchange for Investor A shares of the Arch
Government & Corporate Bond Portfolio;
(ii) the proposed acquisition of substantially all of the
assets and known liabilities of the Arrow Municipal
Income Portfolio by the Arch National Municipal Bond
Portfolio in exchange for Investor A shares of the Arch
National Municipal Bond Portfolio; and
The aforementioned proposed acquisitions are referred
to herein collectively as the "Reorganization." The Arch
<PAGE> 2
The ARCH Fund, Inc.
August 12, 1997
Page 2
Government & Corporate Bond and National Municipal Bond Portfolios are referred
to herein together as the "Arch Portfolios." This opinion relates to Investor A
shares of common stock of each of the Arch Portfolios (par value $0.001 per
share) (the "Shares") to be issued in the Reorganization and is furnished in
connection with Arch's Registration Statement on Form N-14 under the Securities
Act of 1933, as amended (the "Registration Statement"). (This opinion does not
relate to Investor A shares of the Arch Growth Equity Portfolio inasmuch as
these shares are not registered by the Registration Statement.)
As counsel for Arch, we are familiar with the proceedings
taken by it and to be taken by it in connection with the authorization, issuance
and sale of the Shares. In addition, we have examined the Articles of
Incorporation of Arch, as amended and supplemented, the Restated and Amended
By-Laws of Arch, the Registration Statement registering shares of the
Arch Portfolio and the combined proxy statement/prospectus (the "Proxy
Statement/Prospectus") contained therein, the proceedings of the Board of
Directors of Arch approving the transactions contemplated by the Agreement and
Plan of Reorganization between Arch and Arrow (the "Agreement") and other
factual matters we deemed relevant.
As to questions of fact material to this opinion, we have
relied upon the accuracy of the representations and warranties of the parties to
the Agreement and other documents executed by officers and representatives of
Arch, and upon certificates of public officials. We have not undertaken any
independent investigation or verification of factual matters. Any change in any
law, regulation or interpretation, or any change in the facts, could cause a
change in our opinion.
In our examination, we have assumed that: (i) all documents
submitted to us as originals are authentic, the signatures thereon are genuine
and the persons signing the same were of legal capacity; (ii) all documents
submitted to us as certified or photostatic copies conform to the original
documents and that such originals are authentic; and (iii) all certificates of
public officials upon which we have relied have been duly and properly given and
that any public records reviewed by us are complete. We have further assumed
that, upon its execution and delivery, the Agreement will constitute the legal,
valid and binding obligation of Arrow, enforceable against Arrow in accordance
with its terms.
<PAGE> 3
The ARCH Fund, Inc.
August 12, 1997
Page 3
We have made such examination of law as in our judgment is
necessary and appropriate for the purposes of this opinion. We do not purport to
be experts in the laws of any jurisdiction other than the federal laws of the
United States of America and the laws of the Commonwealth of Pennsylvania. In
rendering the opinion expressed herein, we have relied on an opinion of Venable,
Baetjer and Howard, LLP to the extent that any matter which is the subject of
this opinion is governed by the laws of the State of Maryland.
On the basis of and subject to the foregoing and such other
considerations as we deem relevant, we are of the opinion that the Shares of the
Arch Portfolios, when issued pursuant to the Agreement and in the manner
referred to in the Registration Statement, will constitute validly issued
shares, fully paid and non-assessable, under the laws of the State of Maryland.
The opinion expressed in this letter is solely for the use of
Arch, and this opinion may not be referred to or used for any other purpose or
relied on by any other persons without our prior written approval. The opinion
expressed in this letter is limited to the matters set forth in this letter, and
no other opinions should be inferred beyond the matters expressly stated.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name in the Proxy
Statement/Prospectus and statement of additional information constituting parts
thereof.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
<PAGE> 1
Law Offices
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Telex: 834684
Fax: (215) 988-2757
August 6, 1997
The Arch Fund, Inc.
3435 Stelzer Road
Columbia, OH 43219-3035
Arrow Funds
19th Floor
1001 Liberty Avenue
Federated Investors Towers
Pittsburgh, PA 15222-3779
Re: Agreement and Plan of Reorganization
by and between Arrow Funds and The Arch Fund, Inc.
Dear Sirs and Mesdames:
We have been asked to give our opinion, in accordance with the
above proposed Agreement and Plan of Reorganization (the "Plan"), by and between
Arrow Funds ("Arrow") and the Arch Fund, Inc. ("Arch"), as to certain Federal
income tax consequences of the transactions contemplated in the Plan.
Background
Arrow consists of three investment portfolios: Fixed Income
Portfolio, Municipal Income Portfolio and Equity Portfolio (individually, a
"Transferor Fund" and collectively, the "Transferor Funds"). Among Arch's
portfolios are two existing investment portfolios, the Government & Corporate
Bond Portfolio and the National Municipal Bond Portfolio, and one newly-
organized portfolio, the Growth Equity Portfolio (individually, a "Surviving
Fund" and collectively, the "Surviving Funds"). Arrow
<PAGE> 2
The Arch Fund, Inc.
Arrow Funds
August 6, 1997
Page 2
and Arch are open-end management investment companies registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company Act
of 1940, as amended.
At the Closing (as defined in the Plan), it is contemplated
that each Transferor Fund will transfer all of its assets and liabilities to a
corresponding Surviving Fund in exchange for shares of the Surviving Fund. Arch
will then distribute the shares of each Surviving Fund to the shareholders of
the corresponding Transferor Fund in exchange for all outstanding shares of the
Transferor Fund, and the existence of the Transferor Funds will be terminated.
All of the above steps constitute the "Transactions." After the Transactions,
each Surviving Fund will continue the investment operations of the corresponding
Transferor Fund.
For purposes of this opinion, we have relied on certain
written representations of officers of Arrow and Arch, copies of which are
attached hereto, and have assumed such representations to be true. We have also
assumed that the Plan substantially in the form included as an exhibit in the
Combined Proxy Statement/Prospectus ("Proxy Statement"), a draft of which is
part of the Registration Statement (the "Registration Statement") being filed
this day with the SEC on Form N-14, will be duly authorized by the parties and
approved by the shareholders of each Transferor Fund, and the appropriate
documents will be filed with the appropriate government agencies.
Conclusions
Based upon the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury Department regulations in effect as of the date
hereof, current published administrative positions of the Internal Revenue
Service contained in revenue rulings and procedures, and judicial decisions, and
upon the assumptions and representations referred to herein and the documents
provided to us by you (including the Proxy Statement and the Plan), it is our
opinion for Federal income tax purposes that:
<PAGE> 3
The Arch Fund, Inc.
Arrow Funds
August 6, 1997
Page 3
(i) the transfer by each Transferor Fund of all of its assets
and liabilities to the corresponding Surviving Fund in exchange for shares of
the corresponding Surviving Fund, and the distribution of said shares to the
shareholders of the Transferor Fund, as provided in the Plan, will constitute a
reorganization within the meaning of section 368(a)(1)(C), 368(a)(1)(D) or
368(a)(1)(F) of the Code, and each such Fund will be "a party to the
reorganization" within the meaning of section 368(b) of the Code;
(ii) in accordance with sections 361(a), 361(c)(1) and 357(a)
of the Code, no gain or loss will be recognized by any Transferor Fund as a
result of the Transactions;
(iii) in accordance with section 1032(a) of the Code, no gain
or loss will be recognized by any Surviving Fund as a result of the
Transactions;
(iv) in accordance with section 354(a)(1) of the Code, no gain
or loss will be recognized by the shareholders of any Transferor Fund on the
distribution to them by the Transferor Fund of shares of the Surviving Fund in
exchange for their shares of the Transferor Fund;
(v) in accordance with section 358(a)(1) of the Code, the
aggregate basis of the shares of the Surviving Fund received by each shareholder
of a Transferor Fund will be the same as the aggregate basis of the
shareholder's Transferor Fund shares exchanged therefor in the Transactions;
(vi) in accordance with section 362(b) of the Code, the basis
of the assets received by each Surviving Fund in the Transactions will be the
same as the basis of such assets in the hands of the corresponding Transferor
Fund immediately before the Transactions;
(vii) in accordance with section 1223(1) of the Code, a
Transferor Fund shareholder's holding period for shares of the Surviving Fund
will be determined by including the period for which the shareholder held the
shares of the Transferor Fund exchanged therefor, provided that the shareholder
held such shares of the Transferor Fund as a capital asset;
<PAGE> 4
The Arch Fund, Inc.
Arrow Funds
August 6, 1997
Page 4
(viii) in accordance with section 1223(2) of the Code, the
holding period of each Surviving Fund with respect to the assets acquired in the
Transactions will include the period for which such assets were held by the
corresponding Transferor Fund; and
(ix) in accordance with section 381(a) of the Code, each
Surviving Fund will succeed to the tax attributes of the corresponding
Transferor Fund described in section 381(c) of the Code.
This opinion represents our best legal judgment, but it has no
binding effect or official status of any kind, and no assurance can be given
that contrary positions may not be taken by the Internal Revenue Service or a
court concerning the issues. We express no opinion relating to any Federal
income tax matter except on the basis of the facts described above.
Additionally, we express no opinion on the tax consequences under foreign, state
or local laws. In issuing our opinion, we have relied solely upon existing
provisions of the Code, existing and proposed regulations thereunder, and
current administrative positions and judicial decisions. Such laws, regulations,
administrative positions and judicial decisions are subject to change at any
time. Any such change could affect the validity of the opinion set forth above.
Also, future changes in federal income tax laws and the interpretation thereof
can have retroactive effect.
We hereby consent to the filing of this opinion with the SEC
as an exhibit to the Proxy Statement. We also consent to the references to our
firm under the caption "Information Relating to the Proposed Reorganization --
Federal Income Tax Consequences" in the Proxy Statement. This does not
constitute a consent under section 7 of the Securities Act of 1933, and in
consenting to such references to our firm we have not certified any part of the
Registration Statement and do not otherwise come
<PAGE> 5
The Arch Fund, Inc.
Arrow Funds
August 6, 1997
Page 5
within the categories of persons whose consent is required under section 7 or
under the rules and regulations of the SEC issued thereunder.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
SDDH:EMM:JGV
<PAGE> 6
THE ARCH FUND, INC.
3435 Stelzer Road
Columbus, OH 43219-3035
August 6, 1997
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107
Re: Agreement and Plan of Reorganization by and between
Arrow Funds and The Arch Fund, Inc.
Gentlemen:
Arrow Funds ("Arrow") and we have requested your opinion as to
certain Federal income tax matters in connection with the proposed
reorganization (the "Reorganization") of three investment portfolios of Arrow
Funds ("Arrow") (the "Transferor Funds") into two existing investment portfolios
and one newly created investment portfolio of The Arch Fund, Inc. ("Arch") (the
"Surviving Funds") pursuant to the Agreement and Plan of Reorganization (the
"Plan") by and among Arch and Arrow. At the Effective Time of the Reorganization
(as defined in the Plan), it is contemplated that each Transferor Fund will
transfer all of its assets and liabilities to a corresponding Surviving Fund in
exchange for shares of the Surviving Fund. Arch will then distribute the shares
of each Surviving Fund to the shareholders of the corresponding Transferor Fund
in exchange for all outstanding shares of the Transferor Fund, and the existence
of the Transferor Funds will be terminated. All of the above steps constitute
the "Transactions." After the Transactions, each Surviving Fund will continue
the investment operations of the corresponding Transferor Fund. To enable you to
render such opinion, we are furnishing the following representations:
1. Each of the two previously existing investment portfolios,
Government & Corporate Bond Portfolio and National Municipal Bond Portfolio,
qualified as a "regulated investment company" under Part I of Subchapter M of
Subtitle A, Chapter 1, of the Internal Revenue Code of 1986, as amended (the
"Code"), for its most recently ended fiscal year and will so qualify for its
current fiscal year. The newly created investment portfolio, Growth Equity
Portfolio, will qualify as a regulated investment company under Part I of
Subchapter M of Subtitle A of Chapter 1 of the Code.
2. Following the Transactions, each Surviving Fund will
continue the historic business of the corresponding
<PAGE> 7
Transferor Fund or will use a significant portion of the Transferor Fund's
historic business assets in a business.
3. At the time of the Transactions, no Surviving Fund will
have any plan or intention to reacquire any of its shares issued in the
Transactions, except in the ordinary course of business.
4. At the time of the Transactions, no Surviving Fund will
have any plan or intention to sell or otherwise to dispose of any of the assets
of the corresponding Transferor Fund acquired in the Transactions, except for
dispositions made in the ordinary course of business.
5. There is and will be no intercorporate indebtedness between
any Surviving Fund and its corresponding Transferor Fund that was issued,
acquired or will be settled at a discount.
6. No Surviving Fund owns, will own or has owned during the
past five years, directly or indirectly, any stock of the corresponding
Transferor Fund.
7. The Transactions will be accomplished for the purposes set
forth in the Combined Proxy Statement/Prospectus (the "Proxy Statement"), a
draft of which is part of the Registration Statement (the "Registration
Statement") being filed this day with the SEC.
We understand that you will, and expressly authorize you to,
rely upon each of the foregoing representations in rendering your opinion of
even date herewith. We undertake to advise you promptly if we become aware of
any facts or circumstances that would cause any representation that we have
given to be incorrect.
Very truly yours,
THE ARCH FUND, INC.
By: /s/ David Bunstine
------------------
Title: Assistant Secretary
-2-
<PAGE> 8
ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
August 6, 1997
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, PA 19107
Re: Proposed Agreement and Plan of Reorganization by and
between Arrow Funds and The Arch Fund, Inc.
Gentlemen:
The Arch Fund, Inc. ("Arch") and we have requested your
opinion as to certain Federal income tax matters in connection with the proposed
reorganization (the "Reorganization") of three investment portfolios of Arrow
Funds ("Arrow") (the "Transferor Funds") into two existing investment portfolios
and one newly created Arch investment portfolio (the "Surviving Funds") pursuant
to the above-referenced Agreement and Plan of Reorganization (the "Plan") by and
among Arch and Arrow. At the Closing (as defined in the Plan), it is
contemplated that each Transferor Fund will transfer all of its assets and
liabilities to a corresponding Surviving Fund in exchange for shares of the
Surviving Fund. Arch will then distribute the shares of each Surviving Fund to
the shareholders of the corresponding Transferor Fund in exchange for all
outstanding shares of the Transferor Fund, and the existence of the Transferor
Funds will be terminated. All of the above steps constitute the "Transactions."
After the Transactions, each Surviving Fund will continue the investment
operations of the corresponding Transferor Fund. To enable you to render such
opinion, we are furnishing the following representations:
1. Each of the Transferor Funds qualified as a "regulated
investment company" under Part I of Subchapter M of Subtitle A, Chapter 1, of
the Internal Revenue Code of 1986, as amended (the "Code"), for its most
recently ended fiscal year and will so qualify for its current fiscal year.
2. Each Transferor Fund will transfer to the corresponding
Surviving Fund assets consisting of at least 90% of the fair market value of the
Transferor Fund's net assets and at least 70% of the fair market value of its
gross assets immediately prior to the Transactions. For purposes of this
<PAGE> 9
assumption, all of the following shall be considered as assets of such
Transferor Fund held immediately prior to the Transactions: (a) amounts used by
the Transferor Fund to pay its expenses in connection with the Transactions and
(b) all amounts used to make redemptions of or distributions on such Transferor
Fund's shares (except for redemptions in the ordinary course of its business, as
required by section 22(e) of the Investment Company Act of 1940, as amended,
pursuant to a demand for redemption by a shareholder of the Transferor Fund, and
distributions of net investment income and net capital gains, other than net
capital gains resulting from sales of assets for the purpose of satisfying
investment objectives of the Surviving Fund, if any, that differ from the
existing investment objectives of the Transferor Fund).
3. Each Transferor Fund, as promptly as practicable, will
distribute the Surviving Fund shares received in the Transactions to its
shareholders in complete liquidation of the Transferor Fund and, having made
such distributions, will take all necessary steps to terminate its existence.
4. Prior to the Transactions, each Transferor Fund will
continue its historic business within the meaning of Treasury Regulations
section 1.368-1(d) and will not dispose of more than fifty percent (50%) of the
fair market value of its assets for the purpose of satisfying investment
objectives of the corresponding Surviving Fund, if any, that differ from the
existing investment objectives of the Transferor Fund.
5. At the time of the Transactions, the adjusted income tax
basis and the fair market value of the assets to be transferred by each
Transferor Fund to the corresponding Surviving Fund will each equal or exceed
the sum of the liabilities to be assumed by such Surviving Fund or to which such
transferred assets are subject.
6. At the time of the Transactions, there will be no plan or
intention by the shareholders of any Transferor Fund who own five percent (5%)
or more of the Transferor Fund's stock and, to the best of the knowledge of the
management of Trust, no plan or intention on the part of the remaining
shareholders of the Transferor Fund, to sell, exchange or otherwise dispose of a
number of shares of the corresponding Surviving Fund's stock to be received in
the Transactions that would reduce the Transferor Fund shareholders' ownership
of Surviving Fund stock to a number of shares having a value, as of the time of
the Transactions, of less than fifty percent (50%) of the value of all of the
formerly outstanding stock of the Transferor Fund immediately prior to the
Transactions. For purposes of this assumption, (a) shares of the Transferor Fund
surrendered by dissenters will be treated as outstanding Transferor Fund stock
immediately prior to the Transactions, and (b) shares of the Transferor Fund and
the
-2-
<PAGE> 10
Surviving Fund held by Transferor Fund shareholders and otherwise sold, redeemed
or disposed of in anticipation of the Transactions, or subsequent to the
Transactions pursuant to a plan or intention that existed at the time of the
Transactions, also will be taken into account.
7. No Transferor Fund is or will be under the jurisdiction of
a court in a case under Title 11 of the United States Code or a receivership,
foreclosure or similar proceeding in any Federal or State court.
8. The liabilities of each Transferor Fund that will be
assumed by the corresponding Surviving Fund and the liabilities, if any, to
which the transferred assets will be subject were incurred by the Transferor
Fund in the ordinary course of its business.
9. The Transactions have been proposed for the purposes set
forth in the Combined Proxy Statement/Prospectus, a draft of which is part of
the Registration Statement being filed this day with the SEC.
We understand that you will, and expressly authorize you to,
rely upon each of the foregoing representations in rendering your opinion of
even date herewith. We undertake to advise you promptly if we become aware of
any facts or circumstances that would cause any representation that we have
given to be incorrect.
Very truly yours,
ARROW FUNDS
By: /s/ Charles L. Davis, Jr.
------------------------
Title: Vice President &
Asst. Treasurer
-3-
<PAGE> 1
EXHIBIT 14(a)
AUDITORS' CONSENT
The Board of Directors of
The ARCH Fund,Inc.:
We consent to the use of our reports incorporated by reference dated November 6,
1996 for the Arrow Funds as of September 30, 1996 and for the periods indicted
therein and dated January 22, 1997 for The ARCH Fund, Inc. as of November 30,
1996 and for the periods indicted therein and to the references to our firm
under the headings "Financial Highlights" in the Prospectuses and "Independent
Auditors" in the Statements of Additional Information incorporated by reference
herein as well as the reference to our firm under the heading "Financial
Statements" included herein.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Columbus, Ohio
August 12, 1997
<PAGE> 1
Exhibit 14(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references
to our Firm included in the Registration Statement on Form N-14 under the
Securities Act of 1933 and the Investment Company Act of 1940, respectively, of
the Arch Fund, Inc. This consent does not constitute a consent under Section 7
of the Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or under the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/DRINKER BIDDLE & REATH LLP
-----------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
August 12, 1997
<PAGE> 1
EXHIBIT 16
THE ARCH FUND, INC.
POWER OF ATTORNEY
Robert M. Cox, Jr., whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and each of
them, his true and lawful attorney to execute in his name, place and stead, in
his capacity as director or officer, or both, of The Arch Fund, Inc. (the
"Fund"), the Registration Statement of the Fund on Form N-14 pertaining to the
Agreement and Plan of Reorganization between the Fund and Arrow Funds, any
amendments thereto, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission;
and either of said attorneys shall have power to act with or without the other
of said attorneys and shall have full power of substitution and re-substitution;
and either of said attorneys shall have full power and authority to do and
perform in the name and on the behalf of the undersigned director and/or
officer of the Fund, in any and all capacities, every act whatsoever requisite
or necessary to be done in the premises, as fully and to all intents and
purposes as the undersigned director and/or officer of the Fund might or could
do in person, said acts of said attorneys being hereby ratified and approved.
/s/ Robert M. Cox, Jr.
-----------------------
Robert M. Cox, Jr.
Date: July 26, 1997
<PAGE> 2
THE ARCH FUND, INC.
POWER OF ATTORNEY
Joseph J. Hunt, whose signature appears below, does hereby constitute
and appoint Jerry V. Woodham and W. Bruce McConnel, III, and each of them, his
true and lawful attorney to execute in his name, place and stead, in his
capacity as director or officer, or both, of The Arch Fund, Inc. (the "Fund"),
the Registration Statement of the Fund on Form N-14 pertaining to the Agreement
and Plan of Reorganization between the Fund and Arrow Funds, any amendments
thereto, and all instruments necessary or incidental in connection therewith,
and to file the same with the Securities and Exchange Commission; and either of
said attorneys shall have power to act with or without the other of said
attorneys and shall have full power of substitution and re-substitution; and
either of said attorneys shall have full power and authority to do and perform
in the name and on the behalf of the undersigned director and/or officer of the
Fund, in any and all capacities, every act whatsoever requisite or necessary to
be done in the premises, as fully and to all intents and purposes as the
undersigned director and/or officer of the Fund might or could do in person,
said acts of said attorneys being hereby ratified and approved.
/s/ Joseph J. Hunt
-----------------------
Joseph J. Hunt
Date: July 24, 1997
<PAGE> 3
THE ARCH FUND, INC.
POWER OF ATTORNEY
James C. Jacobsen, whose signature appears below, does hereby constitute
and appoint Jerry V. Woodham and W. Bruce McConnel, III and each of them, his
true and lawful attorney to execute in his name, place and stead, in his
capacity as director or officer, or both, of The Arch Fund, Inc. (the "Fund"),
the Registration Statement of the Fund on Form N-14 pertaining to the Agreement
and Plan of Reorganization between the Fund and Arrow Funds, any amendments
thereto, and all instruments necessary or incidental in connection therewith,
and to file the same with the Securities and Exchange Commission; and either of
said attorneys shall have power to act with or without the other of said
attorneys and shall have full power of substitution and re-substitution; and
said attorneys shall have full power and authority to do and perform in the name
and on the behalf of the undersigned director and/or officer of the Fund, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as the undersigned
director and/or officer of the Fund might or could do in person, said acts of
said attorneys being hereby ratified and approved.
/s/ James C. Jacobsen
------------------------
James C. Jacobsen
Date: July 24, 1997
<PAGE> 4
THE ARCH FUND, INC.
POWER OF ATTORNEY
Lyle L. Meyer, whose signature appears below, does hereby constitute and
appoint Jerry V. Woodham and W. Bruce McConnel, III, and each of them, his true
and lawful attorney to execute in his name, place and stead, in his capacity as
director or officer, or both, of The Arch Fund, Inc. (the "Fund"), the
Registration Statement of the Fund on Form N-14 pertaining to the Agreement and
Plan of Reorganization between the Fund and Arrow Funds, any amendments thereto,
and all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and either of said
attorneys shall have power to act with or without the other of said attorneys
and shall have full power of substitution and re-substitution; and either of
said attorneys shall have full power and authority to do and perform in the name
and on the behalf of the undersigned director and/or officer of the Fund, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as the undersigned
director and/or officer of the Fund might or could do in person, said acts of
said attorney being hereby ratified and approved.
/s/ Lyle L. Meyer
---------------------------
Lyle L. Meyer
Date: July 24, 1997
<PAGE> 5
THE ARCH FUND, INC.
POWER OF ATTORNEY
Ronald D. Winney, whose signature appears below, does hereby constitute
and appoint Jerry V. Woodham and W. Bruce McConnel, III, and each of them, his
true and lawful attorney to execute in his name, place and stead, in his
capacity as director or officer, or both, of The Arch Fund, Inc. (the "Fund"),
the Registration Statement of the Fund on Form N-14 pertaining to the Agreement
and Plan of Reorganization between the Fund and Arrow Funds, any amendments
thereto, and all instruments necessary or incidental in connection therewith,
and to file the same with the Securities and Exchange Commission; and either of
said attorneys shall have power to act thereunder with or without the other of
said attorneys and shall have full power of substitution and re-substitution;
and either of said attorneys shall have full power and authority to do and
perform in the name and on the behalf of the undersigned director and/or
officer of the Fund, in any and all capacities, every act whatsoever requisite
or necessary to be done in the premises, as fully and to all intents and
purposes as the undersigned director and/or officer of the Fund might or could
do in person, said acts of said attorney being hereby ratified and approved.
/s/ Ronald D. Winney
---------------------------
Ronald D. Winney
Date: July 28, 1997
<PAGE> 6
THE ARCH FUND, INC.
POWER OF ATTORNEY
Jerry V. Woodham, whose signature appears below, does hereby constitute
and appoint W. Bruce McConnel, III, his true and lawful attorney to execute in
his name, place and stead, in his capacity as director or officer, or both, of
The Arch Fund, Inc. (the "Fund"), the Registration Statement of the Fund on Form
N-14 pertaining to the Agreement and Plan of Reorganization between the Fund and
Arrow Funds, any amendments thereto, and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorney shall have full power and authority to do and
perform in the name and on the behalf of the undersigned director and/or officer
of the Fund, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises, as fully and to all intents and purposes
as the undersigned director and/or officer of the Fund might or could do in
person, said acts of said attorney being hereby ratified and approved.
/s/ Jerry V. Woodham
---------------------------
Jerry V. Woodham
Date: July 23, 1997
<PAGE> 1
EXHIBIT 17(a)
As filed with the Securities and Exchange Commission on June 18, 1997
Registration No. 2-79285/811-3567
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
POST-EFFECTIVE AMENDMENT NO. 40
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
AMENDMENT NO. 41
THE ARCH FUND, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 551-3731
W. BRUCE MCCONNEL, III, Esq.
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Jon W. Bilstrom, Esq.
Mercantile Bank of St. Louis N.A.
One Mercantile Center
8th and Washington Streets
St. Louis, MO 63101
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/x/ 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of shares under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for the fiscal year ended November 30, 1996
on January 28, 1997. Registrant continues its election to register an indefinite
number of shares of beneficial interest pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended.
<PAGE> 2
THIS POST-EFFECTIVE AMENDMENT IS BEING FILED SOLELY IN ORDER TO
REGISTER SHARES OF TWO NEW INVESTMENT PORTFOLIOS, I.E., THE SMALL CAP EQUITY
INDEX PORTFOLIO AND THE GROWTH EQUITY PORTFOLIO. ACCORDINGLY, THE PROSPECTUSES
AND STATEMENTS OF ADDITIONAL INFORMATION FOR THE TREASURY MONEY MARKET
PORTFOLIO, MONEY MARKET PORTFOLIO, TAX-EXEMPT MONEY MARKET PORTFOLIO, U.S.
GOVERNMENT SECURITIES PORTFOLIO, INTERMEDIATE CORPORATE BOND PORTFOLIO, BOND
INDEX PORTFOLIO, GOVERNMENT & CORPORATE BOND PORTFOLIO, SHORT-INTERMEDIATE
MUNICIPAL PORTFOLIO, MISSOURI TAX-EXEMPT BOND PORTFOLIO, NATIONAL MUNICIPAL BOND
PORTFOLIO, EQUITY INCOME PORTFOLIO, EQUITY INDEX PORTFOLIO, GROWTH & INCOME
EQUITY PORTFOLIO, SMALL CAP EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO,
BALANCED PORTFOLIO AND KANSAS TAX-EXEMPT BOND PORTFOLIO ARE NOT INCLUDED IN THIS
FILING.
<PAGE> 3
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1982
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY [X]
ACT OF 1940
THE ARCH FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NO. 6, THE COMMONS
3512 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (800) 441-7379
W. BRUCE MCCONNEL, III
DRINKER BIDDLE & REATH
1100 PHILADELPHIA NATIONAL BANK BUILDING
PHILADELPHIA, PA 19107
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
KENNETH J. BIALKIN
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(COUNSEL FOR THE DISTRIBUTOR)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As Soon as Practicable after the
Effective Date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===================================================================================================================
PROPOSED
MAXIMUM
AMOUNT OFFERING AMOUNT OF
TITLE OF SECURITIES BEING PRICE PER REGISTRATION
BEING REGISTERED REGISTERED UNIT FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A and Class B Shares
of Common Stock ($.001
par value)........ Indefinite $1 $500*
===================================================================================================================
* Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of 1940, Registrant hereby elects to
register an indefinite number of shares of Class A and Class B Common Stock.
===================================================================================================================
</TABLE>
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 1
EXHIBIT 17(b)
ARROW FUNDS
EQUITY PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS
("ARROW") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED
INVESTORS TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA
15222-3779 ON NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND
EACH OF THEM, WITH FULL POWER OF SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO
VOTE AT THE ABOVE-STATED SPECIAL MEETING, AND AT ALL ADJOURNMENTS OR
POSTPONEMENTS THEREOF, ALL SHARES OF BENEFICIAL INTEREST EVIDENCING INTERESTS IN
THE EQUITY PORTFOLIO HELD OF RECORD BY THE UNDERSIGNED ON , 1997, THE
RECORD DATE FOR THE MEETING, UPON THE FOLLOWING MATTERS AND UPON ANY OTHER
MATTER THAT MAY COME BEFORE THE MEETING, IN THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED
HEREON AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING
AUTHORITY TO VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
EQUITY PORTFOLIO
VOTE ON PROPOSAL
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS AND LIABILITIES OF ARROW'S EQUITY PORTFOLIO (THE "ARROW
PORTFOLIO") TO ARCH'S GROWTH EQUITY PORTFOLIO (THE "ARCH PORTFOLIO") IN
EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO; (b) THE DISTRIBUTION OF THE
ARCH PORTFOLIO'S SHARES SO RECEIVED TO SHAREHOLDERS OF THE ARROW
PORTFOLIO; AND (c) THE TERMINATION UNDER STATE LAW OF ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME
BY AUTHORIZED PERSON.
- ------------------------ ---------------------------------
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
<PAGE> 2
ARROW FUNDS
FIXED INCOME PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS
("ARROW") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED
INVESTORS TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA
15222-3779 ON NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND
EACH OF THEM, WITH FULL POWER OF SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO
VOTE AT THE ABOVE-STATED SPECIAL MEETING, AND AT ALL ADJOURNMENTS OR
POSTPONEMENTS THEREOF, ALL SHARES OF BENEFICIAL INTEREST EVIDENCING INTERESTS IN
THE FIXED INCOME PORTFOLIO HELD OF RECORD BY THE UNDERSIGNED ON ,
1997, THE RECORD DATE FOR THE MEETING, UPON THE FOLLOWING MATTERS AND UPON ANY
OTHER MATTER THAT MAY COME BEFORE THE MEETING, IN THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED
HEREON AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING
AUTHORITY TO VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
FIXED INCOME PORTFOLIO
VOTE ON PROPOSAL
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS AND LIABILITIES OF ARROW'S FIXED INCOME PORTFOLIO (THE
"ARROW PORTFOLIO") TO ARCH'S GOVERNMENT & CORPORATE BOND PORTFOLIO (THE
"ARCH PORTFOLIO") IN EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO; (b) THE
DISTRIBUTION OF THE ARCH PORTFOLIO'S SHARES SO RECEIVED TO SHAREHOLDERS
OF THE ARROW PORTFOLIO; AND (c) THE TERMINATION UNDER STATE LAW OF
ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME
BY AUTHORIZED PERSON.
- ------------------------ ---------------------------------
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
<PAGE> 3
ARROW FUNDS
MUNICIPAL INCOME PORTFOLIO
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF ARROW FUNDS
("ARROW") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT FEDERATED
INVESTORS TOWER, 19TH FLOOR, 1001 LIBERTY AVENUE, PITTSBURGH, PENNSYLVANIA
15222-3779 ON NOVEMBER 12, 1997 AT 2:00 P.M. EASTERN TIME.
THE UNDERSIGNED HEREBY APPOINTS AND , AND
EACH OF THEM, WITH FULL POWER OF SUBSTITUTION, AS PROXIES OF THE UNDERSIGNED TO
VOTE AT THE ABOVE-STATED SPECIAL MEETING, AND AT ALL ADJOURNMENTS OR
POSTPONEMENTS THEREOF, ALL SHARES OF BENEFICIAL INTEREST EVIDENCING INTERESTS IN
THE MUNICIPAL INCOME PORTFOLIO HELD OF RECORD BY THE UNDERSIGNED ON ,
1997, THE RECORD DATE FOR THE MEETING, UPON THE FOLLOWING MATTERS AND UPON ANY
OTHER MATTER THAT MAY COME BEFORE THE MEETING, IN THEIR DISCRETION.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED
HEREON AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING
AUTHORITY TO VOTE "FOR" PROPOSAL 1.
TO VOTE MARK AN X IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
MUNICIPAL INCOME PORTFOLIO
VOTE ON PROPOSAL
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. PROPOSAL TO APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION BETWEEN
ARROW AND THE ARCH FUND, INC. ("ARCH") AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS AND LIABILITIES OF ARROW'S MUNICIPAL INCOME PORTFOLIO
(THE "ARROW PORTFOLIO") TO ARCH'S NATIONAL MUNICIPAL BOND PORTFOLIO
(THE "ARCH PORTFOLIO") IN EXCHANGE FOR SHARES OF THE ARCH PORTFOLIO;
(b) THE DISTRIBUTION OF THE ARCH PORTFOLIO'S SHARES SO RECEIVED TO
SHAREHOLDERS OF THE ARROW PORTFOLIO; AND (c) THE TERMINATION UNDER
STATE LAW OF ARROW.
ITEM 2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF
A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME
BY AUTHORIZED PERSON.
- ------------------------ ---------------------------------
SIGNATURE DATE SIGNATURE (JOINT OWNERS) (DATE)
<PAGE> 1
Exhibit 17(c)
THE ARCH FAMILY
OF MUTUAL FUNDS
INVESTOR SHARES
GROWTH EQUITY PORTFOLIO
PROSPECTUS DATED ___________, 1997
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
Highlights.................................................................. 3
Certain Financial Information............................................... 4
Expense Summary for Investor Shares......................................... 6
Financial Highlights........................................................ 8
Investment Objective, Policies and Risk
Considerations............................................................ 10
Pricing of Shares........................................................... 20
How to Purchase and Redeem Shares........................................... 21
Purchase of Shares................................................. 21
Automatic Investment Program (AIP)................................. 23
Applicable Sales Charges -- Investor A Shares..................... 23
Reduced Sales Charges -- Investor A Shares........................ 25
Applicable Sales Charges -- Investor B Shares..................... 26
Characteristics of Investor A Shares and
Investor B Shares................................................ 28
Factors to Consider When Selecting Investor A
Shares or Investor B Shares..................................... 29
Exchange Privileges................................................ 30
Redemption of Shares............................................... 33
Redemption by Mail................................................. 33
Redemption by Telephone............................................ 33
Automatic Withdrawal Plan (AWP).................................... 34
Purchase of Investor A Shares at Net Asset Value................... 35
Other Exchange or Redemption Information........................... 35
Yields and Total Returns.................................................... 36
Dividends and Distributions................................................. 37
Taxes....................................................................... 38
Management of the Fund...................................................... 39
Other Information Concerning the Fund and its Shares........................ 46
Miscellaneous...................................................... 47
<PAGE> 3
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
INVESTOR A SHARES AND INVESTOR B SHARES
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company that currently offers Shares in eighteen investment portfolios. This
Prospectus describes the Investor A Shares and the Investor B Shares in the ARCH
GROWTH EQUITY PORTFOLIO (the "Portfolio"). Investor A Shares and Investor B
Shares are sold through selected broker/dealers and other financial
intermediaries to individual or institutional customers. Investor A Shares are
sold with a front-end sales charge. Investor B Shares are sold with a contingent
deferred sales charge.
THE ARCH GROWTH EQUITY PORTFOLIO'S investment objective is capital
appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies selected on the basis of assessment
of earnings and the risk and volatility of each company's business. Other
factors, such as product position or market share, will also be considered.
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a
wholly-owned subsidiary of Mercantile Bank National Association ("Mercantile"),
acts as investment adviser for the Portfolio; Mercantile serves as custodian;
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as administrator;
and BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolio that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolio, contained in a Statement of Additional
Information dated _______________, 1997, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. An investor may obtain the Statement of Additional Information
without charge by writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178
or by calling 1-800-452-ARCH (2724).
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other
<PAGE> 4
governmental agency, and are not the obligations of or guaranteed or otherwise
supported by any bank. An investment in the Portfolio involves investment risk,
including possible loss of principal.
____________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_________, 1997
-2-
<PAGE> 5
HIGHLIGHTS
The Fund is an open-end, management investment company (commonly known
as a mutual fund) registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund offers investment opportunities in eighteen
investment portfolios. This Prospectus relates to one of those Portfolios: the
ARCH GROWTH EQUITY PORTFOLIO. In addition, the Fund offers investment
opportunities in the ARCH 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, National Municipal Bond, Equity Income, Equity Index, Growth & Income
Equity, Small Cap Equity, Small Cap Equity Index, International Equity and
Balanced Portfolios, which are described in separate Prospectuses. The Portfolio
represents a separate pool of assets with a different investment objective and
different policies then the Fund's other portfolios (as described below under
"Investment Objective, Policies and Risk Considerations"). MVA serves as
adviser, Mercantile as custodian, BISYS Fund Services Ohio, Inc. as
administrator and BISYS Fund Services as sponsor and distributor. For
information on expenses, fee waivers, and services, see "Certain Financial
Information," "Financial Highlights" and "Management of the Fund."
The following information generally describes the Portfolio and its
investment objective. There can be no assurance that the Portfolio will be able
to achieve its investment objective.
The Portfolio is designed for investors who seek capital appreciation
and who are prepared to accept the risks associated with an investment in equity
securities.
Investors should note that the Portfolio may, subject to its investment
policies and limitations, invest in the securities of foreign issuers, enter
into repurchase agreements and reverse repurchase agreements, make securities
loans, invest in put and call options and futures and options on futures, and
make limited investments in illiquid securities and securities issued by other
investment companies. These investment practices involve investment risks of
varying degrees. For example, the securities of a foreign issuer entail certain
inherent risks, such as future political and economic developments and the
adoption of foreign government restrictions, that might adversely affect the
payment of dividends or principal and interest. Default by a counterparty to a
repurchase agreement or securities lending transaction could expose a Portfolio
to loss because of adverse market action or possible delay in disposing of the
underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by the
-3-
<PAGE> 6
Portfolio will decline below the repurchase price which the Portfolio is
obligated to pay. Purchasing options is a specialized investment technique which
entails a substantial risk of loss of amounts paid as premiums to option
writers. There is no assurance that a liquid market will exist for a particular
futures contract at any particular time. The Portfolio may engage in short-term
trading, which may also involve greater risk and increase the Portfolio's
expenses. See "Investment Objective, Policies and Risk Considerations" below and
the Statement of Additional Information under "Investment Objective and
Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Portfolio also offers the economic
advantages of block trading in securities and the availability of a family of
eighteen mutual funds should an investor's investment goals change.
This Prospectus describes the Investor A Shares and the Investor B
Shares of the Portfolio. Investor A Shares of the Portfolio are sold with a
front-end sales charge. Investor B Shares are sold with a contingent deferred
sales charge. For information on purchasing, exchanging or redeeming Investor A
Shares and Investor B Shares of the Portfolio, please see "How to Purchase and
Redeem Shares" below. For a discussion comparing Investor A Shares and Investor
B Shares, please see "Characteristics of Investor A Shares and Investor B
Shares," and "Factors to Consider When Selecting Investor A Shares or Investor B
Shares" on pages __ and __, respectively.
CERTAIN FINANCIAL INFORMATION
Shares of the Portfolio have been classified into four classes of
Shares -- Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of each class in the Portfolio represent equal, pro rata
interests in the investments held by the Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. See
"Other Information Concerning the Fund and Its Shares," "Management of the Fund
- -- Distribution and Services Plans," and "Management of the Fund -- Custodian
and Transfer Agent" below. As a result of payments for distribution and/or
shareholder administrative servicing fees and certain other operating expenses
that may be made in differing amounts, the net investment income of Trust
Shares, Institutional
-4-
<PAGE> 7
Shares, Investor A Shares and Investor B Shares in the Portfolio can be
expected, at any given time, to be different.
The Portfolio commenced operations on January 4, 1993 as the Arrow
Equity Portfolio, a separate investment portfolio (the "Predecessor Portfolio")
of Arrow Funds, which was organized as a Massachusetts business trust. On
________, 1997, the Predecessor Portfolio was reorganized as a new portfolio of
the Fund. Prior to the reorganization, the Predecessor Portfolio offered and
sold shares of beneficial interests that were similar to the Fund's Investor A
Shares.
-5-
<PAGE> 8
EXPENSE SUMMARY FOR
INVESTOR A AND INVESTOR B SHARES
<TABLE>
<CAPTION>
GROWTH EQUITY
PORTFOLIO
-------------------------
INVESTOR A INVESTOR B
---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases (as a percentage of
offering price) ................ 4.5%(1) NONE
Deferred Sales Charge
(as a percentage of offering
price) ......................... NONE 5.0%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees (net
of fee waivers) ................ .75% .75%
12b-1 Fees, including distribution
and service fees ............... .30% 1.00%
Other Expenses (including
administration fees
and other expenses)
(net of fee waivers and
expense reimbursements)(3),(4) . .25% .25%
---- ----
Total Portfolio Operating
Expenses (net of fee waivers
and expense reimbursements)(5) . 1.30% 2.00%
==== ====
</TABLE>
- ----------
1 Reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges -- Investor A Shares."
2 This amount applies to redemptions during the first year. The deferred
sales charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for
redemptions made during the second through sixth years, respectively.
No deferred sales charge is charged after the sixth year. See "How to
Purchase and Redeem Shares -- Applicable Sales Charge -- Investor B
Shares."
3 Without fee waivers, administration fees would be .20%.
4 Without fee waivers and/or expense reimbursements, Other Expenses and
Total Portfolio Operating Expenses would be .35% and 1.40%,
respectively, for Investor A Shares and .35% and 2.10%, respectively,
for Investor B Shares.
-6-
<PAGE> 9
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the end of
each period:
Growth Equity Portfolio
Investor A Shares(1) $ 58 $ 84
Investor B Shares
Assuming complete redemption
at end of period(2) $ 70 $ 93
Assuming no redemption $ 20 $ 63
</TABLE>
- ----------
1 Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2 Assumes deduction of maximum applicable contingent deferred sales
charge.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of
the Predecessor Portfolio is contained in the Arrow Funds' Annual and
Semi-Annual Reports dated September 30, 1996 and March 31, 1997, respectively,
which may be obtained without charge by contacting the Fund at the address or
telephone number provided on page 1 of this Prospectus.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Investor A Shares
or Investor B Shares will bear directly or indirectly. The information contained
in the table reflects the expenses the Portfolio expects to incur during the
next twelve months on its Investor A and Investor B Shares. For more complete
descriptions of the various costs and expenses, see "Management of the Fund" in
this Prospectus and the Statement of Additional Information. The table and
example have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
Because of the payments for distribution services (12b-1 fees) under
the Distribution and Services Plans as shown in the
-7-
<PAGE> 10
above table, long-term shareholders of Investor A Shares and Investor B Shares
of the Portfolio may pay more than the economic equivalent of the maximum
front-end sales load permitted by the National Association of Securities
Dealers, Inc.
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following table supplements the
Predecessor Portfolio's financial statements, which are contained in the Arrow
Funds' Annual and Semi-Annual Reports dated September 30, 1996 and March 31,
1997, respectively, and incorporated by reference into the Statement of
Additional Information, and sets forth certain historical results for shares of
beneficial interest of the Predecessor Portfolio which were similar to Investor
A Shares of the Fund. The financial statements and the data reported in the
Financial Highlights for the fiscal years ended September 30, 1996, 1995 and
1994 and for the fiscal period ended October 31, 1993 were audited by KPMG Peat
Marwick LLP, independent accountants for the Predecessor Portfolio, whose report
thereon is incorporated by reference into the Statement of Additional
Information. The financial statements and the data reported in the Financial
Highlights for the six-month period ended March 31, 1997 is unaudited.
Further information about the performance of the Predecessor Portfolio
is contained in the Arrow Funds' Annual and Semi-Annual Reports dated September
30, 1996 and March 31, 1997, respectively, which may be obtained without charge
by contacting the Funds at the address or telephone number on page 1 of this
Prospectus.
-8-
<PAGE> 11
PREDECESSOR GROWTH EQUITY FUND
(FOR A SHARE OUTSTANDING THROUGH EACH PERIOD)
<TABLE>
<CAPTION>
Six Months Year Ended September 30,
Ended -----------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993(a)
--------------- ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 15.06 $ 13.80 $ 9.74 $ 10.02 $ 10.00
Income from investment operations
Net investment income 0.06 0.12 0.10 0.07 0.04
Net realized and unrealized
gain (loss) on investments 1.14 1.32 4.05 (0.25) 0.02
------------ ------------ ------------ ------------ ------------
Total from investment operations 1.20 1.44 4.15 (0.18) 0.06
------------ ------------ ------------ ------------ ------------
Less distributions
Distributions from net
investment income (0.05) (0.11) (0.09) (0.07) (0.04)
Distributions from net
realized gain on
investments (1.05) (0.07) -- (0.03) --
------------ ------------ ------------ ------------ ------------
Total distributions (1.10) (0.18) (0.09) (0.10) (0.04)
------------
Net asset value, end of period $ 15.16 $ 15.06 $ 13.80 $ 9.74 $ 10.02
============ ============ ============ ============ ============
Total return(b) 7.98% 10.48% 42.90% (1.84%) 0.60%
Ratios to average net assets
Expenses 1.14%* 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.50%* 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.25%* 0.28% 0.30% 0.28% 0.30%*
Supplemental data
Net assets, end of period
(000 omitted) $ 58,555 $ 55,573 $ 43,708 $ 30,282 $ 31,159
Average commission rate paid(d) $ 0.0905 $ 0.0757 -- -- --
Portfolio turnover 25% 45% 45% 127% 54%
</TABLE>
- ----------
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
-9-
<PAGE> 12
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of the Portfolio, there can be no assurance that it will be able to do
so. The investment objective of the Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Unless otherwise indicated, the investment policies and limitations set forth
below may be changed without shareholder approval, although shareholders will be
notified before any material change in these policies and limitations becomes
effective.
The Portfolio's investment objective is capital appreciation. The
Portfolio seeks to achieve this objective by investing primarily in equity
securities of companies selected on the basis of assessment of earnings and the
risk and volatility of each company's business. Other factors, such as product
position or market share, will also be considered by the Adviser.
The Portfolio invests primarily in equity securities of companies
selected by the Adviser on the basis of traditional research techniques. The
equity securities in which the Portfolio invests are primarily those of middle
to large capitalization issuers whose shares are listed on the New York and
American Stock Exchanges. Company earnings are the primary consideration in
selecting portfolio securities. The Portfolio may invest in preferred stocks,
convertible securities, corporate bonds, debentures, notes, warrants, and put
and call options on stocks, although normally it will invest at least 65% of its
assets in common stocks. The lowest rated debt obligation in which the Portfolio
will invest will be rated Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service, Inc. ("Fitch"). Securities rated Baa or BBB have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
higher rated securities. Downgrades will be evaluated on a case by case basis by
the Adviser. The Adviser will determine whether or not the security continues to
be an acceptable investment. If not, the security will be sold. The applicable
ratings categories are described in Appendix A to the Statement of Additional
Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts. Securities of a foreign issuer may
present greater risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a matter of
practice, the Portfolio will not invest in the securities of a foreign issuer if
any such risk
-10-
<PAGE> 13
appears to the Adviser to be substantial. The Portfolio may not invest more than
5% of its total assets in securities of foreign issuers. For additional
information on the risks of foreign securities, see "Risk Factors" below.
In such proportions as, in the judgment of the Adviser, prevailing
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest in short-term money market instruments, securities issued and/or
guaranteed as to payment of principal and interest by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements.
RISK FACTORS
MARKET RISK. The Portfolio invests primarily in equity securities. As
with other mutual funds that invest primarily in equity securities, the
Portfolio is subject to market risks. That is, the possibility exists that
common stocks will decline over short or even extended periods of time and both
the U.S. and certain foreign equity markets tend to be cyclical, experiencing
both periods when stock prices generally increase and periods when stock prices
generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities held by the Portfolio can be expected to vary inversely to changes in
prevailing interest rates. During periods of declining interest rates, the
market value of investment portfolios comprised primarily of fixed income
securities will tend to increase, and during periods of rising interest rates,
the market value will tend to decrease. Fixed income securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities. Changes in the financial strength of an issuer or changes in the
ratings of any particular security may also offset the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not offset cash income from such securities
but will be reflected in the Portfolio's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
-11-
<PAGE> 14
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and savings and loan
associations and foreign branches of U.S. banks and savings and loan
associations are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks and savings and loan associations.
OTHER APPLICABLE POLICIES
Investment methods described in this Prospectus are among those which
the Portfolio has the power to utilize. Some may be employed on a regular basis;
others may not be used at all. Accordingly, reference to any particular method,
or technique carries no implication that it will be utilized or, if it is, that
it be will successful.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of the Portfolio. The U.S. Government securities in
which the Portfolio invests are either guaranteed or issued by the U.S.
Government, its agencies, or instrumentalities. These securities include, but
are not limited to, direct obligations of the U.S. Treasury such as U.S.
Treasury bills, notes and bonds; notes, bonds, and discount notes issued or
guaranteed by U.S. Government agencies and instrumentalities, supported by the
full faith and credit of the United States; notes, bonds, and discount notes of
U.S. Government agencies or instrumentalities which receive or have access to
federal funding; and notes, bonds, and discount notes of other U.S. Government
instrumentalities supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be
-12-
<PAGE> 15
given that the U.S. Government will provide financial support to other agencies
or instrumentalities, since it is not obligated to do so. These
instrumentalities are supported by the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury; the discretionary
authority of the U.S. Government to purchase certain obligations of an agency or
instrumentality; or the credit of the agency or instrumentality.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above,
the Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
Investment by the Portfolio in commercial paper will consist of issues
that are rated at the time of purchase in highest rating category assigned by
S&P, Moody's or Fitch or, if unrated, deemed to be of comparable quality by the
Adviser at the time of purchase. Commercial paper may include variable and
floating rate instruments. See "Other Applicable Policies -- Variable and
Floating Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits of U.S. or foreign banks and savings
and loan associations (collectively, "banks"), if the bank has capital, surplus
and undivided profits at the time of purchase in excess of $100,000,000 or if
the principal amount of the obligation is insured in full by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the Federal Deposit Insurance Corporation. Although the Portfolio may invest
in obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Investments in the obligations of
foreign banks or foreign branches of U.S. banks will not exceed 25% of the
Portfolio's total assets at the time of purchase.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase
rated or unrated variable and floating rate instruments. These instruments may
include variable rate master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated instruments purchased by the Portfolio will be determined
by the Adviser to be of comparable quality at the time of purchase to rated
instruments that may be purchased. The absence of an active secondary market for
a particular variable or floating rate instrument, however, could make it
difficult for the Portfolio to dispose of an instrument if the issuer were to
-13-
<PAGE> 16
default on its payment obligation. The Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to its investment objective and policies, the Portfolio may agree to
purchase U.S. Government securities or other securities from financial
institutions such as banks and broker-dealers, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will enter into repurchase agreements only with
financial institutions such as banks and broker-dealers that the Adviser
believes to be creditworthy. During the term of any repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price (including accrued
interest). Default by a seller could expose the Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although the Portfolio presently does not intend to enter into repurchase
agreements providing for settlement in more than seven days, the Portfolio has
the authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to its investment policies and
limitations, the Portfolio may borrow funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at an agreed upon date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price which
the Portfolio is obligated to pay. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, the
Portfolio may, from time to time, lend portfolio securities on a short-term
basis or a long-term basis, or both, to broker-dealers, banks or institutional
borrowers pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. Collateral for such loans may include cash or
marketable securities. The collateral must be valued daily and, should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lending Portfolio. By lending its securities, the
Portfolio can increase
-14-
<PAGE> 17
its income by continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when marketable securities
are used as collateral. In accordance with current Securities and Exchange
Commission ("SEC") policies, the Portfolio is currently limiting its securities
lending to one-third of its total assets. Loans are subject to termination by
the Portfolio or the borrower at any time.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Portfolio holds against decreases in value. The
Portfolio may also write covered call options on all or any portion of its
portfolio to generate income. The Portfolio may only write call options on
securities either held in its portfolio, or which it has the right to obtain
without payment of further consideration, or for which it has segregated cash or
liquid securities in the amount of any additional consideration.
The Portfolio may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by the Portfolio are
not traded on an exchange. The Portfolio purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks or
savings associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Portfolio
will not buy call options or write put options, other than to close out open
option positions, without further notification to shareholders.
When the Portfolio writes a call option, it risks not participating in
any rise in the value of the underlying security. In addition, when the
Portfolio purchases puts on financial futures contracts to protect against
declines in prices of portfolio securities, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in its portfolio. This may cause the futures
contract and its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Portfolio may
-15-
<PAGE> 18
lose the purchase price of the put option. Finally, it is not certain that a
secondary market for options will exist at all times. Although the Adviser will
consider liquidity before entering into option transactions, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. The Portfolio's ability to
establish and close out option positions depends on this secondary market.
FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and sell
futures contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions. Futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract agrees
to make delivery of the type of instrument called for in the contract and the
buyer agrees to take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to the differences between the value of
the index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Portfolio may also write options and purchase put options on
futures contracts as a hedge to attempt to protect its portfolio securities
against decreases in value. When the Portfolio writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Portfolio is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Portfolio may also write put options and purchase call options on
futures contracts as a hedge against rising purchase prices of portfolio
securities. The Portfolio will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels existing
at the time it enters into the transactions. When the Portfolio writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if the option is
exercised. As a purchaser of a call option on a futures contract, the Portfolio
is entitled (but not obligated) to purchase a futures contract at a fixed price
at any time during the life of the option.
-16-
<PAGE> 19
The Portfolio may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of margin deposits on
the Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of its total assets. When the Portfolio
purchases futures contracts, an amount of cash and liquid securities, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts are unleveraged. When the Portfolio sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
When the Portfolio uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the securities
in its portfolio. This may cause the futures contract and any related options to
react differently than the portfolio securities to market changes. In addition,
the Adviser could be incorrect in its expectations about the direction or extent
of market factors such as stock price movements. In these events, the Portfolio
may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Portfolio's ability to establish and close out futures and options positions
depends on this secondary market.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Portfolio may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act, which include, subject to certain exceptions, a prohibition on the
Portfolio investing more than 10% of the value of its total assets in such
securities. Investment companies in which the Portfolio may invest may impose
distribution fees as well as other types of commissions or charges. Such charges
will be payable by the Portfolio and, therefore, will be borne indirectly by its
shareholders. The Portfolio will invest in securities issued by other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio securities. See the Statement of Additional
Information under "Investment Objective and Policies -- Securities of Other
Investment Companies."
-17-
<PAGE> 20
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Portfolio purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Portfolio to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market value of the securities
purchased may vary from the purchase prices.
The Portfolio may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may invest in
restricted securities. Restricted securities are any securities in which the
Portfolio may invest pursuant to its investment objective and policies but which
are subject to restriction on resale under federal securities law. The Portfolio
will limit investments in illiquid securities (including certain restricted
securities not determined by the Fund's Board of Directors to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice) to no
more than 15% of its net assets.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. Section 4(2) commercial paper is restricted as to disposition
under federal securities law, and is generally sold to institutional investors,
such as the Portfolio, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolio believes that Section 4(2)
commercial paper and certain other restricted securities, which meet the
criteria for liquidity established by the Fund's Board of Directors, are quite
liquid. Therefore, the Portfolio intends to treat these securities as liquid and
not subject to the investment limitation applicable to illiquid securities. In
addition, because these securities are liquid, the Portfolio will not subject
such securities to the limitation otherwise applicable to restricted securities.
-18-
<PAGE> 21
PORTFOLIO TRANSACTIONS. All orders for transactions in securities or
options on behalf of the Portfolio are placed by the Adviser with broker-dealers
that it selects. To the extent permitted by the 1940 Act and guidelines adopted
by the Fund's Board of Directors, the Portfolio may utilize the Distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and
may be changed only by a vote of a majority of the outstanding Shares of the
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objective and Policies."
1. With respect to 75% of the value of its total assets, the Portfolio
will not purchase securities issued by any one issuer (other than cash, cash
items or securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities and repurchase agreements collateralized by such
securities), if as a result more than 5% of the value of its total assets would
be invested in the securities of that issuer. The Portfolio will not acquire
more than 10% of the outstanding voting securities of any one issuer.
2. The Portfolio will not invest 25% or more of the value of its total
assets in any one industry, provided, however, that the Portfolio may invest
more than 25% of the value of its total assets in cash or certain money market
instruments (including instruments issued by a U.S. branch of a domestic bank or
savings and loan association having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment), securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such securities.
3. The Portfolio will not issue senior securities, except that the
Portfolio may borrow money directly or indirectly through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, and except to the extent that the Portfolio may enter into
futures contracts. The Portfolio will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of its portfolio by
enabling the Portfolio to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
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<PAGE> 22
disadvantageous. The Portfolio will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
4. The Portfolio will not lend any of its assets except portfolio
securities in an amount up to one-third the value of its total assets. The
Portfolio shall not be prevented from purchasing or holding U.S. Government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions where
permitted by the Portfolio's investment objective, policies and limitations.
Except with respect to the Portfolio's policy regarding the borrowing
of money, if a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting solely from a change in
the value of the Portfolio's securities will not constitute a violation of such
limitation.
PRICING OF SHARES
The Portfolio's net asset value per Share is determined by the
Administrator as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on each weekday
with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Securities which are traded on a recognized stock exchange are valued
at the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Investments in debt securities
with remaining maturities of 60 days or less may be valued based upon the
amortized cost method. For further information about valuation of investments,
see "Net Asset Value" in the Statement of Additional Information.
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<PAGE> 23
The public offering price for each class of Shares is based upon net
asset value per Share plus, in the case of Investor A Shares, a front-end sales
charge. A class will calculate its net asset value per Share by adding the value
of the Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of shares, the net asset value per Share
of Investor B Shares of the Portfolio will generally be lower than the net asset
value per Share of Trust, Institutional or Investor A Shares of the Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of the Portfolio are sold subject to a front-end
sales charge. Investor B Shares of the Portfolio are sold subject to a back-end
sales charge. This back-end sales charge declines over time and is known as a
"contingent deferred sales charge." Before choosing between Investor A Shares or
Investor B Shares of the Portfolio, investors should read "Characteristics of
Investor A Shares and Investor B Shares" and "Factors to Consider When Selecting
Investor A Shares or Investor B Shares" below.
Investor A Shares and Investor B Shares are sold through broker-dealers
or other organizations acting on behalf of their customers. Generally, investors
purchase Investor A Shares or Investor B Shares through a broker-dealer
organization which has a sales agreement with the Distributor or through an
organization which has entered into a servicing agreement with the Fund with
respect to Investor A Shares and/or Investor B Shares. The organization is
responsible for transmitting purchase orders directly to the Fund. Investors
purchasing Shares of the Portfolio must specify at the time of investment
whether they are purchasing Investor A Shares or Investor B Shares.
The minimum initial investment in the Portfolio is $1,000 and the
minimum for each subsequent investment is $100, except for investments made
through (a) the Automatic Investment Program, in which case the initial minimum
and subsequent minimum investments are $50, (b) a sweep program available
through an investor's financial institution, in which case there are no minimum
investments, (c) a payroll deduction program, in which case there is no minimum
initial investment and minimum subsequent investments are $25 per month, or (d)
a wrap fee program, in which case there are no minimum investments. The minimum
initial investment to participate in the Automatic
-21-
<PAGE> 24
Exchange Program is $5,000. See "How to Purchase and Redeem Shares -- Exchange
Privileges -- Automatic Exchange Program" below for additional requirements.
Purchases may be effected on Business Days when the Adviser,
Distributor and Mercantile (the Custodian) are open for business. The Fund
reserves the right to reject any purchase order, including purchases made with
foreign and third party drafts or checks. All orders for new IRAs or other
retirement plan accounts placed through BISYS Fund Services Ohio, Inc. (the
"Transfer Agent") must be accompanied by an account application. Account
applications may be obtained from your investment representative or the Fund at
1-800-452-ARCH (2724).
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-452-ARCH (2724). Investors may also call the
Fund for information on how to purchase Shares.
EFFECTIVE TIME OF PURCHASE. If purchase orders are received in good
form and accepted by the Fund prior to 4:00 p.m. (Eastern time) on any Business
Day, Shares will be priced according to the net asset value per Share next
determined on that day after receipt of the order. Immediately available funds
must be received by the Custodian prior to 4:00 p.m. within three Business Days
following the receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the person or
organization placing the order.
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of the Portfolio by mail,
complete an account application and send it to the Fund along with a check (or
other negotiable bank draft or money order) in at least the minimum initial
purchase amount, made payable to the Portfolio. Investors purchasing Shares by
mail must indicate whether they wish to buy Investor A Shares or Investor B
Shares. Subsequent purchases of Shares of the Portfolio may be made at any time
in at least the minimum subsequent purchase amount by mailing a check payable to
the Portfolio.
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If
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<PAGE> 25
Shares are held in the name of an organization, such organization is responsible
for transmitting purchase, exchange and redemption orders to the Fund on a
timely basis, recording all purchase, exchange and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners (or arranging for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a
monthly basis in a minimum amount of $50, on the 20th day (or the next Business
Day after the 20th) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A or Investor B Shares, as appropriate, at the net asset value plus any
applicable front-end sales charge next determined on the day an order is
effected by the Transfer Agent. An investor may apply for participation in the
AIP through the organization servicing his or her Fund account and by completing
the supplementary AIP authorization form. The AIP may be modified or terminated
by a shareholder on 30 days' written notice to his or her investment
representative or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging"
in making investments. Dollar Cost Averaging can be useful in investing in
portfolios such as the Portfolio whose price per Share fluctuates. Instead of
trying to time market performance, a fixed dollar amount is invested in
Portfolio Shares at predetermined intervals. This may help investors to reduce
their average cost per Share because the agreed upon fixed investment amount
allows more Shares to be purchased during periods of lower Share prices and
fewer Shares during periods of higher prices. In order to be effective, Dollar
Cost Averaging should usually be followed on a sustained, consistent basis.
Investors should be aware, however, that Shares bought using Dollar Cost
Averaging are made without regard to their price on the day of investment or to
market trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his or
her Shares at a price which is lower than their purchase price.
APPLICABLE SALES CHARGES - INVESTOR A SHARES
The public offering price for Investor A Shares of the Portfolio is the
sum of the net asset value of the Shares being purchased plus any applicable
sales charge. No sales charge is assessed on the reinvestment of dividends and
capital gain distributions. The sales charge is assessed as follows:
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<PAGE> 26
<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 .50
$1,000,000 and over...................... .50 .50 .40
</TABLE>
The Distributor will pay the appropriate Dealers' Reallowance to broker-dealer
organizations which have entered into an agreement with the Distributor. The
Dealers' Reallowance may be changed from time to time. Upon notice to the Fund's
shareholders, the Distributor, at its sole discretion, may reallow up to the
full applicable sales charge as shown on the above schedule during periods
specified in such notice. Dealers who receive 90% or more of a sales load may be
deemed to be "underwriters" under the Securities Act of 1933, as amended.
No sales charge is assessed on purchases of Investor A Shares of the
Portfolio by: (a) directors and officers of the Fund and the immediate family
members of such individuals; (b) directors, current and retired employees and
participants in employee benefit/retirement plans (future and current
annuitants) of Mercantile Bancorporation Inc. or any of its affiliates or the
Distributor or its affiliates and the immediate family members of such
individuals; (c) brokers, dealers, and agents who have a sales agreement with
the Distributor, and their employees (and the immediate family members of such
individuals); (d) customers who purchase pursuant to a wrap fee program offered
by any broker-dealer or other financial institution or financial planning
organization; (e) individuals who purchase Investor A Shares with the proceeds
of Trust Shares or Institutional Shares redeemed in connection with a rollover
of benefits paid by a qualified retirement or employee benefit plan or
distribution on behalf of any other qualified account administered by Mercantile
or its affiliates or correspondent banks, within 60 days of receipt of such
payment; (f) investors who purchase Investor A Shares through a payroll
deduction program; (g) employees of any sub-adviser to the Fund; (h) former
holders of Southwestern Bell Visa cards that had been issued by Mercantile Bank
of Illinois, N.A. and who participated in the Automatic Investment Program
(credit cards may not be used for the purchase of Fund Shares); (i) investors
exchanging Trust Shares of a Portfolio received from the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile or any of its affiliated or correspondent banks; or (j) other
investment companies distributed by the Distributor or its affiliates. Investors
who believe that they may qualify under
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<PAGE> 27
any of the exemptions listed above should contact the Fund at 1-800-452-ARCH
(2724) prior to making a purchase.
REDUCED SALES CHARGES - INVESTOR A SHARES
The sales charge on purchases of Investor A Shares of the Portfolio may
be reduced through:
- rights of accumulation
- quantity discounts
- letter of intent
- reinvestment privilege
To qualify for a reduced sales load, an investor must so notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
RIGHTS OF ACCUMULATION - INVESTOR A SHARES. An investor who has
previously purchased Investor A Shares of the Portfolio and has paid a sales
charge ("load") may be eligible for reduced sales charges when purchasing
additional Investor A Shares of the Portfolio or any other portfolio of the Fund
sold with a sales charge. An investor's aggregate investment in Shares of such
load portfolios is the total value (based on the higher of current net asset
value or the public offering price originally paid) of: (a) current purchases,
and (b) Shares that are already beneficially owned by the investor on which a
sales charge has already been paid. If, for example, an investor beneficially
owns Investor A Shares of the Portfolio having an aggregate current value of
$240,000 and subsequently purchases additional Investor A Shares of another
portfolio with a maximum 4.50% sales load having a current value of $10,000, the
sales charge applicable to the subsequent purchase would be reduced to 1.50% of
the offering price.
QUANTITY DISCOUNTS - INVESTOR A SHARES. As shown in the table under
"Applicable Sales Charges - Investor A Shares," larger purchases reduce the
sales charge paid. The Fund will combine purchases made in the Portfolio on the
same day by the investor and immediate family members when calculating the
applicable sales charge.
LETTER OF INTENT - INVESTOR A SHARES. By checking the Letter of Intent
box on the account application, a shareholder becomes eligible for reduced sales
charges applicable to the total amount invested in Investor A Shares in the
Portfolio over a 13-month period (beginning up to 90 days prior to the date
indicated on the account application). The Transfer Agent will hold in escrow 5%
of the amount indicated for payment of a higher sales load if a shareholder does
not purchase the full amount indicated on the account application. Upon
completion of the total minimum investment specified on the account application,
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<PAGE> 28
the escrow will be released, and an adjustment will be made to reflect any
reduced sales charge applicable to Shares purchased during the 90-day period
prior to submission of the account application. Additionally, if total purchases
within the 13-month period exceed the amount specified, an adjustment will be
made to reflect further reduced sales charges applicable to such purchases. All
such adjustments will be made at the conclusion of the 13-month period and in
the form of additional Shares credited to the shareholder's account at the then
current public offering price applicable to a single purchase of the total
amount of the total purchases. If total purchases are less than the amount
specified, escrowed Shares may be involuntarily redeemed to pay the additional
sales charge. Checking a Letter of Intent box does not bind an investor to
purchase, or the Fund to sell, the full amount indicated at the sales load in
effect at the time of signing, but an investor must complete the intended
purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE - INVESTOR A SHARES. Upon redemption of Investor
A Shares on which a sales charge was paid, a shareholder has a one-time right,
to be exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
MISCELLANEOUS - INVESTOR A SHARES. Reduced sales charges may be
modified or terminated at any time and are subject to confirmation of an
investor's holdings. For more information about reduced sales charges, an
investor should contact his or her investment representative or the Distributor.
APPLICABLE SALES CHARGES - INVESTOR B SHARES
Investor B Shares of the Portfolio are sold at their net asset value
next determined after a purchase order is received in good form by the Fund's
Distributor. Although investors pay no front-end sales charge on purchases of
Investor B Shares, such Shares are subject to a deferred sales charge at the
rates set forth in the chart below if they are redeemed within six years of
purchase. Service Organizations will receive commissions from the Distributor in
connection with sales of Investor B Shares. These commissions may be different
than the reallowances or placement fees, if any, paid to dealers in connection
with sales of Investor A Shares.
The deferred sales charge on Investor B Shares is based on the lesser
of the net asset value of the Shares on the redemption date or the original cost
of the Shares being redeemed. As a result, no sales charge is charged on any
increase in the
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<PAGE> 29
principal value of an investor's Shares. In addition, a contingent deferred
sales charge will not be assessed on Investor B Shares purchased through
reinvestment of dividends or capital gains distributions.
The amount of any contingent deferred sales charge an investor must pay on
Investor B Shares depends on the number of years that elapse between the
purchase date and the date such Investor B Shares are redeemed. Solely for
purposes of determining the number of years from the time of payment for an
investor's Share purchase, all payments during a month will be aggregated and
deemed to have been made on the first day of the month.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
One or less 5.0%
More than one, but less
than two 4.0%
Two, but less than three 3.0%
Three, but less than four 3.0%
Four, but less than five 2.0%
Five, and up to and
including six 1.0%
After six years None
</TABLE>
When an investor redeems his or her Investor B Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Investor B Shares are redeemed first from those Investor B
Shares that are not subject to the deferred sales load (i.e., Investor B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) and after that from the Investor B Shares that have been held the
longest.
For example, assume an investor purchased 100 Investor B Shares at $10 a
Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value
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<PAGE> 30
of $12 per share). Therefore, only $400 of the $600 such investor received from
selling his or her Shares will be subject to the contingent deferred sales
charge, at a rate of 3.0% (the applicable rate in the third year after
purchase). The proceeds from the contingent deferred sales charge that the
investor may pay upon redemption go to the Distributor, which may use such
amounts to defray the expenses associated with the distribution-related services
involved in selling Investor B Shares. The contingent deferred sales charge,
along with ongoing distribution fees paid with respect to Investor B Shares,
enables those Shares to be purchased without the imposition of a front-end sales
charge.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The following types
of redemptions qualify for an exemption from the contingent deferred sales
charge: (i) exchanges described under "Exchange Privileges" below; (ii)
redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension,
profit-sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code due to death, disability or the attainment of a
specified age; (iii) redemptions effected pursuant to a Portfolio's right to
liquidate a shareholder's account if the aggregate net asset value of Shares
held in the account is less than the minimum account size; (iv) redemptions in
connection with the death or disability of a shareholder; or (v) redemptions
resulting from a tax-free return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares lies
in their sales charge structures and distribution arrangements. An investor
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Investor A Shares and Investor B Shares
are the same.
Investor A Shares are sold at their net asset value plus a front-end sales
charge of up to 4.50%. This front-end sales charge may be reduced or waived in
some cases. See "Applicable Sales Charges - Investor A Shares." Investor A
Shares are subject to ongoing distribution and service fees at an annual rate of
up to 0.30% of the Portfolio's average daily net assets attributable to its
Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. See "Applicable Sales Charges -
Investor B Shares."
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<PAGE> 31
Investor B Shares are subject to ongoing distribution and service fees at an
annual rate of up to 1.00% of the Portfolio's average daily net assets
attributable to its Investor B Shares. These ongoing fees, which are higher than
those charged on Investor A Shares, will cause Investor B Shares to have a
higher expense ratio and pay lower dividends than Investor A Shares.
Eight years after purchase, Investor B Shares will convert automatically to
Investor A Shares. The purpose of the conversion is to relieve a holder of
Investor B Shares of the higher ongoing expenses charged to those Shares, after
enough time has passed to allow the Distributor to recover approximately the
amount it would have received if a front-end sales charge had been charged. The
conversion from Investor B Shares to Investor A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Investor A Shares as he or she had of Investor B Shares. The conversion
occurs eight years after the beginning of the calendar month in which the Shares
are purchased. As a result of the conversion, the converted Shares are relieved
of the distribution and service fees borne by Investor B Shares, although they
are subject to the distribution and service fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates - eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of the Portfolio, and
subsequently acquires additional Investor B Shares of the Portfolio only through
reinvestment of dividends and/or distributions, all of such investor's Investor
B Shares in the Portfolio, including those acquired through reinvestment, will
convert to Investor A Shares of the Portfolio on the same date.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of the Portfolio, investors should consider
whether, during the anticipated life of their investment in the Portfolio, the
accumulated distribution fees and potential contingent deferred sales charges on
Investor B Shares prior to conversion would be less than the initial sales
charge and accumulated distribution fees on Investor A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that the sales charge
for Investor A Shares is waived or reduced by one of the methods described
above, investments in Investor A Shares become more desirable. The Fund
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<PAGE> 32
will refuse all purchase orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares
that do not qualify for waivers of or reductions in the initial sales charge
would have less of their purchase price initially invested in the Portfolio than
purchasers of Investor B Shares of the Portfolio.
As described above, purchasers of Investor B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would partially or wholly offset the expected higher
annual expenses borne by Investor B Shares. Because the Portfolio's future
returns cannot be predicted, there can be no assurance that this will be the
case. Holders of Investor B Shares would, however, own Shares that are subject
to higher annual expenses and, for a six-year period, such Shares would be
subject to a contingent deferred sales charge of up to 5.00% upon redemption,
depending upon the year of redemption. Investors expecting to redeem during this
six-year period should compare the cost of the contingent deferred sales charge
plus the aggregate annual Investor B Shares' distribution and service fees to
the cost of the initial sales charge and distribution and service fees on the
Investor A Shares. Over time, the expense of the annual distribution and service
fees on the Investor B Shares may equal or exceed the initial sales charge, if
any, and annual distribution and service fees applicable to Investor A Shares.
For example, if net asset value remains constant, the aggregate distribution and
service fees with respect to Investor B Shares of the Portfolio would equal or
exceed the initial sales charge and aggregate distribution fees of Investor A
Shares of the Portfolio approximately eight years after the purchase. In order
to reduce such fees of investors that hold Investor B Shares for more than eight
years, Investor B Shares will be automatically converted to Investor A Shares as
described above at the end of such eight-year period.
EXCHANGE PRIVILEGES
The exchange privilege enables shareholders to exchange (i) Investor A
Shares of the Portfolio for Investor A Shares of another portfolio offered by
the Fund or, under certain circumstances described below, for Trust Shares or
Institutional Shares of the Portfolio, and (ii) Investor B Shares of the
Portfolio for Investor B Shares of another portfolio offered by the Fund. The
exchange privilege may be exercised only in those
-30-
<PAGE> 33
states where the class of shares of such other portfolios may be legally sold.
EXCHANGES - INVESTOR A SHARES. Shareholders who have purchased Investor A
Shares of the Portfolio and who have paid any applicable sales charge ("load")
(including Shares acquired through reinvestment of dividends or distributions on
such Shares) may exchange those Shares for Investor A Shares of another
portfolio offered by the Fund without paying an additional sales load.
In addition, shareholders who have a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks, and whose Shares are to be held in that account, may also
exchange Investor A Shares of the Portfolio for Trust Shares or Institutional
Shares in the Portfolio.
EXCHANGES - INVESTOR B SHARES. Shareholders who have purchased Investor B
Shares of the Portfolio (including Shares acquired through reinvestment of
dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another portfolio offered by the Fund without the payment
of any contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemptions of Investor B Shares, the holding period of the
Investor B Shares originally held will be added to the holding period of the
Investor B Shares acquired through the exchange. No exchange fee is imposed by
the Fund.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must have a
current value at least equal to the minimum initial or subsequent investment
required by the particular portfolio into which the exchange is being made. The
Fund reserves the right to reject any exchange request. The exchange privilege
may be modified or terminated at any time upon 60 days' written notice to
shareholders. An investor may telephone an exchange request by calling his or
her investment representative, which is responsible for transmitting such
exchange request to the Fund. See "Other Exchange or Redemption Information"
below. Investors who want to telephone an exchange request directly to the Fund,
and, have elected this privilege on the account application may follow the
procedures described below under "Redemption by Telephone." An investor should
consult his or her investment representative or the Fund for further information
regarding procedures for exchanging Shares.
In addition to the Growth Equity Portfolio described in this Prospectus,
the Fund currently offers Investor A Shares and/or Investor B Shares in the
following portfolios:
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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 Small Cap Equity Index Portfolio*
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
- ----------
* Does not offer Investor B Shares.
For more information concerning these portfolios, please call
1-800-452-ARCH (2724). Shareholders exercising the exchange privilege with any
of the other portfolios in the Fund should request and review the portfolio's
prospectus carefully prior to making an exchange.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in the Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another portfolio offered by the Fund. With shareholder authorization,
the Fund's Transfer Agent will withdraw the amount specified (subject to the
applicable minimums) from the shareholder's account and will automatically
invest that amount in Shares of the Portfolio designated by the shareholder on
the date of such deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from their investment representatives
or the Distributor. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written request to their investment representative or to the Fund. The Automatic
Exchange Program may be amended or terminated without notice at any time by the
Distributor.
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REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at the Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. Proceeds from the redemptions of Investor B
Shares will be reduced by the amount of any applicable contingent deferred sales
charge. The organization through which the investor placed the order is
responsible for transmitting redemption orders to the Fund on a timely basis. No
charge for sending redemption payments electronically is currently imposed by
the Fund, although a charge may be imposed in the future. The Fund reserves the
right to send redemption proceeds electronically within seven days after
receiving a redemption order if, in the judgment of the Adviser, an earlier
payment could adversely affect the Portfolio.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000. The signature guarantee requirement will be waived
if all of the following conditions apply: (1) the redemption check is payable to
the shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on
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the account application. It is not necessary for shareholders to confirm
telephone redemption requests in writing. If a shareholder did not originally
select the telephone redemption privilege, the shareholder must provide written
instructions to the Transfer Agent to add this feature. Neither the Fund nor its
service contractors will be liable for any loss, damage, expense or cost arising
out of any telephone redemption effected in accordance with the Fund's telephone
redemption procedures, acting upon instructions reasonably believed to be
genuine. The Fund will employ procedures designed to provide reasonable
assurance that instructions by telephone are genuine; if these procedures are
not followed, the Fund or its service contractors may be liable for any losses
due to unauthorized or fraudulent instructions. If Share certificates are
outstanding with respect to an account, the telephone redemption and telephone
exchange privilege is not available. If, due to temporary adverse conditions,
investors are unable to effect telephone transactions, investors are encouraged
to follow the procedures described in "Other Exchange or Redemption Information"
below.
Proceeds from redemptions of Investor A Shares and/or Investor B Shares
with respect to redemption orders received by the Fund before 4:00 p.m. (Eastern
time) on a Business Day normally are sent electronically or mailed by check to
the organization that placed the redemption order within three Business Days
after the Distributor's receipt of the order in good form.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of the Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be reduced by any applicable contingent deferred sales charge.
Portfolio Shares will be redeemed as necessary to meet withdrawal payments.
Withdrawals may reduce principal and eventually deplete the shareholder's
account. The maintenance of an AWP may be disadvantageous for holders of
Investor B Shares due to the effect of the contingent deferred sales charge. A
shareholder who desires to establish an AWP after opening an account should
complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Distributor for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time.
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PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of the Portfolio at net asset value
without payment of a front-end sales charge. To qualify for a net asset value
purchase, the investor must pay for such purchase with the proceeds from the
redemption of shares of a non-affiliated mutual fund on which a front-end sales
charge was paid. A qualifying purchase of Investor A Shares must occur within 30
days of the prior redemption and must be evidenced by a confirmation of the
redemption transaction. At the time of purchase, the investment representative
must notify the Distributor that the purchase qualifies for a purchase at net
asset value. Proceeds from the redemption of Shares on which no front-end sales
charge was paid do not qualify for a purchase at net asset value.
OTHER EXCHANGE OR REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES OR INVESTOR B SHARES. In the event
a redeeming shareholder owns both Investor A Shares and Investor B Shares in the
Portfolio, the Investor A Shares will be redeemed first unless the shareholder
indicates otherwise.
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in the Portfolio upon 60
days' written notice if the balance in the shareholder's account drops below
$500. The Fund will not require a shareholder to redeem Portfolio Shares if the
value of the shareholder's account drops below $500 due to fluctuations in
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net asset value. Share balances may also be redeemed pursuant to arrangements
between broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares of the Portfolio.
YIELD AND TOTAL RETURN FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
the Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
From time to time, performance information such as total return and yield
data for the Portfolio's Investor A Shares and Investor B Shares may be quoted
in advertisements, sales literature or in communications to shareholders. The
yield is computed based on the net income of a particular class of Shares in the
Portfolio during a 30-day (or one-month) period identified in connection with
the particular yield quotation. More specifically, the yield is computed by
dividing the Portfolio's net income per Share during a 30-day (or one-month)
period by the maximum public offering price per Share on the last day of the
period and annualizing the result.
The Portfolio's total return may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to a particular class
of Shares reflect the average annual percentage change in value of an investment
in such Shares over the particular measuring period. Aggregate total returns
reflect the cumulative percentage change in value over the measuring period.
Both methods of calculating total returns assume that dividends and capital gain
distributions made by the Portfolio during the period are reinvested in the same
class of Shares of the Portfolio and that the maximum sales load in effect
during the period has been charged by the Portfolio. The Portfolio's total
return figures may also be calculated without the deduction of the maximum sales
charge in effect during the period. The effect of not deducting the sales charge
will be to increase the total return reflected. When considering average annual
total return figures for periods longer than one year, it is important to note
that the Portfolio's annual total return for any one year in the period might
have been more or less than the average for the entire period.
Performance data of the Portfolio's Investor A Shares and Investor B Shares
may be compared to the performance of other mutual funds with comparable
investment objectives and policies
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through various mutual fund or market indices and data such as that provided by
S&P, Lehman Brothers, Inc. or any of its affiliates, Ibbotson Associates, Inc.,
Lipper Analytical Services, Inc. and Mutual Fund Forecaster. References may also
be made to indices or data published in Money Magazine, Forbes, Barron's, The
Wall Street Journal, The New York Times, Business Week, American Banker,
Institutional Investor, Pensions and Investments, U.S.A. Today, Fortune,
CDA/Wiesenberger, Morningstar, Inc. and publications of a local or regional
nature. In addition to performance information, general information about the
Portfolio that appears in a publication such as those mentioned above may be
included in advertisements and in reports to Shareholders.
Performance quotations of a class of Shares in the Portfolio represent the
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by an investment representative will
not be included in the calculations of the Portfolio's yields and total returns.
Such fees, if any, will reduce the investor's net return on an investment in the
Portfolio. Investors may call 1-800-452-ARCH (2724) to obtain current yield and
total return information.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Portfolio are declared and paid
monthly as a dividend to shareholders of record. Dividends on each Share of the
Portfolio are determined in the same manner and are paid in the same amounts,
irrespective of class, except that the Portfolio's Trust Shares and
Institutional Shares bear all expenses of the respective Administrative Services
Plans adopted for such Shares and the Portfolio's Investor A Shares and Investor
B Shares bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, the Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the Fund"
and "Other Information Concerning the Fund and Its Shares" below.
Net realized capital gains of the Portfolio, if any, are distributed at
least annually. All dividends and distributions paid on the Portfolio's Shares
are automatically reinvested (without a sales load) in additional Shares of the
same class unless the investor has (i) otherwise indicated in the account
application, or (ii) redeemed all the Shares held in the Portfolio, in which
case a distribution will be paid in cash. Reinvested dividends and distributions
will be taxed in the same manner as those paid in cash.
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TAXES
FEDERAL TAXES
Management of the Fund believes that the Predecessor Portfolio qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code") for the taxable year ended September 30, 1996. It is
intended that the Portfolio will qualify as a regulated investment company as
long as such qualification is in the best interests of shareholders. A regulated
investment company generally is exempt from federal income tax on amounts
distributed to shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if any) net of
certain deductions for such year. In general, the Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. It is the policy of the Portfolio to
distribute as dividends substantially all of its investment company taxable
income and any net tax-exempt interest income each year. Such dividends will be
taxable as ordinary income to the Portfolio's shareholders who are not currently
exempt from federal income taxes, whether such income is received in cash or
reinvested in additional Shares. (Federal income taxes for distributions to an
IRA are deferred under the Code.) In the case of the Portfolio, such dividends
will qualify for the dividends received deduction for corporations to the extent
of the total qualifying dividends received by the Portfolio from domestic
corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. The Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such dividends are received in
cash or reinvested in additional Shares.
An investor considering purchasing Shares of the Portfolio on or just
before the record date of any dividend or capital gains distribution should be
aware that the amount of the forthcoming distribution, although in effect a
return of capital, will be taxable.
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Dividends declared by the Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the
Portfolio on December 31 of such year in the event such dividends are actually
paid during January of the following year.
The Portfolio may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by the Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolio and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the
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names of and general background information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the assets of the Fund,
which were approximately $2.5 billion. MVA also serves as investment adviser to
each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolios securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the average daily net assets of the
Portfolio.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1996 pursuant to the investment advisory agreement then in effect
with Mark Twain Bank, its former adviser, at the effective annual rate of .75%
of its average daily net assets after fee waivers. Without fee waivers, the
Predecessor Portfolio would have borne advisory fees at the annual rate of .75%
of its average daily net assets.
Carl C. Enloe is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Enloe, who joined MVA as a Senior Associate in
April 1997, served as head of investments at Mark Twain Bank since 1987. He
managed the Predecessor Portfolio since its inception.
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ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolio's Administrator. The Administrator also serves
as the administrator to each of the Fund's other portfolios.
The Administrator generally assists in all aspects of the Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolio's arrangements with Service Organizations. See
"Service Organizations" below. For its services, the Administrator is entitled
to receive a fee, computed daily and payable monthly, at the annual rate of .20%
of the Portfolio's average daily net assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the administration fees otherwise payable by the Portfolio in order to
increase the net income available for distribution to shareholders.
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1996 pursuant to the administrative services agreement then
in effect with Federated Administrative Services, its former administrator, at
the effective annual rate of .39% of its average daily net assets.
DISTRIBUTOR
Investor A Shares and Investor B Shares of the Portfolio are sold
continuously by the Distributor, BISYS Fund Services, an affiliate of the
Administrator. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor also acts as the distributor to each of the Fund's other
portfolios.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of the Portfolio. Such compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Fund's portfolios, and/or other
dealer-sponsored special events. In some instances, this compensation will be
made available only to certain dealers whose representatives have sold a
significant amount of such Shares. Compensation will include payment for travel
expenses, including lodging incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include
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the following types of non-cash compensation offered through sales contests: (1)
business and vacation trips, including the provision of travel arrangements and
lodging at resorts, (2) tickets for entertainment events (such as concerts,
cruises and sporting events) and (3) merchandise (such as clothing, trophies,
clocks and pens). Dealers may not use sales of the Portfolio's Shares to qualify
for this compensation to the extent such may be prohibited by the laws of any
state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned compensation is paid for by
the Portfolio or its shareholders.
DISTRIBUTION AND SERVICES PLANS
The Fund has adopted separate Distribution and Services Plans pursuant to
Rule 12b-1 under the 1940 Act with respect to Investor A Shares and Investor B
Shares of the Portfolio. Under the Distribution and Services Plans, the Fund may
pay (i) the Distributor or another person for distribution services provided and
expenses assumed and (ii) Service Organizations for shareholder administrative
services provided pursuant to servicing agreements in connection with Investor A
Shares or Investor B Shares of the Portfolio. Payments to the Distributor are to
compensate it for distribution assistance and expenses assumed and activities
primarily intended to result in the sale of Investor A Shares or Investor B
Shares, including compensating dealers and other sales personnel (which may
include affiliates of the Fund's Adviser), direct advertising and marketing
expenses and expenses incurred in connection with preparing, printing, mailing
and distributing or publishing advertisements and sales literature, for printing
and mailing Prospectuses and Statements of Additional Information (except those
used for regulatory purposes or for distribution to existing shareholders), and
costs associated with implementing and operating the Distribution and Services
Plan. In addition, payments under the Distribution and Services Plan for
Investor B Shares will be used to pay for or finance sales commissions and other
fees payable to Service Organizations and other broker-dealers who sell Investor
B Shares. See "Management of the Fund -- Service Organizations" below for a
description of the servicing agreements and the services provided by Service
Organizations.
Under the Distribution and Services Plan for Investor A Shares, payments by
the Fund for distribution expenses may not exceed .10% (annualized) of the
average daily net asset value of the Portfolio's outstanding Investor A Shares
and payments for shareholder administrative servicing expenses may not exceed
.20% (annualized) of the average daily net asset value of the Portfolio's
outstanding Investor A Shares.
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not
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exceed .75% (annualized) of the average daily net asset value of the Portfolio's
outstanding Investor B Shares and payments for shareholder administrative
servicing expenses may not exceed .25% (annualized) of the average daily net
asset value of the Portfolio's outstanding Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A Shares or Investor B Shares of the
Portfolio, such as establishing and maintaining accounts and records for their
customers who invest in such Shares, assisting customers in processing purchase,
exchange and redemption requests, and responding to customer inquiries
concerning their investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any subcontractor as it would be for its own acts or omissions. The
fees payable to any sub-contractor are paid by the Service Organization out of
the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by the
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such a Service Organization
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
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<PAGE> 46
CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of the Portfolio's assets. BISYS Fund
Services Ohio, Inc. also serves as the Portfolio's transfer agent and dividend
disbursing agent. Its address is 3435 Stelzer Road, Columbus, Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolio. 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
Portfolio 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 Portfolio and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolio. It is
not possible, of course, to predict whether or in what form such legislation
might
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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 the Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in the
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all of their own expenses in
connection with the performance of their services, except that the Distributor
is compensated pursuant to the Distribution and Services Plans as described
under "Distribution and Services Plans" above. The Portfolio's expenses are
deducted from the total income of the Portfolio before dividends and
distributions are paid. These expenses include, but are not limited to, fees
paid to the Adviser and Administrator, transfer agency fees, fees and expenses
of officers and directors who are not affiliated with the Adviser or the
Distributor, taxes, interest, legal fees, custodian fees, auditing fees, 12b-1
fees, servicing fees, certain fees and expenses in registering and qualifying
the Portfolio and its Shares for distribution under federal and state securities
laws, costs of preparing and printing prospectuses and statements of additional
information for regulatory purposes and for distribution to existing
shareholders, the expense of reports to shareholders, shareholders' meetings and
proxy solicitations, fidelity bond and directors and officers liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by the Adviser, Distributor or
Administrator under their respective agreements with the Fund. The Fund also
pays for brokerage fees, commissions and other transaction charges, if any, in
connection with the purchase and sale of portfolio securities. Any general
expenses of the Fund that are not readily identifiable as belonging to a
particular portfolio will be allocated among all portfolios by or under the
direction of the Board of Directors in a manner the Board determines to be fair
and equitable. Any expenses relating only to a particular class of Shares within
a portfolio will be borne solely by such class. See "Certain Financial
Information" and "Management of the Fund" above for additional information
regarding expenses of the Portfolio.
-45-
<PAGE> 48
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation, and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional Shares of common stock, and to classify and
reclassify any unauthorized and unissued Shares into one or more classes of
Shares. The Board of Directors may similarly classify or reclassify any class of
Shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolio, which is classified as a diversified company under the 1940 Act: 50
million Trust Shares, 25 million Institutional Shares, 25 million Investor A
Shares and 25 million Investor B Shares. Trust Shares and Institutional Shares
of the Portfolio are described in separate prospectuses which are available from
the Distributor at the telephone number on page 1 of this Prospectus. Shares in
the Portfolio will be issued without Share certificates.
The Investor A Shares and Investor B Shares of the Portfolio are described
in this Prospectus. The Portfolio also offers Trust Shares and Institutional
Shares. Trust Shares, which are offered to financial institutions acting on
their own behalf or on behalf of certain qualified accounts, and Institutional
Shares, which are offered to financial institutions acting on behalf of accounts
for which they do not exercise investment discretion, are sold without a sales
charge. Trust, Institutional, Investor A and Investor B Shares bear their pro
rata portion of all operating expenses paid by the Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective Administrative Services Plan adopted for such Shares and Investor A
Shares and Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of the Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust Shares or Institutional Shares. Payments
under the Administrative Services Plans may not exceed .30% (on an
-46-
<PAGE> 49
annual basis) of the average daily net asset value of outstanding Trust Shares
or Institutional Shares of the Portfolio.
The Fund offers various services and privileges in connection with its
Investor A Shares and Investor B Shares that are not offered in connection with
its Trust Shares and Institutional Shares, including an automatic investment
program and automatic withdrawal plan. In addition, each class of Shares offers
different exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
portfolios of the Fund will vote together and not by class unless otherwise
required by law or permitted by the Board of Directors. All shareholders of a
particular portfolio will vote together as a single class on matters relating to
the portfolio's investment advisory agreement and investment objective and
fundamental policies. Only holders of Trust Shares, however, will vote on
matters relating to the Administrative Services Plan for Trust Shares and only
holders of Institutional Shares will vote on matters relating to the
Administrative Services than for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares and only holders of Investor B Shares will
vote on matters pertaining to the Distribution and Services Plan for Investor B
Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of the Portfolio or a particular class of Shares means, with respect to
the approval of an investment advisory agreement or distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
the Portfolio or class of Shares, or (b) 67% or more of the Shares of the
Portfolio or class of Shares
-47-
<PAGE> 50
present at a meeting if more than 50% of the outstanding Shares of the Portfolio
or class of Shares are represented at the meeting in person or by proxy.
As of January 1, 1997, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolio may be directed to the Fund at
1-800-452-ARCH (2724).
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIO'S
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIO, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIO, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-48-
<PAGE> 51
THE ARCH FAMILY
OF MUTUAL FUNDS
TRUST SHARES
GROWTH EQUITY PORTFOLIO
PROSPECTUS DATED _______, 1997
<PAGE> 52
TABLE OF CONTENTS
PAGE
----
Highlights................................................................. 3
Certain Financial Information.............................................. 4
Expense Summary for Trust Shares........................................... 5
Investment Objective, Policies and Risk
Considerations........................................................... 6
Investment Limitations..................................................... 15
Pricing of Shares.......................................................... 17
How to Purchase and Redeem Shares.......................................... 17
Purchase of Shares................................................ 17
Exchange Privilege................................................ 18
Redemption of Shares.............................................. 19
Other Exchange or Redemption Information.......................... 21
Yields and Total Returns................................................... 21
Dividends and Distributions................................................ 23
Taxes...................................................................... 23
Management of the Fund..................................................... 25
Other Information Concerning the Fund and its Shares....................... 30
Miscellaneous..................................................... 32
<PAGE> 53
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
TRUST SHARES
The ARCH Fund, Inc. is an open-end management investment company that
currently offers Shares in eighteen investment portfolios. This Prospectus
describes the Trust Shares of the ARCH GROWTH EQUITY PORTFOLIO (the
"Portfolio"). Trust Shares are offered to financial institutions acting on their
own behalf or on behalf of certain qualified accounts.
THE ARCH GROWTH EQUITY PORTFOLIO'S investment objective is capital
appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies selected on the basis of assessment
of earnings and the risk and volatility of each company's business. Other
factors, such as product position or market share, will also be considered.
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a
wholly-owned subsidiary of Mercantile Bank National Association ("Mercantile"),
acts as investment adviser for the Portfolio; Mercantile serves as custodian;
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as administrator;
and BISYS Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolio that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolio, contained in a Statement of Additional
Information dated _______________, 1997, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. An investor may obtain the Statement of Additional Information
without charge by writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178
or by calling 1-800-452-4015.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the
<PAGE> 54
Portfolio involves investment risk, including possible loss of principal.
________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_____________, 1997
-2-
<PAGE> 55
HIGHLIGHTS
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund offers investment
opportunities in eighteen investment portfolios. This Prospectus relates to one
of those portfolios: the ARCH GROWTH EQUITY PORTFOLIO (the "Portfolio"). In
addition, the Fund offers investment opportunities in the ARCH 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, National Municipal Bond,
Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity, Small Cap
Equity Index, International Equity and Balanced Portfolios, which are described
in separate Prospectuses. The Portfolio represents a separate pool of assets
with a different investment objective and different policies than the Fund's
other portfolios (as described below under "Investment Objective, Policies and
Risk Considerations"). MVA serves as adviser, Mercantile as custodian, BISYS
Fund Services Ohio, Inc. as administrator and BISYS Fund Services as sponsor and
distributor. For information on expenses, fee waivers and services, see "Certain
Financial Information" and "Management of the Fund."
The following information generally describes the Portfolio and its
investment objective. There can be no assurance that the Portfolio will be able
to achieve its investment objective.
The Portfolio is designed for investors who seek capital growth and who
are prepared to accept the risks associated with an investment in equity
securities.
Investors should note that the Portfolio may, subject to its investment
policies and limitations, invest in the securities of foreign issuers, enter
into repurchase agreements and reverse repurchase agreements, make securities
loans, invest in put and call options and futures and options on futures, and
make limited investments in illiquid securities and securities issued by other
investment companies. These investment practices involve investment risks of
varying degrees. For example, the securities of a foreign issuer entail certain
inherent risks, such as future political and economic developments and the
adoption of foreign governmental restrictions, that might adversely affect the
payment of dividends or principal and interest. Default by a counterparty to a
repurchase agreement or securities lending transaction could expose the
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by the
Portfolio will decline below the repurchase price which the Portfolio is
obligated to pay. Purchasing options is a
-3-
<PAGE> 56
specialized investment technique which entails a substantial risk of loss of
amounts paid as premiums to option writers. There is no assurance that a liquid
market will exist for a particular futures contract at any particular time. The
Portfolio may engage in short-term trading, which may also involve greater risk
and increase the Portfolio's expenses. See "Investment Objective, Policies and
Risk Considerations" below and the Statement of Additional Information under
"Investment Objective and Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Fund also offers the availability of a
family of eighteen mutual funds should your investment goals change.
This Prospectus describes the Trust Shares of the Portfolio. For
information on purchasing, exchanging or redeeming Trust Shares of the
Portfolio, please see "How to Purchase and Redeem Shares" below.
CERTAIN FINANCIAL INFORMATION
Shares of the Portfolio have been classified into four classes of
Shares -- Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of each class in the Portfolio represent equal, pro rata
interests in the investments held by the Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. See
"Other Information Concerning the Fund and Its Shares," "Management of the Fund
- -- Administrative Services Plan" and "Management of the Fund -- Custodian and
Transfer Agent" below. As a result of payments for distribution and/or
shareholder administrative servicing fees and certain other operating expenses
that may be made in differing amounts, the net investment income of Trust
Shares, Institutional Shares, Investor A Shares and Investor B Shares in the
Portfolio can be expected, at any given time, to be different.
The Portfolio commenced operations on January 4, 1993 as the Arrow
Equity Portfolio, a separate investment portfolio (the "Predecessor Portfolio")
of Arrow Funds, which was organized as a Massachusetts business trust. On
_____________, 1997, the Predecessor Portfolio was reorganized as a new
portfolio of the Fund. Prior to the reorganization, the Predecessor Portfolio
offered and sold shares of beneficial interest that were similar to the Fund's
Investor A Shares.
-4-
<PAGE> 57
EXPENSE SUMMARY FOR
TRUST SHARES
<TABLE>
<CAPTION>
GROWTH
EQUITY
PORTFOLIO
---------
<S> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees (net
of fee waivers)..................................... .75%
12b-1 Fees............................................. .00%
Other Expenses (including
administration fees,
administrative services fees
and other expenses) (net
of fee waivers and expense
reimbursements)(1),(2).............................. .55%
-----
TOTAL PORTFOLIO OPERATING
EXPENSES (net of fee waivers
and expense reimbursements)(3)...................... 1.30%
=====
</TABLE>
- ----------
1 Administrative services fees are payable at an annual rate not to exceed
.30%. Without fee waivers, administration fees would be .20%.
2 Without fee waivers and expense reimbursements, Other Expenses would be .65%
and Total Portfolio Operating Expenses would be 1.40%. Such fee waivers and
expense reimbursements are expected to continue during the current fiscal
year.
-5-
<PAGE> 58
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the end of
each period:
Growth Equity Portfolio............. $13 $41
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of
the Predecessor Portfolio is contained in the Arrow Funds' Annual and
Semi-Annual Reports dated September 30, 1996 and March 31, 1997, respectively,
which may be obtained without charge by contacting the Fund at the address or
telephone number provided on page 1 of this Prospectus.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Trust Shares will
bear directly or indirectly. The table reflects the expenses which the Portfolio
expects to incur during the next twelve months on its Trust Shares. For more
complete descriptions of the various costs and expenses, see "Management of the
Fund" in this Prospectus and the Statement of Additional Information. The table
and example have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of the Portfolio, there can be no assurance that it will be able to do
so. The investment objective of the Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Unless otherwise indicated, the investment policies and limitations set forth
below may be changed without shareholder approval, although shareholders will be
notified before any material change in these policies and limitations become
effective.
The Portfolio's investment objective is capital appreciation. The
Portfolio seeks to achieve this objective by investing primarily in equity
securities of companies selected on the basis of assessment of earnings and the
risk and volatility
-6-
<PAGE> 59
of each company's business. Other factors, such as product position or market
share, will also be considered by the Adviser.
The Portfolio invests primarily in equity securities of companies
selected by the Adviser on the basis of traditional research techniques. The
equity securities in which the Portfolio invests are primarily those of middle
to large capitalization issuers whose shares are listed on the New York and
American Stock Exchanges and Nasdaq. Company earnings are the primary
consideration in selecting portfolio securities. The Portfolio may invest in
preferred stocks, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stocks, although normally it will invest
at least 65% of its assets in common stocks. The lowest rated debt obligation in
which the Portfolio will invest will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"). Securities rated Baa or BBB
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. Downgrades will be evaluated on
a case by case basis by the Adviser. The Adviser will determine whether or not
the security continues to be an acceptable investment. If not, the security will
be sold. The applicable ratings categories are described in Appendix A to the
Statement of Additional Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts. Securities of a foreign issuer may
present greater risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a matter of
practice, the Portfolio will not invest in the securities of a foreign issuer if
any such risk appears to the Adviser to be substantial. The Portfolio may not
invest more than 5% of its total assets in securities of foreign issuers. For
additional information on the risks of foreign securities, see "Risk Factors"
below.
In such proportions as, in the judgment of the Adviser, prevailing
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest in short-term money market instruments, securities issued and/or
guaranteed as to payment of principal and interest by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements.
RISK FACTORS
MARKET RISK. The Portfolio invests primarily in equity securities. As
with other mutual funds that invest primarily in
-7-
<PAGE> 60
equity securities, the Portfolio is subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities held by the Portfolio can be expected to vary inversely to changes in
prevailing interest rates. During periods of declining interest rates, the
market value of investment portfolios comprised primarily of fixed income
securities will tend to increase, and during periods of rising interest rates,
the market value will tend to decrease. Fixed income securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities. Changes in the financial strength of an issuer or changes in the
ratings of any particular security may also offset the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not offset cash income from such securities
but will be reflected in the Portfolio's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and savings and loan
associations and foreign branches of U.S. banks and savings and
-8-
<PAGE> 61
loan associations are subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and savings and loan
associations.
OTHER APPLICABLE POLICIES
Investment methods described in this Prospectus are among those which
the Portfolio has the power to utilize. Some may be employed on a regular basis;
others may not be used at all. Accordingly, reference to any particular method
or technique carries no implication that it will be utilized or, if it is, that
it will be successful.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of the Portfolio. The U.S. Government securities in
which the Portfolio invests are either guaranteed or issued by the U.S.
Government, its agencies, or instrumentalities. These securities include, but
are not limited to, direct obligations of the U.S. Treasury such as U.S.
Treasury bills, notes and bonds; notes, bonds, and discount notes issued or
guaranteed by U.S. Government agencies and instrumentalities, supported by the
full faith and credit of the United States; notes, bonds, and discount notes of
U.S. Government agencies or instrumentalities which receive or have access to
federal funding; and notes, bonds, and discount notes of other U.S. Government
instrumentalities supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. Government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by the issuer's right
to borrow an amount limited to a specific line of credit from the U.S. Treasury;
the discretionary authority of the U.S. Government to purchase certain
obligations of an agency or instrumentality; or the credit of the agency or
instrumentality.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above,
the Portfolio may purchase "money market instruments," including commercial
paper and bank obligations.
Investment by the Portfolio in commercial paper will consist of issues
that are rated at the time of purchase in highest rating category assigned by
S&P, Moody's or Fitch or, if unrated, deemed to be of comparable quality by the
Adviser at the time of
-9-
<PAGE> 62
purchase. Commercial paper may include variable and floating rate instruments.
See "Other Applicable Policies -- Variable and Floating Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits of U.S. or foreign banks and savings
and loan associations (collectively, "banks"), if the bank has capital, surplus
and undivided profits at the time of purchase in excess of $100,000,000 or if
the principal amount of the obligation is insured in full by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the Federal Deposit Insurance Corporation. Although the Portfolio may invest
in obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Investments in the obligations of
foreign banks or foreign branches of U.S. banks will not exceed 25% of the
Portfolio's total assets at the time of purchase.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase
rated or unrated variable and floating rate instruments. These instruments may
include variable rate master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated instruments purchased by the Portfolio will be determined
by the Adviser to be of comparable quality at the time of purchase to rated
instruments that may be purchased. The absence of an active secondary market for
a particular variable or floating rate instrument, however, could make it
difficult for the Portfolio to dispose of an instrument if the issuer were to
default on its payment obligation. The Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to its investment objective and policies, the Portfolio may agree to
purchase U.S. Government securities or other securities from financial
institutions such as banks and broker-dealers, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will enter into repurchase agreements only with
financial institutions such as banks and broker-dealers that the Adviser
believes to be creditworthy. During the term of any repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the
-10-
<PAGE> 63
securities subject to the agreement at not less than 102% of the repurchase
price (including accrued interest). Default by a seller could expose the
Portfolio to possible loss because of adverse market action or possible delay in
disposing of the underlying obligations. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although the Portfolio presently does not intend to enter
into repurchase agreements providing for settlement in more than seven days, the
Portfolio has the authority to do so subject to its limitation on the purchase
of illiquid securities described below. Repurchase agreements are considered to
be loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to its investment policies and
limitations, the Portfolio may borrow funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at an agreed upon date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price which
the Portfolio is obligated to pay. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, the
Portfolio may, from time to time, lend portfolio securities on a short-term
basis or a long-term basis, or both, to broker-dealers, banks or institutional
borrowers pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. Collateral for such loans may include cash or
marketable securities. The collateral must be valued daily and, should the
market value of the loaned securities increase, the borrower must furnish
additional collateral to the lending Portfolio. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when marketable securities are used as collateral. In accordance with
current Securities and Exchange Commission ("SEC") policies, the Portfolio is
currently limiting its securities lending to one-third of its total assets.
Loans are subject to termination by the Portfolio or the borrower at any time.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on
portfolio securities. These options will be used as a hedge to attempt to
protect securities which the Portfolio holds against decreases in value. The
Portfolio may also write covered call options on all or any portion of its
portfolio to generate income. The Portfolio may only write call options on
securities
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either held in its portfolio, or which it has the right to obtain without
payment of further consideration, or for which it has segregated cash or liquid
securities in the amount of any additional consideration.
The Portfolio may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by the Portfolio are
not traded on an exchange. The Portfolio purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks or
savings associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Portfolio
will not buy call options or write put options, other than to close out open
option positions, without further notification to shareholders.
When the Portfolio writes a call option, it risks not participating in
any rise in the value of the underlying security. In addition, when the
Portfolio purchases puts on financial futures contracts to protect against
declines in prices of portfolio securities, there is a risk that the prices of
the securities subject to the futures contracts may not correlate perfectly with
the prices of the securities in its portfolio. This may cause the futures
contract and its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Portfolio may lose the purchase price of
the put option. Finally, it is not certain that a secondary market for options
will exist at all times. Although the Adviser will consider liquidity before
entering into option transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any particular
time. The Portfolio's ability to establish and close out option positions
depends on this secondary market.
FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and sell
futures contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions. Futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract agrees
to make delivery of the type of instrument called for in the
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contract and the buyer agrees to take delivery of the instrument at the
specified future time.
Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices. An index
futures contract is an agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to the differences between the value of
the index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Portfolio may also write options and purchase put options on
futures contracts as a hedge to attempt to protect its portfolio securities
against decreases in value. When the Portfolio writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Portfolio is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Portfolio may also write put options and purchase call options on
futures contracts as a hedge against rising purchase prices of portfolio
securities. The Portfolio will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels existing
at the time it enters into the transactions. When the Portfolio writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if the option is
exercised. As a purchaser of a call option on a futures contract, the Portfolio
is entitled (but not obligated) to purchase a futures contract at a fixed price
at any time during the life of the option.
The Portfolio may not purchase or sell futures contracts or related
options if immediately thereafter the sum of the amount of margin deposits on
the Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of its total assets. When the Portfolio
purchases futures contracts, an amount of cash and liquid securities, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts are unleveraged. When the Portfolio sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
When the Portfolio uses futures and options on futures as hedging
devices, there is a risk that the prices of the
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securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in its portfolio. This may cause the futures contract
and any related options to react differently than the portfolio securities to
market changes. In addition, the Adviser could be incorrect in its expectations
about the direction or extent of market factors such as stock price movements.
In these events, the Portfolio may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Portfolio's ability to establish and close out futures and options positions
depends on this secondary market.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Portfolio may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act, which include, subject to certain exceptions, a prohibition on the
Portfolio investing more than 10% of the value of its total assets in such
securities. Investment companies in which the Portfolio may invest may impose
distribution fees as well as other types of commissions or charges. Such charges
will be payable by the Portfolio and, therefore, will be borne indirectly by its
shareholders. The Portfolio will invest in securities issued by other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio securities. See the Statement of Additional
Information under "Investment Objective and Policies -- Securities of Other
Investment Companies."
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which the Portfolio purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Portfolio to miss a price or yield
considered to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market value of the securities
purchased may vary from the purchase prices.
The Portfolio may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments.
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RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may invest in
restricted securities. Restricted securities are any securities in which the
Portfolio may invest pursuant to its investment objective and policies but which
are subject to restriction on resale under federal securities law. The Portfolio
will limit investments in illiquid securities (including certain restricted
securities not determined by the Fund's Board of Directors to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice) to no
more than 15% of its net assets.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. Section 4(2) commercial paper is restricted as to disposition
under federal securities law, and is generally sold to institutional investors,
such as the Portfolio, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolio believes that Section 4(2)
commercial paper and certain other restricted securities, which meet the
criteria for liquidity established by the Fund's Board of Directors, are quite
liquid. Therefore, the Portfolio intends to treat these securities as liquid and
not subject to the investment limitation applicable to illiquid securities. In
addition, because these securities are liquid, the Portfolio will not subject
such securities to the limitation otherwise applicable to restricted securities.
PORTFOLIO TRANSACTIONS. All orders for transactions in securities or
options on behalf of the Portfolio are placed by the Adviser with broker-dealers
that it selects. To the extent permitted by the 1940 Act and guidelines adopted
by the Fund's Board of Directors, the Portfolio may utilize the Distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and
may be changed only by a vote of a majority of the outstanding Shares of the
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objective and Policies."
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1. With respect to 75% of the value of its total assets, the Portfolio
will not purchase securities issued by any one issuer (other than cash, cash
items or securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities and repurchase agreements collateralized by such
securities), if as a result more than 5% of the value of its total assets would
be invested in the securities of that issuer. The Portfolio will not acquire
more than 10% of the outstanding voting securities of any one issuer.
2. The Portfolio will not invest 25% or more of the value of its total
assets in any one industry, provided, however, that the Portfolio may invest
more than 25% of the value of its total assets in cash or certain money market
instruments (including instruments issued by a U.S. branch of a domestic bank or
savings and loan association having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment), securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such securities.
3. The Portfolio will not issue senior securities, except that the
Portfolio may borrow money directly or indirectly through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, and except to the extent that the Portfolio may enter into
futures contracts. The Portfolio will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of its portfolio by
enabling the Portfolio to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolio will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
4. The Portfolio will not lend any of its assets except portfolio
securities in an amount up to one-third the value of its total assets. The
Portfolio shall not be prevented from purchasing or holding U.S. Government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions where
permitted by the Portfolio's investment objective, policies and limitations.
Except with respect to the Portfolio's policy regarding the borrowing
of money, if a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting solely from a change in
the value of the Portfolio's securities will not constitute a violation of such
limitation.
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PRICING OF SHARES
The Portfolio's net asset value per Share is determined by the
Administrator as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on each weekday,
with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently, one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Securities which are traded on a recognized stock exchange are valued
at the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Investments in debt securities
with remaining maturities of 60 days or less may be valued based upon the
amortized cost method. For further information about valuation of investments,
see "Net Asset Value" in the Statement of Additional Information.
The public offering price for each class of Shares is based upon net
asset value per Share plus, in the case of Investor A Shares, a front-end sales
charge. A class will calculate its net asset value per Share by adding the value
of the Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of the Portfolio will generally be lower than the net asset
value per Share of Trust, Institutional or Investor A Shares of the Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or
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other financial institutions (collectively "financial institutions"), acting on
their own behalf or on behalf of their qualified fiduciary accounts, employee
benefit, retirement plan or other such qualified accounts. Trust Shares are sold
to qualified purchasers without a sales charge imposed by the Fund or the
Distributor. Generally, investors purchase Trust Shares through a financial
institution, which is responsible for transmitting purchase orders directly to
the Fund.
Purchases may be effected on Business Days when the Adviser,
Distributor and Mercantile (the Custodian) are open for business. The Fund
reserves the right to reject any purchase order, including purchases made with
foreign and third party drafts or checks.
Financial institutions placing orders directly or on behalf of their
customers should contact the Fund at 1-800-452-4015. Investors may also call the
Fund for information on how to purchase Shares.
All shareholders of record will receive confirmations of Share
purchases, exchanges and redemptions in the mail. If Shares are held in the name
of banks or other financial institutions, such institution is responsible for
transmitting purchase, exchange and redemption orders to the Fund on a timely
basis, recording all purchase, exchange and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
If purchase orders are received in good form and accepted by the Fund
prior to 4:00 p.m. (Eastern time) on any Business Day, Trust Shares will be
priced according to the net asset value per Share next determined on that day
after receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Trust Shares of
the Portfolio for Trust Shares of another portfolio offered by the Fund.
Exchanges for Trust Shares in another portfolio are effected at net asset value
without payment of any exchange or sales charges. In addition, Trust Shares of
the Portfolio may be exchanged for Investor A Shares of the Portfolio in
connection with the distribution of assets held in a qualified trust, agency or
custodian account with the trust department of Mercantile or any of its
affiliated or
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correspondent banks. Such exchanges will also be effected at net asset value
without payment of any exchange or sales charges. The exchange privilege may be
exercised only in those states where the class of Shares of such other portfolio
may be legally sold.
The Fund reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time upon 60 days'
written notice to shareholders. An investor may telephone an exchange request by
calling his or her financial institution, which is responsible for transmitting
such exchange request to the Fund. See "Other Exchange or Redemption
Information" below. An investor should consult the financial institution or the
Fund for further information regarding procedures for exchanging Shares.
In addition to the Growth Equity Portfolio described in this
Prospectus, the Fund currently offers Trust Shares in the following portfolios:
- 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 Small Cap Equity Index Portfolio
- The ARCH International Equity Portfolio
- The ARCH Balanced Portfolio
For information concerning these portfolios, please call
1-800-452-4015. Shareholders exercising the exchange privilege with any of the
other portfolios offered by the Fund should request and review the portfolio's
prospectus carefully prior to making an exchange.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at the Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. Proceeds from
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redemptions of Trust Shares of the Portfolio with respect to redemption orders
received and accepted by the Fund before 4:00 p.m. (Eastern time) on a Business
Day normally are sent electronically to the financial institution that placed
the redemption order the next Business Day after the Distributor's receipt of
the order in good form. No charge for sending redemption payments electronically
is currently imposed by the Fund, although a charge may be imposed in the
future. The Fund reserves the right to send redemption proceeds electronically
within seven days after receiving a redemption order if, in the judgment of the
Adviser, an earlier payment could adversely affect the Portfolio.
The Transfer Agent may require a signature guarantee by an eligible
guarantor institution. For purposes of this policy, the term "eligible guarantor
institution" shall include banks, brokers, dealers, credit unions, securities
exchanges and associations, clearing agencies and savings associations as those
terms are defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption check is payable to the shareholder(s) of
record and (2) the redemption check is mailed to the shareholder(s) at the
address of record or the proceeds are either mailed or sent electronically to a
commercial bank account previously designated on the account application. An
investor with questions or needing assistance should contact the financial
institution servicing his or her account or the Distributor. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator. If, due to temporary
adverse conditions, investors are unable to effect telephone transactions,
investors are encouraged to follow the procedures described in "Other Exchange
or Redemption Information" below.
Neither the Fund nor its service contractors will be liable for any
loss, damage, expense or cost arising out of any telephone redemption effected
in accordance with the Fund's telephone redemption procedures, upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed, the Fund or its service contractors may be
liable for any losses due to unauthorized or fraudulent instructions. If, due to
temporary adverse conditions, investors are unable to effect telephone
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transactions, Investors are encouraged to follow the procedures described in
"Other Exchange or Redemption Information" below.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which
it has not yet received good payment. In such circumstances, the Fund may delay
the forwarding of proceeds until payment has been collected for the purchase of
such Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in the Portfolio upon 60
days' written notice if the balance in the shareholder's account drops below
$500. The Fund will not require a shareholder to redeem Portfolio Shares if the
value of the shareholder's account drops below $500 due to fluctuations in net
asset value. Share balances may also be redeemed pursuant to arrangements
between financial institutions and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust
Shares, Institutional Shares, Investor A Shares and Investor B Shares of the
Portfolio. YIELD AND TOTAL RETURN FIGURES WILL FLUCTUATE, ARE BASED ON
HISTORICAL EARNINGS, AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
methods used to compute the Portfolio's yields and total returns are described
below and in the Statement of Additional Information.
From time to time, performance information such as total return and
yield data for the Portfolio's Trust Shares may be quoted in advertisements or
in communications to shareholders. The yield is computed based on the net income
of such Shares during a 30-day (or one month) period identified in connection
with the particular yield quotation. More specifically, the yield is computed by
dividing the Portfolio's net income per
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Share during a 30-day (or one month) period by the net asset value per Share on
the last day of the period and annualizing the result.
The Portfolio's total returns may be calculated on an average annual
total return basis, and may also be calculated on an aggregate total return
basis, for various periods. Average annual total returns with respect to Trust
Shares reflect the average annual percentage change in value of an investment in
such Shares over the particular measuring period. Aggregate total returns
reflect the cumulative percentage change in value over the measuring period.
Both methods of calculating total returns assume that dividends and capital gain
distributions made by the Portfolio during the period are reinvested in the
Portfolio's Trust Shares. When considering average annual total return figures
for periods longer than one year, it is important to note that the Portfolio's
annual total return for any one year in the period might have been more or less
than the average for the entire period.
Performance data of the Portfolio's Trust Shares may be compared to the
performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by S&P, Lehman Brothers, Inc. or any of its affiliates, Ibbotson
Associates, Inc., Lipper Analytical Services, Inc. and Mutual Fund Forecaster.
References may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
American Banker, Institutional Investor, Pensions and Investments, U.S.A. Today,
Fortune, CDA/Weisenberger, Morningstar, Inc. and publications of a local or
regional nature. In addition to performance information, general information
about the Portfolio that appears in a publication such as those mentioned above
may be included in advertisements and in reports to shareholders.
Performance quotations of a class of Shares in the Portfolio represent
the Portfolio's past performance and should not be considered as representative
of future results. Any account fees charged by a bank or other financial
institution (as described in "Management of The Fund -- Service Organizations"
below) or other institutions will not be included in the calculations of the
Portfolio's yields and total returns. Such fees, if any, will reduce the
investor's net return on an investment in the Portfolio. Investors may call
1-800-452-4015 to obtain current yield and total return information.
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DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Portfolio are declared and
paid monthly as a dividend to shareholders of record. Dividends on each Share of
the Portfolio are determined in the same manner and are paid in the same amount,
irrespective of class, except that the Portfolio's Trust Shares and
Institutional Shares bear all expenses of the respective Administrative Services
Plans adopted for such Shares and the Portfolio's Investor A Shares and Investor
B Shares bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, the Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the Fund"
and "Other Information Concerning the Fund and Its Shares" below.
Net realized capital gains of the Portfolio, if any, are distributed at
least annually. All dividends and distributions paid on the Portfolio's Shares
are automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated on the account application, or (ii)
redeemed all the Shares held in the Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Management of the Fund believes that the Predecessor Portfolio
qualified as a "regulated investment company" under the Internal Revenue Code of
1986, as amended (the "Code") for the taxable year ended September 30, 1996. It
is intended that the Portfolio will qualify as a regulated investment company as
long as such qualification is in the best interests of shareholders. A regulated
investment company generally is exempt from federal income tax on amounts
distributed to shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if any) net of
certain deductions for such year. In general, the Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. It is the policy
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of the Portfolio to distribute as dividends substantially all of its investment
company taxable income and any net tax-exempt interest income each year. Such
dividends will be taxable as ordinary income to the Portfolio's shareholders who
are not currently exempt from federal income taxes, whether such income is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such dividends will
qualify for the dividends received deduction for corporations to the extent of
the total qualifying dividends received by the Portfolio from domestic
corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolio will generally have no tax liability with respect to such gains and
the distributions will be taxable to shareholders who are not currently exempt
from federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such dividends are received in
cash or reinvested in additional Shares.
An investor considering purchasing Shares of the Portfolio on or just
before the record date of any dividend or capital gains distribution should be
aware that the amount of the forthcoming distribution, although in effect a
return of capital, will be taxable.
Dividends declared by the Portfolio in October, November, or December
of any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the
Portfolio on December 31 of such year in the event such dividends are actually
paid during January of the following year.
The Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt- interest dividend on those Shares, any loss realized on the sale
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or exchange of those Shares will be disallowed to the extent of the
exempt-interest dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different
consequences from those of the federal income tax law described above. In
particular, shareholders should note that dividends paid by the Portfolio may be
taxable to investors under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest on obligations that,
if realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolio and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment
adviser to the Portfolio. MVA's principal office is located at One Mercantile
Center, Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a
wholly-owned subsidiary of Mercantile. As of December 31, 1996, MVA had
approximately $7.9 billion in assets under investment management, including the
Fund's assets, which were approximately $2.5 billion. MVA also serves as
investment adviser to each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and
in accordance with the Fund's investment policies, MVA manages the Portfolio,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
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For the services provided and expenses assumed pursuant to the
investment advisory agreement, MVA is entitled to receive fees, computed daily
and payable monthly, at the annual rate of .75% of the Portfolio's average daily
net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year
ended September 30, 1996 pursuant to the investment advisory agreement then in
effect with Mark Twain Bank, its former adviser, at the effective annual rate of
.75% of its average daily net assets after fee waivers. Without fee waivers, the
Predecessor Portfolio would have borne advisory fees at the annual rate of .75%
of its average daily net assets.
Carl C. Enloe is the person primarily responsible for the day-to-day
management of the Portfolio. Mr. Enloe, who joined MVA as a Senior Associate in
April 1997, served as head of investments at Mark Twain Bank since 1987. He
managed the Predecessor Portfolio since its inception.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolio's Administrator. The Administrator also serves
as the administrator to each of the Fund's other portfolios.
The Administrator generally assists in all aspects of the Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolio's arrangements with Service Organizations under the
Administrative Services Plan described below. For its services, the
Administrator is entitled to receive a fee, computed daily and payable monthly,
at the annual rate of .20% of the Portfolio's average daily net assets.
From time to time, the Administrator may voluntarily waive all or a
portion of the fees otherwise payable by the Portfolio in order to increase the
net income available for distribution to shareholders.
The Predecessor Portfolio bore administrative fees during the fiscal
year ended September 30, 1996 pursuant to the administrative services agreement
then in effect with Federated Administrative Services, its former administrator,
at the effective annual rate of .39% of its average daily net assets.
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DISTRIBUTOR
Trust Shares of the Portfolio are sold continuously by the Distributor,
BISYS Fund Services ("BISYS"), an affiliate of the Administrator. BISYS is a
registered broker-dealer with principal offices at 3435 Stelzer Road, Columbus,
Ohio 43219. The Distributor also acts as distributor to each of the Fund's other
portfolios.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to
the Trust Shares of the Portfolio. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .30% of the average daily net
assets of the Portfolio's Trust Shares owned beneficially by a Service
Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(collectively, the "Servicing Agreements") require the Service Organizations
receiving such compensation (which may include Mercantile and its affiliates) to
perform certain services, including providing administrative services with
respect to the beneficial owners of Trust Shares of the Portfolio, such as
establishing and maintaining accounts and records for their customers who invest
in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their
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customers beneficially owning such Shares. These fees would be in addition to
any amounts which may be received by such a Service Organization under its
Servicing Agreement with the Fund. The Fund's Servicing Agreements require a
Service Organization to disclose to its customers any compensation payable to
the Service Organization by the Portfolio and any other compensation payable by
its customers in connection with their investment in such Shares. Customers of
such Service Organizations receiving servicing fees should read this Prospectus
in light of the terms governing their accounts with their Service Organization.
CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of the Portfolio's assets. BISYS Fund
Services Ohio, Inc. also serves as the Portfolio's transfer agent and dividend
disbursing agent. Its address is 3435 Stelzer Road, Columbus, Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolio. 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
Portfolio 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 laws 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 Portfolio and its shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such
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<PAGE> 81
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 Portfolio. 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 the Portfolio to a
financial intermediary in connection with the investment of fiduciary funds in
the 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 Securities and Exchange Commission, the
Department of Labor or state securities commissions, should consult legal
counsel before entering into Servicing Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information
under "Investment Advisory and Administrative Contracts" and "Custodian and
Transfer Agent," the Fund's service contractors bear all of their own expenses
in connection with the performance of their services, except that the
Distributor is compensated pursuant to the Distribution and Services Plans (as
described below under "Other Information Concerning the Fund and its Shares").
The Portfolio's expenses are deducted from the total income of the Portfolio
before dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to the Adviser and Administrator, transfer agency fees,
fees and expenses of officers and directors who are not affiliated with the
Adviser or the Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general
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<PAGE> 82
expenses of the Fund that are not readily identifiable as belonging to a
particular portfolio will be allocated among all the Fund's portfolios by or
under the direction of the Board of Directors in a manner the Board determines
to be fair and equitable. Any expenses relating only to a particular class of
Shares within a portfolio will be borne solely by such class. See "Certain
Financial Information" and "Management of the Fund" above for additional
information regarding expenses of the Portfolio.
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation
and is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to
seven billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolio, which is classified as a diversified company under the 1940 Act: 50
million Trust Shares, 25 million Institutional Shares, 25 million Investor A
Shares and 25 million Investor B Shares. Institutional, Investor A and Investor
B Shares of the Portfolio are described in separate prospectuses which are
available from the Distributor at the telephone number on page 1 of this
Prospectus. The Board of Directors has also authorized the issuance of
additional classes of shares representing interests in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Portfolio will be issued without
Share certificates.
The Trust Shares of the Portfolio are described in this Prospectus. The
Portfolio also offers Institutional Shares, Investor A Shares and Investor B
Shares. Institutional Shares, which are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion, are
sold without a sales charge. Investor A Shares and Investor B Shares are sold
through selected broker/dealers and other financial intermediaries to individual
or institutional customers. Investor A Shares of the Portfolio are sold with a
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maximum 4.5% front-end sales charge and Investor B Shares of the Portfolio are
sold with a maximum 5.0% contingent deferred sales charge. Trust, Institutional,
Investor A and Investor B Shares bear their pro rata portion of all operating
expenses paid by the Portfolio, except that Trust Shares and Institutional
Shares bear all payments under the Portfolio's respective Administrative
Services Plans adopted for such Shares and Investor A Shares and Investor B
Shares bear all payments under the Portfolio's respective Distribution and
Services Plans adopted for such Shares. In addition, Institutional Shares of the
Portfolio bear the expense of certain sub-transfer agency fees.
Payments under the Administrative Services Plan for Institutional
Shares are made to Service Organizations for administrative services provided to
the Service Organizations' clients or account holders who are the beneficial
owners of Institutional Shares. Payments under the Administrative Services Plan
may not exceed .30% (on an annual basis) of the average daily net asset value of
the Portfolio's outstanding Institutional Shares.
Payments under the Distribution and Services Plans for Investor A
Shares and Investor B Shares are made to (i) the Distributor or another person
for providing distribution assistance and assuming certain related expenses, and
(ii) Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of
Investor A Shares or Investor B Shares. Payments under the Distribution and
Services Plan for Investor A Shares may not exceed .30% (on an annual basis) of
the average daily net asset value of Investor A Shares of the Portfolio.
Payments under the Distribution and Services Plan for Investor B Shares may not
exceed 1.00% (on an annual basis) of the average daily net asset value of
outstanding Investor B Shares of the Portfolio. Distribution payments made under
the Distribution and Services Plans are subject to the requirements of Rule
12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with
Investor A Shares and Investor B Shares of the Portfolio that are not offered in
connection with its Trust Shares or Institutional Shares, including an automatic
investment program and an automatic withdrawal plan. In addition, each class of
Shares offers different exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
portfolios of the Fund will vote together and not by class unless otherwise
required by law or permitted by the Board of Directors. All shareholders of a
particular portfolio will vote together as a single class on matters relating to
the portfolio's investment advisory agreement and
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<PAGE> 84
investment objective and fundamental policies. Only holders of Trust Shares,
however, will vote on matters relating to the Administrative Services Plan for
Trust Shares and only holders of Institutional Shares will vote on matters
pertaining to the Administrative Services Plan for Institutional Shares.
Similarly, only holders of Investor A Shares will vote on matters pertaining to
the Distribution and Services Plan for Investor A Shares and only holders of
Investor B Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor B Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of the Portfolio means, with respect to the approval of an investment
advisory agreement or a change in an investment objective or fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding Shares of the Portfolio (irrespective of class), or (b) 67% or
more of the Shares of the Portfolio (irrespective of class) present at a meeting
if more than 50% of the outstanding Shares of the Portfolio are represented at
the meeting in person or by proxy.
As of January 1, 1997, Mercantile and its affiliates possessed, of
record on behalf of their underlying customer accounts, voting or investment
power with respect to more than 25% of the Fund's outstanding Shares. Therefore,
Mercantile may be deemed to be a controlling person of the Fund within the
meaning of the 1940 Act.
Inquiries regarding the Portfolio may be directed to the Fund at
1-800-452-4015.
______________________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE
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PORTFOLIO'S STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY
REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE PORTFOLIO, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFERING BY THE PORTFOLIO, THE FUND OR THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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<PAGE> 1
Exhibit 17(d)
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
Statement of Additional Information
Part B
_________, 1997
<PAGE> 2
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Growth Equity Portfolio
_________, 1997
TABLE OF CONTENTS
Page
THE FUND ................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES ....................................... 1
NET ASSET VALUE ......................................................... 13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION .......................... 14
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION ........................... 16
DESCRIPTION OF SHARES ................................................... 20
ADDITIONAL INFORMATION CONCERNING TAXES ................................. 22
MANAGEMENT OF THE FUND .................................................. 27
INDEPENDENT AUDITORS .................................................... 36
COUNSEL ................................................................. 36
MISCELLANEOUS ........................................................... 36
FINANCIAL STATEMENTS .................................................... 38
APPENDIX A .............................................................. A-1
This Statement of Additional Information, which provides supplemental
information applicable to the ARCH Growth Equity Portfolio, is not a prospectus.
It should be read only in conjunction with the Portfolio's Prospectuses dated
_________, 1997 and is incorporated by reference in its entirety into the
Prospectuses. No investment in shares of the Portfolio should be made without
reading the relevant Prospectus. Copies of the Prospectuses may be obtained by
writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178 or by calling
(800) 452-ARCH (2724). Capitalized terms used but not defined herein have the
same meanings as in each Prospectus.
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<PAGE> 3
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end, management investment
company currently offering Shares in eighteen investment portfolios.
The ARCH Growth Equity Portfolio (the "Portfolio") commenced operations on
January 4, 1993 as a separate investment portfolio (the "Predecessor Portfolio")
of Arrow Funds, which was organized as a Massachusetts business trust. On
________, 1997, the Predecessor Portfolio was reorganized as a new portfolio of
the Fund. Prior to the reorganization, the Predecessor Portfolio offered and
sold shares of beneficial interests that were similar to the Fund's Investor A
Shares.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the description of the investment
objective and policies of the Portfolio described in the Prospectuses.
OTHER APPLICABLE INVESTMENT POLICIES
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities.
The Portfolio will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the Adviser's
opinion, the investment characteristics of the underlying common stock will
assist the Portfolio in achieving its investment objective. Otherwise the
Portfolio may hold or trade convertible securities. In selecting convertible
securities for the Portfolio, the Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
WARRANTS. The Portfolio may invests in warrants. Warrants are basically
options to purchase common stock at a specific price (usually at a premium above
the market value of the optioned common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging from less than a year to twenty
years or may be perpetual. However, most warrants have expiration dates after
which they are worthless. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no
<PAGE> 4
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to its investment policies
and limitations, the 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. In determining
average weighted portfolio maturity, an instrument issued or guaranteed by the
U.S. Government or an agency or instrumentality thereof, or a variable rate
instrument scheduled on its face to be paid in 397 days or less, will be deemed
to have a maturity equal to the period remaining until the next interest rate
adjustment. Other variable and floating rate obligations will be deemed to have
a maturity equal to the longer of the period remaining to the next interest rate
adjustment or the time the Portfolio can recover payment of principal as
specified in the instrument.
RESTRICTED AND ILLIQUID SECURITIES. The Securities and Exchange Commission
("SEC") has adopted Rule 144A which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act of 1933, as amended, for the resale of certain securities
to qualified institutional buyers. The purchase of securities which can be sold
under Rule 144A could have the effect of increasing the level of illiquidity in
the Portfolio to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these restricted securities.
The Adviser monitors the liquidity of restricted securities in the
Portfolio under the supervision of the Board of Directors. In reaching liquidity
decisions, the Adviser may consider the following factors, although such factors
may not necessarily be determinative: (1) the unregistered nature of a security;
(2) the frequency of trades and quotes for the security; (3) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (4) the trading markets for the security; (5) dealer
undertakings to make a market in the security; and (6) the nature of the
security and the nature of the marketplace trades (including the time needed to
dispose of the security, methods of soliciting offers, and mechanics of
transfer).
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SECURITIES LENDING. When the Portfolio lends its securities, it continues
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. The Portfolio may pay
reasonable administrative and custodial fees in connection with such loans and
may pay a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. Loans are subject to termination
at the option of the Portfolio or the borrower. 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 the Portfolio if a material event affecting the investment is to occur.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the Prospectuses,
the Portfolio intends to limit investments in securities issued by other
investment companies within the limits prescribed by the 1940 Act. The Portfolio
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; (c) not more than 3%
of the outstanding voting stock of any one investment company will be owned by
the Portfolio; and (d) not more than 10% of the outstanding voting stock of any
one investment company will be owned in the aggregate by the Portfolio and other
investment companies advised by the Adviser.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. When-issued and delayed
delivery transactions are made to secure what is considered to be an
advantageous price or yield for the Portfolio. No fees or other expenses, other
than normal transaction costs, are incurred. However, cash or liquid securities
of the Portfolio sufficient to make payment for the securities to be purchased
are segregated on the Portfolio's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The Portfolio does not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of more than
20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio may engage in futures and
options transactions as described below.
As a means of reducing fluctuations in the net asset value of its Shares,
the Portfolio may attempt to hedge all or a portion of its portfolio through the
purchase of put options on portfolio securities and put options on financial
futures
-3-
<PAGE> 6
contracts for portfolio securities. The Portfolio may attempt to hedge all or a
portion of its portfolio by buying and selling financial futures contracts, and
writing call options on futures contracts. The Portfolio may also write covered
call options on portfolio securities to attempt to increase current income.
The Portfolio will maintain its position in securities, options and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired. An option position may be closed out over-the-counter
or on an exchange which provides a secondary market for options of the same
series.
FUTURES CONTRACTS. The Portfolio may enter into futures contracts. A
futures contract is a firm commitment by two parties, i.e. the seller who agrees
to sell a specific type of security called for in the contract ("going short")
and the buyer who agrees to purchase the security ("going long") at a certain
time in the future.
Financial futures contracts call for the delivery of particular debt
instruments issued or guaranteed by the U.S. Treasury or by specified agencies
or instrumentalities of the U.S. Government at a certain time in the future.
Stock index futures contracts are similar to financial futures contracts, but
their price is based upon fluctuations in a particular index of stock prices
during a specified period, such as the S&P 500 Index. No physical delivery of
the underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract by the
Portfolio is to protect it from fluctuations in the value of securities caused
by unanticipated changes in interest rates or stock prices without necessarily
buying or selling securities. For example, in the fixed income securities
market, price moves inversely to interest rates. A rise in rates means a drop in
price. Conversely, a drop in rates means a rise in price. In order to hedge its
holdings of fixed income securities against a rise in market interest rates, the
Portfolio could enter into contracts to "go short" to protect itself against the
possibility that the prices of its fixed income securities may decline during
the Portfolio's anticipated holding period. The Portfolio would "go long" to
hedge against a decline in market interest rates.
STOCK INDEX OPTIONS. The Portfolio may purchase put options on stock
indexes listed on national securities exchanges or traded in the
over-the-counter market. A stock index fluctuates with changes in the market
value of the stock included in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the
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<PAGE> 7
Portfolio's portfolio securities correlate with price movements of the stock
index selected. Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indexes will be subject to
the ability of the Adviser to predict correctly movements in the direction of
the stock market or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Portfolio may purchase and
write listed put options on financial futures contracts. The Portfolio would use
these options only to protect portfolio securities against decreases in value
resulting from market factors such as anticipated increases in interest rates.
Unlike entering directly into a future contract which requires the
purchaser to buy a financial instrument on a set date at a specified price, the
purchase of a put option on a futures contract entitles (but does not obligate)
its purchaser to decide on or before a future date whether to assume a short
position at the specific price. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the option will increase in value. In such an
event, the Portfolio will normally close out its option by selling an identical
option. If the hedge is successful, the proceeds received by the Portfolio upon
the sale of the second option will be large enough to offset both the premium
paid by the Portfolio for the original option plus the realized decrease in
value of the hedged securities.
Alternatively, the Portfolio may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract of the
type underlying the option (for a price less than the strike price of the
option) and exercise the option. The Portfolio would then deliver the futures
contract in return for payment of the strike price. If the Portfolio neither
closes out nor exercises an option, the option will expire on the date provided
in the option contract, and only the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS. In addition to purchasing put
options on futures, the Portfolio may write listed call options on financial
futures contracts or over-
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<PAGE> 8
the-counter call options on futures contracts, to hedge its portfolio against an
increase in market interest rates. When the Portfolio writes a call option on a
futures contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any time
during the life of the option if the option is exercised. As market interest
rates rise and cause the price of futures to decrease, the Portfolio's
obligation under a call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Portfolio's call option position to
increase.
In other words, as the underlying future's price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that the
Portfolio keeps the premium received from the option. This premium can help to
substantially offset the drop in value of the Portfolio's portfolio securities.
Prior to the expiration of a call written by the Portfolio, or exercise of
it by the buyer, the Portfolio may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be less
than the premium received by the Portfolio for the initial option. The net
premium income of the Portfolio will then substantially offset the realized
decrease in value of the hedged securities.
The Portfolio will not maintain open positions in futures contracts it has
sold or call options it has written on financial futures if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Portfolio will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options positions within this
limitation.
"MARGIN" IN FUTURES TRANSACTIONS. Unlike the purchase or sale of a
security, the Portfolio does not pay or receive money upon the purchase or sale
of a futures contract. Rather, the Portfolio is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills with its custodian (or the
broker, if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
a futures contract's initial margin does not involve the borrowing by the
Portfolio to finance the transactions. 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
-6-
<PAGE> 9
contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Portfolio
pays or receives cash, called "variation margin," equal to the daily change in
the value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by the Portfolio but is
instead settlement between the Portfolio and the broker of the amount one would
owe the other if the futures contract expired. In computing its daily net asset
value, the Portfolio will mark to market its open futures positions.
The Portfolio is also required to deposit and maintain margin when it
writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES. The Portfolio may purchase
put options on portfolio securities to protect against price movements in
particular securities in its portfolio. A put option gives the Portfolio, in
return for a premium, the right to sell the underlying security to the writer
(seller) at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES. The Portfolio may
also write covered call options to generate income. As the writer of a call
option, the Portfolio has the obligation, upon exercise of the option during the
option period, to deliver the underlying security upon payment of the exercise
price. The Portfolio may sell call options either on securities held in its
portfolio or on securities which it has the right to obtain without payment of
further consideration (or securities for which it has segregated cash in the
amount of any additional consideration).
OVER-THE-COUNTER OPTIONS. The Portfolio may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options for those options on portfolio securities
held by the Portfolio and not traded on an exchange.
MONEY MARKET INSTRUMENTS. As stated in the Prospectuses and subject to its
investment policies, the Portfolio may invest in the following money market
instruments for temporary defensive or other purposes: commercial paper and
instruments of domestic and foreign banks and savings and loan associations
(collectively, "banks"), such as 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
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<PAGE> 10
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.
For purposes of its investment policies and limitations, the Portfolio
considers certificates of deposit and demand and time deposits issued by a U.S.
branch of a domestic bank having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items".
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements
with respect to its securities. Under the terms of a repurchase agreement, the
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 Portfolio's 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 Portfolio's
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
Portfolio may enter into reverse repurchase agreements (agreements under which
the Portfolio sells portfolio
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<PAGE> 11
securities and agrees to repurchase them at an agreed-upon date and price). At
the time the 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. The Portfolio intends to limit its
borrowings (including reverse repurchase agreements) during the current fiscal
year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Portfolio.
The Portfolio's rate of portfolio turnover may vary greatly from year to
year as well as within a particular year. Portfolio turnover may also be
affected by cash requirements for redemptions of shares and by requirements
which enable a Portfolio to receive certain favorable tax treatment. Portfolio
turnover will not be a limiting factor in making investment decisions.
At November 30, 1996, the Fund did not hold any securities of its regular
brokers or dealers or their parents.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On the exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. For the
fiscal years ended September 30, 1996, 1995 and 1994, the Predecessor Portfolio
paid $71,770, $42,563 and $111,324, respectively, in brokerage commissions on
brokerage transactions.
Securities purchased and sold by the Portfolio 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.
-9-
<PAGE> 12
The Portfolio may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolio will engage in this practice, however, only when the Adviser, in
its sole discretion, believes such practice to be otherwise in the Portfolio's
interests.
While the Adviser generally seeks competitive spreads or commissions, it
may not necessarily allocate each transaction to the underwriter or dealer
charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental investment
research to the Adviser may receive orders for transactions by the Portfolio.
Information so received is in addition to and not in lieu of services required
to be performed by the Adviser and does not reduce the advisory fees payable to
it by the Portfolio. Such information may be useful to the Adviser in serving
both the Portfolio and other clients, and conversely, supplemental information
obtained by the placement of business of other clients may be useful to the
Adviser in carrying out its obligations to the Portfolio. Portfolio securities
will not be purchased from or sold to the Adviser, the Distributor, the
Administrator or any "affiliated person" (as such term is defined under the 1940
Act) or any of them acting as principal, except to the extent permitted by the
SEC. In addition, the Portfolio will not give preference to the Adviser's
correspondents with respect to any transactions.
Investment decisions for the Portfolio are made independently from those
for other investment companies and accounts advised or managed by the Adviser.
Such other investment companies and accounts may also invest in the same
securities as the Portfolio. When a purchase or sale of the same security is
made at substantially the same time on behalf of the Portfolio and another
investment company or account, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which the Adviser
believes to be equitable to the Portfolio and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtained by
the Portfolio. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other investment companies or accounts in order to obtain best
execution.
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<PAGE> 13
INVESTMENT LIMITATIONS
The following investment limitations may be changed with respect to the
Portfolio only by an affirmative vote of a majority of the outstanding shares of
the Portfolio (as defined under "Other Information Concerning the Fund and Its
Shares--Miscellaneous" in the Portfolio's Prospectuses). These investment
limitations supplement those that appear in the Prospectuses.
1. The Portfolio will not sell any securities short or purchase any
securities on margin, but may obtain such short-term credits as are necessary
for clearance of purchases and sales of securities. The deposit or payment by
the Portfolio of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the purchase
of a security on margin.
2. The Portfolio will not purchase or sell commodities, commodity
contracts, or commodity futures contracts except to the extent that the
Portfolio may engage in transactions involving financial futures contracts or
options on financial futures contracts.
3. The Portfolio will not purchase or sell real estate, including limited
partnership interests, although the Portfolio may invest in securities of
issuers whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or which represent interests in real
estate.
4. The Portfolio will not underwrite any issue of securities, except as the
Portfolio may be deemed to be an underwriter under the Securities Act of 1933,
as amended, in connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
The following limitations may be changed by the Fund's Board of Directors
without shareholder approval, although shareholders will be notified before any
material change in these limitations becomes effective:
5. The Portfolio will not mortgage, pledge, or hypothecate any assets,
except to secure permitted borrowings. In these cases, the Portfolio may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of its total assets at the time of the pledge. The
purchase of securities on a when-issued basis will not be deemed to be a pledge
of the Portfolio's assets. For purposes of this limitation the following will
not be deemed to be pledges of the Portfolio's assets: (a) the deposit of assets
in escrow in connection with the writing of covered put or call options and,
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<PAGE> 14
(b) collateral arrangements with respect to (i) the purchase and sale of stock
options (and options on stock indexes) and (ii) initial or variation margin for
futures contracts.
6. The Portfolio will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options, certain
restricted securities not determined by the Fund's Board of Directors to be
liquid, and non-negotiable time deposits with maturities over seven days.
7. The Portfolio will limit its investment in other investment companies to
no more than 3% of the total outstanding voting stock of any investment company,
invest no more than 5% of its total assets in any one investment company, and
invest no more than 10% of its total assets in investment companies in general.
The Portfolio will purchase securities of closed-end investment companies only
in open market transactions involving only customary broker's commissions.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation, reorganization, or acquisition of assets. It should be
noted that investment companies incur certain expenses such as management fees
and, therefore, any investment by the Portfolio in shares of another investment
company would be subject to such duplicate expenses.
8. The Portfolio will not purchase put options on securities, unless the
securities are held in its portfolio and not more than 5% of the value of the
Portfolio's total assets would be invested in premiums on open put option
positions.
9. The Portfolio will not write call options on securities unless the
securities are held in its portfolio or unless the Portfolio is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment.
10. The Portfolio will not purchase securities of a company for the purpose
of exercising control or management.
11. The Portfolio will not invest more than 5% of its net assets in
warrants. No more than 2% of the Portfolio's net assets, to be included within
the overall 5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange. For
purposes of this investment restriction, warrants will be valued at the lower of
cost or market, except that warrants acquired by the Portfolio in units with or
attached to securities may be deemed to be without value.
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<PAGE> 15
NET ASSET VALUE
As stated in the applicable Prospectus, the net asset value per Share of
each class of the Portfolio is calculated by adding the value of all of the
portfolio securities and other assets of the Portfolio attributable to such
class, subtracting the liabilities charged to such class, and dividing the
result by the number of outstanding Shares of such class. "Assets belonging to"
each class of the Portfolio consist of the consideration received upon the
issuance of Shares of each class of the Portfolio together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, any
funds or payments derived from any reinvestment of such proceeds, and a portion
of any general assets of the Fund not belonging to a particular portfolio.
Assets belonging to each class of the Portfolio are charged with the direct
liabilities of each class of the Portfolio and with a share of the general
liabilities of the Fund allocated in proportion to the relative net assets of
the Portfolio and the Fund's other portfolios. The determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of general assets, with respect to a particular class of the Portfolio
are conclusive.
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
closing over-the-counter bid prices. Securities for which there were no
transactions are valued at the average of the current bid and asked prices.
Restricted securities and other assets for which market quotations are not
readily available are valued at fair value as determined in accordance with
guidelines approved by the Fund's Board of Directors. In computing net asset
value, the current value of the Portfolio's open futures contracts and related
options will be "marked-to-market."
Among the factors that ordinarily will be considered in valuing portfolio
securities are the existence of restrictions upon the sale of the security by
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
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<PAGE> 16
as to whether or not securities are restricted securities and as to the legal
requirements for public sale.
Additionally, the Administrator may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. The methods of valuation used by the pricing
service will be reviewed by the Administrator under the general supervision of
the Fund's Board of Directors. Several pricing services are available, one or
more of which may be used by the Administrator from time to time. In valuing the
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 the Portfolio are sold on a continuous basis by the Distributor.
As described in the applicable Prospectuses, Trust Shares and Institutional
Shares of the Portfolio are sold to certain qualified customers at their net
asset value without a sales charge. Investor A Shares of the Portfolio are sold
to retail customers at the public offering price based on the Portfolio's net
asset value plus a front-end load or sales charge as described in the applicable
Prospectus. Investor B Shares of the Portfolio are sold to retail customers at
net asset value but are subject to a contingent deferred sales charge which is
payable upon redemption of such Shares as described in the applicable
Prospectus.
The Fund may redeem Shares involuntarily if the net income with respect to
the 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 shares of beneficial interest of the Predecessor Portfolio, based on the
value of the Predecessor Portfolio's net assets and the number of outstanding
shares at the close of business on March 31, 1997 and the maximum front-end 3.5%
sales charge applicable on such date, is as follows:
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<PAGE> 17
TABLE
Net Assets $58,554,898
Outstanding Shares 3,862,138
Net Asset Value Per
Share $15.16
Sales Charge (3.50% of
offering price, 3.63%
of net asset value
per share) $ 0.55
Offering to Public $15.71
Under the 1940 Act, the Portfolio may suspend the right of redemption or
postpone the date of payment for Shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closing; (c)
the SEC has by order permitted such suspension; or (d) an emergency exists as
determined by the SEC. The Portfolio may also suspend or postpone the
recordation of the transfer of its Shares upon the occurrence of any of the
foregoing conditions.
In addition to the situations described in the Prospectuses under "How to
Purchase and Redeem Shares," the Portfolio may redeem Shares involuntarily to
reimburse the Portfolio for any loss sustained by reason of the failure of a
shareholder to make full payment for Shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio Shares as provided in the
applicable Prospectuses from time to time.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Shares in the Portfolio as
so described in the applicable Prospectus. Any rights an investor may have to
reduce (or have waived) the sales load applicable to an exchange, as may be
provided in a Prospectus, will apply in connection with any such exchange.
By use of the exchange privilege, the investor authorizes his or her
selected dealer, Service Organization or the Distributor to act on telephonic
instructions from any person representing himself or herself to be the investor
and believed by the selected dealer, Service Organization or the Distributor to
be genuine. The investor, selected dealer, Service Organization or the
Distributor must notify the Transfer Agent of
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<PAGE> 18
the investor's prior ownership of Portfolio Shares and account number. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
From time to time the yields and total returns of Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares (computed
separately) of the Portfolio may be quoted in advertisements, shareholder
reports or other communications to Shareholders.
The Portfolio's 30-day "yield" described in the Prospectuses is calculated
separately for Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares 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. The
Portfolio's net investment income per share (irrespective of class) 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 (6)
Yield = 2 [(-------) - 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 = the maximum offering price per Share on the
last day of the period.
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<PAGE> 19
For the purpose of determining interest earned during the period (variable
"a" in the formula), dividend income on equity securities held by the Portfolio
is recognized by accruing 1/360 of the stated dividend rate of the security each
day that the security is in the Portfolio. The Portfolio calculates interest
earned on any debt obligation held in its portfolio by computing the yield to
maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by the 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.
For the 30-day period ended March 31, 1997, the yield of shares of the
Predecessor Portfolio was .50%.
Total Return Calculations. The Portfolio computes its "average annual total
return" for each class of Shares by determining the average annual compounded
rate of return during specified periods that would equate the initial amount
invested in a particular class of Shares to the ending redeemable value of such
investment in the class of Shares by dividing the ending redeemable value of a
hypothetical $1,000 payment by $1,000 (representing a hypothetical initial
payment) and raising the quotient to a power equal to one divided by the number
of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
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<PAGE> 20
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.
The Portfolio computes its aggregate total returns separately for each
class of Shares by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested in a
particular class of Shares to the ending redeemable value of such investment in
the class of Shares. The formula for calculating aggregate total return is as
follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate total return
assume reinvestment of all income dividends and capital gain distributions on
the reinvestment dates during the period and include all recurring fees charged
to all Shareholder accounts, assuming an account size equal to the 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, the 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, (i) the average annual total returns
of shares of the Predecessor Portfolio for the 12-month period ended March 31,
1997 and for the period from January 4, 1993 (commencement of operations)
through March 31, 1997 were 7.78% and 12.12%, respectively, and (ii) the
aggregate
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<PAGE> 21
total return of shares of the Predecessor Portfolio for the period from January
4, 1993 (commencement of operations) through March 31, 1997 was 62.51%.
As stated in the Prospectus relating to Investor A Shares and Investor B
Shares, the Portfolio may also calculate total return figures without deducting
the maximum sales charge imposed on purchases or redemptions. The effect of not
deducting the sales charge will be to increase the total return reflected.
IN GENERAL
Investors may judge the performance of the Portfolio by comparing it 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., Salomon
Brothers, Inc., Standard & Poor's Ratings Group or any of their affiliates, the
Consumer Price 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: 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 Portfolio that appears in a publication such as those mentioned above
may be included in advertisements and in reports to Shareholders.
From time to time, the Fund may include the following types of information
in advertisements, supplemental sales literature and reports to Shareholders:
(1) discussions of general economic or financial principles (such as the effects
of inflation, the power of compounding and the benefits of dollar-cost
averaging); (2) discussions of general economic trends; (3) presentations of
statistical data to supplement such discussions; (4) descriptions of past or
anticipated portfolio holdings for one or more of the portfolios offered by the
Fund; (5)
-19-
<PAGE> 22
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 Portfolio; (7) comparisons of investment products (including the
Portfolio) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of rankings or ratings by recognized rating
organizations.
Such data are for illustrative purposes only and are not intended to
indicate past or future performance results of the Portfolio. Actual performance
of the Portfolio may be more or less than that noted in the hypothetical
illustrations.
Since performance will fluctuate, performance data for the Portfolio cannot
necessarily be used to compare an investment in the Portfolio's 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 Portfolio may be obtained by calling the Fund at: INVESTOR A OR INVESTOR B
SHARES - (800) 452-ARCH (2724); OR TRUST OR INSTITUTIONAL SHARES - (800)
452-4015.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors to
issue up to seven billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of the Fund into one or more
additional classes or by setting or changing in any one or more respects, their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority, the Fund's Board of Directors has
authorized the issuance of sixty-four classes of Shares representing interests
in eighteen 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, National Municipal Bond, Equity Income, Equity Index,
Growth & Income Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index,
International Equity and Balanced Portfolios. Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares in each portfolio are offered
through separate prospectuses to different categories of investors. Portfolio
Shares have no preemptive rights and only such conversion or exchange rights as
the Board may grant in its discretion. When issued for payment as described in
the applicable prospectuses,
-20-
<PAGE> 23
the Shares of the Fund's portfolios 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 each class of the Portfolio bear the same types of ongoing expenses.
In addition, Investor A Shares are subject to a front-end sales charge and
Investor B Shares are subject to a contingent deferred sales charge as described
in the Prospectuses. Each class of Shares also has different exchange
privileges.
In the event of a liquidation or dissolution of the Fund, Shares of the
Portfolio are entitled to receive the assets available for distribution
belonging to the Portfolio, and a proportionate distribution, based upon the
relative asset value of the Portfolio, of any general assets not belonging to
any particular portfolio of the Fund which are available for distribution.
Shareholders of the Portfolio are entitled to participate equally in the net
distributable assets of the Portfolio on liquidation, except that Trust Shares
of the Portfolio will be solely responsible for the Portfolio's payments
pursuant to the Administrative Services Plan for those Shares, Institutional
Shares of the Portfolio will be solely responsible for the Portfolio's payments
pursuant to the Administrative Service Plan for those Shares, Investor A Shares
of the Portfolio will be solely responsible for the Portfolio's payments
pursuant to the Distribution and Services Plan for those Shares and Investor B
Shares of the Portfolio will be solely responsible for the 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 the Portfolio will vote together in
the aggregate and not by class, except that only Trust Shares of the Portfolio
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Portfolio's Administrative Services Plan for Trust Shares,
only Institutional Shares of the Portfolio will be entitled to vote on matters
submitted to a vote of shareholders pertaining to the Portfolio's Administrative
Services Plan for Institutional Shares, only Investor A Shares of the Portfolio
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to the Portfolio's Distribution and Services Plan for Investor A
Shares, and only Investor B Shares of the Portfolio will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Portfolio's
Distribution and Services Plan for Investor B Shares. Further, shareholders of
all of the Fund's portfolios,
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<PAGE> 24
irrespective of series, will vote in the aggregate and not separately on a
portfolio-by-portfolio basis, except as otherwise required by law or when the
Board of Directors determines that the matter to be voted upon affects only the
interests of the shareholders of a particular portfolio or class of Shares. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding Shares of each
series (portfolio) affected by the matter. A portfolio is considered to be
affected by a matter unless it is clear that the interests of each portfolio in
the matter are identical or that the matter does not affect any interest of the
particular portfolio. Under the Rule, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
Shares of the 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 Portfolio will be issued without certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Portfolio and its shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisors with specific reference to
their own tax situations.
The Portfolio is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"). The Portfolio intends to qualify
each year as a regulated investment company. In order to so qualify for a
taxable year under the Code, the Portfolio must satisfy, in addition to the
distribution requirements described in the Prospectuses, certain other
requirements set forth below.
At least 90% of the gross income for a taxable year of the 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
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<PAGE> 25
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to the Portfolio's business of investing in such
stock, securities or currencies (the "90% gross income test").
The Portfolio also must derive less than 30% of its gross income for a
taxable year from gains realized on the sale or other disposition of securities
and certain other investments held for less than three months (the "30% test").
Interest (including original issue discount and accrued market discount)
received by the 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 the 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 the Portfolio's
forward contracts, futures contracts, options on futures contracts and other
investments that qualify as part of a "designated hedge," as defined in Section
851(g) of the Code, may be netted for purposes of determining whether the 30%
test is met.
Finally, at the close of each quarter of its taxable year, at least 50% of
the value of the 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 the Portfolio has not
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<PAGE> 26
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Portfolio does not hold more than 10% of the
outstanding voting securities of such issuer) and no more than 25% of the value
of the 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.
The Portfolio will designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to Shareholders within 60 days after the
close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to Shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the Shareholder has held these
Shares. Shareholders should note that, upon the sale or exchange of Portfolio
Shares, if the Shareholder has not held such Shares for more than six months,
any loss on the sale or exchange of those Shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the Shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains are
taxable at a maximum rate of 28%. For corporations, long-term capital gains and
ordinary income are both taxable at a maximum nominal rate of 35% (or at a
maximum marginal rate of 39% in the case of corporations having taxable income
between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The 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 the Portfolio does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its Shareholders). In such event,
dividend distributions would be taxable as ordinary income to Shareholders, to
the extent of the Portfolio's current and accumulated earnings and profits, and
would be eligible for the dividends received deduction allowed to corporations.
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<PAGE> 27
The Portfolio will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends or 31% of gross sale
proceeds paid to Shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on his or her
return payments of taxable interest or dividends.
In those states and localities which have income tax laws, the treatment of
the Portfolio and its Shareholders under such laws may differ from their
treatment under federal income tax laws. Under state or local law, distributions
of net income may be taxable to Shareholders as dividend income. Shareholders
are advised to consult their tax advisors concerning the application of state
and local taxes.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Portfolio. These rules may have a particular
impact on the amount of income or gain that the Portfolio must distribute to
Shareholders to comply with the distribution requirement, on the income or gain
qualifying under the 90% gross income test, and on the Portfolio's ability to
comply with the 30% test described above.
Generally, futures contracts and options on futures contracts held by the
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 the 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 the 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 the Portfolio, are subject to certain loss deferral rules
which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
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<PAGE> 28
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, the
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, the Portfolio would be allowed (in lieu of the
foregoing) to elect either (1) to offset gains or losses from positions which
are part of a mixed straddle by separately identifying each mixed straddle to
which such treatment applies, or (2) to establish a mixed straddle account for
which gains and losses would be recognized and offset on a periodic basis during
the taxable year. Under either election, the 40%-60% rule will apply to the net
gain or loss attributable to the futures contracts and options, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term.
Some of the non-U.S. dollar denominated investments that the Portfolio may
make, such as non-U.S. dollar-denominated debt securities and preferred stock,
may be subject to the provisions of Subpart J of the Code, which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S dollar. The types of transactions
covered by these provisions include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (2) the accruing of
certain trade receivables and payables; and (3) the entering into or acquisition
of any forward contract, futures contract, option and similar financial
instrument. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer also is treated as a transaction subject to the special currency rules.
However, foreign currency-related regulated futures contracts and non-equity
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. The
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
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<PAGE> 29
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 the
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.
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
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
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.
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* Vice From June, 1992 to present,
3435 Stelzer Road President and employee of BISYS Fund
Columbus, OH 43219 Assistant Services; From 1989 to June, 1992
Age: 51 Treasurer President of Leigh Investments
Consulting/Investments (investment
firm).
David Bunstine* Assistant From December, 1987 to present,
3435 Stelzer Road Secretary employee of BISYS Fund Services.
Columbus, OH 43219
Age: 31
</TABLE>
- ------------------------
* Messrs. Woodham, Winney, Grimm and Bunstine are "interested persons" of the
Fund as defined in the 1940 Act.
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<PAGE> 31
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 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 TOTAL
AGGREGATE RETIREMENT BENEFITS COMPENSATION
COMPENSATION ACCRUED AS PART OF FROM THE FUND AND
NAME OF DIRECTOR FROM THE FUND 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 $10,000.00 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 AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to the Portfolio. Pursuant to the advisory
agreement, MVA has agreed to provide investment advisory services as described
in the Portfolio's Prospectuses. MVA has agreed to pay all expenses incurred by
it in connection with its activities under the agreement other than the cost of
securities, including brokerage commissions, if any, purchased for the
Portfolio.
-29-
<PAGE> 32
The investment advisory agreement provides that MVA shall not be liable for
any error of judgment or mistake of law or for any loss suffered in connection
with the performance of its agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
For the fiscal years ended September 30, 1996, 1995 and 1994, Mark Twain
Bank, the former adviser of the Predecessor Portfolio, earned advisory fees of
$368,254, $253,371 and $234,468, respectively, of which $13,853, $15,785 and
$9,037, respectively, were waived.
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 Portfolio, furnish the Portfolio with
statistical and research data, clerical, accounting, and certain bookkeeping
services, stationery and office supplies, and certain other services required by
the Portfolio, and to compute the net asset value and net income of the
Portfolio. 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 Portfolio's financial accounts and records including
calculation of daily expense accruals, monitors compliance procedures for the
Portfolio with the Portfolio's investment objective, policies and limitations,
tax matters, and applicable laws and regulations, and generally assists in all
aspects of the Portfolio's operations. The Administrator bears all expenses in
connection with the performance of its services, except that the Portfolio bears
any expenses incurred in connection with any use of a pricing service to value
portfolio securities. See "Net Asset Value" above.
For the fiscal years ended September 30, 1996, 1995 and 1994, Federated
Administrative Services, the former administrator of the Predecessor Portfolio,
earned administrative fees of $71,420, $52,746 and $50,000, respectively.
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<PAGE> 33
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 Portfolio in order to increase the net income available for distribution
to Shareholders.
CUSTODIAN AND TRANSFER AGENT
Mercantile is Custodian of the Portfolio's 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 the Portfolio; (ii) receive and
disburse money on behalf of the Portfolio; (iii) collect and receive all income
and other payments and distributions on account of the 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
the Portfolio. Mercantile may, at its own expense, open and maintain a custody
account or accounts on behalf of the 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 Portfolio, 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 serving as sub-custodian.
In the opinion of the staff of the SEC, since the Custodian is an affiliate
of the 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, the Portfolio pays
Mercantile an annual fee. This fee, which is paid monthly, is calculated as the
greater of $6,000 or $.30 for each $1,000 of the Portfolio's average daily net
assets, plus $15.00 for each purchase, sale or delivery of a security upon its
maturity date, $50.00 for each interest collection or claim item, $20.00 for
each transaction involving GNMA, tax-free or other non-depository registered
items with monthly dividends or interest, $30.00 for each purchase, sale or
expiration of an option contract, $50.00 for each purchase, sale or expiration
of a futures contract, and $15.00 for each repurchase trade with an institution
other than Mercantile. In addition, the 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.
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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 the Portfolio's Shareholders; (iii) process transfers
and exchanges of Shares of the Portfolio; (iv) issue periodic statements for the
Portfolio's 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 the Portfolio.
DISTRIBUTOR AND SERVICE ORGANIZATIONS
BISYS Fund Services (the "Distributor"), an affiliate of the Administrator,
serves as the distributor of the Portfolio's Shares pursuant to a Distribution
Agreement. Under the Distribution Agreement, the Distributor, as agent, sells
Shares of the Portfolio on a continuous basis. The Distributor has agreed to use
appropriate efforts to solicit orders for the sale of Shares. With respect to
the Portfolio's Trust Shares and Institutional Shares, no compensation is
payable by the Fund to the Distributor for distribution services. With respect
to the Portfolio's Investor A Shares, the Distributor is entitled to receive a
portion of the front-end sales charge imposed on such Shares. The Distributor is
also entitled to the payment of contingent deferred sales charges upon the
redemption of Investor B Shares of the Portfolio. In addition, under the
Distribution and Services Plan for Investor A Shares described below, the
Distributor is entitled to a distribution fee at the annual rate of .10% for
distribution services and under the Distribution and Services Plan for Investor
B Shares described below, the Distributor is entitled to a distribution fee at
the annual rate of .75% for distribution services. For information regarding the
distribution services provided thereunder, see "Distribution and Services Plans"
under "Management of the Fund" in the Prospectuses and "The Plans" below.
THE PLANS
DISTRIBUTION AND SERVICES PLANS. As described in the Prospectuses, the Fund
has adopted separate Distribution and Services Plans with respect to Investor A
Shares and Investor B Shares of the Portfolio pursuant to the 1940 Act and Rule
12b-1 thereunder. Any material amendment to the Plans or arrangements with the
Distributor or Service Organizations (which may include selected dealers and
affiliates of the Fund's Adviser) must be approved by a majority of the Board of
Directors, including a majority of the directors who are not "interested
persons" of the Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested
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Directors") and by a majority of the Investor A Shares and 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 Shares or Investor B Shares of the
Portfolio. The Servicing Agreements provide that the Servicing Organizations
will render certain shareholder administrative support services to their
customers who are the record or beneficial owners of Investor A Shares 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 Shares or Investor B Shares and monitoring
services for their customers who have invested in Investor A Shares or Investor
B Shares, including the operation of telephone lines for daily quotations of
return information.
Service Organizations and other broker/dealers receive commissions from the
Distributor for selling Investor B Shares, which are paid at the time of the
sale. These commissions approximate the commissions payable with respect to
sales of Investor A Shares. The distribution fees payable under the Distribution
and Services Plan for Investor B Shares 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.
Shares of the Predecessor Portfolio were subject to a Distribution Plan
adopted pursuant to Rule 12b-1 under the 1940 Act. The Plan provided for payment
of fees to Federated Securities Corp., the former distributor of the Predecessor
Portfolio, at an annual rate of .25% of the Predecessor Portfolio's average
daily net assets, to finance activity which was primarily intended to result in
the sale of the Predecessor Portfolio's shares subject to the Plan. Pursuant to
the Plan, Federated Securities Corp. was permitted to pay fees to brokers for
distribution and administrative services and to administrators (i.e. financial
institutions) for administrative services provided to the Predecessor Portfolio
and its shareholders. For the fiscal years ended September 30, 1996,
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<PAGE> 36
1995 and 1994, brokers and administrators earned fees on behalf of the
Predecessor Portfolio of $122,734, $84,456 and $78,171, respectively, all of
which was voluntarily waived for each year.
ADMINISTRATIVE SERVICES PLANS. As described in the applicable Prospectuses,
separate Administrative Services Plans have been adopted with respect to Trust
Shares and Institutional Shares of the Portfolio. 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 and with broker-dealers and other organizations ("Service
Organizations") that purchase Trust Shares, Institutional Shares, Investor A
Shares or Investor B Shares of the 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 Portfolio on behalf of
customers; (ii) providing information periodically to customers showing their
positions in Trust, Institutional, Investor A 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 Trust, Institutional, Investor A or Investor B
Shares owned of record or beneficially by customers or the information necessary
for sub-accounting; (vi) as required by law, forwarding Shareholder
communications (such as proxies, Shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(vii) forwarding to customers proxy statements and proxies containing any
proposals regarding Servicing Agreements or the related Plan; (viii) aggregating
and processing purchase, redemption, and exchange requests from customers and
placing net purchase and redemption orders with the Fund's Distributor; (ix)
providing customers with a service that invests the assets of their accounts in
Trust, Institutional, Investor A or Investor B 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 Shares or Investor B Shares, including the operation
of telephone lines for daily quotations of return information.
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<PAGE> 37
OTHER PLAN INFORMATION. The Board of Directors has approved each Plan and
its respective arrangements with the Distributor, Service Organizations and
broker-dealers based on information provided by the Fund's service contractors
that there is a reasonable likelihood that these Plans and arrangements will
benefit the Portfolio and its shareholders. Pursuant to each Plan, the Board of
Directors reviews, at least quarterly, a written report of the amounts of
distribution fees and/or servicing fees expended pursuant to each Plan, the
Service Organizations to whom such fees were paid, and the purposes for which
the expenditures were made. So long as the Fund has one or more of the above
described Plans in effect, the selection and nomination of the members of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Fund will be committed to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer accounts,
Service Organizations, selected dealers, and other institutions may also charge
their customers directly for cash management and other services provided in
connection with the accounts, including, for example, account maintenance fees,
compensating balance requirements, or fees based upon account transactions,
assets, or income. An investor should therefore read the Prospectuses and this
Statement of Additional Information in light of the terms of his or her account
with a Service Organization, selected dealer, or other institution before
purchasing Trust, Institutional, Investor A or Investor B Shares of the
Portfolio.
FUND EXPENSES. As discussed previously, the Portfolio's service contractors
bear all of their own expenses in connection with the performance of their
services, except that the Portfolio bears certain expenses incurred pursuant to
the Distribution and Services Plans, the Administration Services Plans and
certain sub-transfer agency fees (with respect to Institutional Shares). The
Portfolio also bears the expenses incurred in its operations. Fund expenses
include taxes, interest, fees and salaries of its directors and officers, SEC
fees, state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to Shareholders,
advisory and administration fees, distribution fees for distribution services
provided to and expenses assumed in connection with marketing Investor A Shares
and Investor B Shares, charges of the Custodian and Transfer Agent, Service
Organization fees, certain insurance premiums, outside auditing and legal
expenses, costs of any independent pricing service, costs of Shareholder reports
and meetings and any extraordinary expenses. The Portfolio also pays for
brokerage fees, commission and other transaction charges (if any) incurred in
connection with the purchase and sale of portfolio securities.
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<PAGE> 38
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, certified public accountants, with offices at Two
Nationwide Plaza, Columbus, Ohio 43215, serves as independent auditors for the
Fund. KPMG Peat Marwick LLP performs an annual audit of the Fund's financial
statements. Reports of its activities are provided to the Fund's Board of
Directors.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the Fund,
is a partner), Suite 1100, 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, is counsel to the Fund and will pass upon certain legal matters on
its behalf.
MISCELLANEOUS
As of June 3, 1997, Mercantile held of record 99.997% and 30.171% of the
outstanding Institutional and Trust shares, respectively, in the Treasury Money
Market Portfolio; 94.378% and 32.788% of the outstanding Institutional and Trust
shares, respectively, in the Money Market Portfolio; 78.265% of the outstanding
Trust shares in the Tax-Exempt Money Market Portfolio; 95.061% and 94.922% of
the outstanding Institutional and Trust shares, respectively, in the U.S.
Government Securities Portfolio; 99.999% of the outstanding Trust shares in the
Intermediate Corporate Bond Portfolio; 99.999% and 98.987% of the outstanding
Institutional and Trust shares, respectively, in the Government & Corporate Bond
Portfolio; 99.029% of the outstanding Trust Shares in the Bond Index Portfolio;
96.338% of the outstanding Trust shares in the Short-Intermediate Municipal
Portfolio; 99.232% of the outstanding Trust shares in the Missouri Tax-Exempt
Bond Portfolio; 99.926% of the outstanding Trust shares in the National
Municipal Bond Portfolio; 99.999% and 96.061% of the outstanding Institutional
and Trust shares, respectively, in the Growth & Income Equity Portfolio; 99.999%
and 48.974% of the outstanding Institutional and Trust shares, respectively, in
the Small Cap Equity Portfolio; 96.282% and 93.840% of the outstanding
Institutional and Trust shares, respectively, in the International Equity
Portfolio; 97.799% of the outstanding Trust shares in the Equity Income
Portfolio; 99.999% of the outstanding Trust shares in the Equity Index
Portfolio; and 99.999% and 99.849% 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.
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<PAGE> 39
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 (12.388%); BISYS
Fund Services, FBO Mercantile EOD Sweep, Attn: Linda Zebre, First and Market
Building, Suite 300, Pittsburgh, PA 15222 (47.309%); Investor A Shares - BHC
Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th Floor,
2005 Market Street, Philadelphia, PA 19103-0000 (51.657%); Mercantile Bank of
St. Louis, NA Custodian Richard E. Crippa, Rollover IRA, 2948 Castleford Dr.,
Florissant, MO 63033-0000 (8.938%); St. Louis Regional Medical Center, Attn:
Sharon Edison, 5535 Delmar Blvd., St. Louis, MO 63112 (34.508%).
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 (14.282%); Investor A Shares
- - BHC Securities Inc., Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th
Floor, 2005 Market St., Philadelphia, PA 19103-0000 (84.033%); BISYS Fund
Services, FBO Mercantile EOD Sweep, Attn: Linda Zerbe, First and Market
Building, Suite 300, Pittsburgh, PA 15222 (35.324%); Mercantile Investment
Services Inc., Firm Capital Account, Attn: Judy Harbelt, P.O. Box 790121, St.
Louis, MO 63179-0121 (5.072%); Investor B Shares - Mercantile Bank of St. Louis,
NA Custodian Pheba A. Steinmeyer, IRA, HC 3 Box 1266, Rocky Mt., MO 65072-9042
(5.511%); Alberta Buenemann and Ernie W. Buenemann Trust, Alberta Buenemann
Revocable Living Trust, 1649 Sand Run Road, Troy, MO 63379 (7.405%); Mercantile
Bank of St. Louis, NA Custodian Wayne D. Matheis, Rollover IRA, RR 2 Box 142,
Russellville, MO 65074 (12.082%); Merlin R. Burke and Mary Alice Burke, 2516
Highland, Sedalia, MO 65301 (5.159%); Mercantile Bank of St. Louis, NA Custodian
Edwin C. Hogrebe, IRA, 5537 Goethe, St. Louis, MO 63109 (5.009%); Homer R.
Turner and Edna M. Turner Trust, Edna M. Turner Trust, 33409 E. Pink Hill Rd.,
Grain Valley, MO 64029 (7.869%).
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 (6.961%); BISYS Fund Services,
FBO Mercantile EOD Sweep, Attn: Linda Zerbe, First and Market Building, Suite
300, Pittsburgh, PA 15222 (5.133%); Investor A Shares - BHC Securities Inc.,
Attn: Cash Balance Sweep Dept., 1 Commerce Square, 11th Floor, 2005 Market St.,
Philadelphia, PA 19103-0000 (96.536%).
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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 (12.753%); Mercantile Bank
of St. Louis, NA Custodian Edmund C. Albrecht, Jr., IRA, 236 Carlyle Lake Dr.,
St. Louis, MO 63141 (6.076%); Mercantile Bank of St. Louis, NA Custodian William
J. Gaffney, IRA Rollover, 1424 Bupp Road, St. Louis, MO 63131 (5.105%); Investor
B Shares - BHC Securities Inc., FAO 24130191, Attn: Mutual Funds Dept., 1
Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103 (12.515%);
BHC Securities Inc., FAO 24342961, Attn: Mutual Funds Dept., 1 Commerce Square,
2005 Market St., Suite 1200, Philadelphia, PA 19103 (8.052%); BHC Securities
Inc., FAO 24335526, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market
St., Suite 1200, Philadelphia, PA 19103 (6.477%).
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 - Gary E. Timmons, P.O. Box
3149, Laredo, TX 78044 (23.250%); Jill Larson, 27165 Punario, Mission Viejo, CA
92692-3204 (23.250%); George Gregory Timmons, 1332 E. Desert Cv., Phoenix, AZ
85020 (23.250%); Betty Jane Eckhart, Trust Betty Jane Eckhart Trust U/A, 28265
Beach Rd., Sarcoxie, MO 64862 (29.165%);
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 Pamela Butler Masson, 100
Choctaw Place, Mandeville, LA 70471-0000 (90.147%); Mary Helen Schaeffer, 5801
Quantrell Ave., No. L3, Alexandria, VA 22312 (7.677%).
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 (12.853%); Mercantile Bank of St. Louis, NA
Custodian Eugene F. Tucker, IRA Rollover, 70 Berkshire, St. Louis, MO 63117
(5.886%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian Gerald
C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507 (5.561%); Mercantile Bank of
St. Louis, NA Custodian Wayne D. Matheis, Rollover IRA, RR 2 Box 142,
Russelville, MO 65074 (7.145%); BHC Securities Inc., FAO
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24297770, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite
1200, Philadelphia, PA 19103 (10.564%); BHC Securities Inc., FAO 24337035, Attn:
Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200,
Philadelphia, PA 19103 (5.767%).
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 - James
Sutten, P.O. Box 2465, Inverness, FL 34451-2465 (6.486%); Lane P. Baker and
Madelynn A. Baker, P.O. Box 979, Essex, CT 06426-0000 (93.447%).
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 (33.666%); Investor B Shares - BHC Securities
Inc., FAO 24293705, Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market
St., Philadelphia, PA 19103 (5.070%); BHC Securities Inc., FAO 2429054, Attn:
Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200,
Philadelphia, PA 19103 (10.823%); BHC Securities Inc., FAO 24286677, Attn:
Mutual Funds Dept., 1 Commerce Square, Suite 1200, Philadelphia, PA 19103
(6.510%); Corelink Financial, Inc., P.O. Box 4054, Concord, CA 94524 (33.272%).
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 - Lane P. Baker and
Madelynn A. Baker, P.O. Box 979, Essex, CT 06426-0000 (9.267%); Gail P. Ruga,
207 Aintree Road, Rolla, MO 65401-3760 (21.016%); Kim P. Wheeler, Stifel
Nicolaus & Co., Inc., 500 North Broadway, St. Louis, MO 63102 (21.016%); BHC
Securities Inc., Trade House Account, Attn: Mutual Funds Dept., 1 Commerce
Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103 (22.779%); Merrill
Lynch Pierce Fenner & Smith, FBO James M. Jenkins A, Acct. No. 431- 12C46, Attn:
Stock Powers, 4800 Dear Lake Dr. East, 2nd Floor, Jacksonville, FL 32246
(20.084%); Charles O. Lewis, 1825 39th Avenue, Vero Beach, FL 32960 (5.026%);
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,
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<PAGE> 42
5801 Quantrell Ave., No. L3, Alexandria, VA 22312 (9.050%); Mary Ann Butler and
Pamela Butler Masson, 100 Choctaw Place, Mandeville, LA 70471-0000 (55.739%);
Betty Jane Eckhart, Trust Betty Jane Eckhart Trust U/A, 28 265 Beech Road,
Sarcoxie, MO 64862 (33.569%); 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 (36.117%).
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 Dr.,
Mail Stop D13, North Quincy, MA 02171 (16.914%); The Northern Trust Co., Trust
Carpenters Pension Trust Fund, Attn: Mutual Fund, P.O. Box 92956, Chicago, IL
60675-2956 (7.590%); American Bar Endowment, 750 N. Lake Shore Dr., Chicago, IL
60611 (7.078%); Investor A Shares - BHC Securities Inc., Trade House Account,
Attn: Mutual Fund Dept., 1 Commerce Square, 2005 Market St., Philadelphia, PA
19103-0000 (42.092%).
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 (5.958%); Investor A Shares - BHC Securities Inc.,
Trade House Account, 2005 Market St., Philadelphia, PA 19103-0000 (43.822%);
Frances Dakers, 200 E. 89th St. 28D, New York, NY 10128 (11.982%).
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
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Account, Attn: Mutual Fund Dept., 1 Commerce Square 2005 Market St.,
Philadelphia, PA 19103-0000 (19.088%); Mercantile Bank of St. Louis, NA
Custodian Robert W. Davis, Rollover IRA, 818 Broadway, Elsberry, MO 63343
(5.294%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian Edmund
Frances Codr, Rollover IRA, 2820 S. 42nd St., St. Joseph, MO 64503 (5.627%); BHC
Securities Inc., FAO 24176688, Attn: Mutual Funds Dept., 1 Commerce Square, 2005
Market St., Philadelphia, PA 19103 (10.530%); BHC Securities Inc., FAO 24273057,
Attn: Mutual Funds Dept., 1 Commerce Square, 2005 Market St., Philadelphia, PA
19103 (6.224%); Mercantile Bank of St. Louis, NA Custodian Richard Dell Woods,
SEP IRA, 3114 Pickett Rd., St. Joseph, MO 64503 (7.111%); Mercantile Bank of St.
Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(5.904%).
On the basis of information received from these institutions, the Fund
believes that substantially all of the Shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such Shares on behalf of their underlying
accounts.
FINANCIAL STATEMENTS
The financial statements of the Predecessor Portfolio for the fiscal year
ended September 30, 1996 and periods prior thereto, which have been incorporated
by reference into this Statement of Additional Information, and the information
included in the Financial Highlights table for the same periods, which appears
in the Prospectus for Investor A and Investor B Shares of the Portfolio, have
been audited by KPMG Peat Marwick LLP, independent accountants for the
Predecessor Portfolio, whose report thereon is incorporated by reference into
this Statement of Additional Information, and have been incorporated by
reference, or included, in reliance upon the report of said firm as independent
accountants given upon their authority as experts in accounting and auditing.
The financial statements of the Predecessor Portfolio for the six months ended
March 31, 1997, which are incorporated by reference into this Statement of
Additional Information, and the information included in the Financial Highlights
table for the same period which appears in the Prospectus for Investor A and
Investor B Shares of the Portfolio, are unaudited.
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<PAGE> 44
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.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
<PAGE> 45
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 factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
A-2
<PAGE> 46
"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 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-
A-3
<PAGE> 47
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.
"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.
A-4
<PAGE> 48
"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 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
A-5
<PAGE> 49
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.
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
A-6
<PAGE> 50
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 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.
A-7
<PAGE> 51
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:
"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-8
<PAGE> 52
"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 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,
A-9
<PAGE> 53
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 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.
A-10
<PAGE> 54
"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.
A-11
<PAGE> 1
Exhibit 17(e)
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> 2
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> 3
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> 4
Exhibit 17(e)
INVESTOR SHARES
[LOGO]
THE ARCH FUND(R), INC.
PROSPECTUS
March 31, 1997
Money Market Portfolios
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
Taxable Bond Portfolios
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
Tax-Exempt Bond Portfolios
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Stock Portfolios
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Small Cap Equity Portfolio
International Equity Portfolio
Balanced Portfolio
[ARCH LOGO]
THE ARCH FUNDS
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights............................................................................ 3
Certain Financial Information......................................................... 6
Expense Summary for Investor A and Investor B Shares.................................. 7
Financial Highlights.................................................................. 12
Investment Objectives, Policies and Risk Considerations............................... 25
Pricing of Shares..................................................................... 52
How to Purchase and Redeem Shares..................................................... 53
Purchase of Shares.................................................................. 53
Automatic Investment Program (AIP).................................................. 54
Applicable Sales Charges -- Investor A Shares of the Equity and Bond Portfolios..... 55
Reduced Sales Charges -- Investor A Shares of the Equity and Bond Portfolios........ 56
Applicable Sales Charges -- Investor B Shares of the CDSC Portfolios................ 57
Exchange Privileges................................................................. 60
Redemption of Shares................................................................ 61
Redemption by Mail.................................................................. 61
Redemption by Telephone............................................................. 62
Automatic Withdrawal Plan........................................................... 62
Purchase of Investor A Shares at Net Asset Value.................................... 63
Other Exchange or Redemption Information............................................ 63
Yields and Total Returns.............................................................. 63
Dividends and Distributions........................................................... 65
Taxes................................................................................. 66
Management of the Fund................................................................ 69
Information Concerning the Fund and Its Shares........................................ 75
Description of Shares............................................................... 75
</TABLE>
<PAGE> 6
March 31, 1997
THE ARCH FUND(R), INC.
INVESTOR A SHARES AND INVESTOR B SHARES
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company that currently offers Shares in sixteen investment portfolios. This
Prospectus describes the Investor A Shares in each of those portfolios and the
Investor B Shares in ten of those portfolios. Except as provided below, Investor
A Shares and Investor B Shares are sold through selected broker/dealers and
other financial intermediaries to individual or institutional customers.
Investor A Shares (with the exception of Investor A Shares in the money market
portfolios) are sold with a front-end sales charge. Investor B Shares are sold
with a contingent deferred sales charge.
THE ARCH TREASURY MONEY MARKET PORTFOLIO'S investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal.
THE ARCH MONEY MARKET PORTFOLIO'S investment objective is to seek current
income with liquidity and stability of principal.
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO'S investment objective is to seek
as high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal.
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO'S investment objective is to
seek a high rate of current income that is consistent with relative stability of
principal.
THE ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO'S investment objective is to
seek as high a level of current income as is consistent with preservation of
capital.
THE ARCH BOND INDEX PORTFOLIO'S investment objective 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 debt securities, as represented by the Lehman Brothers Aggregate
Bond Index.
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO'S investment objective is to
seek the highest level of current income consistent with conservation of
capital.
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO'S investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital.
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO'S investment objective is to
seek as high a level of interest income exempt from federal income tax as is
consistent with conservation of capital.
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO'S investment objective is to seek
as high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital.
THE ARCH EQUITY INCOME PORTFOLIO'S investment objective is to seek to
provide an above-average level of income consistent with long-term capital
appreciation.
THE ARCH EQUITY INDEX PORTFOLIO'S investment objective is to seek 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 ARCH GROWTH & INCOME EQUITY PORTFOLIO'S investment objective is to
provide long-term capital growth, with income a secondary consideration.
THE ARCH SMALL CAP EQUITY PORTFOLIO'S investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. The Portfolio was formerly known as the Emerging Growth
Portfolio.
THE ARCH INTERNATIONAL EQUITY PORTFOLIO'S investment objective is to provide
capital growth consistent with reasonable investment risk by investing
principally in foreign equity securities, most of which will be denominated in
foreign currencies.
THE ARCH BALANCED PORTFOLIO'S investment objective is to maximize total
return through a combination of growth of capital and current income consistent
with the preservation of capital.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 7
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolios; Mercantile serves as custodian; BISYS
Fund Services Ohio, Inc. (the "Administrator") serves as administrator; and
BISYS Fund Services (the "Distributor") serves as sponsor and distributor. In
addition, Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") serves as
sub-adviser for the International Equity Portfolio.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated March 31, 1997, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. An investor may obtain the Statement of Additional Information
without charge by writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178
or by calling 1-800-452-ARCH(2724).
AN INVESTMENT IN THE TREASURY MONEY MARKET PORTFOLIO, MONEY MARKET PORTFOLIO
OR TAX-EXEMPT MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY OF THESE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolios involves investment risk, including possible loss of
principal.
2
<PAGE> 8
HIGHLIGHTS
The ARCH Fund, Inc. (the "Fund") is an open-end, management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended. The Fund offers investment opportunities in
sixteen investment portfolios: the ARCH TREASURY MONEY MARKET, MONEY MARKET AND
TAX-EXEMPT MONEY MARKET PORTFOLIOS (the "Money Market Portfolios") and the ARCH
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 (the "Equity and
Bond Portfolios" and, together with the Money Market Portfolios, the
"Portfolios"). Each Portfolio represents a separate pool of assets with
different investment objectives and policies (as described below under
"Investment Objectives, Policies and Risk Considerations"). MVA serves as
adviser, Mercantile as custodian, BISYS Fund Services Ohio, Inc. as
administrator and BISYS Fund Services as sponsor and distributor. In addition,
Clay Finlay serves as sub-adviser for the International Equity Portfolio. For
information on expenses, fee waivers, and services, see "Certain Financial
Information," "Financial Highlights" and "Management of the Fund."
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Money Market Portfolios each seek to maintain a net asset value of
$1.00 per Share. Each Money Market Portfolio's assets are invested in
dollar-denominated debt securities with remaining maturities of 397 days (13
months) or less as defined by the Securities and Exchange Commission, and each
Money Market Portfolio's dollar-weighted average portfolio maturity will not
exceed 90 days. All securities acquired by the Money Market Portfolios will be
determined by MVA, under guidelines approved by the Fund's Board of Directors,
to present minimal credit risks and to be rated in the highest category (or
deemed comparable in quality) at the time of purchase. There can be no assurance
that the Money Market Portfolios will be able to achieve a stable net asset
value on a continuous basis.
The U.S. Government Securities and Government & Corporate Bond Portfolios
are designed for investors who seek higher current income than is typically
offered by money market funds and who are willing to accept a variable Share
value to achieve that objective.
The Intermediate Corporate Bond Portfolio is designed for investors who
seek higher current income than is typically offered by money market funds with
less principal volatility than is normally associated with a long-term bond
fund.
The Bond Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in fixed income securities, and
who seek investment results that, before deduction of operating expenses,
approximate the price and yield performance of U.S. Government, mortgage-backed,
asset-backed and corporate debt securities, as represented by the Lehman
Brothers Aggregate Bond Index.
The Short-Intermediate Municipal Portfolio is designed for investors who
seek a yield that is higher than a municipal money market fund with less
principal volatility than is normally associated with a long-term municipal bond
fund.
The Missouri Tax-Exempt Bond Portfolio is designed for investors who seek a
higher rate of return than that typically offered by tax-exempt money market
funds and who are willing to accept a variable Share value to achieve that
objective.
The National Municipal Bond Portfolio is designed for investors who seek
current income that is exempt from regular federal income tax and relative
stability of principal.
3
<PAGE> 9
The Equity Income Portfolio is designed for investors who seek an
above-average level of income consistent with long-term capital appreciation,
and who are prepared to accept the risks associated with an investment in equity
securities.
The Equity Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in equity securities, and who
seek investment results that, before deduction 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 Growth & Income Equity, Small Cap Equity and Balanced Portfolios are
designed for investors who seek capital growth, and who are prepared to accept
the risks associated with equity securities.
The International Equity Portfolio is designed for investors who seek
capital growth, wish to diversify their investments beyond the United States,
and are prepared to accept the risks entailed in such investments. These risks
may be greater than those associated with investments in the equity securities
of companies located in the United States.
The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios seek to provide income
exempt from federal tax. In addition, the Missouri Tax-Exempt Bond Portfolio
seeks to provide income that is also exempt from Missouri income tax.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, purchase variable and floating rate
instruments, enter into repurchase agreements and reverse repurchase agreements,
make securities loans, invest in options, futures and index-based depository
receipts, and make limited investments in illiquid securities and securities
issued by other investment companies. These investment practices involve
investment risks of varying degrees. For example, the absence of a secondary
market for a particular variable or floating rate instrument could make it
difficult for a Portfolio to dispose of an instrument if the issuer were to
default on its payment obligation. Default by a counterparty to a repurchase
agreement or securities lending transaction could expose a Portfolio to loss
because of adverse market action or possible delay in disposing of the
underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by a Portfolio will decline below
the repurchase price which the Portfolio is obligated to pay. Purchasing options
is a specialized investment technique which entails a substantial risk of loss
of amounts paid as premiums to option writers. Investments in futures and
related options are subject to the ability of the Adviser to correctly predict
movements in the direction of the market and there is no assurance that a liquid
market will exist for a particular futures contract at any particular time.
The Equity and Bond Portfolios, other than the Bond Index and Equity Index
Portfolios, may engage in short-term trading, which may also involve greater
risk and increase such Portfolios' expenses. The International Equity Portfolio
will invest principally in foreign equity securities, most of which will be
denominated in foreign currencies. The other Portfolios do not invest in
instruments denominated in foreign currencies (except that the Growth & Income
Equity, Small Cap Equity, and Balanced Portfolios may invest in certain Canadian
securities and the Intermediate Corporate Bond Portfolio may invest in debt
securities issued by foreign corporations and governments). Foreign securities
entail certain inherent risks, such as future political and economic
developments and the adoption of foreign government restrictions, that might
adversely affect payment of dividends or principal and interest.
The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios may, under certain
conditions, make limited investments in securities the income from which may be
subject to federal income tax. See "Investment Objectives,
4
<PAGE> 10
Policies and Risk Considerations" below and the Statement of Additional
Information under "Investment Objectives and Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Portfolios also offer the economic
advantages of block trading in securities and the availability of a family of
sixteen mutual funds should an investor's investment goals change.
This Prospectus describes the Investor A Shares of each Portfolio and the
Investor B Shares of the Money Market, U.S. Government Securities, Government &
Corporate Bond, Missouri Tax-Exempt Bond, National Municipal Bond, Equity
Income, Growth & Income Equity, Small Cap Equity, International Equity and
Balanced Portfolios (the "CDSC Portfolios"). Investor A Shares of each Portfolio
are sold with a front-end sales charge, except for Investor A Shares of the
Money Market Portfolios which are sold without a sales charge. Investor B Shares
of the CDSC Portfolios are sold with a contingent deferred sales charge. For
information on purchasing, exchanging or redeeming Investor A Shares and/or
Investor B Shares of the Portfolios, please see "How to Purchase and Redeem
Shares" below. For a discussion comparing Investor A Shares and Investor B
Shares, please see "Characteristics of Investor A Shares and Investor B Shares,"
and "Factors to Consider When Selecting Investor A Shares or Investor B Shares"
on pages 58 and 59, respectively.
5
<PAGE> 11
CERTAIN FINANCIAL INFORMATION
Shares of the Money Market, U.S. Government Securities, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios have been classified into four
classes of Shares--Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares. Shares of the Treasury Money Market, Intermediate Corporate
Bond, Bond Index and Equity Index Portfolios have been classified into three
classes of Shares--Trust Shares, Institutional Shares and Investor A Shares.
Shares of the Missouri Tax-Exempt Bond and National Municipal Bond Portfolios
have been classified into three classes of Shares--Trust Shares, Investor A
Shares and Investor B Shares. Shares of the Tax-Exempt Money Market and
Short-Intermediate Municipal Portfolios have been classified into two classes of
Shares--Trust Shares and Investor A Shares. Shares of each class in a Portfolio
represent equal, pro rata interests in the investments held by that Portfolio
and are identical in all respects, except that Shares of each class bear
separate distribution and/or shareholder administrative servicing fees and
certain other operating expenses, and enjoy certain exclusive voting rights on
matters relating to these fees. See "Other Information Concerning the Fund and
Its Shares," "Management of the Fund--Administrative Services Plan," and
"Management of the Fund--Custodian, Sub-Custodian and Transfer Agent" below. As
a result of payments for distribution and/or shareholder administrative
servicing fees and certain other operating expenses that may be made in
differing amounts, the net investment income of Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares in a Portfolio can be
expected, at any given time, to be different.
The Tax-Exempt Money Market Portfolio and Missouri Tax-Exempt Bond
Portfolio commenced operations on July 10, 1986 and July 15, 1988, respectively,
as separate investment portfolios (the "Predecessor Tax-Exempt Money Market
Portfolio" and "Predecessor Missouri Tax-Exempt Bond Portfolio", respectively)
of The ARCH Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest that
were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares.
6
<PAGE> 12
EXPENSE SUMMARY FOR
INVESTOR A AND INVESTOR B SHARES
<TABLE>
<CAPTION>
TREASURY TAX- EXEMPT U.S. INTERMEDIATE
MONEY MONEY GOVERNMENT CORPORATE
MARKET MONEY MARKET MARKET SECURITIES BOND BOND INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ------------------------- ---------- ------------------------- ---------- ----------
INVESTOR A INVESTOR A INVESTOR B INVESTOR A INVESTOR A INVESTOR B INVESTOR A INVESTOR A
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Front-End
Sales
Load
Imposed
on
Purchases
(as a
percentage
of
offering
price)... NONE NONE NONE NONE 2.5%(1) NONE 4.5%(1) 2.5%(1)
DEFERRED
SALES
CHARGE
(as a
percentage
of
offering
price)... NONE NONE 5.0%(2) NONE NONE 5.0%(2) NONE NONE
ANNUAL
PORTFOLIO
OPERATING
EXPENSES
(as a
percentage
of
average
net
assets)
Investment
Advisory
Fees (net
of fee
waivers)(3)... .35% .35% .35% .35% .45% .45% .00% .00%
12b-1 Fees,
including
distribution
and
service
fees (net
of
waivers)(4)... .25% .25% 1.00% .25% .30% 1.00% .30% .30%
Other
Expenses
(including
administration
fees and other
expenses)
(net of
fee
waivers
and
expense
reimburse-
ments)(5,6)... .21% .18% .12% .15% .22% .21% .23% .20%
---- ---- ---- ---- ---- ---- ---- ----
Total
Portfolio
Operating
Expenses
(net of
fee
waivers
and
expense
reimburse-
ments)(6)... .81% .78% 1.47% .75% .97% 1.66% .53% .50%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------
(1) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares--Reduced Sales Charges -- Investor A Shares of the Equity and Bond
Portfolios".
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares--Applicable Sales Charge--Investor B Shares of the CDSC Portfolios."
(3) Without fee waivers, Investment Advisory Fees for the Treasury Money Market,
Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Intermediate Corporate Bond and Bond Index Portfolios would be .40%, .40%,
.40%, .45%, .55% and .30%, respectively.
(4) Without waivers, 12b-1 fees would be .25% for Investor A Shares of the
Treasury Money Market, Money Market and Tax-Exempt Money Market Portfolios.
(5) Without fee waivers, administration fees for a Portfolio would be .20% (.10%
for the Tax-Exempt Money Market Portfolio).
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.31%, .28%, .15%, .32%, .37% and .30% for Investor A Shares of the Treasury
Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond and Bond Index Portfolios,
respectively, and .22% and .31% for Investor B Shares of the Money Market
and U.S. Government Securities Portfolios, respectively, and Total Portfolio
Operating Expenses would be .96%, .93%, .80%, 1.07%, 1.22% and .90% for
Investor A Shares of the Treasury Money Market, Money Market, Tax-Exempt
Money Market, U.S. Government Securities, Intermediate Corporate Bond and
Bond Index Portfolios, respectively, and 1.62% and 1.76% for Investor B
Shares of the Money Market and U.S. Government Securities Portfolios,
respectively.
7
<PAGE> 13
<TABLE>
<CAPTION>
SHORT MISSOURI
GOVERNMENT & INTERMEDIATE TAX-EXEMPT NATIONAL MUNICIPAL EQUITY
CORPORATE BOND MUNICIPAL BOND BOND INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- ---------- ---------------------- ---------------------- ----------
INVESTOR A INVESTOR B INVESTOR A INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases (as a percentage of
offering price).................... 4.5%(1) NONE 2.5%(1) 4.5%(1) NONE 4.5%(1) NONE 4.5%(1)
DEFERRED SALES CHARGE
(as a percentage of offering
price)............................. NONE 5.0%(2) NONE NONE 5.0%(2) NONE 5.0%(2) NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Investment Advisory Fees (after of
fee waivers)(3).................... .45% .45% .0% .45% .45% .0% .0% .0%
12b-1 Fees, including distribution
and service fees (after
waivers)(4)........................ .30% 1.00% .25% .20% 1.00% .30% 1.00% .30%
Other Expenses (including
administration fees and other
expenses) (net of fee waivers and
expense reimbursements)(5,6)....... .20% .20% .31% .20% .20% .07% .10% .18%
--- --- --- --- --- --- --- ---
Total Portfolio Operating Expenses
(net of fee waivers and expense
reimbursements)(6)................. .95% 1.65% .56% .85% 1.65% .37% 1.10% .48%
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
EQUITY
INDEX
PORTFOLIO
----------
INVESTOR B INVESTOR A
---------- ----------
<S> <<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases (as a percentage of
offering price).................... NONE 2.5%(1)
DEFERRED SALES CHARGE
(as a percentage of offering
price)............................. 5.0%(2) NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net
assets)
Investment Advisory Fees (after of
fee waivers)(3).................... .0% .0%
12b-1 Fees, including distribution
and service fees (after
waivers)(4)........................ 1.00% .30%
Other Expenses (including
administration fees and other
expenses) (net of fee waivers and
expense reimbursements)(5,6)....... .18% .28%
--- ---
Total Portfolio Operating Expenses
(net of fee waivers and expense
reimbursements)(6)................. 1.18% .58%
========== ==========
</TABLE>
- ------------
(1) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares--Reduced Sales Charges -- Investor A Shares of the Equity and Bond
Portfolios".
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares--Applicable Sales Charge -- Investor B Shares of the CDSC
Portfolios."
(3) Without fee waivers, Investment Advisory Fees for the Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Equity Income and Equity Index Portfolios would be .45%,
.55%, .45%, .55%, .75% and .30%, respectively.
(4) Without waivers, 12b-1 fees would be .30% for Investor A Shares of each
Portfolio.
(5) Without fee waivers, administration fees for a Portfolio would be .20% (.10%
for the Tax-Exempt Money Market Portfolio).
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.30%, .41%, .30%, .22%, .32% and .38% for Investor A Shares of the
Government & Corporate Bond, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond, National Municipal Bond, Equity Income and Equity Index
Portfolios, respectively, and Total Portfolio Operating Expenses would be
1.05%, 1.26%, 1.05%, 1.07%, 1.37% and .98% for Investor A Shares of the
Government & Corporate Bond, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond, National Municipal Bond, Equity Income and Equity Index
Portfolios, respectively. Other Expenses would be .30%, .30%, .25% and .32%.
For Investor B Shares of the Government and Corporate Bond, Missouri
Tax-Exempt Bond, National Municipal Bond and Equity Income Portfolios,
respectively, and 1.75%, 1.75%, 1.80% and 2.07% for Investor B Shares of the
Government and Corporate Bond, Missouri Tax-Exempt Bond, National Municipal
Bond and Equity Income Portfolios, respectively.
8
<PAGE> 14
<TABLE>
<CAPTION>
GROWTH & INCOME
EQUITY SMALL CAP EQUITY INTERNATIONAL EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------- ------------------------- -------------------------
INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B INVESTOR A INVESTOR B
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Front-End
Sales
Load
Imposed
on
Purchases
(as a
percentage
of
offering
price)... 4.5%(1) NONE 4.5%(1) NONE 4.5%(1) NONE 4.5%(1) NONE
DEFERRED
SALES
CHARGE
(as a
percentage
of
offering
price)... NONE 5.0%(2) NONE 5.0%(2) NONE 5.0%(2) NONE 5.0%(2)
ANNUAL
PORTFOLIO
OPERATING
EXPENSES
(as a
percentage
of
average
net
assets)
Investment
Advisory
Fees (net
of fee
waivers)(3).. .55% .55% .75% .75% 1.00% 1.00% .75% .75%
12b-1 Fees,
including
distribution
and
service
fees
(after
waivers)(4)... .30% 1.00% .30% 1.00% .30% 1.00% .30% 1.00%
Other
Expenses
(including
administration
fees and other
expenses)
(net of
fee
waivers
and
expense
reimburse-
ments)(5,6)... .20% .20% .21% .21% .34% .34% .22% .21%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL
PORTFOLIO
OPERATING
EXPENSES
(net of fee
waivers and
expense
reimburse-
ments)(6)... 1.05% 1.75% 1.26% 1.96% 1.64% 2.34% 1.27% 1.96%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------
(1) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares--Reduced Sales Charges -- Investor A Shares of the Equity and Bond
Portfolios".
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares--Applicable Sales Charge--Investor B Shares of the CDSC Portfolios."
(3) Without fee waivers, Investment Advisory Fees for the Growth & Income
Equity, Small Cap Equity, International Equity and Balanced Portfolios would
be .75%, 1.00% and .75%, respectively.
(4) Without waivers, 12b-1 fees would be .30% for Investor A Shares of each
Portfolio.
(5) Without fee waivers, administration fees for a Portfolio would be .20% (.10%
for the Tax-Exempt Money Market Portfolio).
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.30%, .31%, .44% and .32% for Investor A Shares and .30%, .31%, .44% and
.31% for Investor B Shares of the Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios, respectively, and Total
Portfolio Operating Expenses would be 1.15%, 1.36%, 1.74% and 1.37% for
Investor A Shares and 1.85%, 2.06%, 2.44% and 2.06% for Investor B Shares of
the Growth & Income Equity, Small Cap Equity, International Equity and
Balanced Portfolios, respectively.
9
<PAGE> 15
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each
period:
Treasury Money Market Portfolio
Investor A Shares.................................................. $ 8 $ 26 $ 45 $100
Money Market Portfolio
Investor A Shares.................................................. $ 8 $ 25 $ 43 $ 97
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 65 $ 76 $ 100 $157
Assuming no redemption........................................... $ 15 $ 46 $ 80 $157
Tax-Exempt Money Market Portfolio
Investor A Shares.................................................. $ 8 $ 24 $ 42 $ 93
U.S. Government Securities Portfolio
Investor A Shares(2)............................................... $ 35 $ 55 $ 77 $141
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 67 $ 82 $ 110 $178
Assuming no redemption........................................... $ 17 $ 52 $ 90 $178
Intermediate Corporate Bond Portfolio
Investor A Shares(2)............................................... $ 50 $ 61 N/A N/A
Bond Index Portfolio
Investor A Shares(2)............................................... $ 30 $ 41 N/A N/A
Government & Corporate Portfolio
Investor A Shares(2)............................................... $ 54 $ 74 $ 95 $156
Investor B Shares.................................................. $ 67 $ 82 $ 110 $177
Assuming complete redemption at end of period(1)................. $ 17 $ 52 $ 90 $177
Assuming no redemption
Short-Intermediate Municipal Portfolio
Investor A Shares(2)............................................... $ 31 $ 42 $ 55 $ 93
Missouri Tax-Exempt Bond Portfolio
Investor A Shares(2)............................................... $ 53 $ 71 $ 90 $145
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 67 $ 82 $ 110 $177
Assuming no redemption........................................... $ 17 $ 52 $ 90 $174
National Municipal Bond Portfolio
Investor A Shares(2)............................................... $ 49 $ 56 N/A N/A
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 61 $ 65 N/A N/A
Assuming no Redemption........................................... $ 11 $ 35 N/A N/A
Equity Income Portfolio
Investor A Shares(2)............................................... $ 50 $ 60 N/A N/A
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 62 $ 67 N/A N/A
Assuming no redemption........................................... $ 12 $ 37 N/A N/A
Equity Index Portfolio
Investor A Shares(2)............................................... $ 31 $ 43 N/A N/A
Growth & Income Equity Portfolio
Investor A Shares(2)............................................... $ 55 $ 77 $ 100 $167
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 68 $ 85 $ 115 $188
Assuming no redemption........................................... $ 18 $ 55 $ 96 $188
Small Cap Equity Portfolio
Investor A Shares(2)............................................... $ 57 $ 83 $ 111 $190
Investor B Shares
Assuming complete redemption at end of period(1)................. $ 70 $ 92 $ 126 $210
Assuming no redemption........................................... $ 20 $ 62 $ 106 $210
</TABLE>
10
<PAGE> 16
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Equity Portfolio
Investor A Shares(2)............................................... $61 $ 94 $130 $231
Investor B Shares
Assuming complete redemption at end of period(1)................. $74 $103 $145 $250
Assuming no redemption........................................... $24 $ 73 $125 $250
Balanced Portfolio
Investor A Shares(2)............................................... $57 $ 83 $112 $191
Investor B Shares
Assuming complete redemption at end of period(1)................. $70 $ 92 $126 $211
Assuming no redemption........................................... $20 $ 62 $106 $211
</TABLE>
- ------------
(1) Assumes deduction of maximum applicable contingent deferred sales charge.
(2) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(3) Based on conversion of Investor B Shares into Investor A Shares after eight
years.
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. Information about the actual performance of all of the
Portfolios is contained in the Fund's Annual Report to Shareholders dated
November 30, 1996 which may be obtained without charge by contacting the Fund at
the address or telephone number provided on page 2 of this Prospectus.
The purpose of the foregoing tables is to assist in understanding the
various costs and expenses that an investor in a Portfolio's Investor A Shares
or Investor B Shares will bear directly or indirectly. The information contained
in such tables with respect to the Treasury Money Market, Money Market,
Tax-Exempt Money Market, U.S. Government Securities, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, Growth & Income
Equity, Small Cap Equity, International Equity and Balanced Portfolios is based
on expenses incurred by each of these Portfolios during the last fiscal year
with respect to its Investor A and/or Investor B Shares. Such information with
respect to the National Municipal Bond Portfolio is based on expenses incurred
by such Portfolio during the last fiscal year, restated to reflect the expenses
that the Portfolio expects to incur during the current fiscal year with respect
to its Investor A and Investor B Shares. Such information with respect to the
Intermediate Corporate Bond, Bond Index, Equity Income and Equity Index
Portfolios is based on expenses each such Portfolio expects to incur during the
current fiscal year with respect to its Investor A and/or Investor B Shares. For
more complete descriptions of the various costs and expenses, see "Management of
the Fund" in this Prospectus and the Statement of Additional Information. The
Tables and Examples have not been audited by the Fund's independent auditors and
do not reflect any charges that may be imposed by financial institutions on
their customers. Because of the payments for distribution services (12b-1 fees)
under the Distribution and Services Plans as shown in the above table, long-term
shareholders of Investor A Shares of the Equity and Bond Portfolios and Investor
B Shares of the CDSC Portfolios may pay more than the economic equivalent of the
maximum front-end sales load permitted by the National Association of Securities
Dealers, Inc.
11
<PAGE> 17
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following tables supplement the Fund's
financial statements, which are contained in the Fund's Annual Report to
Shareholders dated November 30, 1996 and incorporated by reference into the
Statement of Additional Information, and set forth certain historic results for
(i) Investor A Shares of each 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, and (ii) Investor B Shares of the
Money Market, U.S. Government Securities, Government & Corporate Bond, Missouri
Tax-Exempt Bond, National Municipal Bond, Growth & Income Equity, Small Cap
Equity, International Equity and Balanced Portfolios (the Equity Income
Portfolio had not commenced operations as of November 30, 1996). The data for
the years or periods ended November 30, 1989 through 1996 and with respect to
the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios (and their
Predecessor Portfolios), for the year ended November 30, 1996, the six-month
period ended November 30, 1995 and each of the years or periods ended May 31,
1990 through 1995, has been audited by KPMG Peat Marwick LLP, independent
auditors, whose unqualified report insofar as it relates to each of the years or
periods in the five-year period ended November 30, 1996 (the year ended November
30, 1996, the six-month period ended November 30, 1995 and each of the years or
periods in the four-year period ended May 31, 1995 with respect to the
Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios (and their
Predecessor Portfolios)) on the financial statements containing such information
is incorporated by reference into the Statement of Additional Information. The
data for years ended November 30, 1987 and 1988 and with respect to the
Predecessor Tax-Exempt Money Market and Predecessor Missouri Tax-Exempt Bond
Portfolios, for the years ended May 31, 1989 and 1988 and the period ended May
31, 1987 were derived from financial statements audited by the Fund's and the
Trust's prior auditors.
Further information about the performance of the Portfolios is available in
the Annual Report. Both the Statement of Additional Information and the Annual
Report may be obtained free of charge by contacting the Fund at the address or
telephone number on page 2 of this Prospectus.
12
<PAGE> 18
TREASURY MONEY MARKET PORTFOLIO
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, DEC. 2, 1991
------------------------------------------------------------------- TO
NOV. 30,
1996 1995 1994(b) 1993 1992(A,B)
------------- ------------- ---------------- ------------- --------------
INVESTOR A INVESTOR A INVESTOR A INVESTOR INVESTOR
SHARES SHARES SHARES SHARES SHARES
------------- ------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment activities
Net investment income... 0.044 0.048 0.31 0.024 0.017
------- ------- ------- ------- -------
Total from investment
activities............ 0.044 0.048 0.031 0.024 0.017
------- ------- ------- ------- -------
Distributions
Net investment income... (0.044) (0.048) (0.031) (0.024) (0.017)
------- ------- ------- ------- -------
Total distributions..... (0.044) (0.048) (0.031) (0.024) (0.017)
------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return.............. 4.46% 4.93% 3.16% 2.43% 1.79%(c)
Ratios/Supplemental Data:
Net assets at end of
period (000)............ $ 7,667 $ 2,776 $ 1,713 $ 1,411 $ 3,257
Ratio of expenses to
average net assets
(including waivers)..... 0.81% 0.78% 0.71% 0.64% 0.58%(d)
Ratio of net investment
income to average net
assets (including
waivers)................ 4.35% 4.84% 3.14% 2.41% 2.88%(d)
Ratio of expenses to
average net assets
(before waivers)*....... 0.96% 0.93% 0.94% 0.97% 1.02%(d)
Ratio of net investment
income to average net
assets (before
waivers)*............... 4.20% 4.69% 2.90% 2.08% 2.44%(d)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On December 2, 1991, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on April 20, 1992, the Portfolio
issued a second series of Shares which were designated as "Investor"
Shares. The financial highlights presented for the period prior to April
20, 1992 represent the financial highlights applicable to Trust Shares. On
September 27, 1994 the Portfolio redesignated Investor Shares as "Investor
A" Shares.
(c) Not Annualized.
(d) Annualized.
13
<PAGE> 19
MONEY MARKET PORTFOLIO
(For a Share(a)outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-------------------------------------------------------------------------------------------------------- INVESTOR B
YEAR ENDED NOVEMBER 30, SHARES
-------------------------------------------------------------------------------------------------------- ---------
JAN. 26,
1996 1995 1994(A) 1993 1992 1991(A) 1996
---------- ---------- ---------- -------- -------- -------- TO
INVESTOR A INVESTOR A INVESTOR A INVESTOR INVESTOR INVESTOR NOV. 30,
SHARES SHARES SHARES SHARES SHARES SHARES 1990 1989 1988 1987 1996(C)
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
asset
value,
beginning
of
period.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Investment
activities
Net
investment
income... 0.047 0.052 0.033 0.025 0.032 0.056 0.078 0.088 0.071 0.062 0.033
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total
from
investment
activities... 0.047 0.052 0.033 0.025 0.032 0.056 0.078 0.088 0.071 0.062 (0.033)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Distributions
Net
investment
income... (0.047) (0.052) (0.033) (0.025) (0.032) (0.056) (0.078) (0.088) (0.071) (0.062) (0.033)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total
distributions.. (0.047) (0.52) (0.033) (0.025) (0.032) (0.056) (0.078) (0.088) (0.071) (0.062) 0.033
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Net
asset
value,
end
of
period.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Total
return... 4.81% 5.33% 3.37% 2.52% 3.21% 5.75% 8.08% 9.21% 7.33(b) 6.40(b) 3.35%(b)
Ratios/
Supplemental
Data:
Net
assets
at
end
of
period
(000)... $91,166 $64,865 $ 48,384 $46,920 $52,224 $60,436 $896,903 $661,145 $289,764 $220,944 $ 41
Ratio
of
expenses
to
average
net
assets
(including
waivers).. 0.78% 0.77% 0.78% 0.79% 0.80% 0.72% 0.55% 0.45% 0.45% 0.45% 1.47%(c)
Ratio
of
net
investment
income
to
average
net
assets
(including
waivers)... 4.70% 5.20% 3.35% 2.50% 3.21% 5.69% 7.77% 8.82% 7.12% 6.22% 3.73%(c)
Ratio
of
expenses
to
average
net
assets
(before
waivers)*.. 0.93% 0.92% 0.93% 0.93% 0.94% 0.80% 0.60% 0.60% 0.58% 0.68% 1.68%(c)
Ratio
of
net
investment
income
to
average
net
assets
(before
waivers)*... 4.55% 5.05% 3.20% 2.36% 3.07% 5.61% 7.72% 8.67% 6.99% 5.99% 3.52%(c)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated existing Shares as
"Investor" Shares. On September 27, 1994 the Portfolio redesignated
Investor Shares as "Investor A" Shares.
(b) Unaudited.
(c) Period from date of initial public offering.
14
<PAGE> 20
TAX-EXEMPT MONEY MARKET PORTFOLIO(A)
(For a Share(b)outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-------------------------------------------------------
SIX
YEAR MONTHS
ENDED ENDED
NOV. 30 NOV. 30 YEAR ENDED MAY 31,
---------- ---------- -------------------------------
1996 1995(F) 1995 1994(B) 1993
---------- ---------- ---------- -------- --------
INVESTOR A INVESTOR A INVESTOR A INVESTOR INVESTOR
SHARES SHARES SHARES SHARES SHARES
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
Beginning of
period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ----- ----- -----
Investment
activities
Net investment
income........ 0.028 0.014 0.027 0.017 0.019
----- ----- ----- ----- -----
Total from
investment
activities.... 0.028 0.014 0.027 0.017 0.019
----- ----- ----- ----- -----
Distributions
Net investment
income........ (0.028) (0.014) (0.027) (0.017) (0.019)
----- ----- ----- ----- -----
Total
distributions... (0.028) (0.014) (0.027) (0.017) (0.019)
----- ----- ----- ----- -----
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ===== ===== =====
Total return..... 2.83% 1.45%(d) 2.70% 1.73% 1.90%
Ratios/Supplemental
Data:
Net assets at end
of period
(000)........... $ 17,984 $5,403 $5,138 $8,631 $6,837
Ratio of expenses
to average net
assets
(including
waivers)........ 0.75% 0.94%(e) 0.84% 0.76% 0.80%
Ratio of net
investment
income to
average net
assets
(including
waivers)........ 2.78% 2.87%(e) 2.63% 1.72% 1.88%
Ratio of expenses
to average net
assets (before
waivers)*....... 0.80% 0.99%(e) 0.93% 0.86% 0.90%
Ratio of net
investment
income to
average net
assets (before
waivers)*....... 2.73% 2.82%(e) 2.54% 1.62% 1.78%
</TABLE>
<TABLE>
<CAPTION>
INVESTOR A SHARES
---------------------------------------------------------
PERIOD
ENDED
YEAR ENDED MAY 31, MAY 31,
---------------------------------------------- ---------
1992 1991 1990(B) 1989(B) 1988(B) 1987(A)
-------- -------- ------- ------ ------- ---------
INVESTOR INVESTOR DOLLAR DOLLAR DOLLAR PORTFOLIO
SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of
period........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ----- ----- ----- -----
Investment
activities
Net investment
income........ 0.031 0.047 0.041 0.042 0.025 0.036
----- ----- ----- ----- ----- -----
Total from
investment
activities.... 0.031 0.047 0.041 0.042 0.025 0.036
----- ----- ----- ----- ----- -----
Distributions
Net investment
income........ (0.031) (0.047) (0.041) (0.042) (0.025) (0.036)
----- ----- ----- ----- ----- -----
Total
distributions... (0.031) (0.047) (0.041) (0.042) (0.025) (0.036)
----- ----- ----- ----- ----- -----
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ===== ===== ===== =====
Total return..... 3.16% 4.82% 5.73% 5.72% 1.81% 3.80%(d)
Ratios/Supplementa
Data:
Net assets at end
of period
(000)........... $ 10,956 $8,286 0 $3,083 0 $ 147,799
Ratio of expenses
to average net
assets
(including
waivers)........ 0.87% 0.58% 0.78% 0.65% 0.65% 0.37%(c),(e)
Ratio of net
investment
income to
average net
assets
(including
waivers)........ 3.10% 5.09% 5.30% 5.38% 4.05% 4.02%(c),(e)
Ratio of expenses
to average net
assets (before
waivers)*....... 0.97% 0.68% 0.87% 0.83% 0.80% 0.62%(c),(e)
Ratio of net
investment
income to
average net
assets (before
waivers)*....... 3.00% 4.99% 5.21% 5.20% 3.90% 3.77%(c),(e)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as an investment
portfolio of The ARCH Tax-Exempt Trust. On October 27, 1995, it was
reorganized as a new portfolio of the Fund.
(b) "Investor A" Shares were originally issued as "Dollar" Shares in June of
1987. As of September 28, 1990, the Portfolio redesignated its existing
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares.
(c) Includes waiver of sub-advisory fees for the period ended May 31, 1987.
(d) Not Annualized.
(e) Annualized.
(f) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
15
<PAGE> 21
U.S. GOVERNMENT SECURITIES PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
----------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------------
1996 1995 1994(A) 1993 1992 1991(A) JUNE 2,
-------- -------- -------- -------- -------- -------- 1988 TO
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR NOV. 30,
A SHARES A SHARES SHARES SHARES SHARES SHARES 1990 1989 1988(B)
-------- -------- -------- -------- -------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of period.......... $10.85 $10.05 $11.20 $10.80 $10.68 $10.21 $10.06 $ 9.94 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Investment activities
Net investment income........ 0.62 0.64 0.61 0.59 0.62 0.75 0.76 0.85 0.36
Net realized and unrealized
gains (losses) from
investments................. (0.15) 0.80 (1.00) 0.47 0.13 0.47 0.16 0.11 (0.06)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
activities.................. 0.47 1.44 (0.39) 1.06 0.75 1.22 0.92 0.96 0.30
------ ------ ------ ------ ------ ------ ------ ------ ------
Distributions
Net investment income........ (0.62) (0.64) (0.61) (0.59) (0.62) (0.75) (0.77) (0.84) (0.36)
Net realized gains........... -- -- -- (0.07) (0.01)
In excess of net realized
gains....................... (0.03) -- (0.18) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......... (0.65) (0.64) (0.79) (0.66) (0.63) (0.75) (0.77) (0.84) (0.36)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $10.67 $10.85 $10.05 $11.20 $10.80 $10.68 $10.21 $10.06 $ 9.94
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (excludes sales
charges).................... 4.57% 14.66% (3.14)% 10.03% 7.20% 12.36% 9.66% 10.40% 3.05%(d),(f)
Ratios/Supplemental Data:
Net Assets at end of period
(000)....................... $7,153 $8,179 $9,631 $9,567 $7,499 $5,791 $6,856 $5,954 $4,335
Ratio of expenses to average
net assets (including
waivers).................... 0.97% 0.97% 0.96% 0.97% 0.95% 0.82% 0.73% 0.74% 0.79%(g)
Ratio of net investment
income to average net assets
(including waivers)......... 5.82% 6.05% 5.98% 5.25% 5.72% 7.12% 7.80% 8.50% 7.26%(g)
Ratio of expenses to average
net assets (before
waivers)*................... 1.07% 1.07% 1.06% 1.08% 1.09% 1.36% 1.28% 1.29% 1.40%(g)
Ratio of net investment
income to average net assets
(before waivers)*........... 5.72% 5.95% 5.88% 5.14% 5.58% 6.58% 7.25% 7.95% 6.65%(g)
Portfolio turnover........... 53.76% 93.76% 50% 24% 74% 36% 53% 84% 215%
<CAPTION>
INVESTOR B
SHARES
--------------------
YEAR MARCH 1,
ENDED 1995 TO
NOV. 30, NOV. 30,
1996 1995(C)
-------- --------
<S> <C> <C>
Net asset value,
Beginning of period.......... $10.84 $10.34
------ ------
Investment activities
Net investment income........ 0.55 0.31
Net realized and unrealized
gains (losses) from
investments................. (0.15) 0.50
------ ------
Total from investment
activities.................. 0.40 0.81
------ ------
Distributions
Net investment income........ (0.55) (0.31)
Net realized gains...........
In excess of net realized
gains....................... (0.03) --
------ ------
Total distributions.......... (0.58) (0.31)
------ ------
Net asset value, end of
period...................... $10.66 $10.84
====== ======
Total Return (excludes sales
charges).................... 3.85% 12.85%(e)
Ratios/Supplemental Data:
Net Assets at end of period
(000)....................... $ 359 $ 41
Ratio of expenses to average
net assets (including
waivers).................... 1.66% 1.68%(g)
Ratio of net investment
income to average net assets
(including waivers)......... 5.06% 5.37%(g)
Ratio of expenses to average
net assets (before
waivers)*................... 1.76% 1.78%(g)
Ratio of net investment
income to average net assets
(before waivers)*........... 4.96% 5.27%(g)
Portfolio turnover........... 53.76% 93.76%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
to November 30, 1995.
(f) Not Annualized.
(g) Annualized.
16
<PAGE> 22
GOVERNMENT & CORPORATE BOND PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------------------
1996 1995 1994(A) 1993 1992 1991(A) JUNE 2,
-------- -------- -------- -------- -------- -------- 1988 TO
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR NOV. 30,
A SHARES A SHARES SHARES SHARES SHARES SHARES 1990 1989 1988(B)
-------- -------- -------- -------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $10.53 $ 9.64 $10.65 $10.26 $10.15 $ 9.71 $ 10.12 $ 9.91 $10.00
------ ------ ------ ------ ------ ------ ------- ------- ------
Investment activities
Net investment income.... 0.64 0.61 0.60 0.64 0.66 0.75 0.84 0.89 0.39
Net realized and
unrealized gains
(losses) from
investments............ (0.19) 0.89 (0.94) 0.39 0.11 0.48 (0.41) 0.22 (0.13)
------ ------ ------ ------ ------ ------ ------- ------- ------
Total from investment
activities........... 0.45 1.50 (0.34) 1.03 0.77 1.23 0.43 1.11 0.26
------ ------ ------ ------ ------ ------ ------- ------- ------
Distributions
Net investment income.... (0.64) (0.61) (0.60) (0.64) (0.66) (0.79) (0.84) (0.90) (0.35)
In excess of net realized
gains.................. -- -- (0.07) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------- ------
Total distributions.... (0.64) (0.61) (0.67) (0.64) (0.66) (0.79) (0.84) (0.90) (0.35)
------ ------ ------ ------ ------ ------ ------- ------- ------
Net asset value, end of
period................... $10.34 $10.53 $ 9.64 $10.65 $10.26 $10.15 $ 9.71 $ 10.12 $ 9.91
====== ====== ====== ====== ====== ====== ======= ======= ======
Total return (excludes
sales charges)........... 4.51% 15.98% (3.32)% 10.23% 7.81% 12.79% (4.96)% 11.79% 2.66%(d),(f)
Ratios/Supplemental Data:
Net Assets at end of
period (000)............. $4,915 $5,496 $5,167 $3,737 $2,490 $2,010 $11,005 $10,327 $7,483
Ratio of expenses to
average net assets
(including waivers)...... 0.95% 0.95% 0.95% 0.95% 0.93% 0.59% 0.53% 0.44% 0.56%(g)
Ratio of net investment
income to average net
assets (including
waivers)................. 6.06% 6.03% 6.00% 6.00% 6.45% 7.77% 8.69% 8.97% 8.47%(g)
Ratio of expenses to
average net assets
(before waivers)*........ 1.05% 1.05% 1.05% 1.05% 1.06% 1.14% 1.08% 0.99% 1.17%(g)
Ratio of net investment
income to average net
assets (before
waivers)*................ 5.96% 5.93% 5.90% 5.90% 6.32% 7.22% 8.14% 8.42% 7.86%(g)
Portfolio turnover........ 149.20% 59.32% 50% 31% 52% 105% 75% 148% 22%
<CAPTION>
INVESTOR B
SHARES
--------------------
YEAR MARCH 1,
ENDED 1995 TO
NOV. 30, NOV. 30,
1996 1995(C)
-------- --------
<S> <C><C> <C>
Net asset value, beginning
of period................ $10.53 $ 9.92
------ ------
Investment activities
Net investment income.... 0.57 0.38
Net realized and
unrealized gains
(losses) from
investments............ (0.19) 0.61
------ ------
Total from investment
activities........... 0.38 0.99
------ ------
Distributions
Net investment income.... (0.57) (0.38)
In excess of net realized
gains.................. -- --
------ ------
Total distributions.... (0.57) (0.38)
------ ------
Net asset value, end of
period................... $10.34 $10.53
====== ======
Total return (excludes
sales charges)........... 3.79% 15.27%(e)
Ratios/Supplemental Data:
Net Assets at end of
period (000)............. $ 511 $ 106
Ratio of expenses to
average net assets
(including waivers)...... 1.65% 1.65%(g)
Ratio of net investment
income to average net
assets (including
waivers)................. 5.37% 5.19%(g)
Ratio of expenses to
average net assets
(before waivers)*........ 1.75% 1.75%(g)
Ratio of net investment
income to average net
assets (before
waivers)*................ 5.27% 5.09%(g)
Portfolio turnover........ 149.20% 59.32%(g)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
to November 30, 1995.
(f) Not Annualized.
(g) Annualized.
17
<PAGE> 23
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
(For a Share outstanding throughout the period)
<TABLE>
<CAPTION>
YEAR ENDED JULY 10,
NOVEMBER 1995 TO
30, NOVEMBER 30,
1996 1995(A)
----------- ------------
INVESTOR A INVESTOR A
SHARES SHARES
----------- ------------
<S> <C> <C>
Net asset value, beginning of period............................ $ 10.08 $10.00
------ ------
Investment activities
Net investment income......................................... 0.40 --
Net realized and unrealized gains (losses) from investments... -- 0.08
------ ------
Total from investment activities......................... 0.40 0.08
------ ------
Distributions
Net investment income......................................... (0.40) --
------ ------
Total distributions........................................ (0.40) --
------ ------
Net asset value, end of period.................................. $ 10.08 $10.08
====== ======
Total return.................................................... 4.02% 0.80%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)............................... $ 51 --(c)
Ratio of expenses to average net assets (including waivers)..... 0.56% 0.00%(d)
Ratio of net investment income to average net assets (including
waivers)...................................................... 3.83% 0.00%(d)
Ratio of expenses to average net assets (before waivers)*....... 1.26% 0.00%(d)
Ratio of net investment income to average net assets (before
waivers)*..................................................... 3.13% 0.00%(d)
Portfolio turnover.............................................. 0.00% 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) Only one share, worth $10.08, was outstanding as of November 30, 1995.
(d) Annualized.
18
<PAGE> 24
MISSOURI TAX-EXEMPT BOND PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------------------------------------------------------------------------------------
Six
Year Months YEAR ENDED MAY 31,
Ended Ended ---------------------------------------------------------------------
Nov. 30, Nov. 30,
1996 1995(c) 1995(b)
--------- --------- -------- 1994 1993 1992 1991(B) 1992
INVESTOR INVESTOR INVESTOR -------- -------- -------- -------- ---------
A A A INVESTOR INVESTOR INVESTOR INVESTOR PORTFOLIO
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
--------- --------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97 $ 10.62 $10.35 $ 10.56
------- ------- ------- ------- ------- ------- ------ ------
Investment activities
Net investment income...... 0.55 0.27 0.55 0.55 0.58 0.63 0.44 0.68
Net realized and unrealized
gains (losses) on
investments.............. (0.05) 0.22 0.40 (0.37) 0.64 0.43 0.36 (0.09)
------- ------- ------- ------- ------- ------- ------ ------
Total from investment
activities............... 0.50 0.49 0.95 0.18 1.22 1.06 0.80 0.59
------- ------- ------- ------- ------- ------- ------ ------
Distributions
Net investment income...... (0.55) (0.27) (0.55) (0.55) (0.58) (0.63) (0.44) (0.65)
Net realized gains......... -- -- (0.01) (0.04) (0.07) (0.08) (0.09)
------- ------- ------- ------- ------- ------- ------ ------
Total distributions...... (0.55) (0.27) (0.56) (0.59) (0.65) (0.71) (0.53) (0.65)
------- ------- ------- ------- ------- ------- ------ ------
Net asset value, end of
period..................... $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97 $10.62 $ 10.50
======= ======= ======= ======= ======= ======= ====== ======
Total return (excludes sales
charges)................... 4.41% 4.32%(g) 8.91% 1.53% 11.47% 10.24% 8.72% 5.50%
Ratios/Supplemental Data:
Net assets at end of period
(000)...................... $25,144 $24,726 $24,318 $27,919 $23,223 $12,635 $6,211 $ 4,572
Ratio of expenses to average
net assets (including
waivers)................... 0.85% 0.95%(h) 0.84% 0.65% 0.63% 0.85% 0.85% 0.70%
Ratio of net investment
income to average net
assets (including
waivers)................... 4.75% 4.64%(h) 5.02% 4.75% 5.11% 5.75% 6.12% 6.38%
Ratio of expenses to average
net assets (before
waivers)*.................. 1.05% 1.18%(h) 1.18% 1.12% 1.18% 1.49% 1.63% 1.70%
Ratio of net investment
income to average net
assets (before waivers)*... 4.55% 4.44%(h) 4.68% 4.28% 4.56% 5.11% 5.34% 5.38%
Portfolio turnover rate..... 3.66% 1.55% -- 20% 15% 21% 71% 41%
<CAPTION>
INVESTOR B SHARES
PERIOD -------------------------------
ENDED MAY SIX
31, MONTHS
1989(A),(B) YEAR ENDED MARCH 1,
----------- ENDED NOV. 1995 TO
PORTFOLIO NOV. 30, 30, MAY 31,
SHARES 1996 1995(C) 1995(D)
---------- -------- ------- --------
<S> <C<C> <C> <C> <C>
Net asset value,
beginning of period........ $10.00 $11.74 $11.52 $11.19
------ ------ ------ ------
Investment activities
Net investment income...... 0.58 0.45 0.22 0.11
Net realized and unrealized
gains (losses) on
investments.............. 0.58 (0.06) 0.22 0.33
------ ------ ------ ------
Total from investment
activities............... 1.16 0.39 0.44 0.44
------ ------ ------ ------
Distributions
Net investment income...... (0.60) (0.45) (0.22) (0.11)
Net realized gains.........
------
Total distributions...... (0.60) (0.45) (0.22) (0.11)
------ ------ ------ ------
Net asset value, end of
period..................... $10.56 $11.68 $11.74 $11.52
====== ====== ====== ======
Total return (excludes sales
charges)................... 12.08%(f) 3.48% 3.88%(g) 8.61%(e)
Ratios/Supplemental Data:
Net assets at end of period
(000)...................... $4,053 $ 675 $ 433 $ 94
Ratio of expenses to average
net assets (including
waivers)................... 0.81%(h) 1.65% 1.77%(h) 1.76%(h)
Ratio of net investment
income to average net
assets (including
waivers)................... 6.36%(h) 3.96% 3.82%(h) 4.00%(h)
Ratio of expenses to average
net assets (before
waivers)*.................. 1.38%(h) 1.75% 1.87%(h) 1.88%(h)
Ratio of net investment
income to average net
assets (before waivers)*... 5.79%(h) 3.86% 3.72%(h) 3.89%(h)
Portfolio turnover rate..... 73%* 3.66% 1.55% --
</TABLE>
- ---------------
* During the period, certain fees were voluntary reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as an investment portfolio of The ARCH
Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new portfolio
of the Fund.
(b) The Portfolio had one series of Shares outstanding ("Portfolio Shares")
through September 27, 1990. On September 28, 1990, the Portfolio issued a
second series of Shares that were designated as "Investor" Shares. On
September 27, 1994, the Portfolio redesignated Investor Shares as "Investor
A" Shares and authorized the issuance of a series of Shares designated as
"Investor B" Shares.
(c) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
(d) For period from date of initial public offering.
(e) Represents total return for Investor A Shares from June 1, 1994 to February
28, 1995 plus total return for Investor B Shares from March 1, 1995 to May
31, 1995.
(f) Aggregate.
(g) Not Annualized.
(h) Annualized.
19
<PAGE> 25
NATIONAL MUNICIPAL BOND PORTFOLIO
(For a Share outstanding throughout the period)
<TABLE>
<CAPTION>
NOVEMBER 18, NOVEMBER 18,
1996 1996
THROUGH THROUGH
NOVEMBER 30, NOVEMBER 30,
1996(A) 1996(A)
------------ ------------
INVESTOR A INVESTOR B
------------ ------------
<S> <C> <C>
Net asset value, beginning of period....................... $10.00 $10.00
------ ------
Investment activities
Net investment income.................................... 0.02 0.02
Net realized and unrealized gains (losses) from
investments........................................... 0.05 0.05
------ ------
Total from investment activities.................... 0.07 0.07
------ ------
Distributions
Net investment income.................................... (0.02) (0.02)
------ ------
Total distributions................................. (0.02) (0.02)
------ ------
Net asset value, end of period............................. $10.05 $10.05
------ ------
Total return (excludes sales charge)....................... 0.73%(b) 0.70%(b)
Ratios/Supplemental Data:
Net assets at end of period (000).......................... $ 1 $ 1
Ratio of expenses to average net assets (including
waivers)................................................. 0.37%(c) 1.10%(c)
Ratio of net investment income to average net assets
(including waivers)...................................... 9.08%(c) 8.35%(c)
Ratio of expenses to average net assets (before
waivers)*................................................ 1.07%(c) 1.80%(c)
Ratio of net investment income to average net assets
(before waivers)*........................................ 8.38%(c) 7.65%(c)
Portfolio turnover......................................... 0.00% 0.00%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
20
<PAGE> 26
GROWTH & INCOME EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
--------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------------------
1996 1995 1994(A) 1993 1992 1991(A)
-------- -------- -------- -------- -------- --------
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR
A SHARES A SHARES SHARES SHARES SHARES SHARES 1990 1989
-------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
Beginning of period................ $ 16.30 $ 12.70 $ 14.74 $ 14.49 $12.33 $11.22 $ 12.41 $ 10.25
------ ------ ------ ------ ------ ------ ------ ------
Investment activities
Net investment income............. 0.20 0.23 0.20 0.25 0.25 0.39 0.39 0.41
Net realized and unrealized gains
(losses) from investments....... 3.32 3.74 (0.17) 1.06 2.24 1.47 (0.56) 2.29
------ ------ ------ ------ ------ ------ ------ ------
Total from investment activities... 3.52 3.97 0.03 1.31 2.49 1.86 (0.17) 2.70
------ ------ ------ ------ ------ ------ ------ ------
Distributions
Net investment income............. (0.20) (0.23) (0.21) (0.25) (0.26) (0.39) (0.39) (0.51)
In excess of net investment
income.......................... (0.01) -- -- -- -- --
Net realized gain................. (0.94) (0.14) (0.18) (0.81) (0.07) (0.36) (0.63) (0.03)
In excess of net realized gains -- -- (1.68) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions............. (1.15) (0.37) (2.07) (1.06) (0.33) (0.75) (1.02) (0.54)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period..... $ 18.67 $ 16.30 $ 12.70 $ 14.74 $14.49 $12.33 $ 11.22 $ 12.41
====== ====== ====== ====== ====== ====== ====== ======
Total return (excludes sales
charges).......................... 22.99% 31.95% 0.20% 9.65% 20.59% 17.39% (1.36)% 27.11%
Ratios/Supplemental Data:
Net Assets at end of period
(000)............................. $38,229 $25,082 $18,343 $11,157 $6,044 $3,254 $20,116 $17,892
Ratio of expenses to average net
assets (including waivers)........ 1.05% 1.05% 1.05% 0.74% 0.71% 0.34% 0.35% 0.42%
Ratio of net investment income to
average net assets (including
waivers).......................... 1.20% 1.59% 1.45% 1.74% 1.94% 3.50% 3.42% 3.69%
Ratio of expenses to average net
assets (before waivers)*.......... 1.15% 1.15% 1.15% 0.96% 0.85% 1.05% 1.00% 1.07%
Ratio of net investment income to
average net assets (before
waivers)*......................... 1.10% 1.49% 1.35% 1.52% 1.80% 2.79% 2.77% 3.04%
Portfolio turnover................. 63.90% 58.50% 65% 41% 79% 78% 227% 133%
Average commission rate paid (e)... $0.0598 -- -- -- -- -- -- --
<CAPTION>
INVESTOR B
SHARES
--------------------
JUNE 2, YEAR MARCH 1,
1988 TO ENDED 1995 TO
NOV. 30, NOV. 30, NOV. 30,
1988(B) 1996 1995(C)
-------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
Beginning of period................ $ 10.00 $ 16.23 $13.43
------ ------ ------
Investment activities
Net investment income............. 0.28 0.11 0.14
Net realized and unrealized gains
(losses) from investments....... 0.06 3.30 2.81
------ ------ ------
Total from investment activities... 0.34 3.41 2.95
------ ------ ------
Distributions
Net investment income............. (0.09) (0.11) (0.15)
In excess of net investment
income..........................
Net realized gain................. -- (0.01) --
In excess of net realized gains -- (0.94) --
------ ------ ------
Total distributions............. (0.09) (1.06) (0.15)
------ ------ ------
Net asset value, end of period..... $ 10.25 $ 18.58 $16.23
====== ====== ======
Total return (excludes sales
charges).......................... 3.46%(d),(f) 22.29% 31.20%(e)
Ratios/Supplemental Data:
Net Assets at end of period
(000)............................. $10,890 $ 3,537 $ 781
Ratio of expenses to average net
assets (including waivers)........ 0.41%(g) 1.75% 1.75%(g)
Ratio of net investment income to
average net assets (including
waivers).......................... 5.62%(g) 0.49% 0.87%(g)
Ratio of expenses to average net
assets (before waivers)*.......... 1.12%(g) 1.85% 1.85%(g)
Ratio of net investment income to
average net assets (before
waivers)*......................... 4.91%(g) 0.39% 0.77%(g)
Portfolio turnover................. 30% 63.90% 58.50%(g)
Average commission rate paid (e)... -- $0.0598 --
</TABLE>
- ---------------
* During the period, fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Unaudited.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
to November 30, 1995.
(f) Not Annualized.
(g) Annualized.
(h) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
21
<PAGE> 27
SMALL CAP EQUITY PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
---------------------------------------------------------------------------- ----------------------------
MAY 6, MARCH 1,
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 1992 TO YEAR ENDED 1995 TO
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1994(B) 1993 1992(B) 1996 1995(D)
------------ ------------ ------------ ------------ ------------ ------------ ------------
INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR INVESTOR
A SHARES A SHARES A SHARES A SHARES A SHARES B SHARES B SHARES
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.............. $ 13.44 $ 11.99 $ 13.14 $ 11.23 $ 10.10 $ 13.37 $ 11.83
------- ------ ------ ------ ------ ------ ------
Investment activities
Net investment
income (loss)....... (0.01) -- (0.03) 0.03 0.02 (0.07) (0.03)
Net realized and
unrealized
gains from
investments 1.03 2.36 .89 2.14 1.13 0.99 1.57
------- ------ ------ ------ ------ ------ ------
Total from investment
activities.......... 1.02 2.36 0.86 2.17 1.15 0.92 1.54
------- ------ ------ ------ ------ ------ ------
Distributions
Net investment
income............ -- -- -- (0.05) (0.02) -- --
In excess of net
investment
income............ (0.01) -- -- -- -- -- --
Net realized
gains............. (1.05) (0.91) (1.78) (0.21) -- (1.05) --
In excess of net
realized gains.... -- -- (0.23) -- -- -- --
------- ------ ------ ------ ------ ------ ------
Total
distributions..... (1.06) (0.91) (2.01) (0.26) (0.02) (1.05) --
------- ------ ------ ------ ------ ------ ------
Net asset value, end
of period........... $ 13.40 $ 13.44 $ 11.99 $ 13.14 $ 11.23 $ 13.24 $ 13.37
======= ====== ====== ====== ====== ====== ======
Total return
(excludes
sales charges)...... 8.36% 21.47% 7.38% 19.75% 12.55%(f) 7.63% 20.83%(e)
Ratios/Supplemental
Data:
Net Assets at end of
period (000)........ $ 13,889 $ 15,056 $ 10,899 $ 4,559 $ 753 $ 1,272 $ 603
Ratio of expenses to
average net assets
(including
waivers)............ 1.26% 1.26% 1.25% 0.61% 0.30%(g) 1.96% 1.96%(g)
Ratio of net
investment income to
average net assets
(including
waivers)............ (0.13)% (0.12)% (0.44)% 0.19% 0.78%(g) (0.83)% (0.78%)(g)
Ratio of expenses to
average net assets
(before waivers)*... 1.36% 1.36% 1.36% 1.23% 1.12%(g) 2.06% 2.06%(g)
Ratio of net
investment income to
average net assets
(before waivers)*... (0.23)% (0.22)% (0.55)% (0.43)% (0.04)%(g) (0.93)% (0.88%)(g)
Portfolio turnover... 65.85% 83.13% 85% 65% 56% 65.85% 83.13%
Average commission
rate paid(h)........ $ 0.0582 -- -- -- -- $ 0.0582 --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Emerging Growth Portfolio changed its name to Small Cap Equity Portfolio
on December 1, 1996.
(b) On May 6, 1992, the Portfolio issued a series of Shares which were
designated as "Investor" Shares. On September 27, 1994 the Portfolio
redesignated Investor Shares as "Investor A" Shares and authorized the
issuance of a series of Shares designated as "Investor B" Shares.
(c) Period from commencement of operations.
(d) Period from date of initial public offering.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
through November 30, 1995.
(f) Not Annualized.
(g) Annualized.
(h) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
22
<PAGE> 28
INTERNATIONAL EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
-----------------------------------------------
YEAR ENDED YEAR ENDED APRIL 4, 1993
NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30, INVESTOR B SHARES
1996 1995 1994(A)(B)(C) --------------------------------
------------ ------------ --------------- YEAR ENDED MARCH 1, 1995 TO
INVESTOR INVESTOR INVESTOR NOVEMBER 30, NOVEMBER 30,
A SHARES A SHARES A SHARES 1996 1995(D)
------------ ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......................... $ 10.76 $ 9.90 $ 10.00 $ 10.71 $ 9.26
------ ------ ------ ------ ------
Investment activities
Net investment income (loss)................ 0.02 0.02 (0.01) (0.04) (0.03)
Net realized and unrealized gains from
investments and foreign currency.......... 1.27 0.86 (0.09) 1.23 1.48
------ ------ ------ ------ ------
Total from investment activities............ 1.29 0.88 (0.10) 1.19 1.45
------ ------ ------ ------ ------
Distributions
Net investment income....................... -- (0.01) -- -- --
Tax return of capital....................... -- (0.01) -- -- --
------ ------ ------ ------ ------
Total distributions......................... -- (0.02) -- -- --
------ ------ ------ ------ ------
Net asset value, end of period............... $ 12.05 $10.76 $ 9.90 $ 11.90 $10.71
====== ====== ====== ====== ======
Total return (excludes sales charges)........ 11.99% 8.89% (1.00)%(f) 11.11% 8.38%(e)
Ratios/Supplemental Data:
Net Assets at end of period (000)............ $ 2,573 $1,568 $ 791 $ 437 $ 102
Ratio of expenses to average net assets
(including waivers)......................... 1.44% 1.45% 1.55%(g) 2.14% 2.02%(g)
Ratio of net investment income to average net
assets (including waivers).................. 0.19% 0.07% (0.39)%(g) (0.50)% (0.96)%(g)
Ratio of expenses to average net assets
(before waivers)*........................... 1.75% 1.76% 1.89%(g) 2.46% 2.44%(g)
Ratio of net investment income to average net
assets (before waivers)*.................... (0.12)% (0.24)% (0.73)%(g) (0.82)% (1.38)%(g)
Portfolio turnover........................... 77.63% 62.78% 21% 77.63% 62.78%
Average commission rate paid(h).............. $ 0.0251 -- -- $ 0.0251 --
</TABLE>
- ------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On April 4, 1994, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on May 2, 1994, the Portfolio
issued a new series of Shares which were designated as "Investor" Shares.
The financial highlights presented for April 4, 1994 to May 2, 1994
represent financial highlights applicable to Trust Shares.
(c) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
(d) Period from date of initial public offering.
(e) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
through November 30, 1995.
(f) Not Annualized.
(g) Annualized.
(h) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
23
<PAGE> 29
BALANCED PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
INVESTOR A SHARES
---------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED APRIL 1, 1993
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30, INVESTOR B SHARES
1996 1995 1994 1993(B) --------------------------------
------------ ------------ ------------ --------------- YEAR ENDED MARCH 1, 1995 TO
INVESTOR INVESTOR INVESTOR INVESTOR NOVEMBER 30, NOVEMBER 30,
A SHARES A SHARES A SHARES A SHARES 1996 1995(C)
------------ ------------ ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......... $ 11.65 $ 9.61 $10.22 $ 10.00 $ 11.59 $10.13
------ ------ ------ ------ ------
Investment activities
Net investment income....... 0.32 0.32 0.28 0.23 0.25 0.22
Net realized and unrealized
gains from investments.... 1.34 2.02 (0.47) 0.15 1.33 1.44
------ ------ ------ ------ ------ ------
Total from investment
activities................ 1.66 2.34 (0.19) 0.38 1.58 1.66
------ ------ ------ ------ ------ ------
Distributions
Net investment income....... (0.31) (0.30) (0.29) (0.16) (0.26) (0.20)
Net realized gains.......... (0.42) -- -- -- (0.42) --
In excess of net realized
gains..................... -- -- (0.13) -- -- --
------ ------ ------ ------ ------ ------
Total distributions......... (0.73) (0.30) (0.42) (0.16) (0.68) (0.20)
------ ------ ------ ------ ------ ------
Net asset value, end of
period...................... $ 12.58 $11.65 $ 9.61 $ 10.22 $ 12.49 $11.59
====== ====== ====== ====== ====== ======
Total return (excludes sales
charges).................... 15.10% 24.85% (1.91%) 3.86%(e) 14.35% 23.92%(d)
Ratios/Supplemental Data:
Net Assets at end of period
(000)..................... $ 9,328 $8,348 $7,321 $ 1,978 $ 321 $ 36
Ratio of expenses to average
net assets (including
waivers).................. 1.27% 1.27% 1.27% 0.56%(f) 1.96% 1.93%(f)
Ratio of net investment
income to average net
assets (including
waivers).................. 2.79% 2.98% 2.77% 3.42%(f) 2.09% 2.28%(f)
Ratio of expenses to average
net assets (before
waivers)*................. 1.37% 1.37% 1.39% 1.21%(f) 2.06% 2.03%(f)
Ratio of net investment
income to average net
assets (before
waivers)*................. 2.69% 2.88% 2.65% 2.77%(f) 1.99% 2.18%(f)
Portfolio turnover.......... 85.16% 58.16% 49% 26%(f) 85.16% 58.16%
Average commission rate
paid(g)................... $ 0.0599 -- -- -- $ 0.0599 --
</TABLE>
- ------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares and authorized the issuance of a series of Shares
designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Period from date of initial public offering.
(d) Represents total return for Investor A Shares from December 1, 1994 to
February 28, 1995 plus total return for Investor B Shares from March 1, 1995
through November 30, 1995.
(e) Not Annualized.
(f) Annualized.
24
<PAGE> 30
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of each Portfolio, there can be no assurance that it will be able to
do so. The investment objective of each Portfolio may be changed only with the
affirmative vote of a majority of the outstanding Shares of the Portfolio,
except that the investment objectives of the Bond Index and Equity Index
Portfolios may be changed by the Fund's Board of Directors without shareholder
approval. Shareholders of the latter Portfolios will be given at least 30 days'
written notice before any such change occurs. The Treasury Money Market, Money
Market and Tax-Exempt Money Market Portfolios are "money market" funds that
invest in instruments with remaining maturities of 397 days or less (with
certain exceptions) and with dollar-weighted average portfolio maturities of 90
days or less, subject to the quality, diversification and other requirements of
Rule 2a-7 under the Investment Company Act of 1940, as amended, (the "1940 Act")
and other rules of the Securities and Exchange Commission (the "SEC").
THE TREASURY MONEY MARKET PORTFOLIO
The Treasury Money Market Portfolio's investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal. In pursuing its investment objective, the
Portfolio invests in selected money market obligations issued by the U.S.
Government (or its agencies and instrumentalities) that are guaranteed as to
principal and interest by the U.S. Government, the interest on which is
generally exempt from state income tax. Securities that are generally eligible
for this exemption include those issued by the U.S. Treasury (bills,
certificates of indebtedness, notes and certain bonds) and certain U.S.
Government agencies and instrumentalities, including the General Services
Administration and Small Business Administration. Each investor should consult
his or her tax advisor to determine whether distributions from the Portfolio are
exempt from state income tax in the investor's home state. Under normal market
conditions, the Portfolio intends to invest substantially all (but not less than
65%) of its total assets in securities with the above characteristics and
(except to the extent discussed below) will not enter into repurchase agreements
or purchase any U.S. Government security that the Adviser believes is subject to
state income tax.
Under extraordinary circumstances, such as when appropriate exempt
securities are unavailable or pending investment, the Treasury Money Market
Portfolio may temporarily hold cash or invest in repurchase agreements
collateralized by U.S. Government securities, other U.S. Government agency or
instrumentality securities, securities of other investment companies that invest
in securities in which the Portfolio is permitted to invest, or cash
equivalents.
THE MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objective is to seek current income
with liquidity and stability of principal. In pursuing its investment objective,
the Portfolio invests substantially all of its assets in a broad range of money
market instruments. These instruments include obligations of the U.S.
Government, U.S. dollar-denominated foreign securities, obligations of U.S. and
foreign banks and savings and loan institutions and commercial obligations that
meet the applicable quality requirements described below.
The Money Market Portfolio will purchase only "First Tier Eligible
Securities" (as defined by the SEC) that present minimal credit risks as
determined by the Adviser pursuant to guidelines approved by the Fund's Board of
Directors. First Tier Eligible Securities consist of (i) securities that either
(a) have short-term debt ratings at the time of purchase in the highest rating
category by at least two unaffiliated nationally recognized statistical rating
organizations ("Rating Agencies") (or one Rating Agency if the security was
rated by only one Rating Agency), or (b) are issued by issuers with such
ratings, and (ii) certain securities that are unrated (including securities of
issuers that have long-term but not short-term ratings) but are of comparable
quality as determined in
25
<PAGE> 31
accordance with guidelines approved by the Board of Directors. The applicable
ratings by Rating Agencies are described in Appendix A to the Statement of
Additional Information. The following descriptions illustrate the types of
instruments in which the Portfolio invests.
Banking Obligations. The Money Market Portfolio may purchase obligations of
issuers in the banking industry, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Portfolio may invest in obligations of
foreign banks or foreign branches of U.S. banks in amounts not in excess of 25%
of its assets where the Adviser deems the instrument to present minimal credit
risks. (See "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below.) The Portfolio may also make interest-bearing savings
deposits in commercial and savings banks in amounts not in excess of 5% of the
value of its total assets.
Commercial Paper and Variable and Floating Rate Instruments. The Portfolio
may invest in commercial paper, including asset-backed commercial paper
representing interests in a pool of corporate receivables, dollar-denominated
obligations issued by domestic and foreign bank holding companies, and corporate
bonds that meet the quality and maturity requirements described above. The
Portfolio may also invest in variable or floating rate notes that may have a
stated maturity in excess of thirteen months but will, in any event, permit the
Portfolio to demand payment of the principal of the instrument at least once
every thirteen months upon no more than 30 days' notice (unless the instrument
is guaranteed by the U.S. Government or an agency or instrumentality thereof).
Such instruments may include variable amount master demand notes, which are
unsecured instruments that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate. Unrated
variable and floating rate instruments will be determined by the Adviser (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to First Tier Eligible Securities. There may be no active
secondary market in the instruments, which could make it difficult for the
Portfolio to dispose of an instrument in the event the issuer were to default on
its payment obligation or during periods that the Portfolio could not exercise
its demand rights. The Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments. Variable and floating rate instruments
held by the Portfolio will be subject to the Portfolio's 10% limitation on
illiquid investments when the Portfolio may not demand payment of the principal
amount within seven days and a liquid trading market is absent.
Government Obligations. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the Portfolio may, when deemed appropriate by
the Adviser, invest in short-term obligations issued by state and local
governmental issuers that meet the quality requirements described above and, as
a result of the Tax Reform Act of 1986, carry yields that are competitive with
those of other types of money market instruments of comparable quality.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Money Market Portfolio's investment objective is to seek as
high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Portfolio seeks to
achieve its objective by investing substantially all of its assets in short-term
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their respective political
subdivisions, agencies, instrumentalities and authorities the interest on which,
in the opinion of bond counsel or counsel to the issuer, is exempt from regular
federal income tax (collectively, "Municipal Obligations"). The Portfolio may
also hold tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The Tax-Exempt Money Market Portfolio will purchase only "First Tier
Eligible Securities" (as defined by the SEC) that present minimal credit risks
as determined by the Adviser pursuant to
26
<PAGE> 32
guidelines approved by the Board of Directors. See "The Money Market Portfolio"
above for a description of "First Tier Eligible Securities."
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from interest attributable to tax-exempt obligations of a particular state and
its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands may be exempt from federal
and state income tax. Dividends derived from interest on obligations of other
governmental issuers are exempt from federal income tax but may be subject to
state income tax.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Tax-Exempt Money Market Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Tax-Exempt Money Market Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. Such instruments may include obligations
of the U.S. Government, its agencies or instrumentalities; debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the highest rating category by a Rating Agency;
certificates of deposit or bankers' acceptances of domestic branches of U.S.
banks with total assets at the time of purchase of $1 billion or more; or
repurchase agreements with respect to such obligations.
THE U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio's investment objective is to seek
a high rate of current income that is consistent with relative stability of
principal. In pursuing its investment objective, the Portfolio invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities normally having remaining maturities of 1 to 30 years and
repurchase agreements relating to such obligations. (For further information,
see "Other Applicable Policies--U.S. Government Obligations" below.)
Consistent with its investment policies, the U.S. Government Securities
Portfolio may invest in mortgage-backed securities, including those representing
an undivided ownership interest in a pool of mortgage loans, such as
certificates issued by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") and collateralized mortgage obligations ("CMOs").
For further information regarding these instruments, see "Other Applicable
Policies--Asset-Backed Securities" below.
THE INTERMEDIATE CORPORATE BOND PORTFOLIO
The Intermediate Corporate Bond Portfolio's investment objective is to seek
as high a level of current income as is consistent with preservation of capital.
In pursuing its investment objective, the Portfolio will invest, under normal
market and economic conditions, at least 65% of its total assets in
non-convertible corporate debt obligations, which shall mean obligations of (i)
domestic or foreign business corporations, or (ii) agencies, instrumentalities
or authorities which are organized in corporate form by one or more states or
political subdivisions in the United States or one or more foreign governments.
The Portfolio may also invest in obligations issued or guaranteed by the U.S. or
foreign governments, their agencies or instrumentalities, and asset-backed
securities, including various collateralized mortgage obligations and other
mortgage-related securities. For further information regarding these
instruments, see "Other Applicable Policies--Asset-Backed
27
<PAGE> 33
Securities" below. In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield to maturity,
anticipated changes in interest rates, and the overall quality of the
investment. The Portfolio seeks to provide a current yield greater than that
generally available from money market instruments.
The Portfolio may purchase debt securities which are rated at the time of
purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated debt securities deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its total assets in debt obligations
rated in one of the three highest rating categories assigned by one or more
Rating Agencies (or unrated debt obligations determined to be of comparable
quality). Securities that are rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of investment
grade quality, and such securities will be purchased (and retained) only if the
Adviser believes that the issuers have an adequate capacity to pay interest and
repay principal. Unrated debt securities will be purchased only if they are
considered by the Adviser to be at least comparable in quality at the time of
purchase to instruments within the rating categories listed above. Debt
securities purchased by the Portfolio whose ratings are subsequently downgraded
below the four highest rating categories of a Rating Agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by the Rating Agencies are described in the Appendix to the Statement of
Additional Information.
The Portfolio reserves the right to hold as a temporary defensive measure
up to 100% of its total assets in cash and short-term obligations (having
remaining maturities of 13 months or less) at such times and in such proportions
as, in the opinion of the Adviser, prevailing market or economic conditions
warrant. Short-term obligations in which the Portfolio may invest include (i)
money market instruments, such as commercial paper, including variable and
floating rate instruments, rated at the time of purchase in one of the two
highest rating categories assigned by a Rating Agency or, if unrated, deemed to
be of comparable quality by the Adviser at the time of purchase, and bank
obligations, including bankers' acceptances, negotiable certificates of deposit
and non-negotiable time deposits of U.S. and foreign banks having total assets
at the time of purchase in excess of $1 billion, (ii) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and (iii)
repurchase agreements. For further information regarding variable and floating
rate instruments, see "The Money Market Portfolio--Commercial Paper and Variable
and Floating Rate Instruments" above. Although the Portfolio will invest in
obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Risk Factors--Risks
Associated with Foreign Securities and Currencies" below. Investments in the
obligations of foreign banks or foreign branches of U.S. banks will not exceed
25% of the Portfolio's total assets at the time of purchase.
The Portfolio's average weighted maturity will be between three and ten
years and will vary in light of current market and economic conditions, the
comparative yields on instruments with different maturities, and other factors.
THE BOND INDEX PORTFOLIO
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Brothers Aggregate Bond Index (the "Lehman
Aggregate").
The Portfolio is not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. Government, mortgage-backed, asset-backed and
28
<PAGE> 34
corporate debt securities, as represented by the Lehman Aggregate, through the
use of sophisticated computer models to determine which securities should be
purchased or sold, while keeping transaction and administrative costs to a
minimum. The Portfolio will invest substantially all of its total assets in
securities listed in the Lehman Aggregate, including without limitation, asset-
backed securities. For further information regarding asset-backed securities see
"Other Applicable Policies--Asset-Backed Securities" below. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio that
is included in the Lehman Aggregate at the time of such purchase. The Portfolio
should exhibit price and yield volatility similar to that of the Lehman
Aggregate. For further information, see "Other Investment Policies--The Indexing
Approach" below and the Statement of Additional Information under "Investment
Objectives and Policies--The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S. Government,
mortgage-backed, asset-backed and nonconvertible corporate debt securities that
meet the following criteria: the securities have at least $100 million par
amount outstanding; the securities are rated investment grade (at least Baa or
BBB) by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P") (if not rated by Moody's); have at least one year until maturity;
and have coupons with fixed rates. The Lehman Aggregate excludes collateralized
mortgage obligations ("CMOs"), adjustable rate mortgages, manufactured homes,
non-agency bonds, buydowns, graduated equity mortgages, project loans and
non-conforming (i.e., "jumbo") mortgages. As of December 31, 1996, over 5,727
issues were included in the Lehman Aggregate, representing approximately $4.5
trillion in market value. U.S. Treasury and agency securities represented
approximately 51.6% of the total market value, asset-backed and mortgage-backed
securities represented approximately 30.6% of the total market value, with
corporate debt securities representing the balance of approximately 17.82%. The
average maturity of the Lehman Aggregate was approximately 8.7 years. The
Adviser believes that the Lehman Aggregate is an appropriate benchmark for the
Portfolio because it is diversified, it is familiar to investors, and it is
widely accepted as a reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate--U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
29
<PAGE> 35
THE GOVERNMENT & CORPORATE BOND PORTFOLIO
The Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital. In
pursuing its investment objective, the Portfolio intends to invest at least 65%
of its assets in fixed-income and related debt securities rated in one of the
three highest rating categories assigned by a Rating Agency at the time of
purchase or in unrated investments deemed by the Adviser to be of comparable
quality pursuant to guidelines approved by the Fund's Board of Directors. Debt
securities may include a broad range of fixed and variable rate bonds,
debentures, notes, and securities convertible into or exchangeable for common
stock; dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and first mortgage loans, income participation
loans, participation certificates in pools of mortgages, including mortgages
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
CMOs and other mortgage-related securities, and other asset-backed securities.
For further information regarding asset-backed securities, see "Other Applicable
Policies--Asset-Backed Securities" below. The Portfolio may invest up to 10% of
its total assets at the time of purchase in dollar-denominated debt obligations
of foreign issuers, either directly or through American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"), and up to 25% of its total
assets at the time of purchase in non-mortgage asset-backed securities,
respectively. See "Other Applicable Policies--Foreign Securities" below and the
Statement of Additional Information under "Investment Objectives and
Policies--ADRs and EDRs."
The Government & Corporate Bond Portfolio may purchase debt securities
which are rated at the time of purchase within the four highest rating
categories assigned by Rating Agencies or unrated debt securities (including
convertible securities) which the Adviser believes present attractive
opportunities and are of at least comparable quality to instruments so rated.
The Portfolio's dollar-weighted average portfolio quality is expected to be at
least "A" or higher. Securities rated in the lowest of the above four rating
categories have speculative characteristics, even though they are of
investment-grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Such
securities will be purchased (and retained) only when the Adviser believes the
issuers have an adequate capacity to pay interest and repay principal. (For a
description of the rating categories of Rating Agencies, see Appendix A to the
Statement of Additional Information.) In making investment decisions, the
Adviser will consider a number of factors including current yield, maturity,
yield to maturity, anticipated changes in interest rates, and the overall
quality of the investment. The Portfolio seeks to provide a current yield
greater than that generally available from money market instruments.
The Government & Corporate Bond Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. Short-term obligations include, but are
not limited to, commercial paper, bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations, repurchase agreements and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Short-Intermediate Municipal Portfolio's investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital. The Portfolio seeks to achieve
its objective by investing substantially all of its assets in investment grade
Municipal Obligations. As a matter of fundamental policy, under normal market
conditions at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations, primarily bonds (at least 65% under normal market
conditions).
30
<PAGE> 36
The Short-Intermediate Municipal Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper, and
variable and floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes they have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. Municipal Obligations
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories of a Rating Agency will be disposed of in an
orderly manner, normally within 30-60 days. The applicable ratings issued by the
Rating Agencies are described in the Appendix to the Statement of Additional
Information.
In addition, the Short-Intermediate Municipal Portfolio may from time to
time during temporary defensive periods, invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a Rating Agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
The Short-Intermediate Municipal Portfolio's average dollar-weighted
maturity will be between two and five years and will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Missouri Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Missouri
Municipal Obligations (which, to the extent possible, are also exempt from
Missouri income tax).
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are derived
from interest attributable to tax-exempt obligations of the State of Missouri
and its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands ("Missouri Municipal
Obligations") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Missouri Tax-Exempt Bond Portfolio's total assets will be invested in
Missouri Municipal Obligations. The Portfolio will seek to maximize the
proportion of its dividends which are exempt from both federal and Missouri
income tax and presently expects to invest substantially all of its total assets
in Missouri Municipal Obligations.
The Missouri Tax-Exempt Bond Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
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purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Missouri Tax-Exempt Bond Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. See "The Tax-Exempt Money Market
Portfolio" above for a description of the types of taxable money market
instruments in which the Portfolio may invest.
The Missouri Tax-Exempt Bond Portfolio's average weighted maturity will
vary in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
THE NATIONAL MUNICIPAL BOND PORTFOLIO
The National Municipal Bond Portfolio's investment objective is to seek as
high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. In pursuing its investment objective,
the Portfolio intends to invest, under normal market and economic conditions,
substantially all of its assets in investment grade Municipal Obligations. As a
matter of fundamental policy, under normal market and economic conditions at
least 80% of the Portfolio's total assets will be invested in Municipal
Obligations, primarily, bonds (at least 65% under normal market conditions).
The Portfolio may purchase Municipal Obligations that are rated at the time
of purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated Municipal Obligations deemed by the Adviser to be
of comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its assets in Municipal Obligations
rated at the time of purchase in one of the three highest rating categories
assigned by one or more Rating Agencies (or unrated Municipal Obligations
determined to be of comparable quality). Securities that are rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Unrated obligations will
be purchased only if they are considered by the Adviser to be at least
comparable in quality at the time of purchase to instruments within the rating
categories listed above. Municipal Obligations purchased by the Portfolio whose
ratings are subsequently downgraded below the four highest rating categories of
a Rating Agency will be disposed of in an orderly manner, normally within 30 to
60 days. The applicable ratings issued by the Rating Agencies are described in
the Appendix to the Statement of Additional Information.
In addition, the Portfolio may from time to time during temporary defensive
periods, invest in taxable obligations in such proportions as, in the opinion of
the Adviser, prevailing market or
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economic conditions warrant. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities and debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the two highest rating categories of a Rating Agency. The
Portfolio does not intend to invest in taxable obligations under normal market
conditions.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Portfolio may also hold
uninvested cash reserves which do not earn income pending investment. There is
no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
The Portfolio's average dollar-weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors.
THE EQUITY INCOME PORTFOLIO
The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation. In
pursuing its investment objective, the Portfolio intends to invest, under normal
market and economic conditions, substantially all of its assets in common stock,
preferred stock, rights, warrants, and securities convertible into common stock.
The Adviser will select stocks based on a number of quantitative factors,
including dividend yield, current and future earnings potential compared to
stock prices, total return potential and other measures of value, such as cash
flow, asset value or book value, if appropriate. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable as compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce an above average level of income
(as measured by the Standard & Poor's 500 Composite Stock Price Index). Under
normal market and economic conditions, at least 65% of the Portfolio's total
assets will be invested in income-producing equity securities.
The Portfolio may indirectly invest in foreign securities through the
purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Other Applicable
Policies-- Foreign Securities" below and the Statement of Additional Information
under "Investment Objectives and Policies--ADRs and EDRs."
The Portfolio reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets in
cash and short-term obligations (having remaining maturities of 13 months or
less) at such times and in such proportions as, in the opinion of the Adviser,
such abnormal market or economic conditions warrant. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.
THE EQUITY INDEX PORTFOLIO
The Equity Index Portfolio, which is expected to commence operations in
1997, seeks to provide investment results that, before deduction of operating
expenses, approximate the price and yield performance of U.S. publicly traded
common stocks with large stock market capitalizations as represented by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Like the Bond Index Portfolio, the Equity Index Portfolio is not managed in
a traditional sense, that is, by making discretionary judgments based on
analysis of economic, financial and market
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conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the S&P 500, through the use of sophisticated
computer models to determine which securities should be purchased or sold, while
keeping transaction and administrative costs to a minimum. The Portfolio will
invest substantially all of its total assets in securities listed in the S&P
500. The Adviser generally selects securities for the Portfolio on the basis of
their weightings in the S&P 500 and will only purchase a security for the
Portfolio that is included in the S&P 500 at the time of such purchase. The
Portfolio should exhibit price volatility similar to that of the S&P 500. For
further information, see "Other Investment Policies--The Indexing Approach"
below and the Statement of Additional Information under "Investment Objectives
and Policies--The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common stocks,
most of which are listed on the New York Stock Exchange. S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 have an average market capitalization of $5.6 trillion and account
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock approximately the same percentage as that stock represents
in the S&P 500. Under certain circumstances, the Portfolio may not hold all 500
stocks in the S&P 500, for example because of changes in the S&P 500, or as a
result of shareholder activity in the Portfolio. The Portfolio will rebalance
its holdings monthly to reflect changes in the S&P 500. "Market capitalization"
for a company is the market price per share of stock multiplied by the number of
shares outstanding. The Adviser believes that the S&P 500 is an appropriate
benchmark for the Portfolio because it is diversified, it is familiar to many
investors and it is widely accepted as a reference for common stock investments.
THE GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income a secondary consideration. In pursuing its
investment objective, the Portfolio normally invests substantially all of its
assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Adviser selects stocks based on a number of
factors, including historical and projected earnings, growth and asset value,
earnings compared to stock prices generally (as measured by the S&P 500, and
consistency of earnings growth and earnings quality. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable compared to the price
and yield of the common stock. The stocks or securities in which the Portfolio
invests may be expected to produce some income but income is not a major
criterion in their selection.
The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 15% of the Portfolio's total assets. For further information, see
"Other Applicable Policies--Foreign Securities" below and the Statement of
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Additional Information under "Investment Objectives and Policies--ADRs and
EDRs." The Portfolio may also invest in Canadian securities listed on a national
securities exchange.
The Growth & Income Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. See "The Government & Corporate Bond
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.
THE SMALL CAP EQUITY PORTFOLIO
The Small Cap Equity Portfolio's investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. In pursuing its investment objective, the Portfolio (which
was formerly known as the Emerging Growth Portfolio) normally invests at least
65% of its total assets in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation. The
market capitalization of the issuers of securities purchased by the Portfolio
will normally range from $100 million to $2 billion at the time of purchase. The
Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Adviser, offer improved
growth possibilities because of rejuvenated management, product changes, or
other developments that might stimulate earnings or asset growth, or in
companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.
The Small Cap Equity Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The securities
of such smaller companies may have limited marketability, may be subject to more
abrupt or erratic market movements than securities of larger companies or the
market averages in general, and may involve greater risk than is customarily
associated with more established companies. To qualify for investment by the
Portfolio, however, a company will be expected to have, in the opinion of the
Adviser, above-average possibilities for capital appreciation (when compared
with the average appreciation of companies whose securities are included in the
S&P 500).
The Small Cap Equity Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth, and
quality of products manufactured and/or services offered. Stocks purchased for
the Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market. The Portfolio
may also invest in initial public offerings of new companies that demonstrate
the potential for price appreciation. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price of the convertible
security is favorable compared to the price of the common stock. In general, the
Portfolio's stocks and other securities will be diversified over a number of
industry groups in an effort to reduce the risks inherent in such investments.
The Small Cap Equity Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. For further information, see
"Other Applicable Policies--Foreign Securities" below, and the Statement of
Additional Information under "Investment Objectives and Policies--ADRs and
EDRs." The Portfolio may also invest in securities issued by Canadian
corporations and Canadian counterparts of U.S.
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corporations, which may or may not be listed on a national securities exchange
or traded in over-the-counter markets.
The Small Cap Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
THE INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to provide
capital growth consistent with reasonable investment risk. The Portfolio seeks
to achieve this objective by investing principally in foreign equity securities,
most of which will be denominated in foreign currencies. During normal market
conditions, the Portfolio will invest substantially all of its assets in
securities of companies which derive more than 50% of their gross revenues from,
or have more than 50% of their assets outside, the United States. Additionally,
under normal market conditions, the Portfolio will invest in equity securities
from at least three different countries (excluding the United States). However,
the Portfolio may invest all its assets in a single country during temporary
defensive periods.
The International Equity Portfolio expects to invest at least half of its
assets in securities of companies located either in developed countries in
Western Europe or in Japan, although it may also purchase securities of
companies located in other developed countries and developing countries. For
further information, see "Risk Factors--Risks Associated with Foreign Securities
and Currencies" below.
By investing in foreign securities, the International Equity Portfolio will
attempt to take advantage of differences between economic trends and the
performance of securities markets in various countries, regions and geographic
areas. The Portfolio will achieve diversification by investing in securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The multinational
character of the Portfolio's investments should reduce the effect that events in
any one country or geographic area will have on its investment holdings. Of
course, negative movement by one of the Portfolio's investments in one foreign
market may offset gains from the Portfolio's investments in another market.
Equity securities in which the International Equity Portfolio may invest
include common stock, preferred stock, rights, warrants and securities
convertible into common stock. A convertible security may be purchased for the
Portfolio when, in the Adviser's or Sub-Adviser's opinion, the price and yield
of the convertible security is favorable compared to the price and yield of the
common stock.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Equity Portfolio may invest up to 100% of its
assets in U.S. Government obligations or debt obligations of companies
incorporated and having their principal business activities in the United
States. The Portfolio does not intend to invest in such securities for the
purpose of meeting its investment objective.
The International Equity Portfolio may also invest, without limitation, in
foreign securities through the purchase of ADRs and EDRs. For further
information, see "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below and the Statement of Additional Information under "Investment
Objectives and Policies--ADRs and EDRs."
The International Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser or Sub-
Adviser, prevailing market or economic conditions warrant. See "The Government &
Corporate
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Bond Portfolio" above for a description of the types of short-term obligations
in which the Portfolio may invest.
Although investing in any mutual fund has certain inherent risks, an
investment in the International Equity Portfolio may have even greater risks
than investments in most other types of mutual funds. The Portfolio is not a
complete investment program, and it may not be appropriate for investors who
cannot financially bear the loss of at least a significant portion of their
investment. The Portfolio's net asset value per Share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Portfolio's
objective. See "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below.
THE BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the statistical impact of the Adviser's
economic outlook upon the future returns of each asset group. The models are
especially sensitive to the forecasts for inflation, interest rates and
long-term corporate earnings growth. Investment returns are normally heavily
impacted by such variables and their expected changes over time. Therefore, the
Adviser's method attempts to take advantage of changing economic conditions by
increasing or decreasing the ratio of stocks to bonds in the Portfolio. For
example, if the Adviser expected more rapid economic growth leading to better
corporate earnings, it would increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed income securities and cash
equivalents.
Under normal market conditions, the Balanced Portfolio's policy is
generally to invest at least 25% of the value of its total assets in fixed
income securities and no more than 75% in equity securities. The actual
percentage of assets invested in equity securities, fixed income securities and
cash equivalents will vary from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
The equity securities in which the Balanced Portfolio normally invests
include common stock, preferred stock, rights, warrants and securities
convertible into common or preferred stock. For further information regarding
these instruments, see "The Equity Income Portfolio" and "The Growth & Income
Equity Portfolio" above.
The fixed income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Adviser to be of
comparable quality pursuant to guidelines approved by the Fund's Board of
Directors. For further information regarding these instruments, see "The
Government & Corporate Bond Portfolio" above.
The Balanced Portfolio may purchase asset-backed securities. For further
information regarding these instruments, see "Other Applicable
Policies--Asset-Backed Securities" below.
The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or
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economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
RISK FACTORS
MARKET RISK. The Equity Income, Equity Index, Growth & Income Equity, Small
Cap Equity and International Equity Portfolios invest primarily, and the
Balanced Portfolio invests to a significant degree, in equity securities. As
with other mutual funds that invest primarily or to a significant degree in
equity securities, these Portfolios are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income securities,
including Municipal Obligations, held by the 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, National Municipal Bond and Balanced
Portfolios can be expected to vary inversely to changes in prevailing interest
rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in a Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors
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may limit the investment opportunities available to the International Equity
Portfolio and result in a lack of liquidity and a high price volatility with
respect to securities of issuers from developing countries.
Certain countries may also impose restrictions on the International Equity
Portfolio's ability to repatriate investment income or capital. Even when there
is no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of the
International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected to
be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios may be
subject to certain of the risks described above in connection with investment in
foreign securities.
MUNICIPAL OBLIGATIONS. The ability of the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios (collectively, the "Tax-Exempt Portfolios") to achieve their
respective investment objectives are dependent upon the ability of issuers of
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. There are additional risks associated with investment in
the Missouri Tax-Exempt Bond Portfolio because it invests its assets
predominantly in Missouri Municipal Obligations. Investors in the Missouri
Tax-Exempt Bond Portfolio should be aware that certain provisions of, and
amendments to, the Missouri Constitution limit tax increases which could result
in certain adverse consequences affecting Missouri Municipal Obligations. Some
of the significant financial considerations relating to the Missouri Tax-Exempt
Bond Portfolio's investments in Missouri Municipal Obligations are summarized in
the Statement of Additional Information.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt Money
Market, Short-Intermediate Municipal and National Municipal Bond Portfolios may
invest 25% or more of their respective net assets in (i) Municipal Obligations
whose issuers are in the same state, (ii) Municipal Obligations the interest on
which is paid solely from revenues of similar projects, and (iii) private
activity bonds, no Portfolio presently intends to do so unless in the opinion of
the
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Adviser the investment is warranted. Although the Missouri Tax-Exempt Bond
Portfolio does not presently intend to do so on a regular basis, it may invest
more than 25% of its assets in industrial development bonds issued before August
7, 1986, the interest on which is not treated as a specific tax preference item
under the federal alternative minimum tax, and in Municipal Obligations, the
interest on which is paid solely from revenues of similar projects, if such
investments are deemed necessary or appropriate by the Adviser. To the extent
that a Portfolio's assets are invested in Municipal Obligations the issuers of
which are in the same state or that are payable from the revenues of similar
projects or in private activity bonds, a Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions relating to such
projects and bonds to a greater extent that it would be if its assets were not
so invested. See "Investment Objectives and Policies--Municipal Obligations" in
the Statement on Additional Information.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios
is classified as non-diversified under the 1940 Act. Investment return on a
non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a nondiversified portfolio may be more susceptible to
economic, political, and regulatory developments than a diversified investment
portfolio with similar objectives. The value of a Portfolio's securities can be
expected to vary inversely with changes in prevailing interest rates.
Investors in the Missouri Tax-Exempt Bond Portfolio should consider the
risk inherent in such Portfolio's concentrations in Missouri Municipal
Obligations versus the safety that comes with a less geographically concentrated
investment portfolio, and should compare the yields and tax-equivalent yields
available on portfolios of Missouri Municipal Obligations with the yields and
tax-equivalent yields of more diversified portfolios with securities of
comparable quality, including non-Missouri securities, before making an
investment decision.
Municipal Obligations purchased by the Tax-Exempt Portfolios may be backed
by letters of credit or guarantees issued by domestic or foreign banks and other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or a guarantee with
respect to a Municipal Obligation held by a Tax-Exempt Portfolio could have an
adverse effect on the Portfolio's investment portfolio and the value of its
shares. Foreign letters of credit and guarantees involve certain risks in
addition to those of domestic obligations, including less stringent reserve
requirements and different accounting, auditing and recordkeeping requirements.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri Municipal Obligations, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of Municipal Obligations, the
creation of any tax-exempt derivative security, or the bases for such opinions.
OTHER APPLICABLE POLICIES
The investment policies described in this Prospectus are among those which
one or more of the Portfolios have the ability to utilize. Some of these
policies may be employed on a regular basis; others may not be used at all.
Accordingly, reference to any particular policy, method or technique carries no
implication that it will be utilized or, if it is, that it will be successful.
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U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of a Portfolio. Certain U.S. Government securities held
by the Treasury Money Market, Money Market or Tax-Exempt Money Market Portfolios
may have remaining maturities exceeding thirteen months if such securities
provide for adjustments in their interest rates no less frequently than every
thirteen months. Examples of the types of U.S. Government obligations that may
be held by the Portfolios, subject to their respective investment objectives and
policies, include, in addition to U.S. Treasury bonds, notes and bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, GNMA,
FNMA, FHLMC, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Resolution Trust Corporation, and Maritime Administration. Obligations of
certain agencies and instrumentalities of the U.S. Government, such as those of
GNMA, are supported by the full faith and credit of the U.S. Treasury; others,
such as the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. There is
no assurance that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Equity Index Portfolios) may also invest
in "stripped" U.S. Treasury obligations offered under the Separate Trading of
Registered Interest and Principal Securities ("STRIPS") program or Coupon Under
Bank-Entry Safekeeping ("CUBES") program or other stripped securities issued
directly by agencies or instrumentalities of the U.S. Government (and, with
respect to the Treasury Money Market Portfolio only, that are also guaranteed as
to principal and interest by the U.S. Government). STRIPS and CUBES represent
either future interest or principal payments and are direct obligations of the
U.S. Government that clear through the Federal Reserve System. The Money Market,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Growth &
Income Equity, Small Cap Equity and Balanced Portfolios may also purchase U.S.
Treasury and agency securities that are stripped by brokerage firms and
custodian banks and sold under proprietary names. These stripped securities are
resold in custodial receipt programs with a number of different names (such as
TIGRs and CATS) and are not considered U.S. Government securities for purposes
of the 1940 Act.
Stripped securities are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, each Portfolio (except the
National Municipal Bond Portfolio) may agree to purchase U.S. Government
securities from financial institutions such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). A Portfolio will enter into repurchase
agreements only with financial institutions such as banks and broker-dealers
that the Adviser or Sub-Adviser believes to be creditworthy. During the term of
any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller and will require the seller to maintain the
value of the securities subject to the agreement at not less than 102% of the
repurchase price (including
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accrued interest). Default by a seller could expose a Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although no Portfolio presently intends to enter into repurchase agreements
providing for settlement in more than seven days, each Portfolio does have the
authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act. The income on repurchase agreements is taxable. See "Taxes"
below.
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies, each
Portfolio (except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers and agree to
repurchase them at an agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price which the Portfolio is obligated to pay.
Reverse repurchase agreements are considered to be borrowings by a Portfolio
under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, each Portfolio
(except the Treasury Money Market, Money Market, Tax-Exempt Money Market and
Missouri Tax-Exempt Bond Portfolios) may, from time to time, lend its portfolio
securities to broker-dealers, banks or institutional borrowers pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government,
or its agencies or instrumentalities, or an irrevocable letter of credit issued
by a bank that has at least $1.5 billion in total assets, or any combination
thereof. The collateral must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33 1/3% of the
aggregate net assets of such Portfolio. Loans are subject to termination by a
Portfolio or a borrower at any time.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies which determine their net asset value per Share based on the amortized
cost or penny-rounding method and which invest in securities in which the
Portfolio is permitted to invest. Each Portfolio may invest in securities of
other investment companies within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition on a Portfolio investing
more than 10% of the value of its total assets in such securities. Investments
in other investment companies will cause a Portfolio (and, indirectly, the
Portfolio's shareholders) to bear proportionately the cost incurred in
connection with the operations of such other investment companies. In addition,
investment companies in which a Portfolio may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
shares as well as other types of commissions or charges (no sales charge will be
paid by the Missouri Tax-Exempt Bond Portfolios in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. See the Statement of Additional
Information under "Investment Objectives and Policies--Securities of Other
Investment Companies." The income on securities of other investment companies
may be taxable to investors at the state or local level. See "Taxes" below.
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WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate Municipal
and National Municipal Bond Portfolios may purchase or sell securities on a
"delayed settlement" basis. This refers to a transaction in the secondary market
that will settle some time in the future. When issued purchases, forward
commitments and delayed settlement transactions involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date, or
if the value of the security to be sold increases prior to the settlement date.
Each Portfolio expects that these transactions will not exceed 25% of the value
of its total assets (at the time of purchase) under normal market conditions. No
Portfolio intends to engage in such transactions for speculative purposes but
only for the purpose of acquiring portfolio securities.
OPTIONS. Each of the Equity and Bond Portfolios (except the
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 its net assets. Such options may relate to particular
securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Such transactions
will be entered into only as a hedge against fluctuations in the value of
securities which a Portfolio holds or intends to purchase.
These Portfolios may also write covered call options. A covered call option
is an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Such options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
The International Equity Portfolio may write covered call options, buy put
options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction"--the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options will not be a primary investment technique of any
Portfolio. For additional information relating to option trading practices,
including particular risks, see the Statement of Additional Information and
Appendix B thereof.
FOREIGN CURRENCY PUT OPTIONS. The International Equity Portfolio may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the
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Portfolio, upon payment of a premium, the right to sell a currency at the
exercise price until the expiration of the option and serves to insure against
adverse currency price movements in the underlying portfolio assets denominated
in that currency.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may purchase
unlisted currency options. A number of major investment firms trade unlisted
options which are more flexible than exchange listed options with respect to
strike price and maturity date. These unlisted options generally are available
on a wider range of currencies. Unlisted foreign currency options are generally
less liquid than listed options and involve the credit risk associated with the
individual issuer. They will be deemed to be illiquid for purposes of the
limitation on investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Equity
Portfolio may buy and sell securities denominated in currencies other than the
U.S. dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolio may from time to time enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolio may enter into currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward currency contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by the International
Equity Portfolio to purchase or sell a specific currency at a future date at a
price set at the time of the contract. In this respect, forward currency
contracts are similar to foreign currency futures contracts described below;
however, unlike futures contracts, which are traded on recognized commodities
exchanges, forward currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Also, forward currency contracts usually involve delivery of
the currency involved instead of cash payment as in the case of futures
contracts.
The International Equity Portfolio may use forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. The use of such forward contracts is limited to
hedging against movements in the value of foreign currencies relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
foreign currency exchange transactions. Transaction and position hedging will
not be limited to an overall percentage of the Portfolio's assets but will be
employed as necessary to correspond to particular transactions or positions. The
Portfolio may not hedge its currency positions to an extent greater than the
aggregate market value (at the time of entering into the forward contract) of
the securities held in its portfolio denominated in, quoted in, or currently
convertible into that particular currency. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities decline, but forward foreign currency exchange
contracts do allow the Portfolio to establish a rate of exchange for a future
point in time.
FUTURES CONTRACTS AND RELATED OPTIONS. The U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Equity
Income, Equity Index, Growth and Income Equity, Small Cap Equity and Balanced
Portfolios may invest in futures contracts and options on futures contracts to
the extent permitted by the Commodity Futures Trading Commission
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("CFTC") and the SEC. The International Equity Portfolio may invest in interest
rate futures contracts, options on futures contracts and other types of
financial futures contracts (such as foreign currency contracts), as well as any
index or foreign market futures which are available in recognized exchanges or
in other established financial markets to the extent permitted by the CFTC and
the SEC. Such transactions, including stock or bond index futures contracts, or
options thereon, act as a hedge to protect a Portfolio from fluctuations in the
value of its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities or, with respect
to the Bond Index and Equity Index Portfolios, can be used to simulate full
investment in the Lehman Aggregate or S&P 500 while retaining a cash balance for
portfolio management purposes. Hedging is a specialized investment technique
that entails skills different from other investment management. The Adviser (or
Sub-Adviser) may also consider such transactions to be economically appropriate
for the reduction of risk inherent in the ongoing management of a Portfolio. A
stock or bond index futures contract is an agreement in which one party agrees
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the index value (which assigns relative values to
the common stock or bonds included in the index) at the close of the last
trading day of the contract and the price at which the agreement is originally
made. No physical delivery of the underlying stock or bond in the index is
contemplated. Similarly, it may be in the best interest of a Portfolio to
purchase or sell interest rate futures contracts, or options thereon, which
provide for the future delivery of specified fixed income securities.
The purchase and sale of futures contracts or related options will not be a
primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. For a more detailed description of
futures contracts and related options, see the Statement of Additional
Information and Appendix B thereof.
ASSET-BACKED SECURITIES. The U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios
may purchase asset-backed securities (i.e., securities backed by mortgages,
installment sale contracts, corporate receivables, credit card receivables or
other assets) that are issued by entities such as GNMA, FNMA and FHLMC and
private issuers such as commercial banks, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks, and investment banks. To the extent that a Portfolio invests in
asset-backed securities issued by companies that are investment companies under
the 1940 Act, such acquisitions will be subject to the percentage limitations
prescribed by the 1940 Act. See "Other Applicable Policies--Securities of Other
Investment Companies" above.
Presently there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and CMOs, which provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
subject to greater volatility and interest-rate risk than other types of
mortgage-backed securities. The average life of asset-backed securities varies
with the underlying instruments or assets and market conditions, which in the
case of mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with
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comparable maturities. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by a Portfolio will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. When interest rates rise, the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.
In general, the collateral supporting non-mortgage asset-backed securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Non-mortgage asset-backed securities involve certain
risks that are not presented by mortgage-backed securities arising primarily
from the nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and the repossession of automobiles and
other personal property upon the default of the debtor may be difficult or
impracticable in some cases.
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the Tax-Exempt Portfolios are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenues securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds issued by or on behalf of
public authorities to finance various privately operated facilities are
considered Municipal Obligations. Interest on private activity bonds, although
free of regular federal income tax, may be an item of tax preference for
purposes of the federal alternative minimum tax.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Also included within the
general category of Municipal Obligations are participation certificates in
leases, installment purchase contracts, or conditional sales contracts ("lease
obligations") entered into by state or political subdivisions to finance the
acquisition or construction of equipment, land, or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, certain lease obligations are backed
by the lessee's covenant to appropriate money to make the lease obligation
payments. However, under certain lease obligations, the lessee has no obligation
to make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing and may
not be as marketable as more conventional securities. To the extent these
securities are illiquid, they are subject to each Portfolio's applicable
limitation on illiquid securities described below.
VARIABLE AND FLOATING RATE MUNICIPAL OBLIGATIONS. Municipal Obligations
purchased by the Tax-Exempt Portfolios may include rated or unrated variable and
floating rate instruments, including
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variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by a Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however, could make it difficult for a
Portfolio to dispose of an instrument if the issuer were to default on its
payment obligation. A Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to Municipal Obligations held by it. Under a
stand-by commitment, a dealer agrees to purchase, at a Portfolio's option,
specified Municipal Obligations at a specified price. The Portfolios will
acquire stand-by commitments solely to facilitate portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes. The Portfolios
expect that stand-by commitments will generally be available without the payment
of any direct or indirect consideration. However, if necessary or advisable, a
Portfolio may pay for a stand-by commitment either separately in cash or by
paying a higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield otherwise available for the same
securities). Stand-by commitments acquired by a Portfolio will be valued at zero
in determining the Portfolio's net asset value.
TAX-EXEMPT DERIVATIVES. Each of the Tax-Exempt Portfolios may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of each Tax-Exempt Portfolio's
assets will be invested in such securities during the current year. See the
Statement of Additional Information under "Investment Objectives and
Policies -- Tax-Exempt Derivatives."
DEPOSITORY RECEIPTS. The Bond Index and Equity Index Portfolios may invest
in receipts issued by banks or brokerage firms that are created by depositing
securities listed in each Portfolio's respective index into a special account at
a custodian bank. The custodian holds such securities for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. The Portfolios may invest in index-based depository receipts in
lieu of investment in the actual securities that are listed in the respective
indexes.
THE INDEXING APPROACH. The Bond Index and Equity Index Portfolios seek to
approximate the investment performance of their respective market segments, as
represented by their respective indexes, i.e. the Lehman Aggregate in the case
of the Bond Index Portfolio and the S&P 500 in the case of the Equity Index
Portfolio. While there can be no guarantee that a Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P or Lehman Brothers, Inc. ("Lehman") calculate their
respective indexes, and the timing of purchases and redemptions. The Adviser
monitors the correlation of the performance of the Portfolios in relation to
their indexes under the supervision of the Board of Directors. In the unlikely
event that a high correlation is not achieved, the Board of Directors will take
appropriate steps to correct the reason for the lower correlation.
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<PAGE> 53
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
ILLIQUID SECURITIES. A Portfolio will not invest more than 15% (10% for
each of the Money Market Portfolios) of the value of its net assets in illiquid
securities. Repurchase agreements that do not provide for settlement within
seven days, time deposits maturing in more than seven days, and securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but that may be purchased by institutional buyers pursuant to SEC Rule 144A are
subject to the applicable limit (unless the Adviser or Sub-Adviser, pursuant to
guidelines established by the Board of Directors, determines that a liquid
market exists). The purchase of securities which can be sold under Rule 144A
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities.
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Equity and Bond
Portfolios will not normally engage in short-term trading, each Portfolio
(except the Bond Index and Equity Index Portfolios) reserves the right to do so
if the Adviser (or Sub-Adviser) believes that selling a particular security is
appropriate in light of the Portfolio's investment objective. Investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Taxes" in this Prospectus and the
Statement of Additional Information.
Although the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios cannot accurately predict their respective annual
portfolio turnover rates, such rates are not expected to exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the Adviser (or Sub-Adviser) with broker-dealers that
it selects. To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Distributor or one or
more of its affiliates as a broker in connection with the purchase or sale of
securities when the Adviser believes the charge for the transaction does not
exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
Except as otherwise noted, each Portfolio's investment policies discussed
above are not fundamental and may be changed by the Fund's Board of Directors
without shareholder approval. However, each Portfolio also has in place certain
fundamental investment limitations, some of which are set forth below, which may
be changed only by a vote of a majority of the outstanding Shares of
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<PAGE> 54
a Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objectives and Policies."
THE TREASURY MONEY MARKET AND MONEY MARKET PORTFOLIOS
A Portfolio may not:
1. Make loans, except that a Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies and
may enter into repurchase agreements with respect to securities (together
with any cash collateral) that are consistent with the Portfolio's
permitted investments and that equal at all times at least 100% of the
value of the repurchase price.
2. Borrow money or issue senior securities, except that a Portfolio
may borrow from banks and the Money Market Portfolio may enter into reverse
repurchase agreements, for temporary purposes in amounts up to 10% of the
value of its total assets at the time of such borrowing; or mortgage,
pledge or hypothecate any assets, except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of a Portfolio's total assets at the time of
such borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are outstanding.
3. With respect to the Treasury Money Market Portfolio, purchase
securities other than obligations of the U.S. Government, its agencies and
instrumentalities, some of which may be subject to repurchase agreements,
except that the Portfolio may purchase securities of other investment
companies that seek to maintain a constant net asset value per Share and
that are permitted themselves only to invest in securities which may be
acquired by the Portfolio.
4. With respect to the Money Market Portfolio, purchase any securities
which would cause 25% or more of the value of the Portfolio's total assets
at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by domestic bank instruments
or obligations of the U.S. Government, its agencies or instrumentalities;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a separate
industry.
In accordance with current regulations of the SEC, the Money Market
Portfolio intends to limit investments in the securities of any single issuer
(other than securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities) to not more than 5% of the Portfolio's total assets at the
time of purchase, provided that the Portfolio may invest up to 25% of its total
assets in the securities of any one issuer for a period of up to three business
days. This intention is not, however, a fundamental policy of the Money Market
Portfolio. The Portfolio would have the ability to invest more than five percent
of its assets in any one issuer in accordance with its fundamental policy only
in the event that Rule 2a-7 of the 1940 Act is amended in the future.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE MUNICIPAL, NATIONAL MUNICIPAL
BOND, EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY,
INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of
49
<PAGE> 55
such investments, more than 5% of the Portfolio's total assets would be
invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided however, that (a) with respect to
each Portfolio except the Short-Intermediate Municipal and National
Municipal Bond Portfolios, (i) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by obligations of the
U.S. Government or its agencies or instrumentalities; (ii) wholly-owned
finance companies will be considered to be in the industries of their
parents if their activities are primarily related to financing the
activities of their parents; and (iii) utilities will be divided according
to their services (for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry); and
(b) with respect to the Short-Intermediate Municipal and National Municipal
Bond Portfolios, there is no limitation with respect to obligations issued
or guaranteed by the U.S. Government, any state, territory or possession of
the U.S. Government, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions.
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and each Portfolio other than the National Municipal
Bond Portfolio may enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets, except in connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts borrowed or 10% of the
Portfolio's total assets at the time of such borrowing; or purchase
securities while its borrowings exceed 5% of its total assets. A
Portfolio's transactions in futures and related options (including the
margin posted by a Portfolio in connection with such transactions), and
securities held in escrow or separate accounts in connection with a
Portfolio's investment practices described in this Prospectus or the
Statement of Additional Information are not subject to this limitation.
4. Make loans, except that (a) each Portfolio may purchase or hold
debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and (b) each
Portfolio except the National Municipal Bond Portfolio may enter into
repurchase agreements.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts
and related options, and (b) a Portfolio may obtain short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities.
THE TAX-EXEMPT MONEY MARKET AND MISSOURI TAX-EXEMPT BOND PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer if, immediately after and as
a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to
50% of the Portfolio's total assets may be invested without regard to this
5% limitation provided that no more than 25% of the Portfolio's total
assets are invested in the securities of any one issuer and (b) this 5%
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. For purposes of this
limitation, a security is considered to be issued by the governmental
entity (or entities) whose assets and revenues back the security, or, with
respect to an industrial development bond (in the case of the Tax-Exempt
Money Market Portfolio) or a private activity
50
<PAGE> 56
bond (in the case of the Missouri Tax-Exempt Bond Portfolio) that is backed
only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain
circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee, except that a
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the
Portfolio's total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks, and the Missouri Tax-Exempt Bond Portfolio may enter
into reverse repurchase agreements, for temporary defensive purposes in
amounts not in excess of 10% of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of its total assets at the
time of such borrowing (including any reverse repurchase agreements); or
purchase securities while borrowings exceed 5% of Tax-Exempt Money Market
Portfolio's net assets or 5% of the Missouri Tax-Exempt Bond Portfolio's
total assets. Securities held in escrow or separate accounts in connection
with the Portfolios' investment practices described in this Prospectus or
the Statement of Additional Information are not subject to this limitation.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Portfolio may not:
1. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 1 above with respect to the Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) or guaranteed by the United
States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 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.
2. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, under normal market conditions or when the Adviser deems that
suitable tax-exempt obligations are available, at least 80% of the Tax-Exempt
Money Market Portfolio's assets must be invested in obligations the interest on
which is exempt from federal income tax and stand-by commitments with respect to
such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph, the
Tax-Exempt Money Market Portfolio may invest in securities of other investment
companies that (a) invest in securities that are substantially similar to those
the Portfolio may acquire, and (b) distribute income that is exempt from regular
federal income tax.
The following additional investment policies with respect to the Tax-Exempt
Money Market and Missouri Tax-Exempt Bond Portfolio are not fundamental and may
be changed by the Board of Directors without shareholder approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities would exceed 15% (10%
with respect to the Tax-Exempt Money Market Portfolio) of the Portfolios'
respective net assets.
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<PAGE> 57
The Tax-Exempt Money Market Portfolio has an operating policy to comply
with the requirements of Rule 2a-7 of the 1940 Act. To the extent that Rule 2a-7
is more restrictive than the Portfolio's fundamental limitations, the Portfolio
will operate in accordance with Rule 2a-7.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
THE MONEY MARKET PORTFOLIOS
The Money Market Portfolios' respective net asset values per Share are
determined by the Administrator as of 12:00 noon (Eastern time) and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time) on each weekday, with the exception of those
holidays on which the New York Stock Exchange or the Federal Reserve Bank of St.
Louis are closed (a "Business Day"). Currently one or both of these institutions
are closed on the customary national business holidays of New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day (observed).
Each Portfolio's assets are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain its net asset value per Share at
$1.00, there can be no assurance that the net asset value per Share will not
vary. See the Statement of Additional Information under "Net Asset Value" for
further information.
THE EQUITY AND BOND PORTFOLIOS
The Equity and Bond Portfolios' respective net asset values per Share are
determined by the Administrator as of the close of regular trading hours on the
Exchange on each Business Day (currently 4:00 p.m. Eastern time).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. For further information about valuation of
investments, see "Net Asset Value" in the Statement of Additional Information.
OTHER INFORMATION
The public offering price for each class of Shares of a Portfolio is based
upon net asset value per Share plus, in the case of Investor A Shares of each
Portfolio except the Money Market Portfolios, a front-end sales charge. A class
will calculate its net asset value per Share by adding the value of a
Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of a Portfolio which declares its net investment income
quarterly will generally be lower than the net asset value per Share of Trust,
Institutional or Investor A Shares of the same Portfolio.
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HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of each Portfolio are sold subject to a front-end sales
charge, except for Investor A Shares of the Money Market Portfolios which are
sold without any sales charge. Investor B Shares of each Portfolio except for
the Treasury Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond,
Bond Index, Short-Intermediate Municipal and Equity Index Portfolios which do
not offer Investor B Shares, are sold subject to a back-end sales charge. This
back-end sales charge declines over time and is known as a "contingent deferred
sales charge." Before choosing between Investor A Shares or Investor B Shares of
a Portfolio, investors should read "Characteristics of Investor A Shares and
Investor B Shares" and "Factors to Consider When Selecting Investor A Shares or
Investor b Shares" below.
Except as provided below with respect to Investor B Shares of the Money
Market Portfolio, Investor A Shares and Investor B Shares are sold through
broker-dealers or other organizations acting on behalf of their customers.
Generally, investors purchase Investor A Shares or Investor B Shares through a
broker-dealer organization which has a sales agreement with the Distributor or
through an organization which has entered into a servicing agreement with the
Fund with respect to Investor A Shares and/or Investor B Shares. The
organization is responsible for transmitting purchase orders directly to the
Fund. Investors purchasing Shares of a Portfolio which offers both Investor A
and Investor B Shares must specify at the time of investment whether they are
purchasing Investor A Shares or Investor B Shares.
Investor B Shares of the Money Market Portfolio are available for purchase
only by those investors participating in the ARCH Asset Adviser Program.
Otherwise, Investor B Shares of the Money Market Portfolio are available only to
the holders of Investor B Shares of another Portfolio who wish to exchange their
Investor B Shares of such other Portfolio for Investor B Shares of the Money
Market Portfolio. For further information on the ARCH Asset Adviser Program,
investors should, contact their investment representatives or the ARCH Funds'
Service Center at 1-800-452-ARCH(2724).
The minimum initial investment in each Portfolio is $1,000 and the minimum
for each subsequent investment is $100, except for investments made through (a)
the Automatic Investment Program, in which case the initial minimum and
subsequent minimum investments are $50, (b) a sweep program available through an
investor's financial institution, in which case there are no minimum
investments, (c) a payroll deduction program, in which case there is no minimum
initial investment and minimum subsequent investments are $25 per month, or (d)
a wrap fee program, in which case there are no minimum investments. The minimum
initial investment to participate in the Automatic Exchange program is $5,000.
See "How to Purchase and Redeem Shares--Exchange Privileges--Automatic Exchange
Program" below for additional requirements.
Purchases may be effected on Business Days when the Adviser, Distributor,
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks. All orders for new IRAs or other retirement plan
accounts placed through the transfer agent must be accompanied by an account
application. Account applications may be obtained from your investment
representative or the Fund at 1-800-452-ARCH(2724).
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-452-ARCH(2724). Investors may also call the
Fund for information on how to purchase Shares.
EFFECTIVE TIME OF PURCHASE. A purchase order for the Money Market
Portfolios received and accepted by the Fund by 12:00 noon (Eastern time) on a
Business Day, is effected at the net asset value per Share next determined after
receipt of the order in good form if the Fund's Custodian has
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received payment in federal funds or other immediately available funds by 4:00
p.m. (Eastern time) on that day. If such funds are not available for investment
by 4:00 p.m. (Eastern time), the order will be cancelled. Purchase orders
received after 12:00 noon (Eastern time) will be placed the following Business
Day.
If purchase orders for the Equity and Bond Portfolios are received in good
form and accepted by the Fund prior to 4:00 p.m. (Eastern time) on any Business
Day, Shares will be priced according to the net asset value per Share next
determined on that day after receipt of the order. Immediately available funds
must be received by the Custodian prior to 4:00 p.m. within three Business Days
following the receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the person or
organization placing the order.
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of a Portfolio by mail, complete an
account application and send it to the Fund along with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, made payable to the appropriate Portfolio. Investors purchasing Shares
of a Portfolio which offers both Investor A Shares and Investor B Shares by mail
must indicate whether they wish to buy Investor A Shares or Investor B Shares.
Subsequent purchases of Shares of a Portfolio may be made at any time in at
least the minimum subsequent purchase amount by mailing a check payable to the
Portfolio.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of an
organization, such organization is responsible for transmitting purchase,
exchange, and redemption orders to the Fund on a timely basis, recording all
purchase, exchange, and redemption transactions, and providing regular account
statements which confirm such transactions to beneficial owners (or arranging
for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a monthly
basis in a minimum amount of $50, on the 20th day (or the next Business Day
after the 20th) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A or Investor B Shares, as appropriate, at the net asset value plus any
applicable front-end sales charge next determined on the day an order is
effected by the transfer agent, BISYS Fund Services Ohio, Inc. (the "Transfer
Agent"). An investor may apply for participation in the AIP through the
organization servicing his or her Fund account and by completing the
supplementary AIP authorization form. The AIP may be modified or terminated by a
shareholder on 30 days' written notice to his or her investment representative
or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging" in
making investments. Dollar Cost Averaging can be useful in investing in
portfolios such as the Equity and Bond Portfolios whose price per Share
fluctuates. Instead of trying to time market performance, a fixed dollar amount
is invested in Portfolio Shares at predetermined intervals. This may help
investors to reduce their average cost per Share because the agreed upon fixed
investment amount allows more Shares to be purchased during periods of lower
Share prices and fewer Shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market
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trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his or
her Shares at a price which is lower than their purchase price.
APPLICABLE SALES CHARGES -- INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
The public offering price for Investor A Shares of the Equity and Bond
Portfolios is the sum of the net asset value of the Shares being purchased plus
any applicable sales charge. No sales charge is assessed on the reinvestment of
dividends and capital gain distributions. The sales charge is assessed as
follows:
THE ARCH INTERMEDIATE CORPORATE BOND, GOVERNMENT &
CORPORATE BOND, MISSOURI TAX-EXEMPT BOND,
EQUITY INCOME, GROWTH & INCOME EQUITY, SMALL CAP EQUITY,
INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
AS A % OF DEALERS'
OFFERING AS A % OF REALLOWANCE
AMOUNT OF PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
----------- --------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000........................ 4.50% 4.71% 4.00%
$50,000 but less than $100,000........... 3.50 3.63 3.00
$100,000 but less than $250,000.......... 2.50 2.56 2.00
$250,000 but less than $500,000.......... 1.50 1.52 1.00
$500,000 but less than $1,000,000........ 1.00 1.01 0.50
$1,000,000 and over...................... .50 .50 .40
</TABLE>
THE ARCH U.S. GOVERNMENT SECURITIES, BOND INDEX,
SHORT-INTERMEDIATE MUNICIPAL AND EQUITY INDEX PORTFOLIOS
<TABLE>
<CAPTION>
AS A % OF DEALERS'
OFFERING AS A % OF REALLOWANCE
AMOUNT OF PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
----------- --------- --------------- --------------
<S> <C> <C> <C>
Less than $250,000....................... 2.50% 2.56% 2.00%
$50,000 but less than $500,000........... 1.50 1.52 1.30
$100,000 but less than $1,000,000........ 1.00 1.01 85
$1,000,000 and over...................... .50 .50 .40
</TABLE>
The Distributor will pay the appropriate Dealers' Reallowance to broker-dealer
organizations which have entered into an agreement with the Distributor. The
Dealers' Reallowance may be changed from time to time. Upon notice to the Fund's
shareholders, the Distributor, at its sole discretion, may reallow up to the
full applicable sales charge as shown on the above schedule during periods
specified in such notice. Dealers who receive 90% or more of a sales load may be
deemed to be "underwriters" under the Securities Act of 1933, as amended.
No sales charge is assessed on purchases of Investor A Shares of the Equity
and Bond Portfolios by: (a) directors and officers of the Fund and the immediate
family members of such individuals; (b) directors, current and retired employees
and participants in employee benefit/retirement plans (future and current
annuitants) of Mercantile Bancorporation Inc. or any of its affiliates or the
Distributor or its affiliates and the immediate family members of such
individuals; (c) brokers, dealers, and agents who have a sales agreement with
the Distributor, and their employees (and the immediate family members of such
individuals); (d) customers who purchase pursuant to a wrap fee program offered
by any broker-dealer or other financial institution or financial planning
organization; (e) individuals who purchase Investor A Shares with the proceeds
of Trust Shares or Institutional Shares redeemed in connection with a rollover
of benefits paid by a qualified
55
<PAGE> 61
retirement or employee benefit plan or distribution on behalf of any other
qualified account administered by Mercantile or its affiliates or correspondent
banks, within 60 days of receipt of such payment; (f) investors who purchase
Investor A Shares through a payroll deduction program; (g) employees of any
sub-adviser to the Fund; (h) former holders of Southwestern Bell Visa cards that
had been issued by Mercantile Bank of Illinois, N.A. and who participated in the
Automatic Investment Program (credit cards may not be used for the purchase of
Fund Shares); (i) investors exchanging Trust Shares of a Portfolio received from
the distribution of assets held in a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks; or (j) other investment companies distributed by the
Distributor or its affiliates. Investors who believe that they may qualify under
any of the exemptions listed above should contact the Fund at
1-800-452-ARCH(2724) prior to making a purchase.
REDUCED SALES CHARGES--INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
The sales charge on purchases of Investor A Shares of the Equity and Bond
Portfolios may be reduced through:
- rights of accumulation
- quantity discounts
- letter of intent
- reinvestment privilege
To qualify for a reduced sales load, an investor must so notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
RIGHTS OF ACCUMULATION--INVESTOR A SHARES. An investor who has previously
purchased Investor A Shares of a Portfolio and has paid a sales charge ("load")
may be eligible for reduced sales charges when purchasing additional Investor A
Shares of a Portfolio with a sales charge. An investor's aggregate investment in
Shares of such load Portfolios is the total value (based on the higher of
current net asset value or the public offering price originally paid) of: (a)
current purchases, and (b) Shares that are already beneficially owned by the
investor on which a sales charge has already been paid. If, for example, an
investor beneficially owns Investor A Shares of a Portfolio with a maximum 4.50%
sales load having an aggregate current value of $240,000 and subsequently
purchases additional Investor A Shares of a Portfolio with a maximum 4.50% sales
load having a current value of $10,000, the sales charge applicable to the
subsequent purchase would be reduced to 1.50% of the offering price.
QUANTITY DISCOUNTS--INVESTOR A SHARES. As shown in the table under
"Applicable Sales Charges--Investor A Shares of the Equity and Bond Portfolios,"
larger purchases reduce the sales charge paid. The Fund will combine purchases
made in a load Portfolio on the same day by the investor and immediate family
members when calculating the applicable sales charge.
LETTER OF INTENT--INVESTOR A SHARES. By checking the Letter of Intent box
on the account application, a shareholder becomes eligible for reduced sales
charges applicable to the total amount invested in Investor A Shares in a load
Portfolio over a 13-month period (beginning up to 90 days prior to the date
indicated on the account application). The Transfer Agent will hold in escrow 5%
of the amount indicated for payment of a higher sales load if a shareholder does
not purchase the full amount indicated on the account application. Upon
completion of the total minimum investment specified on the account application,
the escrow will be released, and an adjustment will be made to reflect any
reduced sales charge applicable to Shares purchased during the 90-day period
prior to submission of the account application. Additionally, if total purchases
within the 13-month period exceed the amount specified, an adjustment will be
made to reflect further reduced sales charges applicable to such purchases. All
such adjustments will be made at the conclusion of the 13-month period and in
the form of additional Shares credited to the shareholder's account at the then
current public offering price applicable to a single purchase of the total
amount of the total purchases. If
56
<PAGE> 62
total purchases are less than the amount specified, escrowed Shares may be
involuntarily redeemed to pay the additional sales charge. Checking a Letter of
Intent box does not bind an investor to purchase, or the Fund to sell, the full
amount indicated at the sales load in effect at the time of signing, but an
investor must complete the intended purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE--INVESTOR A SHARES. Upon redemption of Investor A
Shares on which a sales charge was paid, a shareholder has a one-time right, to
be exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
MISCELLANEOUS--INVESTOR A SHARES. Reduced sales charges may be modified or
terminated at any time and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, an investor should
contact his or her investment representative or the Distributor.
APPLICABLE SALES CHARGES--INVESTOR B SHARES OF THE CDSC PORTFOLIOS
Investor B Shares of the CDSC Portfolios are sold at their net asset value
next determined after a purchase order is received in good form by the Fund's
Distributor. Although investors pay no front-end sales charge on purchases of
Investor B Shares, such Shares are subject to a deferred sales charge at the
rates set forth in the chart below if they are redeemed within six years of
purchase. Service Organizations will receive commissions from the Distributor in
connection with sales of Investor B Shares. These commissions may be different
than the reallowances or placement fees, if any, paid to dealers in connection
with sales of Investor A Shares.
The deferred sales charge on Investor B Shares is based on the lesser of
the net asset value of the Shares on the redemption date or the original cost of
the Shares being redeemed. As a result, no sales charge is charged on any
increase in the principal value of an investor's Shares. In addition, a
contingent deferred sales charge will not be assessed on Investor B Shares
purchased through reinvestment of dividends or capital gains distributions.
The amount of any contingent deferred sales charge an investor must pay on
Investor B Shares depends on the number of years that elapse between the
purchase date and the date such Investor B Shares are redeemed. Solely for
purposes of determining the number of years from the time of payment for an
investor's Share purchase, all payments during a month will be aggregated and
deemed to have been made on the first day of the month.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE (AS A
PERCENTAGE OF
DOLLAR
NUMBER OF YEARS AMOUNT SUBJECT TO
ELAPSED SINCE PURCHASE THE CHANGE)
---------------------- ------------------
<S> <C>
One or less................................................. 5.0%
More than one, but less than two............................ 4.0%
Two, but less than three.................................... 3.0%
Three, but less than four................................... 3.0%
Four, but less than five.................................... 2.0%
Five, and up to and including six........................... 1.0%
After six years............................................. None
</TABLE>
When an investor redeems his or her Investor B Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Investor B Shares are redeemed first from those Investor B
Shares that are not subject to the deferred sales load (i.e., Investor B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) and after that from the Investor B Shares that have been held the
longest.
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<PAGE> 63
For example, assume an investor purchased 100 Investor B Shares at $10 a
Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value of $12 per
share). Therefore, only $400 of the $600 such investor received from selling his
or her Shares will be subject to the contingent deferred sales charge, at a rate
of 3.0% (the applicable rate in the third year after purchase). The proceeds
from the contingent deferred sales charge that the investor may pay upon
redemption go to the Distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to Investor B Shares, enables those Shares
to be purchased without the imposition of a front-end sales charge.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The following types
of redemptions qualify for an exemption from the contingent deferred sales
charge: (i) exchanges described under "Exchange Privileges" below; (ii)
redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension,
profit-sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code due to death, disability or the attainment of a
specified age; (iii) redemptions effected pursuant to a Portfolio's right to
liquidate a shareholder's account if the aggregate net asset value of Shares
held in the account is less than the minimum account size; (iv) redemptions in
connection with the death or disability of a shareholder; or (v) redemptions
resulting from a tax-free return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares lies
in their sales charge structures and distribution arrangements. An investor
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Investor A Shares and Investor B Shares
are the same.
Investor A Shares are sold at their net asset value plus, in the case of
the Equity and Bond Portfolios, a front-end sales charge of up to 4.50% (2.50%
with respect to the U.S. Government Securities, Bond Index, Short-Intermediate
Municipal and Equity Index Portfolios). This front-end sales charge may be
reduced or waived in some cases. See "Applicable Sales Charges--Investor A
Shares of the Equity and Bond Portfolios." Investor A Shares are subject to
ongoing distribution and service fees at an annual rate of up to 0.30% (0.25%
with respect to the Money Market Portfolios) of a Portfolio's average daily net
assets attributable to its Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. See "Applicable Sales Charges--Investor
B Shares of the CDSC Portfolios." Investor B Shares are subject to ongoing
distribution and service fees at an annual rate of up to 1.00% of a Portfolio's
average daily net assets attributable to its Investor B Shares. These ongoing
fees, which are higher than those charged on Investor A Shares, will cause
Investor B Shares to have a higher expense ratio and pay lower dividends than
Investor A Shares.
Eight years after purchase, Investor B Shares will convert automatically to
Investor A Shares. The purpose of the conversion is to relieve a holder of
Investor B Shares of the higher ongoing expenses charged to those Shares, after
enough time has passed to allow the Distributor to recover
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<PAGE> 64
approximately the amount it would have received if a front-end sales charge had
been charged. The conversion from Investor B Shares to Investor A Shares takes
place at net asset value, as a result of which an investor receives
dollar-for-dollar the same value of Investor A Shares as he or she had of
Investor B Shares. The conversion occurs eight years after the beginning of the
calendar month in which the Shares are purchased. As a result of the conversion,
the converted Shares are relieved of the distribution and service fees borne by
Investor B Shares, although they are subject to the distribution and service
fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates--eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both Investor A Shares
and Investor B Shares, investors should consider whether, during the anticipated
life of their investment in the Portfolio, the accumulated distribution fees and
potential contingent deferred sales charges on Investor B Shares prior to
conversion would be less than the initial sales charge and accumulated
distribution fees on Investor A Shares purchased at the same time (note that
Investor A Shares of the Money Market Portfolio are sold without a sales
charge), and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that there is no sales
charge for Investor A Shares, in the case of the Money Market Portfolio, or the
sales charge for Investor A Shares is waived or reduced by one of the methods
described above, in the case of the Equity and Bond Portfolios, investments in
Investor A Shares become more desirable. The Fund will refuse all purchase
orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares of
the Equity and Bond Portfolios that do not qualify for waivers of or reductions
in the initial sales charge would have less of their purchase price initially
invested in a Portfolio than purchasers of Investor B Shares of the same
Portfolio.
As described above, purchasers of Investor B Shares of the Equity and Bond
Portfolios will have more of their initial purchase price invested. Any positive
investment return on this additional invested amount would partially or wholly
offset the expected higher annual expenses borne by Investor B Shares of those
Portfolios. Because the Portfolios' future returns cannot be predicted, there
can be no assurance that this will be the case. Holders of Investor B Shares
would, however, own Shares that are subject to higher annual expenses and, for a
six-year period, such Shares would be subject to a contingent deferred sales
charge of up to 5.00% upon redemption, depending upon the year of redemption.
Investors expecting to redeem during this six-year period should compare the
cost of the contingent deferred sales charge plus the aggregate annual Investor
B Shares' distribution and service fees to the cost of the initial sales charge
and distribution and service fees on the Investor A Shares (note that Investor A
Shares of the Money Market Portfolio are sold without a sales charge). Over
time, the expense of the annual distribution and service fees on the Investor B
Shares may equal or exceed the initial sales charge, if any, and annual
distribution and service fees applicable to Investor A Shares. For example, if
net asset value remains constant, the aggregate distribution and service fees
with respect to Investor B Shares of the Equity and Bond Portfolios would equal
or exceed the initial sales charge and aggregate distribution fees of Investor
59
<PAGE> 65
A Shares of those Portfolios approximately eight years after the purchase. In
order to reduce such fees of investors that hold Investor B Shares for more than
eight years, Investor B Shares will be automatically converted to Investor A
Shares as described above at the end of such eight-year period.
EXCHANGE PRIVILEGES
The exchange privilege enables shareholders to exchange (i) Investor A
Shares of a Portfolio for Investor A Shares of another Portfolio offered by the
Fund or, under certain circumstances described below, for Trust Shares or
Institutional Shares of the same Portfolio, and (ii) Investor B Shares of a
Portfolio for Investor B Shares of another Portfolio offered by the Fund. The
exchange privilege may be exercised only in those states where the class of
shares of such other Portfolios may be legally sold.
EXCHANGES--INVESTOR A SHARES. Shareholders who have purchased Investor A
Shares of a Portfolio and who have paid any applicable sales charge ("load")
(including Shares acquired through reinvestment of dividends or distributions on
such Shares) may exchange those Shares for Investor A Shares of another load
Portfolio without paying an additional sales load. Shareholders who have
purchased Investor A Shares of a Portfolio (other than through a previous
exchange from another load Portfolio on which any applicable sales load has been
paid) with a lower sales load may be charged an additional sales load on
exchanges of Shares of such Portfolio for Shares of a Portfolio with a higher
sales load. Shareholders may also exchange Investor A Shares of a no-load
Portfolio for Investor A Shares of another no-load Portfolio without paying a
sales load. When Investor A Shares of a no-load Portfolio are exchanged for
Investor A Shares of a load Portfolio, the applicable sales load (if any) will
be assessed. However, shareholders exchanging Investor A Shares of a no-load
Portfolio that were acquired through a previous exchange involving Shares on
which a load was paid will not be required to pay an additional sales load upon
the reinvestment of the equivalent investment into a load Portfolio within a
twelve month period. Under such circumstances, the shareholder must notify the
Distributor that a sales load was originally paid and provide the Distributor
with sufficient information to permit confirmation of the shareholder's right
not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks, and whose Shares are to be held in that account, may also
exchange Investor A Shares of a Portfolio for Trust Shares or Institutional
Shares in the same Portfolio.
EXCHANGES--INVESTOR B SHARES. Shareholders who have purchased Investor B
Shares of a Portfolio (including Shares acquired through reinvestment of
dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must have a
current value at least equal to the minimum initial or subsequent investment
required by the particular Portfolio into which the exchange is being made. The
Fund reserves the right to reject any exchange request. The exchange privilege
may be modified or terminated at any time upon 60 days' written notice to
shareholders. An investor may telephone an exchange request by calling his or
her investment representative, which is responsible for transmitting such
exchange request to the Fund. See "Other Exchange or Redemption Information"
below. Investors who want to telephone an exchange request directly to the Fund,
and, have elected this privilege on the account application may follow
60
<PAGE> 66
the procedures described below under "Redemption by Telephone." An investor
should consult his or her investment representative or the Fund for further
information regarding procedures for exchanging Shares.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from their investment representative or
the Fund. To change instructions with respect to the Automatic Exchange Program
or to discontinue this feature, shareholders must send a written request to
their investment representative or to the Fund. The Automatic Exchange Program
may be amended or terminated without notice at any time by the Fund.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. Proceeds from the redemptions of Investor B
Shares will be reduced by the amount of any applicable contingent deferred sales
charge. The organization through which the investor placed the order is
responsible for transmitting redemption orders to the Fund on a timely basis. No
charge for sending redemption payments electronically is currently imposed by
the Fund, although a charge may be imposed in the future. The Fund reserves the
right to send redemption proceeds electronically within seven days after
receiving a redemption order if, in the judgment of the Adviser, an earlier
payment could adversely affect a Portfolio.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
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<PAGE> 67
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on the account application. It is not necessary for shareholders to
confirm telephone redemption requests in writing. If a shareholder did not
originally select the telephone redemption privilege, the shareholder must
provide written instructions to the Transfer Agent to add this feature. Neither
the Fund nor its service contractors will be liable for any loss, damage,
expense or cost arising out of any telephone redemption effected in accordance
with the Fund's telephone redemption procedures, acting upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed the Fund or its service contractors may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and telephone exchange privilege is not available. If, due to
temporary adverse conditions, investors are unable to effect telephone
transactions, investors are encouraged to follow the procedures described in
"Other Exchange or Redemption Information" below.
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the MONEY MARKET PORTFOLIOS with respect to redemption orders received by the
Fund before 12:00 noon (Eastern time) on a Business Day normally will be sent
electronically the same day (or mailed by check the next Business Day) to the
organization that placed the redemption order in good form. Proceeds for
redemption orders that are received after 12:00 noon (Eastern time) or on a non-
business Day normally will be sent electronically on the next Business Day (or
mailed by check on the second Business Day thereafter).
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the EQUITY AND BOND PORTFOLIOS with respect to redemption orders received by the
Fund before 4:00 p.m. (Eastern time) on a Business Day normally are sent
electronically or mailed by check to the organization that placed the redemption
order within three Business Days after the Distributor's receipt of the order in
good form.
CHECKWRITING--MONEY MARKET PORTFOLIOS
Checkwriting is available from certain institutions with respect to each of
the Money Market Portfolios. No charge for use of the checkwriting privilege is
currently imposed by the Fund, although a charge may be imposed in the future.
With this service, a shareholder may write up to six checks per month in an
amount per check of $250 or more. To obtain checks, a shareholder must complete
the signature card that accompanies the account application. To establish this
checkwriting service after opening an account in a Money Market Portfolio, the
shareholder must contact his or her investment representative by telephone or
mail to obtain an account application. A signature guarantee may be required. A
SHAREHOLDER WILL RECEIVE THE DAILY DIVIDENDS DECLARED ON THE SHARES TO BE
REDEEMED UP TO THE DAY THAT A CHECK IS PRESENTED TO THE CUSTODIAN FOR PAYMENT.
Upon 30 days' written notice to shareholders, the checkwriting privilege may be
modified or terminated. An investor cannot close an account in a Money Market
Portfolio by writing a check. The checkwriting privilege may be disadvantageous
for holders of Investor B Shares of the Money Market Portfolio due to the effect
of the contingent deferred sales charge.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be
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<PAGE> 68
reduced by any applicable contingent deferred sales charge. Portfolio Shares
will be redeemed as necessary to meet withdrawal payments. Withdrawals may
reduce principal and eventually deplete the shareholder's account. The
maintenance of an AWP may be disadvantageous for holders of Investor B Shares
due to the effect of the contingent deferred sales charge. A shareholder who
desires to establish an AWP after opening an account should complete the AWP
form in the back of the Prospectus or contact his or her investment
representative or the Fund for an AWP application. A signature guarantee will be
required. An AWP may be terminated by a shareholder on 30 days' written notice
to his or her investment representative or to the Fund or by the Fund at any
time.
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of the Equity and Bond Portfolios at net
asset value without payment of a front-end sales charge. To qualify for a net
asset value the investor must pay for such purchase with the proceeds from the
redemption of shares of a non-affiliated mutual fund on which a front-end sales
charge was paid. A qualifying purchase of Investor A Shares must occur within 30
days of the prior redemption and must be evidenced by a confirmation of the
redemption transaction. At the time of purchase, the investment representative
must notify the Fund that the purchase qualifies for a purchase at net asset
value. Proceeds from the redemption of Shares on which no front-end sales charge
was paid do not qualify for a purchase at net asset value.
OTHER EXCHANGE OR REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN A PORTFOLIO THAT OFFERS BOTH INVESTOR A SHARES AND
INVESTOR B SHARES, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE REDEEMING
INVESTOR A SHARES OR INVESTOR B SHARES. In the event a redeeming shareholder
owns both Investor A Shares and Investor B Shares in a Portfolio, the Investor A
Shares will be redeemed first unless the shareholder indicates otherwise.
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and/or Investor B Shares of a Portfolio.
TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
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The methods used to compute each Portfolio's yields and total returns are
described below and in the Statement of Additional Information.
THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as total return, "yield,"
and "effective yield" for the Money Market Portfolios' Investor A Shares and/or
Investor B Shares may be quoted in advertisements or in communications to
shareholders. The "yield" quoted in advertisements refers to the income
generated by an investment in a particular class of Shares of a Portfolio over a
specified period (such as a seven-day period) identified in connection with the
particular yield quotation. This income is then "annualized." That is, the
amount of income generated by the investment during that period is assumed to be
generated for each such period over a 52-week or one-year period and is shown as
a percentage of the investment. The "effective yield" is calculated similarly
but, when annualized, the income earned by an investment in a particular class
of Shares of a Portfolio is assumed to be reinvested. The "effective yield" will
be slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.
In addition, the Treasury Money Market Portfolio's "state tax-equivalent
yield" may also be quoted. The "state tax-equivalent yield" shows the level of
taxable yield needed to produce an after-tax yield that is equivalent to a
particular state's tax-exempt yield achieved by the Portfolio. The "state
tax-equivalent yield" refers to the portion of income that is derived from
interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities that qualifies for exemption from state income tax. The yield
calculation assumes that 100% of the interest income is exempt from state income
tax. The "state tax-equivalent yield" is computed by dividing the tax-exempt
portion of the Portfolio's yield by a denominator consisting of one minus a
stated income tax rate.
The Tax-Exempt Money Market Portfolio may also quote its "tax-equivalent
yield" and "tax-equivalent effective yield," which demonstrate the level of
taxable yield need to produce an after-tax yield that is equivalent to the
Portfolio's yield and effective yield. Each are calculated by increasing the
Portfolio's yield and effective yield by the amount necessary to reflect the
payment of federal (and/or state) tax at a stated tax rate. The "tax equivalent
yield" and "tax-equivalent effective yield" will always be higher than the
Portfolio's yield and effective yield, respectively. The Tax-Exempt Money Market
Portfolio may also compute its "tax-equivalent yield" and "tax-equivalent
effective yield" with respect to certain states, which shows the level of
taxable yield and effective yield, respectively, needed to produce an after-tax
equivalent to the federal and state tax-exempt yield of the Portfolio's
particular class of Shares, assuming payment of federal income tax and state
personal income tax each at a stated rate and based upon a specified percentage
of the Portfolio's income which is exempt from state income tax as well as
federal income tax.
THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return and yield
data for the Equity and Bond Portfolios' Investor A Shares and/or Investor B
Shares may be quoted in advertisements, sales literature or in communications to
shareholders. The yield is computed based on the net income of a particular
class of Shares in the particular Portfolio during a 30-day (or one-month)
period identified in connection with the particular yield quotation. More
specifically, the yield is computed by dividing the Portfolio's net income per
Share during a 30-day (or one-month) period by the maximum public offering price
per Share on the last day of the period and annualizing the result. The
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios' "tax equivalent" yields, which show the level of taxable yield
needed to produce an after-tax equivalent to each Portfolio's tax-free yield,
may also be quoted from time to time. This is done by increasing a Portfolio's
yield (calculated as above) by the amount necessary to reflect the payment of
federal income tax at a stated tax rate. The Missouri Tax-Exempt Bond Portfolio
may also compute its "Missouri tax-equivalent" yield which shows the amount of
taxable yield needed to
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produce an after-tax equivalent to the federal and Missouri tax-exempt yield of
the Portfolio's Shares, assuming payment of federal income tax and Missouri
income tax each at a stated rate.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to a particular class
of Shares reflect the average annual percentage change in value of an investment
in such Shares of a Portfolio over the particular measuring period. Aggregate
total returns reflect the cumulative percentage change in value over the
measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by a Portfolio during the period
are reinvested in the same class of Shares of the Portfolio and that the maximum
sales load in effect during the period has been charged by the Portfolio. The
Portfolios' total return figures may also be calculated without the deduction of
the maximum sales charge in effect during the period. The effect of not
deducting the sales charge will be to increase the total return reflected. When
considering average annual total return figures for periods longer than one
year, it is important to note that a Portfolio's annual total return for any one
year in the period might have been more or less than the average for the entire
period.
INFORMATION APPLICABLE TO ALL PORTFOLIOS
Performance data of the Portfolios' Investor A Shares and/or Investor B
Shares may be compared to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and data such as that provided by Lehman Brothers, Inc. or any of its
affiliates, Ibbotson Associates, Inc., Lipper Analytical Services, Inc., Mutual
Fund Forecaster and IBC/Donoghue's MONEY FUND REPORT(R) published by
IBC/Donoghue. References may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Institutional Investor, Pensions and
Investments, U.S.A. Today, Fortune, CDA/Wiesenberger, Morningstar, Inc. and
publications of a local or regional nature. In addition to performance
information, general information about the Portfolios that appears in a
publication such as those mentioned above may be included in advertisements and
in reports to Shareholders.
Performance quotations of a class of Shares in a Portfolio represent that
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by an investment representative will
not be included in the calculations of the Portfolios' yields and total returns.
Such fees, if any, will reduce the investor's net return on an investment in a
Portfolio. Investors may call 1-800-452-ARCH(2724) to obtain current yield and
total return information.
DIVIDENDS AND DISTRIBUTIONS
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 AND
NATIONAL MUNICIPAL BOND PORTFOLIOS
Dividends from net investment income of 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 and National Municipal Bond Portfolios are
declared daily and paid monthly not later than five Business Days after the end
of each month. Investor A Shares and/or Investor B Shares of the Treasury Money
Market, Money Market and Tax-Exempt Money Market Portfolios earn dividends from
the day the purchase order is received by the Fund through the day before the
redemption order for such Shares is received. Investor A Shares and/or Investor
B Shares of the U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios earn dividends from the
day after the purchase order is received by the Transfer Agent through the day
the redemption order for such Shares is received. Shares of a Portfolio
purchased by check begin
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earning dividends when payment for Shares purchased are converted into federal
funds and are available for investment. For purchases by check, this normally
will be the second Business Day following receipt of the check.
Dividends on each Share of such Portfolios are determined in the same
manner and are paid in the same amounts, irrespective of class, except that a
Portfolio's Trust Shares and Institutional Shares (other than the Tax-Exempt
Portfolios which do not offer Institutional Shares) bear all expenses of the
respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares (other than the Treasury
Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index
and Short-Intermediate Municipal Portfolios which do not offer Investor B
Shares) bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, a Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the Fund"
and "Other Information Concerning the Fund and Its Shares" below.
THE EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY AND BALANCED PORTFOLIOS
Net investment income for the Equity Income, Equity Index, Growth & Income
Equity and Balanced Portfolios is declared and paid monthly as a dividend to
shareholders of record. Dividends on each Share of each of these Portfolios are
determined in the same manner and are paid in the same amount, irrespective of
class, except that a Portfolio's Trust Shares and Institutional Shares bear all
expenses of the respective Administrative Services Plans adopted for such Shares
and a Portfolio's Investor A Shares and Investor B Shares (other than the Equity
Index Portfolio which does not offer Investor B Shares) bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain sub-transfer
agency fees. See "Management of the Fund" and "Other Information Concerning the
Fund and Its Shares" below.
THE SMALL CAP EQUITY AND INTERNATIONAL EQUITY PORTFOLIOS
Net investment income for the Small Cap Equity and International Equity
Portfolios is declared and paid quarterly as a dividend to shareholders of
record. Dividends on each Share of each of these Portfolios are determined in
the same manner and are paid in the same amount, irrespective of class, except
that a Portfolio's Trust Shares and Institutional Shares bear all expenses of
the respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain sub-transfer
agency fees. See "Management of the Fund" and "Other Information Concerning the
Fund and Its Shares."
OTHER DIVIDEND AND DISTRIBUTION INFORMATION
The Money Market Portfolios do not expect to realize capital gains. Net
realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested (without a sales load) in additional Shares of the same
class unless the investor has (i) otherwise indicated in the account
application, or (ii) redeemed all the Shares held in a Portfolio, in which case
a distribution will be paid in cash. Reinvested dividends and distributions will
be taxed in the same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio of the Fund intends to qualify as a "regulated investment
company" for the current taxable year. It is intended that each Portfolio will
continue to so qualify as long as such
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qualification is in the best interests of shareholders. A regulated investment
company is generally exempt from federal income tax on amounts distributed to
shareholders.
Qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"), for a taxable year requires, among other
things, that each Portfolio distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its net
exempt-interest income (if any). In general, a Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
longterm capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain over net short-term capital loss, if any, for
such taxable year. The Treasury Money Market, Money Market, 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 intend to distribute as dividends
substantially all of their respective investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to a Portfolio's shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or reinvested in
additional Shares. (Federal income taxes for distributions to an IRA are
deferred under the Code.) In the case of the Equity Income, Equity Index, Growth
& Income Equity, Small Cap Equity, International Equity and Balanced Portfolios,
such dividends will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
Portfolios from domestic corporations for the taxable year. Because all of the
Treasury Money Market, Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index and Government & Corporate Bond Portfolios' net
investment income is expected to be derived from earned interest, it is not
expected that any distributions from such Portfolios will be eligible for the
dividends received deduction.
It is the policy of each Tax-Exempt Portfolio to distribute as dividends
substantially all of its net tax-exempt interest income and any investment
company taxable income each year. Dividends derived from interest on Municipal
Obligations (known as exempt-interest dividends) may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code, unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. See the Statement of Additional
Information under "Additional Information Concerning Taxes." Distributions of
net income may be taxable to investors under state or local law as dividend
income even though a substantial portion of such distributions may be derived
from interest on tax-exempt obligations which, if realized directly, would be
exempt from such income tax.
If a Tax-Exempt Portfolio should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Portfolio that is attributable to interest
on such bonds in their federal alternative minimum taxable income for purposes
of determining liability (if any) for the 26-28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders also must
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum and environmental tax purposes. The
environmental tax applicable to corporations is imposed at the rate of .12% on
the excess of the corporation's modified federal alternative minimum taxable
income over $2,000,000.
Substantially all of each Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. A Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such gains are received in cash or
reinvested in additional Shares.
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To the extent dividends paid to shareholders of a Tax-Exempt Portfolio are
derived from taxable income or from long-term or short-term capital gains, such
dividends will be subject to federal income tax, whether such dividends are paid
in the form of cash or additional Shares.
An investor considering purchasing Shares of a Money Market Portfolio on or
just before the record date of any capital gains distribution (or in the case of
the Equity and Bond Portfolios, the record date of any dividend or capital gains
distribution) should be aware that the amount of the forthcoming distribution,
although in effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on December
31 of such year, if such dividends are actually paid during January of the
following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares of the Equity and Bond Portfolios, depending upon
the tax basis of such Shares and their price at the time of redemption, transfer
or exchange. If an investor holds Shares for six months or less and during that
time receives an exempt-interest dividend on those Shares, any loss realized on
the sale or exchange of those Shares will be disallowed to the extent of the
exempt-interest dividend.
Certain interest income and dividends earned by the International Equity
Portfolio from foreign securities is expected to be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it, including
generally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio may make this election. As a consequence, the amount
of these foreign taxes paid by the Portfolio will be included in its
shareholders' taxable income pro rata (in addition to taxable distributions
actually received by them), and each shareholder may elect either (a) to credit
his or her proportionate amount of such taxes against his or her U.S. federal
income tax liabilities (subject to certain limitations), or (b) if he or she
itemizes his or her deductions, to deduct such proportionate amounts from his or
her U.S. taxable income.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio qualifies
as a regulated investment company for federal income tax purposes, shareholders
of such Portfolio who are Missouri resident individuals, trusts or estates
resident in Missouri, or corporations subject to Missouri taxing jurisdiction
(collectively, "Missouri Taxpayers") will not be subject to Missouri income
taxation on dividends distributed to them to the extent that such dividends (a)
qualify as exempt-interest dividends of a regulated investment company under
Code section 852(b)(5), (b) are the subject of the written notice to
shareholders required by 12 C.S.R. section 10-2.155(2), (c) are attributable to
interest on (1) obligations issued by the State of Missouri or any of its
political subdivisions or authorities, or (2) certain obligations of the United
States, any territory or possession of the United States, or any authority,
commission, or instrumentality of the United States, to the extent exempted from
Missouri income tax under Federal Law, and (d) are properly reported on the
Missouri income tax returns of the shareholder in the respective Portfolio. In
connection with these exclusions from Missouri taxable income, the State also
denies any deduction for interest on debt incurred to carry the obligation or
securities and any expenses incurred in the production of the excluded interest
or dividend income.
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To the extent possible, the Missouri Tax-Exempt Bond Portfolio intends to
invest in obligations which will permit distributions attributable to interest
to be excludable by Missouri Taxpayers. Despite this intention, Missouri
Taxpayers generally will be subject to Missouri income tax on other types of
distributions received from the Missouri Tax-Exempt Bond Portfolio, including
distributions of interest on obligations of other issuers and all long-term and
short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distribution were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri bank tax or other comparable forms of
specialized Missouri taxation.
All shareholders of the Portfolios should consult with their tax advisors
with respect to the state and local tax consequences of the purchase, ownership,
and disposition of Shares in the Portfolios, the receipt of distributions from
the Portfolios, and the proper method in which to report Portfolio-related items
on a shareholder's Missouri tax returns.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may be taxable
to investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide investors, to
the extent permissible by federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Shareholders should note
that many, but not all, states permit all or a portion of a regulated investment
company's dividends which are derived from interest on U.S. Treasury obligations
(and obligations of certain U.S. Government agencies)("Treasury Obligations") to
be exempt or excluded from state and local taxation. In addition, only certain
states allow dividends of a regulated investment company that are derived from
dividends of other regulated investment companies investing directly in Treasury
Obligations to be exempt or excluded from state and local taxation. Some states
reduce a shareholder's allowable deductions by interest on debt incurred to
carry obligations producing state tax-exempt interest and by other expenses
related to such obligations. Income earned by the Portfolio from repurchase
agreements generally is not exempt from state or local income tax. Shareholders
should consult their own tax advisors about the status of distributions from the
Treasury Money Market Portfolio under state and local law.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal and, for the Treasury Money Market Portfolio, the
state income tax consequences, and for the Missouri Tax-Exempt Bond Portfolio,
the Missouri state income tax consequences, of distributions made each year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
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INVESTMENT ADVISER AND SUB-ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to each Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the assets of the Fund,
which were approximately $2.5 billion.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolios,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolios' securities and other investments, and directs the
maintenance of each Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, with respect to the Treasury Money Market and Money Market Portfolios,
at the annual rates of .40% of the first $1.5 billion of each such Portfolio's
average daily net assets, .35% of the next $1.0 billion of net assets and .25%
of net assets in excess of $2.5 billion, and with respect to the Tax-Exempt
Money Market, 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,
at the annual rates of .40%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%,
.30%, .55%, .75%, 1.00% and .75%, respectively, of the average daily net assets
of each Portfolio, respectively. For the fiscal year ended November 30, 1996,
MVA received advisory fees (net of waivers) at the effective annual rates of
.35%, .35%, .35%, .45%, .45%, .00%, .45%, .00%, .55%, .75%, 1.00% and .75% of
the respective average daily net assets of the Treasury Money Market, Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Government &
Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Growth & Income Equity, Small Cap Equity, International Equity
and Balanced Portfolios. The Intermediate Corporate Bond, Bond Index, Equity
Income and Equity Index Portfolios had not commenced operations as of November
30, 1996.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of one or more Portfolios available for
distributions as dividends. The voluntary fee reduction will cause the return of
any such Portfolio to be higher than it would otherwise be in the absence of
such reduction.
David A. Bethke, CFA, is the person primarily responsible for the
day-to-day management of the U.S. Government Securities, Intermediate Corporate
Bond and Government & Corporate Bond Portfolios and has managed each of the
Portfolios since inception. Mr. Bethke, Senior Associate, joined MVA in 1987 and
has seven years of prior investment experience.
Peter Merzian, is the person primarily responsible for the day-to-day
management of the Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond and Balanced Portfolios. Mr. Merzian, a Senior Associate
of MVA, has been with MVA since 1993 and prior thereto was employed as a
portfolio manager of another financial institution. Mr. Merzian has served as
portfolio manager of the Short-Intermediate Municipal and National Municipal
Bond Portfolios since their respective dates of inception and of the Balanced
Portfolio since May 1996. Mr. Merzian has served as portfolio manager of the
Missouri Tax-Exempt Bond Portfolio (including the Predecessor Missouri
Tax-Exempt Bond Portfolio) since 1993.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, Senior Associate, has
been with MVA since 1983. For the past 13 years, he has served as a stock
analyst and has managed several of Mercantile's common funds. Mr. Glidden has
managed the Equity Income Portfolio since its inception.
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Timothy S. Engelbrecht, is the person primarily responsible for the
day-to-day management of the Growth & Income Equity Portfolio. Mr. Engelbrecht,
a Senior Associate, has been employed by MVA for the past sixteen years and has
had portfolio management and other responsibilities for MVA for the past fifteen
years. Mr. Engelbrecht has managed the Growth & Income Equity Portfolio since
May 1996.
Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Small Cap Equity Portfolio. Mr. Anthony, Senior Associate, has
been with MVA for 21 years and has managed the Small Cap Equity Portfolio since
its inception.
MVA has entered into a sub-advisory agreement with Clay Finlay Inc.
Pursuant to the terms of such sub-investment advisory agreement, Clay Finlay has
been retained by MVA to manage the investment and reinvestment of the assets of
the International Equity Portfolio and to provide analytical and investment
research services to it, subject to the supervision of MVA and to the direction
and control of the Fund's Board of Directors.
Under this arrangement, Clay Finlay is responsible for the day-to-day
management of the International Equity Portfolio's assets. MVA reviews
investment performance policies and guidelines, maintains certain books and
records, is responsible for selecting and monitoring the performance of Clay
Finlay, and for reporting the activities of Clay Finlay in managing the
Portfolio to the Fund's Board of Directors.
Clay Finlay is registered as an investment adviser with the SEC and is a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200 Park
Avenue, 56th Floor, New York, New York 10166. Clay Finlay, founded in 1982, has
extensive experience in international investments and as of December 31, 1996
had approximately $6.5 billion in assets under management.
Frances Dakers is the person primarily responsible for the day-to-day
management of the International Equity Portfolio's investments. Ms. Dakers, a
Principal and Senior Portfolio Manager of Clay Finlay, has been associated with
Clay Finlay since January, 1982 and has managed the International Equity
Portfolio since its inception.
For the services provided and expenses assumed pursuant to its sub-advisory
agreement with MVA, Clay Finlay receives from MVA a fee, computed daily and
payable monthly, at the annual rate of .75% of the first $50 million of the
International Equity Portfolio's average daily net assets, plus .50% of the next
$50 million of average daily net assets, plus .25% of average daily net assets
in excess of $100 million. Prior to August 29, 1996, Clay Finlay received from
MVA a fee, computed daily and paid monthly, at the annual rate of .75% of the
International Equity Portfolio's average daily net assets. For the fiscal year
ended November 30, 1996, Clay Finlay received sub-advisory fees at the effective
annual rate of .75% of the International Equity Portfolio's average daily net
assets. Clay Finlay bears all expenses incurred by it in connection with its
services under the sub-advisory agreement.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolios' Administrator.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolios' arrangements with Service Organizations. See
"Service Organizations" below. For its services, the Administrator is entitled
to receive a fee, computed daily and payable monthly, at the annual rate of .20%
(.10% for the Tax-Exempt Money Market Portfolio) of each Portfolio's average
daily net assets. For the fiscal year ended November 30, 1996, the Administrator
received administration fees (net of waivers) at the effective annual rate of
.10% (.05% with respect to the National Municipal Bond Portfolio) of the average
daily net assets of each 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. From time to time, the Administrator may
voluntarily waive all or a portion of the
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<PAGE> 77
administration fees otherwise payable by a Portfolio in order to increase the
net income available for distribution to shareholders.
DISTRIBUTOR
Investor A Shares and/or Investor B Shares in each Portfolio are sold
continuously by the Distributor, BISYS Fund Services, an affiliate of the
Administrator. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of any of the Portfolios. Such compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Portfolios, and/or other dealer-sponsored
special events. In some instances, this compensation will be made available only
to certain dealers whose representatives have sold a significant amount of such
Shares. Compensation will include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) business and vacation trips, including the provision of
travel arrangements and lodging at resorts, (2) tickets for entertainment events
(such as concerts, cruises and sporting events) and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of a Portfolio's
Shares to qualify for this compensation to the extent such may be prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Portfolios or their shareholders.
DISTRIBUTION AND SERVICES PLANS
The Fund has adopted separate Distribution and Services Plans pursuant to
Rule 12b-1 under the 1940 Act with respect to Investor A Shares of the
Portfolios and Investor B Shares of the CDSC Portfolios. Under the Distribution
and Services Plans, the Fund may pay (i) the Distributor or another person for
distribution services provided and expenses assumed and (ii) Service
Organizations for shareholder administrative services provided pursuant to
servicing agreements in connection with Investor A Shares or Investor B Shares
of a Portfolio. Payments to the Distributor are to compensate it for
distribution assistance and expenses assumed and activities primarily intended
to result in the sale of Investor A Shares or Investor B Shares, including
compensating dealers and other sales personnel (which may include affiliates of
the Fund's Adviser), direct advertising and marketing expenses and expenses
incurred in connection with preparing, printing, mailing and distributing or
publishing advertisements and sales literature, for printing and mailing
Prospectuses and Statements of Additional Information (except those used for
regulatory purposes or for distribution to existing shareholders), and costs
associated with implementing and operating the Distribution and Services Plan.
In addition, payments under the Distribution and Services Plan for Investor B
Shares will be used to pay for or finance sales commissions and other fees
payable to Service Organizations and other broker-dealers who sell Investor B
Shares. See "Management of the Fund--Service Organizations" below for a
description of the servicing agreements and the services provided by Service
Organizations.
Under the Distribution and Services Plan for Investor A Shares, payments by
the Fund for distribution expenses may not exceed .10% (annualized) of the
average daily net asset value of a Portfolio's outstanding Investor A Shares and
payments for shareholder administrative servicing expenses may not exceed .20%
(.15% with respect to the Money Market Portfolios) (annualized) of the average
daily net asset value of a Portfolio's outstanding Investor A Shares.
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<PAGE> 78
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not exceed .75% (annualized) of the
average daily net asset value of a Portfolio's outstanding Investor B Shares and
payments for shareholder administrative servicing expenses may not exceed .25%
(annualized) of the average daily net asset value of a Portfolio's outstanding
Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A Shares or Investor B Shares of a Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any subcontractor as it would be for its own acts or omissions. The
fees payable to any sub-contractor are paid by the Service Organization out of
the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such a Service Organization
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of each Portfolio's assets. In addition,
Bankers Trust Company of New York, with principal offices at 16 Wall Street, New
York, New York 10005, serves as the Sub-Custodian for the International Equity
Portfolio. BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent. Its address is 3435 Stelzer Road, Columbus,
Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolios. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer
73
<PAGE> 79
agent, or custodian to such an investment company, or from purchasing Shares of
such a company as agent for and upon the order of customers. Mercantile, MVA,
Service Organizations that are banks or bank affiliates, and broker-dealers that
are bank affiliates are subject to such laws and regulations, but believe they
may perform the services for the Portfolios contemplated by their respective
agreements, this Prospectus and the Statement of Additional Information without
violating applicable banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by a Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all expenses in connection with the
performance of their services, except that the Distributor is compensated
pursuant to the Distribution and Services Plans as described under "Distribution
and Services Plans" above. Expenses are deducted from the total income of each
Portfolio before dividends and distributions are paid. These expenses include,
but are not limited to, fees paid to the Adviser and Administrator, transfer
agency fees, fees and expenses of officers and directors who are not affiliated
with the Adviser or the Distributor, taxes, interest, legal fees, custodian
fees, auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying a Portfolio and its Shares for distribution under
Federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular Portfolio will be allocated among all Portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable. Any expenses relating only to a particular
class of Shares within a Portfolio will be borne solely by such class. See
"Certain Financial Information" and "Management of the Fund" above for
additional information regarding expenses of each Portfolio.
74
<PAGE> 80
INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation, and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional Shares of common stock, and to classify and
reclassify any unauthorized and unissued Shares into one or more classes of
Shares. The Board of Directors may similarly classify or reclassify any class of
Shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which (except the Tax-Exempt Money Market and Missouri
Tax-Exempt Bond Portfolios) is classified as a diversified company under the
1940 Act: 1 billion Trust Shares, 300 million Institutional Shares and 100
million Investor A Shares, representing interests in the Treasury Money Market
Portfolio; 1.8 billion Trust Shares, 300 million Institutional Shares, 550
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Money Market Portfolio; 300 million Trust Shares and 50 million
Investor A Shares, representing interests in the Tax-Exempt Money Market
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares, representing interests in
the U.S. Government Securities Portfolio; 50 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares, representing interests in
the Intermediate Corporate Bond Portfolio; 25 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares representing interests in
the Bond Index Portfolio; 50 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
representing interests in the Government & Corporate Bond Portfolio; 25 million
Trust Shares and 25 million Investor A Shares, representing interests in the
Short-Intermediate Municipal Portfolio; 25 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Missouri Tax-Exempt Bond Portfolio; 50 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares representing interests in the
National Municipal Bond Portfolio; 50 million Trust Shares, 25 million
Institutional Shares, 25 million Investor A Shares and 25 million Investor B
Shares representing interests in the Equity Income Portfolio; 25 million Trust
Shares, 25 million Institutional Shares and 25 million Investor A Shares
representing interests in the Equity Index Portfolio; 50 million Trust Shares,
20 million Institutional Shares, 5 million Investor A Shares and 50 million
Investor B Shares, representing interests in the Growth & Income Equity
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares and 50 million Investor B
Shares, representing interests in the Small Cap Equity Portfolio; 10 million
Trust Shares, 10 million Institutional Shares, 10 million Investor A Shares and
50 million Investor B Shares, representing interests in the International Equity
Portfolio; and 15 million Trust Shares, 20 million Institutional Shares, 5
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Balanced Portfolio. Trust and Institutional Shares of the
Portfolios are described in separate prospectuses which are available from the
Distributor at the telephone number on the cover of this Prospectus. Shares in
the Fund's Portfolios will be issued without Share certificates.
The Investor A Shares and/or Investor B Shares of the Portfolios are
described in this Prospectus. The Portfolios also offer Trust Shares and, in
addition, each Portfolio except the Tax-Exempt Portfolios offers Institutional
Shares. Institutional Shares, which are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion, and
Trust Shares, which are offered to financial institutions acting on their own
behalf or on behalf of certain qualified accounts, are sold without a sales
charge. Trust, Institutional, Investor A and/or Investor B Shares bear their pro
rata portion of all operating expenses paid by a Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective
75
<PAGE> 81
Administrative Services Plans adopted for such Shares and Investor A Shares and
Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of a Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust Shares or Institutional Shares. Payments
under the Administrative Services Plans may not exceed .25% (on an annual basis)
of the average daily net asset value of outstanding Trust or Institutional
Shares of the Money Market Portfolios or .30% (on an annual basis) of the
average daily net asset value of outstanding Trust or Institutional Shares of
the Equity and Bond Portfolios.
The Fund offers various services and privileges in connection with its
Investor A Shares and Investor B Shares that are not offered in connection with
its Trust or Institutional Shares, including an automatic investment program and
automatic withdrawal plan. In addition, each class of Shares offers different
exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
Portfolios will vote together and not by class unless otherwise required by law
or permitted by the Board of Directors. All shareholders of a particular
Portfolio will vote together as a single class on matters relating to the
Portfolio's investment advisory (or sub-advisory) agreement and investment
objective and fundamental policies. Only holders of Trust Shares, however, will
vote on matters relating to the Administrative Services Plan for Trust Shares
and only holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares and only holders of Investor B Shares will
vote on matters pertaining to the Distribution and Services Plan for Investor B
Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding Shares (irrespective of
Portfolio or class) may elect all of the Directors. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Shares
will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of a Portfolio or a particular class of Shares means, with respect to
the approval of an investment advisory agreement or distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
such Portfolio or class of Shares, or (b) 67% or more of the Shares of such
Portfolio or class of Shares present at a meeting if more than 50% of the
outstanding Shares of such Portfolio or class of Shares are represented at the
meeting in person or by proxy.
As of January 1, 1997, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolios may be directed to the Fund at
1-800-452-ARCH(2724).
76
<PAGE> 82
------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIOS'
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIOS, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIOS, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
77
<PAGE> 83
INVESTMENT ADVISER
Mississippi Valley Advisors Inc.
One Mercantile Center
Seventh & Washington Streets
St. Louis, Missouri 63101
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219-3035
LEGAL COUNSEL
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219-3035
<PAGE> 84
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> 85
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> 86
Trust Shares
THE ARCH FUND(R), INC.
PROSPECTUS
MARCH 31, 1997
Money Market Portfolios
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
Taxable Bond Portfolios
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
Tax-Exempt Bond Portfolios
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Stock Portfolios
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Small Cap Equity Portfolio
International Equity Portfolio
Balanced Portfolio
[ARCH MUTUAL FUNDS LOGO]
The ARCH Funds
<PAGE> 87
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights............................................................................ 3
Certain Financial Information......................................................... 5
Expense Summary for Trust Shares...................................................... 5
Financial Highlights.................................................................. 8
Investment Objectives, Policies and Risk Considerations............................... 19
Pricing of Shares..................................................................... 45
The Money Market Portfolios......................................................... 45
The Equity and Bond Portfolios...................................................... 46
How to Purchase and Redeem Shares..................................................... 46
Purchase of Shares.................................................................. 46
Purchase of Shares--The Money Market Portfolios..................................... 47
Purchase of Shares--The Equity and Bond Portfolios.................................. 47
Exchanges........................................................................... 47
Redemption of Shares................................................................ 47
Yields and Total Returns.............................................................. 49
Dividends and Distributions........................................................... 51
Taxes................................................................................. 52
Management of the Fund................................................................ 55
Other Information Concerning the Fund and its Shares.................................. 59
</TABLE>
<PAGE> 88
TRUST SHARES -- THE ARCH FUND(R), INC.
MARCH 31, 1997
The ARCH Fund, Inc. is an open-end, management investment company that
currently offers Shares in sixteen investment portfolios. This Prospectus
describes the Trust Shares in each of those portfolios. Trust Shares are offered
to financial institutions acting on their own behalf or on behalf of certain
qualified accounts.
THE ARCH TREASURY MONEY MARKET PORTFOLIO'S investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal.
THE ARCH MONEY MARKET PORTFOLIO'S investment objective is to seek current
income with liquidity and stability of principal.
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO'S investment objective is to seek
as high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal.
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO'S investment objective is to
seek a high rate of current income that is consistent with relative stability of
principal.
THE ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO'S investment objective is to
seek as high a level of current income as is consistent with preservation of
capital.
THE ARCH BOND INDEX PORTFOLIO'S investment objective 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 debt securities, as represented by the Lehman Brothers Aggregate
Bond Index.
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO'S investment objective is to
seek the highest level of current income consistent with conservation of
capital.
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO'S investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital.
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO'S investment objective is to
seek as high a level of interest income exempt from federal income tax as is
consistent with conservation of capital. Under normal market conditions,
substantially all of the Portfolio's assets are expected to be invested in
municipal obligations that are also exempt from Missouri income tax.
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO'S investment objective is to seek
as high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital.
THE ARCH EQUITY INCOME PORTFOLIO'S investment objective is to seek to
provide an above-average level of income consistent with long-term capital
appreciation.
THE ARCH EQUITY INDEX PORTFOLIO'S investment objective 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 ARCH GROWTH & INCOME EQUITY PORTFOLIO'S investment objective is to
provide long-term capital growth, with income a secondary consideration.
THE ARCH SMALL CAP EQUITY PORTFOLIO'S investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. The Portfolio was formerly known as the ARCH Emerging
Growth Portfolio.
THE ARCH INTERNATIONAL EQUITY PORTFOLIO'S investment objective is to provide
capital growth consistent with reasonable investment risk by investing primarily
in foreign equity securities, most of which will be denominated in foreign
currencies.
THE ARCH BALANCED PORTFOLIO'S investment objective is to maximize total
return through a combination of growth of capital and current income consistent
with the preservation of capital.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 89
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolios. Mercantile serves as custodian; BISYS
Fund Services Ohio, Inc. (the "Administrator") serves as administrator; and
BISYS Fund Services (the "Distributor") serves as sponsor and distributor. In
addition, Clay Finlay Inc. ("Clay Finlay" or the "Sub-Adviser") serves as
sub-adviser for the International Equity Portfolio.
This Prospectus sets forth concisely certain information about the
Portfolios that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolios, contained in a Statement of Additional
Information dated March 31, 1997, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. An investor may obtain the Statement of Additional Information
without charge by writing the Fund at P.O. Box 78069, St. Louis, Missouri 63178
or by calling 1-800-452-4015.
AN INVESTMENT IN THE TREASURY MONEY MARKET PORTFOLIO, MONEY MARKET PORTFOLIO
OR TAX-EXEMPT MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY OF THESE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolios involves investment risk, including the possible loss of
principal.
2
<PAGE> 90
HIGHLIGHTS
The ARCH Fund, Inc. (the "Fund") is an open-end, management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended. The Fund offers investment opportunities in
sixteen investment portfolios: the ARCH TREASURY MONEY MARKET, MONEY MARKET and
TAX-EXEMPT MONEY MARKET PORTFOLIOS (the "Money Market Portfolios") and the ARCH
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 (the "Equity and
Bond Portfolios" and, together with the Money Market Portfolios, the
"Portfolios"). Each Portfolio represents a separate pool of assets with
different investment objectives and policies (as described below under
"Investment Objectives, Policies and Risk Considerations"). MVA serves as
adviser, Mercantile as custodian, BISYS Fund Services Ohio, Inc. as
administrator and BISYS Fund Services as sponsor and distributor. In addition,
Clay Finlay serves as sub-adviser for the International Equity Portfolio. For
information on expenses, fee waivers, and services, see "Certain Financial
Information," "Financial Highlights" and "Management of the Fund."
The following information generally describes the Portfolios and their
investment objectives. There can be no assurance that the Portfolios will be
able to achieve their respective investment objectives.
The Money Market Portfolios each seek to maintain a net asset value of
$1.00 per Share. Each Money Market Portfolio's assets are invested in
dollar-denominated debt securities with remaining maturities of 397 days (13
months) or less as defined by the Securities and Exchange Commission, and each
Money Market Portfolio's dollar-weighted average portfolio maturity will not
exceed 90 days. All securities acquired by the Money Market Portfolios will be
determined by MVA, under guidelines approved by the Fund's Board of Directors,
to present minimal credit risks and to be rated in the highest category (or
deemed comparable in quality) at the time of purchase. There can be no assurance
that the Money Market Portfolios will be able to achieve a stable net asset
value on a continuous basis.
The U.S. Government Securities and Government & Corporate Bond Portfolios
are designed for investors who seek higher current income than is typically
offered by money market funds and who are willing to accept a variable Share
value to achieve that objective.
The Intermediate Corporate Bond Portfolio is designed for investors who
seek higher current income than is typically offered by money market funds with
less principal volatility than is normally associated with a long-term bond
fund.
The Bond Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in fixed income securities, and
who seek investment results that, before deduction of operating expenses,
approximate the price and yield performance of U.S. Government, mortgage-backed,
asset-backed and corporate debt securities, as represented by the Lehman
Brothers Aggregate Bond Index.
The Short-Intermediate Municipal Portfolio is designed for investors who
seek a yield that is higher than a municipal money market fund with less
principal volatility than is normally associated with a long-term municipal bond
fund.
The Missouri Tax-Exempt Bond Portfolio is designed for investors who seek a
higher rate of return than that typically offered by tax-exempt money market
funds and who are willing to accept a variable Share value to achieve that
objective.
The National Municipal Bond Portfolio is designed for investors who seek
current income that is exempt from regular federal income tax and relative
stability of principal.
The Equity Income Portfolio is designed for investors who seek an
above-average level of income consistent with long-term capital appreciation,
and who are prepared to accept the risks associated with an investment in equity
securities.
The Equity Index Portfolio is designed for investors who are willing to
accept the risks associated with an investment in equity securities, and who
seek investment results that, before
3
<PAGE> 91
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 Growth & Income Equity, Small Cap Equity and Balanced Portfolios are
designed for investors who seek capital growth, and who are prepared to accept
the risks associated with equity securities.
The International Equity Portfolio is designed for investors who seek
capital growth, wish to diversify their investments beyond the United States,
and are prepared to accept the risks entailed in such investments. These risks
may be greater than those associated with investments in the equity securities
of companies located in the United States.
The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios seek to provide income
exempt from federal tax. In addition, the Missouri Tax-Exempt Bond Portfolio
seeks to provide income that is also exempt from Missouri income tax.
Investors should note that one or more of the Portfolios may, subject to
their investment policies and limitations, purchase variable and floating rate
instruments, enter into repurchase agreements and reverse repurchase agreements,
make securities loans, invest in options, futures and index-based depository
receipts, and make limited investments in illiquid securities and securities
issued by other investment companies. These investment practices involve
investment risks of varying degrees. For example, the absence of a secondary
market for a particular variable or floating rate instrument could make it
difficult for a Portfolio to dispose of an instrument if the issuer were to
default on its payment obligation. Default by a counterparty to a repurchase
agreement or securities lending transaction could expose a Portfolio to loss
because of adverse market action or possible delay in disposing of the
underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by a Portfolio will decline below
the repurchase price which the Portfolio is obligated to pay. Purchasing options
is a specialized investment technique which entails a substantial risk of loss
of amounts paid as premiums to option writers. Investments in futures and
related options are subject to the ability of the Adviser to correctly predict
movements in the direction of the market and there is no assurance that a liquid
market will exist for a particular futures contract at any particular time.
The Equity and Bond Portfolios, other than the Bond Index and Equity Index
Portfolios, may engage in short-term trading, which may also involve greater
risk and increase such Portfolios' expenses. The International Equity Portfolio
will invest principally in foreign equity securities, most of which will be
denominated in foreign currencies. The other Portfolios do not invest in
instruments denominated in foreign currencies (except that the Growth & Income
Equity, Small Cap Equity, and Balanced Portfolios may invest in certain Canadian
securities and the Intermediate Corporate Bond Portfolio may invest in debt
securities issued by foreign corporations and governments). Foreign securities
entail certain inherent risks, such as future political and economic
developments and the adoption of foreign government restrictions, that might
adversely affect payment of dividends or principal and interest.
The Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios may, under certain
conditions, make limited investments in securities the income from which may be
subject to federal income tax. See "Investment Objectives, Policies and Risk
Considerations" below and the Statement of Additional Information under
"Investment Objectives and Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Portfolios also offer the economic
advantages of block trading in securities and the availability of a family of
sixteen mutual funds should an investor's investment goals change.
For information on purchasing, exchanging or redeeming Trust Shares of the
Portfolios, please see "How to Purchase and Redeem Shares" below.
4
<PAGE> 92
CERTAIN FINANCIAL INFORMATION
Shares of the Money Market, U.S. Government Securities, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios have been classified into four
classes of Shares--Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares. Shares of the Treasury Money Market, Intermediate Corporate
Bond, Bond Index and Equity Index Portfolios have been classified into three
classes of Shares--Trust Shares, Institutional Shares and Investor A Shares.
Shares of the Missouri Tax-Exempt Bond and National Municipal Bond Portfolios
have been classified into three classes of Shares--Trust Shares, Investor A
Shares and Investor B Shares. Shares of the Tax-Exempt Money Market and
Short-Intermediate Municipal Portfolios have been classified into two classes of
Shares--Trust Shares and Investor A Shares. Shares of each class in a Portfolio
represent equal, pro rata interests in the investments held by that Portfolio
and are identical in all respects, except that Shares of each class bear
separate distribution and/or shareholder administrative servicing fees and
certain other operating expenses, and enjoy certain exclusive voting rights on
matters relating to these fees. See "Other Information Concerning the Fund and
Its Shares," "Management of the Fund--Administrative Services Plan," and
"Management of the Fund--Custodian, Sub-Custodian and Transfer Agent" below. As
a result of payments for distribution and/or shareholder administrative
servicing fees and certain other operating expenses that may be made in
differing amounts, the net investment income of Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares in a Portfolio can be
expected, at any given time, to be different.
The Tax-Exempt Money Market Portfolio and Missouri Tax-Exempt Bond Portfolio
commenced operations on July 10, 1986 and July 15, 1988, respectively, as
separate investment portfolios (the "Predecessor Tax-Exempt Money Market
Portfolio" and "Predecessor Missouri Tax-Exempt Bond Portfolio," respectively)
of The ARCH Tax-Exempt Trust (the "Trust"), which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest that
were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares.
EXPENSE SUMMARY FOR TRUST SHARES
<TABLE>
<CAPTION>
TREASURY TAX-EXEMPT U.S. INTERMEDIATE GOVERNMENT SHORT-
MONEY MONEY MONEY GOVERNMENT CORPORATE BOND & CORPORATE INTERMEDIATE
MARKET MARKET MARKET SECURITIES BOND INDEX BOND MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------- ---------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (as a
percentage of average
net assets)
Investment Advisory Fees
(net of fee
waivers)1............. .35% .35% .35% .45% .00% .00% .45% .00%
12b-1 Fees.............. .00% .00% .00% .00% .00% .00% .00% .00%
Other Expenses
(including
administration fees,
administrative
services fees and
other expenses) (net
of fee waivers and
expense
reimbursements)2,3.... .26% .26% .18% .22% .23% .20% .20% .31%
--- --- --- --- --- --- --- ---
Total Portfolio
Operating Expenses
(net of fee waivers
and expense
reimbursements)3...... .61% .61% .53% .67% .23% .20% .65% .31%
=== === === === === === === ===
</TABLE>
- ---------------
1 Without fee waivers, investment advisory fees would be .40%, .40%, .40%, .45%,
.55%, .30%, .45% and .55% for the Treasury Money Market, Money Market,
Tax-Exempt Money Market, U.S. Government Securities, Intermediate Corporate
Bond, Bond Index, Government & Corporate Bond and Short-Intermediate Municipal
Portfolios, respectively.
2 Without fee waivers, administration fees would be .10% for the Tax-Exempt
Money Market Portfolio and .20% for each other Portfolio. Administrative
services fees are payable at an annual rate not to exceed .25% for the Money
Market Portfolios and .30% for the Equity and Bond Portfolios.
3 Without fee waivers and/or expense reimbursements, Other Expenses would be
.61%, .61%, .43%, .62%, .67%, .60%, .30% and .71% and Total Portfolio
Operating Expenses would be 1.01%, 1.01%, .83%, 1.07%, 1.22%, .90%, 1.05% and
1.26% for the Treasury Money Market, Money Market, Tax-Exempt Money Market,
U.S. Government Securities, Intermediate Corporate Bond, Bond Index,
Government & Corporate Bond and Short-Intermediate Municipal Portfolios,
respectively.
5
<PAGE> 93
<TABLE>
<CAPTION>
MISSOURI NATIONAL GROWTH &
TAX-EXEMPT MUNICIPAL EQUITY EQUITY INCOME SMALL CAP INTERNATIONAL
BOND BOND INCOME INDEX EQUITY EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- --------- --------- --------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (as a percentage of
average net assets)
Investment Advisory Fees (net
of fee waivers)1............. .45% .00% .00% .00% .55% .75% 1.00% .75%
12b-1 Fees..................... .00% .00% .00% .00% .00% .00% .00% .00%
Other Expenses (including
administration fees,
administrative services fees
and other expenses) (net of
fee waivers and expense
reimbursements)2,3........... .20% .12% .18% .28% .20% .21% .34% .22%
--- --- --- --- --- --- ---- ---
Total Portfolio Operating
Expenses (net of fee waivers
and expense
reimbursements)3............. .65% .12% .18% .28% .75% .96% 1.34% .97%
=== === === === === === ==== ===
</TABLE>
- ---------------
1 Without fee waivers, investment advisory fees would be .45%, .55%, .75%, .30%,
.55%, .75%, 1.00% and .75% for the Missouri Tax-Exempt Bond, National
Municipal Bond, Equity Income, Equity Index, Growth & Income Equity, Small Cap
Equity, International Equity and Balanced Portfolios, respectively.
2 Without fee waivers, administration fees would be .20% for each Portfolio.
Administrative services fees are payable at an annual rate not to exceed .25%
for the Money Market Portfolios and .30% for the Equity and Bond Portfolios.
3 Without fee waivers and/or expense reimbursements, Other Expenses would be
.60%. .57%, .62%, .68%, .55%, .61%, .74% and .62% and Total Portfolio
Operating Expenses would be 1.05%, 1.12%, 1.37%, .98%, 1.10%, 1.36%, 1.74% and
1.37% for the Missouri Tax-Exempt Bond, National Municipal Bond, Equity
Income, Equity Index, Growth & Income Equity, Small Cap Equity, International
Equity and Balanced Portfolios, respectively.
6
<PAGE> 94
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and (2)
redemption at the end of each period:
Treasury Money Market Portfolio.................... $ 6 $20 $34 $ 76
Money Market Portfolio............................. $ 6 $20 $34 $ 76
Tax-Exempt Money Market Portfolio.................. $ 5 $17 $30 $ 66
U.S. Government Securities Portfolio............... $ 7 $21 $37 $ 83
Intermediate Corporate Bond Portfolio.............. $ 2 $ 7 N/A N/A
Bond Index Portfolio............................... $ 2 $ 7 N/A N/A
Government & Corporate Bond Portfolio.............. $ 7 $21 $36 $ 81
Short-Intermediate Municipal Portfolio............. $ 3 $10 $17 $ 39
Missouri Tax-Exempt Bond Portfolio................. $ 7 $21 $36 $ 81
National Municipal Bond Portfolio.................. $ 1 $ 4 N/A N/A
Equity Income Portfolio............................ $ 2 $ 6 N/A N/A
Equity Index Portfolio............................. $ 3 $ 9 N/A N/A
Growth & Income Equity Portfolio................... $ 8 $24 $42 $ 93
Small Cap Equity Portfolio......................... $ 10 $31 $53 $118
International Equity Portfolio..................... $ 14 $42 $73 $161
Balanced Portfolio................................. $ 10 $31 $54 $119
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN. Information about the actual performance of all of the
Portfolios is contained in the Fund's Annual Report to Shareholders dated
November 30, 1996 which may be obtained without charge by contacting the Fund at
the address or telephone number provided on page 2 of this Prospectus.
The purpose of the foregoing tables is to assist in understanding the
various costs and expenses that an investor in a Portfolio's Trust Shares will
bear directly or indirectly. The information contained in such tables with
respect to the Treasury Money Market, Money Market, Tax-Exempt Money Market,
U.S. Government Securities, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios is based on expenses incurred by
each of these Portfolios during the last fiscal year with respect to its Trust
Shares. Such information with respect to the National Municipal Bond Portfolio
is based on expenses incurred by such Portfolio during the last fiscal year,
restated to reflect the expenses that the Portfolio expects to incur during the
current fiscal year with respect to its Trust Shares. Such information with
respect to the Intermediate Corporate Bond, Bond Index, Equity Income and Equity
Index Portfolios is based on expenses each such Portfolio expects to incur
during the current fiscal year with respect to its Trust Shares. (For more
complete descriptions of the various costs and expenses, see "Management of the
Fund" in this Prospectus and the Statement of Additional Information.) The
Tables and Examples have not been audited by the Fund's independent auditors and
do not reflect any charges that may be imposed by financial institutions on
their customers.
7
<PAGE> 95
FINANCIAL HIGHLIGHTS
The Financial Highlights in the following tables supplement the Fund's
financial statements, which are contained in the Fund's Annual Report to
Shareholders dated November 30, 1996 and incorporated by reference into the
Statement of Additional Information. The Financial Highlights set forth certain
historic results for Trust Shares of each Portfolio other than the Intermediate
Corporate Bond, Bond Index, Equity Income and Equity Index Portfolios which had
not commenced investment operations as of November 30, 1996. The data for the
years ended November 30, 1989 through 1996, and with respect to the Tax-Exempt
Money Market and Missouri Tax-Exempt Bond Portfolios (and their Predecessor
Portfolios), for the year ended November 30, 1996, the six-month period ended
November 30, 1995 and each of the years or periods ended May 31, 1990 through
1995, has been audited by KPMG Peat Marwick LLP, independent auditors, whose
unqualified report insofar as it relates to each of the years or periods in the
five-year period ended November 30, 1996 (the year ended November 30, 1996, the
six-month period ended November 30, 1995 and each of the years or periods in the
four-year period ended May 31, 1995 with respect to the Tax-Exempt Money Market
and Missouri Tax-Exempt Bond Portfolios (and their Predecessor Portfolios)) on
the financial statements containing such information is incorporated by
reference into the Statement of Additional Information. The data for the years
ended November 30, 1987 and 1988 and with respect to the Predecessor Tax-Exempt
Money Market and Predecessor Missouri Tax-Exempt Bond Portfolios, for the years
ended May 31, 1989 and 1988 and the period ended May 31, 1987, were derived from
financial statements audited by the Fund's and the Trust's prior auditors.
Further information about the performance of the Portfolios is available in the
Fund's Annual Report. Both the Statement of Additional Information and the
Annual Report may be obtained free of charge by contacting the Fund at the
address or telephone number provided on page 2 of this Prospectus.
TREASURY MONEY MARKET PORTFOLIO
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------- DECEMBER 2, 1991
1996 1995 1994 1993 TO NOVEMBER 30,
-------- -------- -------- -------- 1992(A)(B)
TRUST TRUST TRUST TRUST ----------------
SHARES SHARES SHARES SHARES TRUST SHARES
-------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income.................... 0.045 0.050 0.033 0.026 0.034
-------- -------- -------- -------- --------
Total from Investment Activities....... 0.045 0.050 0.033 0.026 0.034
-------- -------- -------- -------- --------
Distributions
Net investment income.................... (0.045) (0.050) (0.033) (0.026) (0.034)
-------- -------- -------- -------- --------
Total Distributions.................... (0.045) (0.050) (0.033) (0.026) (0.034)
-------- -------- -------- -------- --------
Net Asset Value, End of Period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return............................... 4.64% 5.12% 3.38% 2.67% 3.16%(c)
Ratios/Supplemental Data:
Net Assets at end of period (000)........ $131,322 $252,780 $242,099 $256,503 $229,288
Ratio of expenses to average net assets
(including waivers).................... 0.61% 0.60% 0.49% 0.41% 0.28%(d)
Ratio of net investment income to average
net assets (including waivers)......... 4.55% 5.01% 3.26% 2.64% 3.35%(d)
Ratio of expenses to average net assets
(before waivers)*...................... 0.76% 0.75% 0.94% 0.85% 0.72%(d)
Ratio of net investment income to average
net assets (before waivers)*........... 4.40% 4.86% 2.82% 2.21% 2.91%(d)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On December 2, 1991, the Portfolio issued a series of Shares which were
designated as "Trust" Shares. In addition, on April 20, 1992, the Portfolio
issued a second series of Shares which were designated as "Investor" Shares.
On September 27, 1994, the Portfolio redesignated Investor Shares as
"Investor A" Shares.
(c) Not Annualized.
(d) Annualized.
8
<PAGE> 96
MONEY MARKET PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991(A)
-------- -------- -------- -------- -------- --------
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Investment Activities
Net investment income........................... 0.049 0.054 0.035 0.026 0.034 0.058 0.078
-------- -------- -------- -------- -------- -------- --------
Total from Investment Activities.............. 0.049 0.054 0.035 0.026 0.034 0.058 0.078
-------- -------- -------- -------- -------- -------- --------
Distributions
Net investment income........................... (0.049) (0.054) (0.035) (0.026) (0.034) (0.058) (0.078)
-------- -------- -------- -------- -------- -------- --------
Total Distributions........................... (0.049) (0.054) (0.035) (0.026) (0.034) (0.058) (0.078)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total Return...................................... 4.99% 5.52% 3.55% 2.72% 3.44% 5.95% 8.08%
Ratios/Supplemental Data:
Net Assets at end of period (000)............... $717,265 $698,131 $544,952 $621,717 $574,941 $700,474 $896,903
Ratio of expenses to average net assets
(including waivers)........................... 0.61% 0.59% 0.61% 0.59% 0.57% 0.59% 0.55%
Ratio of net investment income to average net
assets (including waivers).................... 4.88% 5.38% 3.45% 2.70% 3.44% 5.81% 7.77%
Ratio of expenses to average net assets (before
waivers)*..................................... 0.76% 0.74% 0.93% 0.80% 0.71% 0.67% 0.60%
Ratio of net investment income to average net
assets (before waivers)*...................... 4.73% 5.23% 3.13% 2.49% 3.30% 5.73% 7.72%
<CAPTION>
1989 1988 1987
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Investment Activities
Net investment income........................... 0.088 0.071 0.062
-------- -------- --------
Total from Investment Activities.............. 0.088 0.071 0.062
-------- -------- --------
Distributions
Net investment income........................... (0.088) (0.071) (0.062)
-------- -------- --------
Total Distributions........................... (0.088) (0.071) (0.062)
-------- -------- --------
Net Asset Value, End of Period.................... $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return...................................... 9.21% 7.33%(b) 6.40%(b)
Ratios/Supplemental Data:
Net Assets at end of period (000)............... $661,145 $289,764 $220,944
Ratio of expenses to average net assets
(including waivers)........................... 0.45% 0.45% 0.45%
Ratio of net investment income to average net
assets (including waivers).................... 8.82% 7.12% 6.22%
Ratio of expenses to average net assets (before
waivers)*..................................... 0.60% 0.58% 0.68%
Ratio of net investment income to average net
assets (before waivers)*...................... 8.67% 6.99% 5.99%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated existing Shares as
"Investor" Shares. In addition, on December 1, 1990, the Portfolio issued a
second series of Shares which were designated as "Trust" Shares. The
financial highlights presented for periods prior to December 1, 1990 are the
financial highlights applicable to Investor Shares. On September 27, 1994
the Portfolio redesignated the Investor Shares as "Investor A" Shares.
(b) Unaudited.
9
<PAGE> 97
TAX-EXEMPT MONEY MARKET PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED MAY 31,
YEAR ENDED ENDED -------------------------------------------------------
NOVEMBER 30, NOVEMBER 30,
1996 1995(F) 1995 1994 1993 1992 1991(B)
------------ ------------ ------- -------- -------- -------- --------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
------------ ------------ ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------- -------- -------- --------
Investment Activities
Net investment income............. 0.030 0.016 0.029 0.020 0.021 0.034 0.031
------- ------- ------- -------- -------- -------- --------
Total from Investment
Activities.................... 0.030 0.016 0.029 0.020 0.021 0.034 0.031
------- ------- ------- -------- -------- -------- --------
Distributions
Net investment income............. (0.030) (0.016) (0.029) (0.020) (0.021) (0.034) (0.031)
------- ------- ------- -------- -------- -------- --------
Total Distributions............. (0.030) (0.016) (0.029) (0.020) (0.021) (0.034) (0.031)
------- ------- ------- -------- -------- -------- --------
Net Asset Value, End of Period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======== ======== ======== ========
Total Return........................ 3.06% 1.57%(d) 2.93% 1.97% 2.16% 3.44% 2.25%
Ratios/Supplemental Data:
Net Assets at end of period
(000)........................... $ 95,726 $ 78,031 $85,324 $112,594 137,602 $126,079 $137,847
Ratio of expenses to average net
assets (including waivers)...... 0.53% 0.70%(e) 0.61% 0.52% 0.52% 0.59% 0.58%
Ratio of net investment income to
average net assets (including
waivers)........................ 3.01% 3.10%(e) 2.87% 1.95% 2.13% 3.38% 4.65%
Ratio of expenses to average net
assets (before waivers)*........ 0.58% 0.75%(e) 0.70% 0.86% 0.62% 0.69% 0.68%
Ratio of net investment income to
average net assets (before
waivers)*....................... 2.96% 3.05%(e) 2.78% 1.61% 2.03% 3.28% 4.55%
<CAPTION>
PERIOD
ENDED
MAY 31,
1990(B) 1989(B) 1988(B) 1987(A)(B)
-------- ------- ------- ---------
TRUST TRUST TRUST PORTFOLIO
SHARES SHARES SHARES SHARES
-------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- -------
Investment Activities
Net investment income............. 0.056 0.056 0.043 0.036
-------- ------- ------- -------
Total from Investment
Activities.................... 0.056 0.056 0.043 0.036
-------- ------- ------- -------
Distributions
Net investment income............. (0.056) (0.056) (0.043) (0.036)
-------- ------- ------- -------
Total Distributions............. (0.056) (0.056) (0.043) (0.036)
-------- ------- ------- -------
Net Asset Value, End of Period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= =======
Total Return........................ 5.71% 5.74% 4.35% 3.80%(d)
Ratios/Supplemental Data:
Net Assets at end of period
(000)........................... $132,407 $70,153 $72,120 $ 147,799
Ratio of expenses to average net
assets (including waivers)...... 0.51% 0.45% 0.45% 0.37%(c)(e)
Ratio of net investment income to
average net assets (including
waivers)........................ 5.57% 5.59% 4.27% 4.02%(c)(e)
Ratio of expenses to average net
assets (before waivers)*........ 0.61% 0.63% 0.60% 0.62%(c)(e)
Ratio of net investment income to
average net assets (before
waivers)*....................... 5.47% 5.41% 4.12% 3.77%(c)(e)
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio commenced operations on July 10, 1986 as a portfolio of The
ARCH Tax-Exempt Trust. On October 2, 1995, it was reorganized as a new
portfolio of the Fund.
(b) "Trust" Shares were originally issued as "Money" Shares. As of September 28,
1990, the Portfolio issued a second series of Shares which were designated
as "Trust" Shares. The financial highlights presented for periods prior to
September 28, 1990 are the financial highlights applicable to Money Shares.
(c) Includes waiver of sub-advisory fees for the period ended May 31, 1987.
(d) Not Annualized.
(e) Annualized.
(f) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal year-end from May 31 to November 30.
10
<PAGE> 98
U.S. GOVERNMENT SECURITIES PORTFOLIO
(For a Share(a)outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992 1991(A)
------- ------- ------- ------- ------- -------
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68 $ 10.42
------- ------- ------- ------- ------- -------
Investment Activities
Net investment income..................................... 0.66 0.67 0.66 0.62 0.66 0.64
Net realized and unrealized gains (losses) from
investments............................................. (0.15) 0.80 (0.97) 0.47 0.13 0.26
------- ------- ------- ------- ------- -------
Total from Investment Activities........................ 0.51 1.47 (0.31) 1.09 0.79 0.90
------- ------- ------- ------- ------- -------
Distributions
Net investment income..................................... (0.66) (0.67) (0.66) (0.62) (0.66) (0.64)
Net realized gains........................................ -- -- -- (0.07) (0.01) --
In excess of net realized gains........................... (0.03) -- (0.18) -- -- --
------- ------- ------- ------- ------- -------
Total Distributions..................................... (0.69) (0.67) (0.84) (0.69) (0.67) (0.64)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.............................. $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68
======= ======= ======= ======= ======= =======
Total Return................................................ 4.88% 15.00% (2.85%) 10.36% 7.52% 12.62%
Ratios/Supplemental Data:
Net Assets at end of period (000)......................... $60,079 $45,513 $33,166 $35,121 $31,106 $21,484
Ratio of expenses to average net assets................... 0.67% 0.67% 0.66% 0.67% 0.65% 0.56%
Ratio of net investment income to average net assets...... 6.10% 6.36% 6.25% 5.57% 6.02% 7.26%
Ratio of expenses to average net assets (before
waivers)*............................................... 0.77% 0.77% 1.06% 0.91% 0.79% 1.11%
Ratio of net investment income to average net assets
(before waivers)*....................................... 6.00% 6.26% 5.85% 5.33% 5.88% 6.71%
Portfolio turnover........................................ 53.76% 93.76% 50% 24% 74% 36%
<CAPTION>
JUNE 2,
1988 TO
NOVEMBER 30,
1990 1989 1988(B)
------ ------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $10.06 $ 9.94 $10.00
------ ------ ------
Investment Activities
Net investment income..................................... 0.76 0.85 0.36
Net realized and unrealized gains (losses) from
investments............................................. 0.16 0.11 (0.06)
------ ------ ------
Total from Investment Activities........................ 0.92 0.96 0.30
------ ------ ------
Distributions
Net investment income..................................... (0.77) (0.84) (0.36)
Net realized gains........................................ -- -- --
In excess of net realized gains........................... -- -- --
------ ------ ------
Total Distributions..................................... (0.77) (0.84) (0.36)
------ ------ ------
Net Asset Value, End of Period.............................. $10.21 $10.06 $ 9.94
====== ====== ======
Total Return................................................ 9.66% 10.04% 3.05%(c)(d)
Ratios/Supplemental Data:
Net Assets at end of period (000)......................... $6,856 $5,954 $4,335
Ratio of expenses to average net assets................... 0.73% 0.74% 0.79%(e)
Ratio of net investment income to average net assets...... 7.80% 8.50% 7.26%(e)
Ratio of expenses to average net assets (before
waivers)*............................................... 1.28% 1.29% 1.40%(e)
Ratio of net investment income to average net assets
(before waivers)*....................................... 7.25% 7.95% 6.65%(e)
Portfolio turnover........................................ 53% 84% 215%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on February 1, 1991, the Portfolio
issued a second series of Shares which were designated as "Trust" Shares.
The financial highlights presented for the periods prior to February 1, 1991
are the financial highlights applicable to Investor Shares. On September 27,
1994, the Portfolio redesignated the Investor Shares as "Investor A" Shares.
(b) Period from commencement of operations.
(c) Unaudited.
(d) Not Annualized.
(e) Annualized.
11
<PAGE> 99
GOVERNMENT & CORPORATE BOND PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992 1991(A)
-------- -------- -------- -------- -------- -------
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15 $ 9.84
-------- -------- -------- -------- -------- -------
Investment Activities
Net investment income.................................... 0.67 0.64 0.63 0.68 0.70 0.64
Net realized and unrealized gains (losses) from
investments............................................ (0.19) 0.89 (0.94) 0.39 0.11 0.31
-------- -------- -------- -------- -------- -------
Total from Investment Activities....................... 0.48 1.53 (0.31) 1.07 0.81 0.95
-------- -------- -------- -------- -------- -------
Distributions
Net investment income.................................... (0.67) (0.64) (0.63) (0.68) (0.70) (0.64)
In excess of net realized gains.......................... -- -- (0.07) -- -- --
-------- -------- -------- -------- -------- -------
Total Distributions.................................... (0.67) (0.64) (0.70) (0.68) (0.70) (0.64)
-------- -------- -------- -------- -------- -------
Net Asset Value, End of Period............................. $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15
======== ======== ======== ======== ======== =======
Total Return............................................... 4.82% 16.31% (3.03)% 10.55% 8.14% 13.04%
Ratios/Supplemental Data:
Net Assets at end of period (000)........................ $141,440 $127,741 $132,577 $149,674 $135,404 $89,975
Ratio of expenses to average net assets (including
waivers)............................................... 0.65% 0.65% 0.65% 0.65% 0.63% 0.36%
Ratio of net investment income to average net assets
(including waivers).................................... 6.36% 6.32% 6.25% 6.32% 6.73% 7.51%
Ratio of expenses to average net assets (before
waivers)*.............................................. 0.75% 0.75% 1.05% 0.88% 0.76% 0.91%
Ratio of net investment income to average net assets
(before waivers)*...................................... 6.26% 6.22% 5.85% 6.09% 6.60% 6.96%
Portfolio turnover....................................... 149.20% 59.32% 50% 31% 52% 105%
<CAPTION>
JUNE 15,
1988 TO
NOVEMBER 30,
1990 1989 1988(B)
------- ------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $ 10.12 $ 9.91 $10.00
------- ------- ------
Investment Activities
Net investment income.................................... 0.84 0.89 0.39
Net realized and unrealized gains (losses) from
investments............................................ (0.41) 0.22 (0.13)
------- ------- ------
Total from Investment Activities....................... 0.43 1.11 0.26
------- ------- ------
Distributions
Net investment income.................................... (0.84) (0.90) (0.35)
In excess of net realized gains.......................... -- -- --
------- ------- ------
Total Distributions.................................... (0.84) (0.90) (0.35)
------- ------- ------
Net Asset Value, End of Period............................. $ 9.71 $ 10.12 $ 9.91
======= ======= ======
Total Return............................................... 4.96% 11.79% 2.66%(c)(d)
Ratios/Supplemental Data:
Net Assets at end of period (000)........................ $11,005 $10,327 $7,483
Ratio of expenses to average net assets (including
waivers)............................................... 0.53% 0.44% 0.56%(e)
Ratio of net investment income to average net assets
(including waivers).................................... 8.69% 8.97% 8.47%(e)
Ratio of expenses to average net assets (before
waivers)*.............................................. 1.08% 0.99% 1.17%(e)
Ratio of net investment income to average net assets
(before waivers)*...................................... 8.14% 8.42% 7.86%(e)
Portfolio turnover....................................... 75% 148% 22%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on February 1, 1991, the Portfolio
issued a second series of Shares which were designated as "Trust" Shares.
The financial highlights presented for periods prior to February 1, 1991 are
the financial highlights applicable to Investor Shares. On September 27,
1994 the Portfolio redesignated the Investor Shares as "Investor A" Shares.
(b) Period from commencement of operations.
(c) Unaudited.
(d) Not Annualized.
(e) Annualized.
12
<PAGE> 100
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
JULY 10, 1995
YEAR ENDED TO NOVEMBER 30,
NOVEMBER 30, 1996 1995(A)
----------------- ---------------
TRUST SHARES TRUST SHARES
----------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................. $ 10.07 $ 10.00
------- -------
Investment Activities Net investment income (loss)............... 0.41 0.14
Net realized and unrealized gains (losses) from investments.... -- 0.07
------- -------
Total from Investment Activities............................. 0.41 0.21
------- -------
Distributions
Net investment income.......................................... (0.41) (0.14)
------- -------
Total Distributions.......................................... (0.41) (0.14)
------- -------
Net Asset Value, End of Period................................... $ 10.07 $ 10.07
======= =======
Total Return..................................................... 4.15% 2.15%(b)
Ratios/Supplemental Data:
Net Assets at end of period (000).............................. $29,472 $23,754
Ratio of expenses to average net assets (including waivers).... 0.31% 0.47%(c)
Ratio of net investment income to average net assets (including
waivers)..................................................... 4.07% 3.81%
Ratio of expenses to average net assets (before waivers)*...... 0.96% 1.12%(c)
Ratio of net investment income to average net assets (before
waivers)*.................................................... 3.42% 3.16%(c)
Portfolio turnover............................................. 0.00% 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.
13
<PAGE> 101
MISSOURI TAX-EXEMPT BOND PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR SIX MONTHS YEAR ENDED MAY 31, PERIOD
ENDED ENDED ----------------------------------------------------------------- ENDED
NOVEMBER 30, NOVEMBER 30, MAY 31,
1996 1995(C) 1995 1994 1993 1992 1991(B) 1990(B) 1989(A)(B)
------------ ------------ ------- ------- ------- ------ --------- --------- ----------
TRUST TRUST TRUST TRUST TRUST TRUST PORTFOLIO PORTFOLIO PORTFOLIO
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
------------ ------------ ------- ------- ------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............... $ 11.74 $ 11.52 $11.13 $11.54 $10.97 $10.62 $ 10.50 $ 10.56 $10.00
------- ------- ------ ------ ------ ------ ------- ------- ------
Investment Activities:
Net investment
income............. 0.57 0.28 0.57 0.58 0.60 0.64 0.67 0.68 0.58
Net realized and
unrealized gains
(losses) on
investments........ (0.05) 0.22 0.40 (0.37) 0.64 0.43 0.24 (0.09) 0.58
------- ------- ------ ------ ------ ------ ------- ------- ------
Total from Investment
Activities......... 0.52 0.50 0.97 0.21 1.24 1.07 0.91 0.59 1.16
------- ------- ------ ------ ------ ------ ------- ------- ------
Distributions
Net investment
income............. (0.57) (0.28) (0.57) (0.58) (0.60) (0.64) (0.70) (0.65) (0.60)
Net realized gains... -- -- (0.01) (0.04) (0.07) (0.08) (0.09) 0.00 0.00
------- ------- ------ ------ ------ ------ ------- ------- ------
Total
Distributions...... (0.57) (0.28) (0.58) (0.62) (0.67) (0.72) (0.79) (0.65) 0.00
------- ------- ------ ------ ------ ------ ------- ------- ------
Net Asset Value, End
of Period............ $ 11.69 $ 11.74 $11.52 $11.13 $11.54 $10.97 $ 10.62 $ 10.50 $10.56
======= ======= ====== ====== ====== ====== ======= ======= ======
Total Return.......... 4.62% 4.41%(d) 9.12% 1.73% 11.70% 10.37% 9.08% 5.50% 12.08%(d)
Ratios/Supplemental Data:
Net Assets at end of
period (000)....... $55,905 $47,773 $44,336 $47,743 $32,777 $6,609 $ 4,735 $ 4,568 $4,053
Ratio of expenses to
average net assets
(including
waivers)........... 0.65% 0.78%(e) 0.64% 0.45% 0.43% 0.73% 0.70%(e) 0.70% 0.81%(e)
Ratio of net
investment income
to average net
assets (including
waivers)........... 4.95% 4.83%(e) 5.22% 4.96% 5.30% 5.87% 6.37%(e) 6.38% 6.36%(e)
Ratio of expenses to
average net assets
(before
waivers)*.......... 0.75% 0.88%(e) 1.16% 1.13% 0.98% 1.38% 1.66% 1.70% 1.38%(e)
Ratio of net
investment income
to average net
assets (before
waivers)*.......... 4.85% 4.73%(e) 4.70% 4.28% 4.75% 5.22% 5.41% 5.38% 5.79%(e)
Portfolio turnover
rate............... 3.66% 1.55% -- 20% 15% 21% 71% 41% 73%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Portfolio (formerly, the Long-Term Tax-Exempt Portfolio) commenced
operations on July 15, 1988 as a portfolio of The ARCH Tax-Exempt Trust. On
October 2, 1995, it was reorganized as a new portfolio of the Fund.
(b) The Portfolio had one class of Shares outstanding ("Portfolio Shares")
through September 27, 1990. As of September 28, 1990 the Portfolio issued a
second class of Shares and designated such Shares as "Trust" Shares. The
financial highlights presented for periods prior to September 28, 1990
represent the financial highlights applicable to Portfolio Shares.
(c) Upon its reorganization as a portfolio of the Fund, the Portfolio changed
its fiscal-year end from May 31 to November 30.
(d) Not Annualized.
(e) Annualized.
14
<PAGE> 102
NATIONAL MUNICIPAL BOND PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
NOVEMBER 18, 1996
TO
NOVEMBER 30,
1996(A)
-------------------
TRUST SHARES
-------------------
<S> <C>
Net Asset Value, Beginning of Period..................................... $ 10.00
--------
Investment Activities
Net Investment income (loss)........................................... 0.02
Net realized and unrealized gains (losses) from investments............ 0.05
--------
Total from Investment Activities......................................... 0.07
--------
Distributions
Net investment income.................................................. (0.02)
--------
Total Distributions.................................................... (0.02)
--------
Net Asset Value, End of Period........................................... $ 10.05
========
Total Return............................................................. 0.74%(b)
Ratios/Supplemental Data:
Net Assets at end of period (000)...................................... $310,413
Ratio of expenses to average net assets (including waivers)............ 0.12%(c)
Ratio of net investment income to average net assets (including
waivers)............................................................ 5.77%(c)
Ratio of expenses to average net assets (before waivers)*.............. 0.82%(c)
Ratio of net investment income to average net assets (before
waivers)*........................................................... 5.07%(c)
Portfolio turnover..................................................... 0.0%
</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.
15
<PAGE> 103
GROWTH & INCOME EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
JUNE 2,
YEAR ENDED NOVEMBER 30, 1988 TO
------------------------------------------------------------------------------------------- NOVEMBER 30,
1996 1995 1994 1993 1992 1991(A) 1990 1989 1988(B)
-------- -------- -------- -------- -------- -------- ------- ------- ------------
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 16.32 $ 12.72 $ 14.74 $ 14.49 $ 12.33 $ 12.24 $ 12.41 $ 10.25 $ 10.00
------- -------- -------- -------- -------- -------- ------- ------- -------
Investment Activities
Net investment
income............... 0.24 0.27 0.22 0.25 0.24 0.22 0.39 0.41 0.28
Net realized and
unrealized gains
(losses) from
investments.......... 3.34 3.74 (0.17) 1.06 2.25 0.03 (0.56) 2.29 0.06
------- -------- -------- -------- -------- -------- ------- ------- -------
Total from Investment
Activities........... 3.58 4.01 0.05 1.31 2.49 0.25 (0.17) 2.70 0.34
------- -------- -------- -------- -------- -------- ------- ------- -------
Distributions
Net investment
income............... (0.24) (0.27) (0.21) (0.25) (0.26) (0.16) (0.39) (0.51) (0.09)
In excess of net
investment income...... (0.01) -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------- ------- -------
Net realized gains...... (0.94) (0.14) (0.18) (0.81) (0.07) (0.63) (0.03)
In excess of net
realized gains....... -- -- (1.68) -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------- ------- -------
Total
Distributions...... (1.19) (0.41) (2.07) (1.06) (0.33) (0.16) (1.02) (0.54) (0.09)
------- -------- -------- -------- -------- -------- ------- ------- -------
Net Asset Value, End of
Period................. $ 18.71 $ 16.32 $ 12.72 $ 14.74 $ 14.49 $ 12.33 $ 11.22 $ 12.41 $ 10.25
======= ======== ======== ======== ======== ======== ======= ======= =======
Total Return............ 23.45% 32.27% 0.36% 9.65% 20.59% 17.39% (1.36)% 27.11% 3.45%(c)(d)
Ratios/Supplemental Data:
Net Assets at end of
period (000).........$348,183 $286,546 $235,955 $238,771 $232,967 $139,021 $20,116 $17,892 $ 10,890
Ratio of expenses to
average net assets... 0.75% 0.75% 0.75% 0.74% 0.71% 0.27% 0.35% 0.42% 0.41%(e)
Ratio of net investment
income to average net
assets............... 1.50% 1.89% 1.72% 1.74% 1.94% 2.56% 3.42% 3.69% 5.62%(e)
Ratio of expenses to
average net assets
(before waivers)*.... 0.85% 0.85% 1.15% 0.96% 0.85% 0.91% 1.00% 1.07% 1.12%(e)
Ratio of net investment
income to average net
assets (before
waivers)*............ 1.40% 1.79% 1.32% 1.52% 1.80% 1.92% 2.77% 3.04% 4.91%(e)
Portfolio turnover..... 63.90% 58.50% 65% 41% 79% 78% 227% 133% 30%
Average commission rate
paid (f)............... $ 0.0598 -- -- -- -- -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on April 1, 1991, the Portfolio
issued a second series of Shares which were designated as "Trust" Shares.
The financial highlights presented for the periods prior to December 1, 1990
are the financial highlights applicable to Investor Shares. On September 27,
1994, the Portfolio redesignated the Investor Shares as "Investor A" Shares.
(b) Period from commencement of operations.
(c) Unaudited.
(d) Not Annualized.
(e) Annualized.
(f) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
16
<PAGE> 104
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SMALL CAP EQUITY PORTFOLIO(A) INTERNATIONAL EQUITY PORTFOLIO
------------------------------------------------------------ -------------------------------------
YEAR YEAR YEAR YEAR MAY 1, 1992 YEAR YEAR APRIL 4, 1994
ENDED ENDED ENDED ENDED TO ENDED ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1994 1993 1992(B) 1996 1995 1994(B)
-------- -------- -------- -------- ------------ -------- -------- -------------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
-------- -------- -------- -------- ------------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $ 13.49 $ 12.01 $ 13.14 $ 11.23 $ 10.00 $ 10.79 $ 9.92 $ 10.00
-------- -------- ------- ------- ------- ------- ------- -------
Investment Activities
Net investment income
(loss).............. 0.02 0.03 (0.01) 0.03 0.04 0.06 0.03 0.01
Net realized and
unrealized gains
(losses) from
investments and
foreign currency.... 1.05 2.36 0.89 2.14 1.21 1.27 0.86 (0.09)
------- -------- ------- ------- ------- ------- ------- -------
Total from Investment
Activities.......... 1.07 2.39 0.88 2.17 1.25 1.33 (0.89) (0.08)
------- -------- ------- ------- ------- ------- ------- -------
Distributions
Net investment
income.............. (0.02) -- -- (0.05) (0.02) -- -- --
Net realized gains.... (1.05) (0.91) (1.78) (0.21) -- -- (0.01) --
In excess of realized
gains............... -- -- (0.23) -- -- -- (0.01) --
-------- -------- ------- ------- ------- ------- ------- -------
Total
Distributions..... (1.07) (0.91) (2.01) (0.26) (0.02) -- (0.02) --
-------- -------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period................ $ 13.49 $ 13.49 $ 12.01 $ 13.14 $ 11.23 $ 12.12 $ 10.79 $ 9.92
======== ======== ======= ======= ======= ======= ======= =======
Total Return............ 8.72% 21.70% 7.56% 19.75% 12.55%(c) 12.33% 8.97% (0.80%)(c)
Ratios/Supplemental Data:
Net Assets at end of
period (000)........ $171,295 $139,681 $77,690 $47,473 $ 26,829 $52,181 $36,096 $23,746
Ratio of expenses to
average net assets
(including
waivers)............ 0.96% 0.96% 0.95% 0.61% 0.30%(d) 1.14% 1.16% 1.23%(d)
Ratio of net
investment income to
average net assets
(including
waivers)............ 0.17% 0.18% (0.16)% 0.19% 0.78%(d) 0.51% 0.39% 0.23%(d)
Ratio of expenses to
average net assets
(before waivers)*... 1.06% 1.06% 1.36% 1.23% 1.12%(d) 1.45% 1.46% 1.95%(d)
Ratio of net
investment income to
average net assets
(before waivers)*... 0.07% 0.08% (0.56)% (0.43)% (0.04)%(d) 0.20% 0.09% (0.49%)(d)
Portfolio turnover.... 65.85% 83.13% 85% 65% 56% 77.63% 62.78% 21%
Average commission
rate paid(e)........ $ 0.0582 -- -- -- -- $0.0251 -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) The Emerging Growth Portfolio changed its name to Small Cap Equity Portfolio
on December 1, 1996.
(b) Period from commencement of operations.
(c) Not Annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
17
<PAGE> 105
BALANCED PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED APRIL 1, 1993
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, TO NOVEMBER 30,
1996 1995 1994 1993(A)
------------ ------------ ------------ ---------------
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 11.64 $ 9.62 $ 10.22 $ 10.00
------- ------- ------- -------
Investment Activities
Net Investment income (loss).. 0.37 0.34 0.29 0.23
Net realized and unrealized
gains (losses) from
investments................ 1.34 2.02 (0.47) 0.15
------- ------- ------- -------
Total from Investment
Activities................. 1.71 2.36 (0.18) 0.38
------- ------- ------- -------
Distributions
Net investment income......... (0.35) (0.34) (0.29) (0.16)
Net realized gains............ (0.42) -- -- --
In excess of realized gains... -- -- (0.13) --
------- ------- ------- -------
Total Distributions........... (0.77) (0.34) (0.42) (0.16)
------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 12.58 $ 11.64 $ 9.62 $ 10.22
======= ======= ======= =======
Total Return.................... 15.56% 24.97% (1.81%) 3.86%(b)
Ratios/Supplemental Data:
Net Assets at end of period
(000)...................... $ 61,821 $ 72,669 $ 65,288 $69,720
Ratio of expenses to average
net assets (including
waivers)................... 0.97% 0.98% 0.97% 0.56%(c)
Ratio of net investment income
to average net assets
(including waivers)........ 3.08% 3.29% 3.04% 3.42%(c)
Ratio of expenses to average
net assets (before
waivers)*.................. 1.07% 1.08% 1.39% 1.21%(c)
Ratio of net investment income
to average net assets
(before waivers)*.......... 2.98% 3.19% 2.63% 2.77%(c)
Portfolio turnover............ 85.16% 58.16% 49% 26%
Average commission rate
paid(d).................... $ 0.0599 -- -- --
</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.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
18
<PAGE> 106
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of each Portfolio, there can be no assurance that it will be able to
do so. The investment objective of each Portfolio may be changed only with the
affirmative vote of a majority of the outstanding Shares of the Portfolio,
except that the investment objectives of the Bond Index and Equity Index
Portfolios may be changed by the Fund's Board of Directors without shareholder
approval. Shareholders of the latter Portfolios will be given at least 30 days'
written notice before any such change occurs. The Treasury Money Market, Money
Market and Tax-Exempt Money Market Portfolios are "money market" funds that
invest in instruments with remaining maturities of 397 days or less (with
certain exceptions) and with dollar-weighted average portfolio maturities of 90
days or less, subject to the quality, diversification and other requirements of
Rule 2a-7 under the Investment Company Act of 1940, as amended, (the "1940 Act")
and other rules of the Securities and Exchange Commission (the "SEC").
THE TREASURY MONEY MARKET PORTFOLIO
The Treasury Money Market Portfolio's investment objective is to seek a
high level of current income exempt from state income tax consistent with
liquidity and security of principal. In pursuing its investment objective, the
Portfolio invests in selected money market obligations issued by the U.S.
Government (or its agencies and instrumentalities) that are guaranteed as to
principal and interest by the U.S. Government, the interest on which is
generally exempt from state income tax. Securities that are generally eligible
for this exemption include those issued by the U.S. Treasury (bills,
certificates of indebtedness, notes and certain bonds) and certain U.S.
Government agencies and instrumentalities, including the General Services
Administration and Small Business Administration. Each investor should consult
his or her tax advisor to determine whether distributions from the Portfolio are
exempt from state income tax in the investor's home state. Under normal market
conditions, the Portfolio intends to invest substantially all (but not less than
65%) of its total assets in securities with the above characteristics and
(except to the extent discussed below) will not enter into repurchase agreements
or purchase any U.S. Government security that the Adviser believes is subject to
state income tax.
Under extraordinary circumstances, such as when appropriate exempt
securities are unavailable or pending investment, the Treasury Money Market
Portfolio may temporarily hold cash or invest in repurchase agreements
collateralized by U.S. Government securities, other U.S. Government agency or
instrumentality securities, securities of other investment companies that invest
in securities in which the Portfolio is permitted to invest, or cash
equivalents.
THE MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objective is to seek current income
with liquidity and stability of principal. In pursuing its investment objective,
the Portfolio invests substantially all of its assets in a broad range of money
market instruments. These instruments include obligations of the U.S.
Government, U.S. dollar-denominated foreign securities, obligations of U.S. and
foreign banks and savings and loan institutions and commercial obligations that
meet the applicable quality requirements described below.
The Money Market Portfolio will purchase only "First Tier Eligible
Securities" (as defined by the SEC) that present minimal credit risks as
determined by the Adviser pursuant to guidelines approved by the Fund's Board of
Directors. First Tier Eligible Securities consist of (i) securities that either
(a) have short-term debt ratings at the time of purchase in the highest rating
category by at least two unaffiliated nationally recognized statistical rating
organizations ("Rating Agencies") (or one Rating Agency if the security was
rated by only one Rating Agency), or (b) are issued by issuers with such
ratings, and (ii) certain securities that are unrated (including securities of
issuers that have long-term but not short-term ratings) but are of comparable
quality as determined in
19
<PAGE> 107
accordance with guidelines approved by the Board of Directors. The applicable
ratings by Rating Agencies are described in Appendix A to the Statement of
Additional Information. The following descriptions illustrate the types of
instruments in which the Portfolio invests.
Banking Obligations. The Money Market Portfolio may purchase obligations
of issuers in the banking industry, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Portfolio may invest in obligations of
foreign banks or foreign branches of U.S. banks in amounts not in excess of 25%
of its assets where the Adviser deems the instrument to present minimal credit
risks. (See "Risk Factors -- Risks Associated with Foreign Securities and
Currencies" below.) The Portfolio may also make interest-bearing savings
deposits in commercial and savings banks in amounts not in excess of 5% of the
value of its total assets.
Commercial Paper and Variable and Floating Rate Instruments. The Portfolio
may invest in commercial paper, including asset-backed commercial paper
representing interests in a pool of corporate receivables, dollar-denominated
obligations issued by domestic and foreign bank holding companies, and corporate
bonds that meet the quality and maturity requirements described above. The
Portfolio may also invest in variable or floating rate notes that may have a
stated maturity in excess of thirteen months but will, in any event, permit the
Portfolio to demand payment of the principal of the instrument at least once
every thirteen months upon no more than 30 days' notice (unless the instrument
is guaranteed by the U.S. Government or an agency or instrumentality thereof).
Such instruments may include variable amount master demand notes, which are
unsecured instruments that permit the indebtedness thereunder to vary in
addition to providing for periodic adjustments in the interest rate. Unrated
variable and floating rate instruments will be determined by the Adviser (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to First Tier Eligible Securities. There may be no active
secondary market in the instruments, which could make it difficult for the
Portfolio to dispose of an instrument in the event the issuer were to default on
its payment obligation or during periods that the Portfolio could not exercise
its demand rights. The Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments. Variable and floating rate instruments
held by the Portfolio will be subject to the Portfolio's 10% limitation on
illiquid investments when the Portfolio may not demand payment of the principal
amount within seven days and a liquid trading market is absent.
Government Obligations. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the Portfolio may, when deemed appropriate by
the Adviser, invest in short-term obligations issued by state and local
governmental issuers that meet the quality requirements described above and, as
a result of the Tax Reform Act of 1986, carry yields that are competitive with
those of other types of money market instruments of comparable quality.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO
The Tax-Exempt Money Market Portfolio's investment objective is to seek as
high a level of current interest income exempt from federal income tax as is
consistent with liquidity and stability of principal. The Portfolio seeks to
achieve its objective by investing substantially all of its assets in short-term
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their respective political
subdivisions, agencies, instrumentalities and authorities the interest on which,
in the opinion of bond counsel or counsel to the issuer, is exempt from regular
federal income tax (collectively, "Municipal Obligations"). The Portfolio my
also hold tax-exempt derivative securities such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The Tax-Exempt Money Market Portfolio will purchase only "First Tier
Eligible Securities" (as defined by the SEC) that present minimal credit risks
as determined by the Adviser pursuant to
20
<PAGE> 108
guidelines approved by the Board of Directors. See "The Money Market Portfolio"
above for a description of "First Tier Eligible Securities."
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from interest attributable to tax-exempt obligations of a particular state and
its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands may be exempt from federal
and state income tax. Dividends derived from interest on obligations of other
governmental issuers are exempt from federal income tax but may be subject to
state income tax.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Tax-Exempt Money Market Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Tax-Exempt Money Market Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. Such instruments may include obligations
of the U.S. Government, its agencies or instrumentalities; debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the highest rating category by a Rating Agency;
certificates of deposit or bankers' acceptances of domestic branches of U.S.
banks with total assets at the time of purchase of $1 billion or more; or
repurchase agreements with respect to such obligations.
THE U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio's investment objective is to seek
a high rate of current income that is consistent with relative stability of
principal. In pursuing its investment objective, the Portfolio invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities normally having remaining maturities of 1 to 30 years and
repurchase agreements relating to such obligations. (For further information,
see "Other Applicable Policies -- U.S. Government Obligations" below.)
Consistent with its investment policies, the U.S. Government Securities
Portfolio may invest in mortgage-backed securities, including those representing
an undivided ownership interest in a pool of mortgage loans, such as
certificates issued by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") and collateralized mortgage obligations ("CMOs").
For further information regarding these instruments, see "Other Applicable
Policies -- Asset-Backed Securities" below.
THE INTERMEDIATE CORPORATE BOND PORTFOLIO
The Intermediate Corporate Bond Portfolio's investment objective is to seek
as high a level of current income as is consistent with preservation of capital.
In pursuing its investment objective, the Portfolio will invest, under normal
market and economic conditions, at least 65% of its total assets in
non-convertible corporate debt obligations, which shall mean obligations of (i)
domestic or foreign business corporations, or (ii) agencies, instrumentalities
or authorities which are organized in corporate form by one or more states or
political subdivisions in the United States or one or more foreign governments.
The Portfolio may also invest in obligations issued or guaranteed by the U.S. or
foreign governments, their agencies or instrumentalities, and asset-backed
securities, including various collateralized mortgage obligations and other
mortgage-related securities. For further information regarding these
instruments, see "Other Applicable Policies -- Asset-Backed
21
<PAGE> 109
Securities" below. In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield to maturity,
anticipated changes in interest rates, and the overall quality of the
investment. The Portfolio seeks to provide a current yield greater than that
generally available from money market instruments.
The Portfolio may purchase debt securities which are rated at the time of
purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated debt securities deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its total assets in debt obligations
rated in one of the three highest rating categories assigned by one or more
Rating Agencies (or unrated debt obligations determined to be of comparable
quality). Securities that are rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of investment
grade quality, and such securities will be purchased (and retained) only if the
Adviser believes that the issuers have an adequate capacity to pay interest and
repay principal. Unrated debt securities will be purchased only if they are
considered by the Adviser to be at least comparable in quality at the time of
purchase to instruments within the rating categories listed above. Debt
securities purchased by the Portfolio whose ratings are subsequently downgraded
below the four highest rating categories of a Rating Agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by the Rating Agencies are described in the Appendix to the Statement of
Additional Information.
The Portfolio reserves the right to hold as a temporary defensive measure
up to 100% of its total assets in cash and short-term obligations (having
remaining maturities of 13 months or less) at such times and in such proportions
as, in the opinion of the Adviser, prevailing market or economic conditions
warrant. Short-term obligations in which the Portfolio may invest include (i)
money market instruments, such as commercial paper, including variable and
floating rate instruments, rated at the time of purchase in one of the two
highest rating categories assigned by a Rating Agency or, if unrated, deemed to
be of comparable quality by the Adviser at the time of purchase, and bank
obligations, including bankers' acceptances, negotiable certificates of deposit
and non-negotiable time deposits of U.S. and foreign banks having total assets
at the time of purchase in excess of $1 billion, (ii) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and (iii)
repurchase agreements. For further information regarding variable and floating
rate instruments, see "The Money Market Portfolio -- Commercial Paper and
Variable and Floating Rate Instruments" above. Although the Portfolio will
invest in obligations of foreign banks or foreign branches of U.S. banks only
when the Adviser determines that the instrument presents minimal credit risks,
such investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Risk Factors -- Risks
Associated with Foreign Securities and Currencies" below. Investments in the
obligations of foreign banks or foreign branches of U.S. banks will not exceed
25% of the Portfolio's total assets at the time of purchase.
The Portfolio's average weighted maturity will be between three and ten
years and will vary in light of current market and economic conditions, the
comparative yields on instruments with different maturities, and other factors.
THE BOND INDEX PORTFOLIO
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Brothers Aggregate Bond Index (the "Lehman
Aggregate").
The Portfolio is not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. Government, mortgage-backed, asset-backed and
22
<PAGE> 110
corporate debt securities, as represented by the Lehman Aggregate, through the
use of sophisticated computer models to determine which securities should be
purchased or sold, while keeping transaction and administrative costs to a
minimum. The Portfolio will invest substantially all of its total assets in
securities listed in the Lehman Aggregate, including without limitation, asset-
backed securities. For further information regarding asset-backed securities see
"Other Applicable Policies -- Asset-Backed Securities" below. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio that
is included in the Lehman Aggregate at the time of such purchase. The Portfolio
should exhibit price and yield volatility similar to that of the Lehman
Aggregate. For further information, see "Other Investment Policies -- The
Indexing Approach" below and the Statement of Additional Information under
"Investment Objectives and Policies -- The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S. Government,
mortgage-backed, asset-backed and non-convertible corporate debt securities that
meet the following criteria: the securities have at least $100 million par
amount outstanding; the securities are rated investment grade (at least Baa or
BBB) by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P") (if not rated by Moody's); have at least one year until maturity;
and have coupons with fixed rates. The Lehman Aggregate excludes collateralized
mortgage obligations ("CMOs"), adjustable rate mortgages, manufactured homes,
non-agency bonds, buydowns, graduated equity mortgages, project loans and
non-conforming (i.e., "jumbo") mortgages. As of December 31, 1996, over 5,727
issues were included in the Lehman Aggregate, representing approximately $4.5
trillion in market value. U.S. Treasury and agency securities represented
approximately 51.6% of the total market value, asset-backed and mortgage-backed
securities represented approximately 30.6% of the total market value, with
corporate debt securities representing the balance of approximately 17.82%. The
average maturity of the Lehman Aggregate was approximately 8.7 years. The
Adviser believes that the Lehman Aggregate is an appropriate benchmark for the
Portfolio because it is diversified, it is familiar to investors, and it is
widely accepted as a reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate -- U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
23
<PAGE> 111
THE GOVERNMENT & CORPORATE BOND PORTFOLIO
The Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital. In
pursuing its investment objective, the Portfolio intends to invest at least 65%
of its assets in fixed-income and related debt securities rated in one of the
three highest rating categories assigned by a Rating Agency at the time of
purchase or in unrated investments deemed by the Adviser to be of comparable
quality pursuant to guidelines approved by the Fund's Board of Directors. Debt
securities may include a broad range of fixed and variable rate bonds,
debentures, notes, and securities convertible into or exchangeable for common
stock; dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and first mortgage loans, income participation
loans, participation certificates in pools of mortgages, including mortgages
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
CMOs and other mortgage-related securities, and other asset-backed securities.
For further information regarding asset-backed securities, see "Other Applicable
Policies -- Asset-Backed Securities" below. The Portfolio may invest up to 10%
of its total assets at the time of purchase in dollar-denominated debt
obligations of foreign issuers, either directly or through American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"), and up to 25% of
its total assets at the time of purchase in non-mortgage asset-backed
securities, respectively. See "Other Applicable Policies -- Foreign Securities"
below and the Statement of Additional Information under "Investment Objectives
and Policies -- ADRs and EDRs."
The Government & Corporate Bond Portfolio may purchase debt securities
which are rated at the time of purchase within the four highest rating
categories assigned by Rating Agencies or unrated debt securities (including
convertible securities) which the Adviser believes present attractive
opportunities and are of at least comparable quality to instruments so rated.
The Portfolio's dollar-weighted average portfolio quality is expected to be at
least "A" or higher. Securities rated in the lowest of the above four rating
categories have speculative characteristics, even though they are of
investment-grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Such
securities will be purchased (and retained) only when the Adviser believes the
issuers have an adequate capacity to pay interest and repay principal. (For a
description of the rating categories of Rating Agencies, see Appendix A to the
Statement of Additional Information.) In making investment decisions, the
Adviser will consider a number of factors including current yield, maturity,
yield to maturity, anticipated changes in interest rates, and the overall
quality of the investment. The Portfolio seeks to provide a current yield
greater than that generally available from money market instruments.
The Government & Corporate Bond Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. Short-term obligations include, but are
not limited to, commercial paper, bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations, repurchase agreements and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Short-Intermediate Municipal Portfolio's investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital. The Portfolio seeks to achieve
its objective by investing substantially all of its assets in investment grade
Municipal Obligations. As a matter of fundamental policy, under normal market
conditions at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations, primarily bonds (at least 65% under normal market
conditions).
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The Short-Intermediate Municipal Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper, and
variable and floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes they have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. Municipal Obligations
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories of a Rating Agency will be disposed of in an
orderly manner, normally within 30-60 days. The applicable ratings issued by the
Rating Agencies are described in the Appendix to the Statement of Additional
Information.
In addition, the Short-Intermediate Municipal Portfolio may from time to
time during temporary defensive periods, invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a Rating Agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
The Short-Intermediate Municipal Portfolio's average dollar-weighted
maturity will be between two and five years and will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Missouri Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Missouri
Municipal Obligations (which, to the extent possible, are also exempt from
Missouri income tax).
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are derived
from interest attributable to tax-exempt obligations of the State of Missouri
and its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands ("Missouri Municipal
Obligations") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Missouri Tax-Exempt Bond Portfolio's total assets will be invested in
Missouri Municipal Obligations. The Portfolio will seek to maximize the
proportion of its dividends which are exempt from both federal and Missouri
income tax and presently expects to invest substantially all of its total assets
in Missouri Municipal Obligations.
The Missouri Tax-Exempt Bond Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
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purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Missouri Tax-Exempt Bond Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. See "The Tax-Exempt Money Market
Portfolio" above for a description of the types of taxable money market
instruments in which the Portfolio may invest.
The Missouri Tax-Exempt Bond Portfolio's average weighted maturity will
vary in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
THE NATIONAL MUNICIPAL BOND PORTFOLIO
The National Municipal Bond Portfolio's investment objective is to seek as
high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. In pursuing its investment objective,
the Portfolio intends to invest, under normal market and economic conditions,
substantially all of its assets in investment grade Municipal Obligations. As a
matter of fundamental policy, under normal market and economic conditions at
least 80% of the Portfolio's total assets will be invested in Municipal
Obligations, primarily, bonds (at least 65% under normal market conditions).
The Portfolio may purchase Municipal Obligations that are rated at the time
of purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated Municipal Obligations deemed by the Adviser to be
of comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its assets in Municipal Obligations
rated at the time of purchase in one of the three highest rating categories
assigned by one or more Rating Agencies (or unrated Municipal Obligations
determined to be of comparable quality). Securities that are rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Unrated obligations will
be purchased only if they are considered by the Adviser to be at least
comparable in quality at the time of purchase to instruments within the rating
categories listed above. Municipal Obligations purchased by the Portfolio whose
ratings are subsequently downgraded below the four highest rating categories of
a Rating Agency will be disposed of in an orderly manner, normally within 30 to
60 days. The applicable ratings issued by the Rating Agencies are described in
the Appendix to the Statement of Additional Information.
In addition, the Portfolio may from time to time during temporary defensive
periods, invest in taxable obligations in such proportions as, in the opinion of
the Adviser, prevailing market or
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economic conditions warrant. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities and debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the two highest rating categories of a Rating Agency. The
Portfolio does not intend to invest in taxable obligations under normal market
conditions.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Portfolio may also hold
uninvested cash reserves which do not earn income pending investment. There is
no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
The Portfolio's average dollar-weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors.
THE EQUITY INCOME PORTFOLIO
The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation. In
pursuing its investment objective, the Portfolio intends to invest, under normal
market and economic conditions, substantially all of its assets in common stock,
preferred stock, rights, warrants, and securities convertible into common stock.
The Adviser will select stocks based on a number of quantitative factors,
including dividend yield, current and future earnings potential compared to
stock prices, total return potential and other measures of value, such as cash
flow, asset value or book value, if appropriate. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable as compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce an above average level of income
(as measured by the Standard & Poor's 500 Composite Stock Price Index). Under
normal market and economic conditions, at least 65% of the Portfolio's total
assets will be invested in income-producing equity securities.
The Portfolio may indirectly invest in foreign securities through the
purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Other Applicable
Policies -- Foreign Securities" below and the Statement of Additional
Information under "Investment Objectives and Policies -- ADRs and EDRs."
The Portfolio reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets in
cash and short-term obligations (having remaining maturities of 13 months or
less) at such times and in such proportions as, in the opinion of the Adviser,
such abnormal market or economic conditions warrant. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.
THE EQUITY INDEX PORTFOLIO
The Equity Index Portfolio, which is expected to commence operations in
1997, seeks to provide investment results that, before deduction of operating
expenses, approximate the price and yield performance of U.S. publicly traded
common stocks with large stock market capitalizations as represented by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Like the Bond Index Portfolio, the Equity Index Portfolio is not managed in
a traditional sense, that is, by making discretionary judgments based on
analysis of economic, financial and market
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conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the S&P 500, through the use of sophisticated
computer models to determine which securities should be purchased or sold, while
keeping transaction and administrative costs to a minimum. The Portfolio will
invest substantially all of its total assets in securities listed in the S&P
500. The Adviser generally selects securities for the Portfolio on the basis of
their weightings in the S&P 500 and will only purchase a security for the
Portfolio that is included in the S&P 500 at the time of such purchase. The
Portfolio should exhibit price volatility similar to that of the S&P 500. For
further information, see "Other Investment Policies -- The Indexing Approach"
below and the Statement of Additional Information under "Investment Objectives
and Policies -- The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common stocks,
most of which are listed on the New York Stock Exchange. S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 have an average market capitalization of $5.6 trillion and account
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock approximately the same percentage as that stock represents
in the S&P 500. Under certain circumstances, the Portfolio may not hold all 500
stocks in the S&P 500, for example because of changes in the S&P 500, or as a
result of shareholder activity in the Portfolio. The Portfolio will rebalance
its holdings monthly to reflect changes in the S&P 500. "Market capitalization"
for a company is the market price per share of stock multiplied by the number of
shares outstanding. The Adviser believes that the S&P 500 is an appropriate
benchmark for the Portfolio because it is diversified, it is familiar to many
investors and it is widely accepted as a reference for common stock investments.
THE GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income a secondary consideration. In pursuing its
investment objective, the Portfolio normally invests substantially all of its
assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Adviser selects stocks based on a number of
factors, including historical and projected earnings, growth and asset value,
earnings compared to stock prices generally (as measured by the S&P 500, and
consistency of earnings growth and earnings quality. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable compared to the price
and yield of the common stock. The stocks or securities in which the Portfolio
invests may be expected to produce some income but income is not a major
criterion in their selection.
The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 15% of the Portfolio's total assets. For further information, see
"Other Applicable Policies -- Foreign Securities" below and the Statement of
Additional Information under "Investment Objectives and Policies -- ADRs and
EDRs." The Portfolio may also invest in Canadian securities listed on a national
securities exchange.
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The Growth & Income Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. See "The Government & Corporate Bond
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.
THE SMALL CAP EQUITY PORTFOLIO
The Small Cap Equity Portfolio's investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. In pursuing its investment objective, the Portfolio (which
was formerly known as the Emerging Growth Portfolio) normally invests at least
65% of its total assets in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation. The
market capitalization of the issuers of securities purchased by the Portfolio
will normally range from $100 million to $2 billion at the time of purchase. The
Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Adviser, offer improved
growth possibilities because of rejuvenated management, product changes, or
other developments that might stimulate earnings or asset growth, or in
companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.
The Small Cap Equity Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The securities
of such smaller companies may have limited marketability, may be subject to more
abrupt or erratic market movements than securities of larger companies or the
market averages in general, and may involve greater risk than is customarily
associated with more established companies. To qualify for investment by the
Portfolio, however, a company will be expected to have, in the opinion of the
Adviser, above-average possibilities for capital appreciation (when compared
with the average appreciation of companies whose securities are included in the
S&P 500).
The Small Cap Equity Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth, and
quality of products manufactured and/or services offered. Stocks purchased for
the Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market. The Portfolio
may also invest in initial public offerings of new companies that demonstrate
the potential for price appreciation. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price of the convertible
security is favorable compared to the price of the common stock. In general, the
Portfolio's stocks and other securities will be diversified over a number of
industry groups in an effort to reduce the risks inherent in such investments.
The Small Cap Equity Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. For further information, see
"Other Applicable Policies -- Foreign Securities" below, and the Statement of
Additional Information under "Investment Objectives and Policies -- ADRs and
EDRs." The Portfolio may also invest in securities issued by Canadian
corporations and Canadian counterparts of U.S. corporations, which may or may
not be listed on a national securities exchange or traded in over-the-counter
markets.
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The Small Cap Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
THE INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to provide
capital growth consistent with reasonable investment risk. The Portfolio seeks
to achieve this objective by investing principally in foreign equity securities,
most of which will be denominated in foreign currencies. During normal market
conditions, the Portfolio will invest substantially all of its assets in
securities of companies which derive more than 50% of their gross revenues from,
or have more than 50% of their assets outside, the United States. Additionally,
under normal market conditions, the Portfolio will invest in equity securities
from at least three different countries (excluding the United States). However,
the Portfolio may invest all its assets in a single country during temporary
defensive periods.
The International Equity Portfolio expects to invest at least half of its
assets in securities of companies located either in developed countries in
Western Europe or in Japan, although it may also purchase securities of
companies located in other developed countries and developing countries. For
further information, see "Risk Factors -- Risks Associated with Foreign
Securities and Currencies" below.
By investing in foreign securities, the International Equity Portfolio will
attempt to take advantage of differences between economic trends and the
performance of securities markets in various countries, regions and geographic
areas. The Portfolio will achieve diversification by investing in securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The multinational
character of the Portfolio's investments should reduce the effect that events in
any one country or geographic area will have on its investment holdings. Of
course, negative movement by one of the Portfolio's investments in one foreign
market may offset gains from the Portfolio's investments in another market.
Equity securities in which the International Equity Portfolio may invest
include common stock, preferred stock, rights, warrants and securities
convertible into common stock. A convertible security may be purchased for the
Portfolio when, in the Adviser's or Sub-Adviser's opinion, the price and yield
of the convertible security is favorable compared to the price and yield of the
common stock.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Equity Portfolio may invest up to 100% of its
assets in U.S. Government obligations or debt obligations of companies
incorporated and having their principal business activities in the United
States. The Portfolio does not intend to invest in such securities for the
purpose of meeting its investment objective.
The International Equity Portfolio may also invest, without limitation, in
foreign securities through the purchase of ADRs and EDRs. For further
information, see "Risk Factors -- Risks Associated with Foreign Securities and
Currencies" below and the Statement of Additional Information under "Investment
Objectives and Policies -- ADRs and EDRs."
The International Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser or Sub-
Adviser, prevailing market or economic conditions warrant. See "The Government &
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest.
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Although investing in any mutual fund has certain inherent risks, an
investment in the International Equity Portfolio may have even greater risks
than investments in most other types of mutual funds. The Portfolio is not a
complete investment program, and it may not be appropriate for investors who
cannot financially bear the loss of at least a significant portion of their
investment. The Portfolio's net asset value per Share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Portfolio's
objective. See "Risk Factors -- Risks Associated with Foreign Securities and
Currencies" below.
THE BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the statistical impact of the Adviser's
economic outlook upon the future returns of each asset group. The models are
especially sensitive to the forecasts for inflation, interest rates and
long-term corporate earnings growth. Investment returns are normally heavily
impacted by such variables and their expected changes over time. Therefore, the
Adviser's method attempts to take advantage of changing economic conditions by
increasing or decreasing the ratio of stocks to bonds in the Portfolio. For
example, if the Adviser expected more rapid economic growth leading to better
corporate earnings, it would increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed income securities and cash
equivalents.
Under normal market conditions, the Balanced Portfolio's policy is
generally to invest at least 25% of the value of its total assets in fixed
income securities and no more than 75% in equity securities. The actual
percentage of assets invested in equity securities, fixed income securities and
cash equivalents will vary from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
The equity securities in which the Balanced Portfolio normally invests
include common stock, preferred stock, rights, warrants and securities
convertible into common or preferred stock. For further information regarding
these instruments, see "The Equity Income Portfolio" and "The Growth & Income
Equity Portfolio" above.
The fixed income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Adviser to be of
comparable quality pursuant to guidelines approved by the Fund's Board of
Directors. For further information regarding these instruments, see "The
Government & Corporate Bond Portfolio" above.
The Balanced Portfolio may purchase asset-backed securities. For further
information regarding these instruments, see "Other Applicable
Policies -- Asset-Backed Securities" below.
The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. See "The Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.
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RISK FACTORS
MARKET RISK. The Equity Income, Equity Index, Growth & Income Equity,
Small Cap Equity and International Equity Portfolios invest primarily, and the
Balanced Portfolio invests to a significant degree, in equity securities. As
with other mutual funds that invest primarily or to a significant degree in
equity securities, these Portfolios are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities, including Municipal Obligations, held by the 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, National Municipal Bond and Balanced
Portfolios can be expected to vary inversely to changes in prevailing interest
rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in a Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors may limit the
investment opportunities available to the International Equity Portfolio and
result in a lack of liquidity and a high price volatility with respect to
securities of issuers from developing countries.
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Certain countries may also impose restrictions on the International Equity
Portfolio's ability to repatriate investment income or capital. Even when there
is no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of the
International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected to
be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios may be
subject to certain of the risks described above in connection with investment in
foreign securities.
MUNICIPAL OBLIGATIONS. The ability of the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios (collectively, the "Tax-Exempt Portfolios") to achieve their
respective investment objectives are dependent upon the ability of issuers of
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. There are additional risks associated with investment in
the Missouri Tax-Exempt Bond Portfolio because it invests its assets
predominantly in Missouri Municipal Obligations. Investors in the Missouri
Tax-Exempt Bond Portfolio should be aware that certain provisions of, and
amendments to, the Missouri Constitution limit tax increases which could result
in certain adverse consequences affecting Missouri Municipal Obligations. Some
of the significant financial considerations relating to the Missouri Tax-Exempt
Bond Portfolio's investments in Missouri Municipal Obligations are summarized in
the Statement of Additional Information.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt Money
Market, Short-Intermediate Municipal and National Municipal Bond Portfolios may
invest 25% or more of their respective net assets in (i) Municipal Obligations
whose issuers are in the same state, (ii) Municipal Obligations the interest on
which is paid solely from revenues of similar projects, and (iii) private
activity bonds, no Portfolio presently intends to do so unless in the opinion of
the Adviser the investment is warranted. Although the Missouri Tax-Exempt Bond
Portfolio does not presently intend to do so on a regular basis, it may invest
more than 25% of its assets in industrial development bonds issued before August
7, 1986, the interest on which is not treated as a specific tax preference item
under the federal alternative minimum tax, and in Municipal Obligations, the
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interest on which is paid solely from revenues of similar projects, if such
investments are deemed necessary or appropriate by the Adviser. To the extent
that a Portfolio's assets are invested in Municipal Obligations the issuers of
which are in the same state or that are payable from the revenues of similar
projects or in private activity bonds, a Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions relating to such
projects and bonds to a greater extent that it would be if its assets were not
so invested. See "Investment Objectives and Policies -- Municipal Obligations"
in the Statement on Additional Information.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios
is classified as non-diversified under the 1940 Act. Investment return on a
non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a non-diversified portfolio may be more susceptible to
economic, political, and regulatory developments than a diversified investment
portfolio with similar objectives. The value of a Portfolio's securities can be
expected to vary inversely with changes in prevailing interest rates.
Investors in the Missouri Tax-Exempt Bond Portfolio should consider the
risk inherent in such Portfolio's concentrations in Missouri Municipal
Obligations versus the safety that comes with a less geographically concentrated
investment portfolio, and should compare the yields and tax-equivalent yields
available on portfolios of Missouri Municipal Obligations with the yields and
tax-equivalent yields of more diversified portfolios with securities of
comparable quality, including non-Missouri securities, before making an
investment decision.
Municipal Obligations purchased by the Tax-Exempt Portfolios may be backed
by letters of credit or guarantees issued by domestic or foreign banks and other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or a guarantee with
respect to a Municipal Obligation held by a Tax-Exempt Portfolio could have an
adverse effect on the Portfolio's investment portfolio and the value of its
shares. Foreign letters of credit and guarantees involve certain risks in
addition to those of domestic obligations, including less stringent reserve
requirements and different accounting, auditing and recordkeeping requirements.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri Municipal Obligations, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of Municipal Obligations, the
creation of any tax-exempt derivative security, or the bases for such opinions.
OTHER APPLICABLE POLICIES
The investment policies described in this Prospectus are among those which
one or more of the Portfolios have the ability to utilize. Some of these
policies may be employed on a regular basis; others may not be used at all.
Accordingly, reference to any particular policy, method or technique carries no
implication that it will be utilized or, if it is, that it will be successful.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of a Portfolio. Certain U.S. Government securities held
by the Treasury Money Market, Money Market or Tax-Exempt Money Market Portfolios
may have remaining maturities exceeding thirteen months if such securities
provide for adjustments in their
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interest rates no less frequently than every thirteen months. Examples of the
types of U.S. Government obligations that may be held by the Portfolios, subject
to their respective investment objectives and policies, include, in addition to
U.S. Treasury bonds, notes and bills, the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, GNMA, FNMA, FHLMC, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Resolution Trust Corporation,
and Maritime Administration. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of GNMA, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of FNMA, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. There is
no assurance that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Equity Index Portfolios) may also invest
in "stripped" U.S. Treasury obligations offered under the Separate Trading of
Registered Interest and Principal Securities ("STRIPS") program or Coupon Under
Bank-Entry Safekeeping ("CUBES") program or other stripped securities issued
directly by agencies or instrumentalities of the U.S. Government (and, with
respect to the Treasury Money Market Portfolio only, that are also guaranteed as
to principal and interest by the U.S. Government). STRIPS and CUBES represent
either future interest or principal payments and are direct obligations of the
U.S. Government that clear through the Federal Reserve System. The Money Market,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Growth &
Income Equity, Small Cap Equity and Balanced Portfolios may also purchase U.S.
Treasury and agency securities that are stripped by brokerage firms and
custodian banks and sold under proprietary names. These stripped securities are
resold in custodial receipt programs with a number of different names (such as
TIGRs and CATS) and are not considered U.S. Government securities for purposes
of the 1940 Act.
Stripped securities are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, each Portfolio (except the
National Municipal Bond Portfolio) may agree to purchase U.S. Government
securities from financial institutions such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). A Portfolio will enter into repurchase
agreements only with financial institutions such as banks and broker-dealers
that the Adviser or Sub-Adviser believes to be creditworthy. During the term of
any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller and will require the seller to maintain the
value of the securities subject to the agreement at not less than 102% of the
repurchase price (including accrued interest). Default by a seller could expose
a Portfolio to possible loss because of adverse market action or possible delay
in disposing of the underlying obligations. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although no Portfolio presently intends to enter into
repurchase agreements providing for settlement in more than seven days, each
Portfolio does have the authority to do so subject to its limitation on the
purchase of illiquid securities described below. Repurchase agreements are
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considered to be loans under the 1940 Act. The income on repurchase agreements
is taxable. See "Taxes" below.
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies, each
Portfolio (except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers and agree to
repurchase them at an agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price which the Portfolio is obligated to pay.
Reverse repurchase agreements are considered to be borrowings by a Portfolio
under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, each Portfolio
(except the Treasury Money Market, Money Market, Tax-Exempt Money Market and
Missouri Tax-Exempt Bond Portfolios) may, from time to time, lend its portfolio
securities to broker-dealers, banks or institutional borrowers pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government,
or its agencies or instrumentalities, or an irrevocable letter of credit issued
by a bank that has at least $1.5 billion in total assets, or any combination
thereof. The collateral must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33 1/3% of the
aggregate net assets of such Portfolio. Loans are subject to termination by a
Portfolio or a borrower at any time.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies which determine their net asset value per Share based on the amortized
cost or penny-rounding method and which invest in securities in which the
Portfolio is permitted to invest. Each Portfolio may invest in securities of
other investment companies within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition on a Portfolio investing
more than 10% of the value of its total assets in such securities. Investments
in other investment companies will cause a Portfolio (and, indirectly, the
Portfolio's shareholders) to bear proportionately the cost incurred in
connection with the operations of such other investment companies. In addition,
investment companies in which a Portfolio may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
shares as well as other types of commissions or charges (no sales charge will be
paid by the Missouri Tax-Exempt Bond Portfolios in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. See the Statement of Additional
Information under "Investment Objectives and Policies -- Securities of Other
Investment Companies." The income on securities of other investment companies
may be taxable to investors at the state or local level. See "Taxes" below.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate Municipal
and National Municipal Bond Portfolios may purchase or sell securities on a
"delayed settlement" basis. This refers to a transaction in the secondary market
that will settle some time in the future. When issued purchases,
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forward commitments and delayed settlement transactions involve a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, or if the value of the security to be sold increases prior to the
settlement date. Each Portfolio expects that these transactions will not exceed
25% of the value of its total assets (at the time of purchase) under normal
market conditions. No Portfolio intends to engage in such transactions for
speculative purposes but only for the purpose of acquiring portfolio securities.
OPTIONS. Each of the Equity and Bond Portfolios (except the
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 its net assets. Such options may relate to particular
securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Such transactions
will be entered into only as a hedge against fluctuations in the value of
securities which a Portfolio holds or intends to purchase.
These Portfolios may also write covered call options. A covered call option
is an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Such options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
The International Equity Portfolio may write covered call options, buy put
options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction" -- the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options will not be a primary investment technique of any
Portfolio. For additional information relating to option trading practices,
including particular risks, see the Statement of Additional Information and
Appendix B thereof.
FOREIGN CURRENCY PUT OPTIONS. The International Equity Portfolio may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the Portfolio, upon payment of a premium, the right
to sell a currency at the exercise price until the expiration of the option and
serves to insure against adverse currency price movements in the underlying
portfolio assets denominated in that currency.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may purchase
unlisted currency options. A number of major investment firms trade unlisted
options which are more flexible than exchange listed options with respect to
strike price and maturity date. These unlisted options generally are available
on a wider range of currencies. Unlisted foreign currency options are generally
less liquid than listed options and involve the credit risk associated with the
individual
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issuer. They will be deemed to be illiquid for purposes of the limitation on
investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Equity
Portfolio may buy and sell securities denominated in currencies other than the
U.S. dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolio may from time to time enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolio may enter into currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward currency contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by the International
Equity Portfolio to purchase or sell a specific currency at a future date at a
price set at the time of the contract. In this respect, forward currency
contracts are similar to foreign currency futures contracts described below;
however, unlike futures contracts, which are traded on recognized commodities
exchanges, forward currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Also, forward currency contracts usually involve delivery of
the currency involved instead of cash payment as in the case of futures
contracts.
The International Equity Portfolio may use forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. The use of such forward contracts is limited to
hedging against movements in the value of foreign currencies relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
foreign currency exchange transactions. Transaction and position hedging will
not be limited to an overall percentage of the Portfolio's assets but will be
employed as necessary to correspond to particular transactions or positions. The
Portfolio may not hedge its currency positions to an extent greater than the
aggregate market value (at the time of entering into the forward contract) of
the securities held in its portfolio denominated in, quoted in, or currently
convertible into that particular currency. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities decline, but forward foreign currency exchange
contracts do allow the Portfolio to establish a rate of exchange for a future
point in time.
FUTURES CONTRACTS AND RELATED OPTIONS. The U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Equity
Income, Equity Index, Growth and Income Equity, Small Cap Equity and Balanced
Portfolios may invest in futures contracts and options on futures contracts to
the extent permitted by the Commodity Futures Trading Commission ("CFTC") and
the SEC. The International Equity Portfolio may invest in interest rate futures
contracts, options on futures contracts and other types of financial futures
contracts (such as foreign currency contracts), as well as any index or foreign
market futures which are available in recognized exchanges or in other
established financial markets to the extent permitted by the CFTC and the SEC.
Such transactions, including stock or bond index futures contracts, or options
thereon, act as a hedge to protect a Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities or, with respect
to the Bond Index and Equity Index Portfolios, can be used to simulate full
investment in the Lehman Aggregate or S&P 500 while retaining a cash balance for
portfolio
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management purposes. Hedging is a specialized investment technique that entails
skills different from other investment management. The Adviser (or Sub-Adviser)
may also consider such transactions to be economically appropriate for the
reduction of risk inherent in the ongoing management of a Portfolio. A stock or
bond index futures contract is an agreement in which one party agrees to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value (which assigns relative values to the common
stock or bonds included in the index) at the close of the last trading day of
the contract and the price at which the agreement is originally made. No
physical delivery of the underlying stock or bond in the index is contemplated.
Similarly, it may be in the best interest of a Portfolio to purchase or sell
interest rate futures contracts, or options thereon, which provide for the
future delivery of specified fixed income securities.
The purchase and sale of futures contracts or related options will not be a
primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. For a more detailed description of
futures contracts and related options, see the Statement of Additional
Information and Appendix B thereof.
ASSET-BACKED SECURITIES. The U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios
may purchase asset-backed securities (i.e., securities backed by mortgages,
installment sale contracts, corporate receivables, credit card receivables or
other assets) that are issued by entities such as GNMA, FNMA and FHLMC and
private issuers such as commercial banks, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks, and investment banks. To the extent that a Portfolio invests in
asset-backed securities issued by companies that are investment companies under
the 1940 Act, such acquisitions will be subject to the percentage limitations
prescribed by the 1940 Act. See "Other Applicable Policies -- Securities of
Other Investment Companies" above.
Presently there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and CMOs, which provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
subject to greater volatility and interest-rate risk than other types of
mortgage-backed securities. The average life of asset-backed securities varies
with the underlying instruments or assets and market conditions, which in the
case of mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with comparable maturities. In addition, in periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Portfolio will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. When interest rates rise, the value of an asset-backed
security generally will decline; however, when interest rates decline, the value
of an assetbacked security with prepayment features may not increase as much as
that of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.
In general, the collateral supporting non-mortgage assetbacked securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Nonmortgage asset-
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backed securities involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). For example, credit card receivables are generally unsecured
and the repossession of automobiles and other personal property upon the default
of the debtor may be difficult or impracticable in some cases.
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the Tax-Exempt Portfolios are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenues securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds issued by or on behalf of
public authorities to finance various privately operated facilities are
considered Municipal Obligations. Interest on private activity bonds, although
free of regular federal income tax, may be an item of tax preference for
purposes of the federal alternative minimum tax.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Also included within the
general category of Municipal Obligations are participation certificates in
leases, installment purchase contracts, or conditional sales contracts ("lease
obligations") entered into by state or political subdivisions to finance the
acquisition or construction of equipment, land, or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, certain lease obligations are backed
by the lessee's covenant to appropriate money to make the lease obligation
payments. However, under certain lease obligations, the lessee has no obligation
to make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing and may
not be as marketable as more conventional securities. To the extent these
securities are illiquid, they are subject to each Portfolio's applicable
limitation on illiquid securities described below.
VARIABLE AND FLOATING RATE MUNICIPAL OBLIGATIONS. Municipal Obligations
purchased by the Tax-Exempt Portfolios may include rated or unrated variable and
floating rate instruments, including variable rate master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Unrated instruments purchased by a Portfolio
will be determined by the Adviser to be of comparable quality at the time of
purchase to rated instruments that may be purchased. The absence of an active
secondary market for a particular variable or floating rate instrument, however,
could make it difficult for a Portfolio to dispose of an instrument if the
issuer were to default on its payment obligation. A Portfolio could, for these
or other reasons, suffer a loss with respect to such instruments.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to Municipal Obligations held by it. Under a
stand-by commitment, a
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dealer agrees to purchase, at a Portfolio's option, specified Municipal
Obligations at a specified price. The Portfolios will acquire stand-by
commitments solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. The Portfolios expect
that stand-by commitments will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, a
Portfolio may pay for a stand-by commitment either separately in cash or by
paying a higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield otherwise available for the same
securities). Stand-by commitments acquired by a Portfolio will be valued at zero
in determining the Portfolio's net asset value.
TAX-EXEMPT DERIVATIVES. Each of the Tax-Exempt Portfolios may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of each Tax-Exempt Portfolio's
assets will be invested in such securities during the current year. See the
Statement of Additional Information under "Investment Objectives and
Policies -- Tax-Exempt Derivatives."
DEPOSITORY RECEIPTS. The Bond Index and Equity Index Portfolios may invest
in receipts issued by banks or brokerage firms that are created by depositing
securities listed in each Portfolio's respective index into a special account at
a custodian bank. The custodian holds such securities for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. The Portfolios may invest in index-based depository receipts in
lieu of investment in the actual securities that are listed in the respective
indexes.
THE INDEXING APPROACH. The Bond Index and Equity Index Portfolios seek to
approximate the investment performance of their respective market segments, as
represented by their respective indexes, i.e. the Lehman Aggregate in the case
of the Bond Index Portfolio and the S&P 500 in the case of the Equity Index
Portfolio. While there can be no guarantee that a Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P or Lehman Brothers, Inc. ("Lehman") calculate their
respective indexes, and the timing of purchases and redemptions. The Adviser
monitors the correlation of the performance of the Portfolios in relation to
their indexes under the supervision of the Board of Directors. In the unlikely
event that a high correlation is not achieved, the Board of Directors will take
appropriate steps to correct the reason for the lower correlation.
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in
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their respective indexes, which may result in a return that does not correspond
with that of the indexes, after taking expenses into account.
ILLIQUID SECURITIES. A Portfolio will not invest more than 15% (10% for
each of the Money Market Portfolios) of the value of its net assets in illiquid
securities. Repurchase agreements that do not provide for settlement within
seven days, time deposits maturing in more than seven days, and securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but that may be purchased by institutional buyers pursuant to SEC Rule 144A are
subject to the applicable limit (unless the Adviser or Sub-Adviser, pursuant to
guidelines established by the Board of Directors, determines that a liquid
market exists). The purchase of securities which can be sold under Rule 144A
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities.
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Equity and Bond
Portfolios will not normally engage in short-term trading, each Portfolio
(except the Bond Index and Equity Index Portfolios) reserves the right to do so
if the Adviser (or Sub-Adviser) believes that selling a particular security is
appropriate in light of the Portfolio's investment objective. Investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Taxes" in this Prospectus and the
Statement of Additional Information.
Although the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios cannot accurately predict their respective annual
portfolio turnover rates, such rates are not expected to exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the Adviser (or Sub-Adviser) with broker-dealers that
it selects. To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Distributor or one or
more of its affiliates as a broker in connection with the purchase or sale of
securities when the Adviser believes the charge for the transaction does not
exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
Except as otherwise noted, each Portfolio's investment policies discussed
above are not fundamental and may be changed by the Fund's Board of Directors
without shareholder approval. However, each Portfolio also has in place certain
fundamental investment limitations, some of which are set forth below, which may
be changed only by a vote of a majority of the outstanding Shares of a
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objectives and Policies."
THE TREASURY MONEY MARKET AND MONEY MARKET PORTFOLIOS
A Portfolio may not:
1. Make loans, except that a Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies and
may enter into repurchase agreements with respect to securities (together
with any cash collateral) that are consistent with the Portfolio's
permitted investments and that equal at all times at least 100% of the
value of the repurchase price.
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2. Borrow money or issue senior securities, except that a Portfolio
may borrow from banks and the Money Markert Portfolio may enter into
reverse repurchase agreements, for temporary purposes in amounts up to 10%
of the value of its total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets, except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of a Portfolio's total assets at the
time of such borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are outstanding.
3. With respect to the Treasury Money Market Portfolio, purchase
securities other than obligations of the U.S. Government, its agencies and
instrumentalities, some of which may be subject to repurchase agreements,
except that the Portfolio may purchase securities of other investment
companies that seek to maintain a constant net asset value per Share and
that are permitted themselves only to invest in securities which may be
acquired by the Portfolio.
4. With respect to the Money Market Portfolio, purchase any securities
which would cause 25% or more of the value of the Portfolio's total assets
at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by domestic bank instruments
or obligations of the U.S. Government, its agencies or instrumentalities;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a separate
industry.
In accordance with current regulations of the SEC, the Money Market
Portfolio intends to limit investments in the securities of any single issuer
(other than securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities) to not more than 5% of the Portfolio's total assets at the
time of purchase, provided that the Portfolio may invest up to 25% of its total
assets in the securities of any one issuer for a period of up to three business
days. This intention is not, however, a fundamental policy of the Money Market
Portfolio. The Portfolio would have the ability to invest more than five percent
of its assets in any one issuer in accordance with its fundamental policy only
in the event that Rule 2a-7 of the 1940 Act is amended in the future.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE MUNICIPAL, NATIONAL MUNICIPAL
BOND, EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY,
INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such
investments, more than 5% of the Portfolio's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided however, that (a) with respect to
each Portfolio except the Short-Intermediate Municipal and National
Municipal Bond Portfolios, (i) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by obligations of the
U.S. Government or its agencies or instrumentalities; (ii) wholly-owned
finance companies will be considered to be in the industries of their
parents if their activities are
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primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry); and (b) with respect to the Short-
Intermediate Municipal and National Municipal Bond Portfolios, there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the U.S. Government, the
District of Columbia, or any of their authorities, agencies,
instrumentalities or political subdivisions.
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and each Portfolio other than the National Municipal
Bond Portfolio may enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets, except in connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts borrowed or 10% of the
Portfolio's total assets at the time of such borrowing; or purchase
securities while its borrowings exceed 5% of its total assets. A
Portfolio's transactions in futures and related options (including the
margin posted by a Portfolio in connection with such transactions), and
securities held in escrow or separate accounts in connection with a
Portfolio's investment practices described in this Prospectus or the
Statement of Additional Information are not subject to this limitation.
4. Make loans, except that (a) each Portfolio may purchase or hold
debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and (b) each
Portfolio except the National Municipal Bond Portfolio may enter into
repurchase agreements.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts
and related options, and (b) a Portfolio may obtain short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities.
THE TAX-EXEMPT MONEY MARKET AND MISSOURI TAX-EXEMPT BOND PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer if, immediately after and as
a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to
50% of the Portfolio's total assets may be invested without regard to this
5% limitation provided that no more than 25% of the Portfolio's total
assets are invested in the securities of any one issuer and (b) this 5%
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. For purposes of this
limitation, a security is considered to be issued by the governmental
entity (or entities) whose assets and revenues back the security, or, with
respect to an industrial development bond (in the case of the Tax-Exempt
Money Market Portfolio) or a private activity bond (in the case of the
Missouri Tax-Exempt Bond Portfolio) that is backed only by the assets and
revenues of a non-governmental user, a security is considered to be issued
by such non-governmental user. In certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection
with such guarantee, except that a guarantee of a security shall not be
deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the Portfolio's total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks, and the Missouri Tax-Exempt Bond Portfolio may enter
into reverse repurchase agreements, for temporary defensive purposes in
amounts not in excess of 10% of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar
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amounts borrowed or 10% of its total assets at the time of such borrowing
(including any reverse repurchase agreements); or purchase securities while
borrowings exceed 5% of Tax-Exempt Money Market Portfolio's net assets or
5% of the Missouri Tax-Exempt Bond Portfolio's total assets. Securities
held in escrow or separate accounts in connection with the Portfolios'
investment practices described in this Prospectus or the Statement of
Additional Information are not subject to this limitation.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Portfolio may not:
1. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 1 above with respect to the Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) or guaranteed by the United
States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 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.
2. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, under normal market conditions or when the Adviser deems that
suitable tax-exempt obligations are available, at least 80% of the Tax-Exempt
Money Market Portfolio's assets must be invested in obligations the interest on
which is exempt from federal income tax and stand-by commitments with respect to
such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph, the
Tax-Exempt Money Market Portfolio may invest in securities of other investment
companies that (a) invest in securities that are substantially similar to those
the Portfolio may acquire, and (b) distribute income that is exempt from regular
federal income tax.
The following additional investment policies with respect to the Tax-Exempt
Money Market and Missouri Tax-Exempt Bond Portfolio are not fundamental and may
be changed by the Board of Directors without shareholder approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities would exceed 15% (10%
with respect to the Tax-Exempt Money Market Portfolio) of the Portfolios'
respective net assets.
The Tax-Exempt Money Market Portfolio has an operating policy to comply
with the requirements of Rule 2a-7 of the 1940 Act. To the extent that Rule 2a-7
is more restrictive than the Portfolio's fundamental limitations, the Portfolio
will operate in accordance with Rule 2a-7.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
THE MONEY MARKET PORTFOLIOS
The Money Market Portfolios' respective net asset values per Share are
determined by the Administrator as of 12:00 noon (Eastern time) and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently, 4:00 p.m. Eastern time) on each weekday,
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with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Each Portfolio's assets are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain its net asset value per Share at
$1.00, there can be no assurance that the net asset value per Share will not
vary. See the Statement of Additional Information under "Net Asset Value" for
further information.
THE EQUITY AND BOND PORTFOLIOS
The Equity and Bond Portfolios' respective net asset values per Share are
determined by the Administrator as of the close of regular trading hours on the
Exchange on each Business Day (currently 4:00 p.m. Eastern time).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. For further information about valuation of
investments, see "Net Asset Value" in the Statement of Additional Information.
OTHER INFORMATION
The public offering price for each class of Shares of a Portfolio is based
upon net asset value per Share plus, in the case of Investor A Shares of each
Portfolio except the Money Market Portfolios, a front-end sales charge. A class
will calculate its net asset value per Share by adding the value of a
Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of a Portfolio which declares its net investment income
quarterly will generally be lower than the net asset value per Share of Trust,
Institutional or Investor A Shares of the same Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or other financial institutions
(collectively "financial institutions"), acting on their own behalf or on behalf
of their qualified fiduciary accounts, employee benefit, retirement plan, or
other such qualified accounts. Trust Shares are sold to qualified purchasers
without a sales charge imposed by the Fund or the Distributor. Generally,
investors purchase Trust Shares through a financial institution, which is
responsible for transmitting purchase orders directly to the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
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Financial institutions placing orders directly or on behalf of their
customers should contact the Fund at 1-800-452-4015. Investors may also call the
Fund for information on how to purchase Shares.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of banks
or other financial institutions, such institution is responsible for
transmitting purchase, exchange, and redemption orders to the Fund on a timely
basis, recording all purchase, exchange, and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
PURCHASE OF SHARES -- THE MONEY MARKET PORTFOLIOS
A purchase order received and accepted by the Fund by 12:00 noon (Eastern
time) on a Business Day is effected at the net asset value per Share next
determined after receipt of the order in good form if the Fund's Custodian has
received payment in federal funds by 4:00 p.m. (Eastern time) that day. If such
funds are not available for investment by 4:00 p.m. (Eastern time), the order
will be cancelled. Purchase orders received after 12:00 noon (Eastern time) will
be placed the following business day.
PURCHASE OF SHARES -- THE EQUITY AND BOND PORTFOLIOS
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Trust Shares will be priced
according to the net asset value per Share next determined on that day after
receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGES
The exchange privilege enables shareholders to exchange Trust Shares of a
Portfolio for Trust Shares of another Portfolio offered by the Fund. Exchanges
for Trust Shares in another Portfolio are effected without payment of any
exchange or sales charges. In addition, Trust Shares of a Portfolio may also be
exchanged for Investor A Shares of the same Portfolio in connection with the
distribution of assets held in a qualified trust, agency or custodian account
with the trust department of Mercantile or any of its affiliated or
correspondent banks. Such exchanges will also be effected without payment of any
exchange or sales charges. The exchange privilege may be exercised only in those
states where the class of shares of such other Portfolios may be legally sold.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such request to
the Distributor. See "Other Exchange or Redemption Information" below. An
investor should consult the financial institution or the Distributor for further
information regarding procedures for exchanging Shares.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. No charge for
sending redemption payments electronically is currently imposed by the Fund,
although a charge may be imposed in the future. The Fund reserves the right to
send redemption proceeds electronically within seven days
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after receiving a redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect a Portfolio.
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact the financial institution servicing his or her account or the
Distributor. Additional documentation may be required if the redemption is
requested by a corporation, partnership, trust, fiduciary, executor, or
administrator. If, due to temporary adverse conditions, investors are unable to
effect telephone transactions, investors are encouraged to follow the procedures
described in "Other Exchange or Redemption Information" below.
Neither the Fund nor its service providers will be liable for any loss,
damage, expense or cost arising out of any telephone redemption effected in
accordance with the Fund's telephone redemption procedures, upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed, the Fund or its service providers may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available.
Proceeds from redemptions of Shares of the MONEY MARKET PORTFOLIOS with
respect to redemption orders received by the Fund before 12:00 noon (Eastern
time) on a Business Day normally are sent electronically the same day to the
financial institution that placed the redemption order in good form. Proceeds
for redemption orders that are received after 12:00 noon (Eastern time) or on a
non-Business Day normally are wired to the financial institution on the next
Business Day.
Proceeds from redemptions of Shares of the EQUITY AND BOND PORTFOLIOS with
respect to redemption orders received by the Fund before 4:00 p.m. (Eastern
time) on a Business Day normally are sent electronically to the financial
institution that placed the redemption order the next Business Day after the
Distributor's receipt of the order in good form.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund
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may make payment wholly or partly in portfolio securities at their then market
value equal to the redemption price. In such cases, an investor may incur
brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
financial institutions and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and/or Investor B Shares of a Portfolio.
TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
each Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as total return, "yield"
and "effective yield" for the Money Market Portfolios' Trust Shares may be
quoted in advertisements or in communications to shareholders. The "yield"
quoted in advertisements refers to the income generated by an investment in such
Shares of a Portfolio over a specified period (such as a seven-day period)
identified in connection with the particular yield quotation. This income is
then "annualized." That is, the amount of income generated by the investment
during that period is assumed to be generated for each such period over a
52-week or one-year period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in such Shares of a Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
In addition, the Treasury Money Market Portfolio's "state tax-equivalent
yield" may also be quoted. The "state tax-equivalent yield" shows the level of
taxable yield needed to produce an after-tax yield that is equivalent to a
particular state's tax-exempt yield achieved by the Portfolio. The "state
tax-equivalent yield" refers to the portion of income that is derived from
interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities that qualifies for exemption from state income tax. The yield
calculation assumes that 100% of the interest income is exempt from state income
tax. The "state tax-equivalent yield" is computed by dividing the tax-exempt
portion of the Portfolio's yield by a denominator consisting of one minus a
stated income tax rate.
The Tax-Exempt Money Market Portfolio may also quote its "tax-equivalent
yield" and "tax-equivalent effective yield", which demonstrate the level of
taxable yield needed to produce an after-tax yield that is equivalent to the
Portfolio's yield and effective yield. Each are calculated by increasing the
Portfolio's yield and effective yield by the amount necessary to reflect the
payment of federal (and/or state) tax at a stated tax rate. The "tax equivalent
yield" and "tax-equivalent effective yield" will always be higher than the
Portfolio's yield and effective yield, respectively. The Tax-Exempt Money Market
Portfolio may also compute its "tax-equivalent yield" and "taxequivalent
effective yield" with respect to certain states, which shows the level of
taxable yield and effective yield, respectively, needed to produce an after-tax
equivalent to the federal and state tax-exempt yield of the Portfolio's
particular class of Shares, assuming payment of federal income tax and state
personal income tax each at a stated rate and based upon a specified percentage
of the Portfolio's income which is exempt from state income tax as well as
federal income tax.
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THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return and yield
data for the Equity and Bond Portfolios' Trust Shares may be quoted in
advertisements or in communications to shareholders. The yield is computed based
on the net income of such Shares in the particular Portfolio during a 30-day (or
one-month) period identified in connection with the particular yield quotation.
More specifically, the yield is computed by dividing the Portfolio's net income
per Share during a 30-day (or one-month) period by the net asset value per Share
on the last day of the period and annualizing the result. The Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' "tax
equivalent" yields, which show the level of taxable yield needed to produce an
after-tax equivalent to each Portfolio's tax-free yield may also be quoted from
time to time. This is done by increasing a Portfolio's yield (calculated as
above) by the amount necessary to reflect the payment of federal income tax at a
stated tax rate. The Missouri Tax-Exempt Bond Portfolio may also compute its
"Missouri tax-equivalent" yield which shows the level of taxable yield needed to
produce an after-tax equivalent to the federal and Missouri tax-exempt yield of
the Portfolio's Shares, assuming payment of federal income tax and Missouri
income tax each at a stated rate.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to Trust Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular Portfolio over the particular measuring period.
Aggregate total returns reflect the cumulative percentage change in value over
the measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by a Portfolio during the period
are reinvested in the Portfolio's Trust Shares. When considering average annual
total return figures for periods longer than one year, it is important to note
that a Portfolio's annual total return for any one year in the period might have
been more or less than the average for the entire period.
INFORMATION APPLICABLE TO ALL PORTFOLIOS
Performance data of the Portfolios' Trust Shares may be compared to the
performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by Lehman Brothers, Inc., or any of its affiliates, Ibbotson
Associates, Inc., Lipper Analytical Services, Inc., Mutual Fund Forecaster and
IBC/Donoghue's MONEY FUND REPORT(R) published by IBC/Donoghue. References may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The New York Times, Business Week, American Banker,
Institutional Investor, Pensions and Investments, U.S.A. Today, Fortune,
CDA/Weisenberger, Morningstar, Inc. and publications of a local or regional
nature. In addition to performance information, general information about the
Portfolios that appears in a publication such as those mentioned above may be
included in advertisements and in reports to shareholders.
Performance quotations of a class of Shares in a Portfolio represent that
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by a bank or other financial
institution (as described in "Management of The Fund -- Service Organizations"
below) or other institutions will not be included in the calculations of a
Portfolio's yields and total returns. Such fees, if any, will reduce the
investor's net return on an investment in a Portfolio. Investors may call
1-800-452-4015 to obtain current yield and total return information.
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DIVIDENDS AND DISTRIBUTIONS
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 AND
NATIONAL MUNICIPAL BOND PORTFOLIOS
Dividends from net investment income of 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 and National Municipal Bond Portfolios are
declared daily and paid monthly not later than five Business Days after the end
of each month. Trust Shares of the Treasury Money Market, Money Market and
Tax-Exempt Money Market Portfolios earn dividends from the day the purchase
order is received by the Transfer Agent through the day before the redemption
order for such Shares is received. Trust Shares of the U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios earn dividends from the day after the purchase order
is received by the Transfer Agent through the day the redemption order for such
Shares is received. Dividends on each Share of such Portfolios are determined in
the same manner and are paid in the same amounts irrespective of class, except
that a Portfolio's Trust Shares and Institutional Shares (other than the
Tax-Exempt Portfolios which do not offer Institutional Shares) bear all expenses
of the respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares (other than the Treasury
Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index
and Short-Intermediate Municipal Portfolios which do not offer Investor B
Shares) bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, a Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the
Fund -- Administrative Services Plan" and "Other Information Concerning the Fund
and Its Shares" below.
THE EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY AND BALANCED PORTFOLIOS
Net investment income for the Equity Income, Equity Index, Growth & Income
Equity and Balanced Portfolios is declared and paid monthly as a dividend to
shareholders of record. Dividends on each Share of each of these Portfolios are
determined in the same manner and are paid in the same amount, irrespective of
class, except that a Portfolio's Trust Shares and Institutional Shares bear all
expenses of the respective Administrative Services Plans adopted for such Shares
and a Portfolio's Investor A Shares and Investor B Shares (other than the Equity
Index Portfolio which does not offer Investor B Shares) bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain sub-transfer
agency fees. See "Management of the Fund -- Administrative Services Plan" and
"Other Information Concerning the Fund and Its Shares" below.
THE SMALL CAP EQUITY AND INTERNATIONAL EQUITY PORTFOLIOS
Net investment income for the Small Cap Equity and International Equity
Portfolios is declared and paid quarterly as a dividend to shareholders of
record. Dividends on each Share of each of these Portfolios are determined in
the same manner and are paid in the same amount, irrespective of class, except
that a Portfolio's Trust Shares and Institutional Shares bear all expenses of
the respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain subtransfer
agency fees. See "Management of the Fund -Administrative Services Plan" and
"Other Information Concerning the Fund and Its Shares" below.
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OTHER DIVIDEND AND DISTRIBUTION INFORMATION
The Money Market Portfolios do not expect to realize capital gains. Net
realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated in the account application, or (ii)
redeemed all the Shares held in a Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio of the Fund intends to qualify as a "regulated investment
company" for the current taxable year. It is intended that each Portfolio will
continue to so qualify as long as such qualification is in the best interests of
shareholders. A regulated investment company is generally exempt from federal
income tax on amounts distributed to shareholders.
Qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"), for a taxable year requires, among other
things, that each Portfolio distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its net
exempt-interest income (if any). In general, a Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain over net short-term capital loss, if any, for
such taxable year. The Treasury Money Market, Money Market, 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 intend to distribute as dividends
substantially all of their respective investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to a Portfolio's shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or reinvested in
additional Shares. (Federal income taxes for distributions to an IRA are
deferred under the Code.) In the case of the Equity Income, Equity Index, Growth
& Income Equity, Small Cap Equity, International Equity and Balanced Portfolios,
such dividends will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
Portfolios from domestic corporations for the taxable year. Because all of the
Treasury Money Market, Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index and Government & Corporate Bond Portfolios' net
investment income is expected to be derived from earned interest, it is not
expected that any distributions from such Portfolios will be eligible for the
dividends received deduction.
It is the policy of each Tax-Exempt Portfolio to distribute as dividends
substantially all of its net tax-exempt interest income and any investment
company taxable income each year. Dividends derived from interest on Municipal
Obligations (known as exempt-interest dividends) may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code, unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. See the Statement of Additional
Information under "Additional Information Concerning Taxes." Distributions of
net income may be taxable to investors under state or local law as dividend
income even though a substantial portion of such distributions may be derived
from interest on tax-exempt obligations which, if realized directly, would be
exempt from such income tax.
If a Tax-Exempt Portfolio should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the
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Portfolio that is attributable to interest on such bonds in their federal
alternative minimum taxable income for purposes of determining liability (if
any) for the 26-28% alternative minimum tax applicable to individuals and the
20% alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000.
Substantially all of each Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. A Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such gains are received in cash or
reinvested in additional Shares.
To the extent dividends paid to shareholders of a Tax-Exempt Portfolio are
derived from taxable income or from long-term or short-term capital gains, such
dividends will be subject to federal income tax, whether such dividends are paid
in the form of cash or additional Shares.
An investor considering purchasing Shares of a Money Market Portfolio on or
just before the record date of any capital gains distribution (or in the case of
the Equity and Bond Portfolios, the record date of any dividend or capital gains
distribution) should be aware that the amount of the forthcoming distribution,
although in effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on December
31 of such year, if such dividends are actually paid during January of the
following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares of the Equity and Bond Portfolios, depending upon
the tax basis of such Shares and their price at the time of redemption, transfer
or exchange. If an investor holds Shares for six months or less and during that
time receives an exempt-interest dividend on those Shares, any loss realized on
the sale or exchange of those Shares will be disallowed to the extent of the
exempt-interest dividend.
Certain interest income and dividends earned by the International Equity
Portfolio from foreign securities is expected to be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it, including
generally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio may make this election. As a consequence, the amount
of these foreign taxes paid by the Portfolio will be included in its
shareholders' taxable income pro rata (in addition to taxable distributions
actually received by them), and each shareholder may elect either (a) to credit
his proportionate amount of such taxes against his U.S. federal income tax
liabilities (subject to certain limitations), or (b) if he itemizes his
deductions, to deduct such proportionate amounts from his U.S. taxable income.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio qualifies
as a regulated investment company for federal income tax purposes, shareholders
of such Portfolio who are Missouri resident individuals, trusts or estates
resident in Missouri, or corporations subject to
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Missouri taxing jurisdiction (collectively, "Missouri Taxpayers") will not be
subject to Missouri income taxation on dividends distributed to them to the
extent that such dividends (a) qualify as exempt-interest dividends of a
regulated investment company under Code section 852(b)(5), (b) are the subject
of the written notice to shareholders required by 12 C.S.R. section 10-2.155(2),
(c) are attributable to interest on (1) obligations issued by the State of
Missouri or any of its political subdivisions or authorities, or (2) certain
obligations of the United States, any territory or possession of the United
States, or any authority, commission, or instrumentality of the United Sates, to
the extent exempted from Missouri income tax under Federal Law, and (d) are
properly reported on the Missouri income tax returns of the shareholder in the
respective Portfolio. In connection with these exclusions from Missouri taxable
income, the State also denies any deduction for interest on debt incurred to
carry the obligations or securities and any expenses incurred in the production
of the excluded interest or dividend income.
To the extent possible, the Missouri Tax-Exempt Bond Portfolio intends to
invest in obligations which will permit distributions attributable to interest
to be excludable by Missouri Taxpayers. Despite this intention, Missouri
Taxpayers generally will be subject to Missouri income tax on other types of
distributions received from the Missouri Tax-Exempt Bond Portfolio, including
distributions of interest on obligations of other issuers and all long-term and
short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distribution were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri bank tax or other comparable forms of
specialized Missouri taxation.
All shareholders of the Portfolios should consult with their tax advisors
with respect to the state and local tax consequences of the purchase, ownership,
and disposition of Shares in the Portfolios, the receipt of distributions from
the Portfolios, and the proper method in which to report Portfolio-related items
on a shareholder's Missouri tax returns.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may be taxable
to investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide investors, to
the extent permissible by federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Shareholders should note
that many, but not all, states permit all or a portion of a regulated investment
company's dividends which are derived from interest on U.S. Treasury obligations
(and obligations of certain U.S. Government agencies)("Treasury Obligations") to
be exempt or excluded from state and local taxation. In addition, only certain
states allow dividends of a regulated investment company that are derived from
dividends of other regulated investment companies investing directly in Treasury
Obligations to be exempt or excluded from state and local taxation. Some states
reduce a shareholder's allowable deductions by interest on debt incurred to
carry obligations producing state tax-exempt interest and by other expenses
related to such obligations. Income earned by the Portfolio from repurchase
agreements generally is not exempt from state or local income tax. Shareholders
should consult their own tax advisors about the status of distributions from the
Treasury Money Market Portfolio under state and local law.
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MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal and, for the Treasury Money Market Portfolio, the
state income tax consequences, and for the Missouri Tax-Exempt Bond Portfolio,
the Missouri state income tax consequences, of distributions made each year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER AND SUB-ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to each Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the Funds' assets,
which were approximately $2.5 billion.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolios,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolios' securities and other investments, and directs the
maintenance of each Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, with respect to the Treasury Money Market and Money Market Portfolios,
at the annual rates of .40% of the first $1.5 billion of each such Portfolio's
average daily net assets, .35% of the next $1.0 billion of net assets and .25%
of net assets in excess of $2.5 billion, and with respect to the Tax-Exempt
Money Market, 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,
at the annual rates of .40%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%,
.30%, .55%, .75%, 1.00% and .75%, respectively, of the average daily net assets
of each Portfolio, respectively. For the fiscal year ended November 30, 1996,
MVA received advisory fees (net of waivers) at the effective annual rates of
.35%, .35%, .35%, .45%, .45%, .00%, .45%, .00%, .55%, .75%, .75%, 1.00% and .75%
of the respective average daily net assets of the Treasury Money Market, Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Government &
Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Growth & Income Equity, Small Cap Equity, International Equity
and Balanced Portfolios. The Intermediate Corporate Bond, Bond Index, Equity
Income and Equity Index Portfolios had not commenced operations as of November
30, 1996.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of one or more Portfolios available for
distributions as dividends. The voluntary fee reduction will cause the return of
any such Portfolio to be higher than it would otherwise be in the absence of
such reduction.
David A. Bethke, CFA, is the person primarily responsible for the
day-to-day management of the U.S. Government Securities, Intermediate Corporate
Bond and Government & Corporate Bond Portfolios and has managed each of these
Portfolios since inception. Mr. Bethke, Senior Associate, joined MVA in 1987 and
has seven years of prior investment experience.
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Peter Merzian, is the person primarily responsible for the day-to-day
management of the Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond and Balanced Portfolios. Mr. Merzian, a Senior Associate
of MVA, has been with MVA since 1993 and prior thereto was employed as a
portfolio manager of another financial institution. Mr. Merzian has served as
portfolio manager of the Short-Intermediate Municipal and National Municipal
Bond Portfolios since their respective dates of inception and of the Balanced
Portfolio since May 1996. Mr. Merzian has served as portfolio manager of the
Missouri Tax-Exempt Bond Portfolio (including the Predecessor Missouri
Tax-Exempt Bond Portfolio) since 1993.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, Senior Associate, has
been with MVA since 1983. For the past 13 years, he has served as a stock
analyst and has managed several of Mercantile's common funds. Mr. Glidden has
managed the Equity Income Portfolio since its inception.
Timothy S. Engelbrecht, is the person primarily responsible for the
day-to-day management of the Growth & Income Equity Portfolio. Mr. Engelbrecht,
a Senior Associate, has been employed by MVA for the past sixteen years and has
had portfolio management and other responsibilities for MVA for the past fifteen
years. Mr. Engelbrecht has managed the Growth & Income Equity Portfolio since
May 1996.
Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Small Cap Equity Portfolio. Mr. Anthony, Senior Associate, has
been with MVA for 21 years and has managed the Small Cap Equity Portfolio since
its inception.
MVA has entered into a sub-advisory agreement with Clay Finlay Inc.
Pursuant to the terms of such sub-investment advisory agreement, Clay Finlay has
been retained by MVA to manage the investment and reinvestment of the assets of
the International Equity Portfolio and to provide analytical and investment
research services to it, subject to the supervision of MVA and to the direction
and control of the Fund's Board of Directors.
Under this arrangement, Clay Finlay is responsible for the day-to-day
management of the International Equity Portfolio's assets. MVA reviews
investment performance policies and guidelines, maintains certain books and
records, is responsible for selecting and monitoring the performance of Clay
Finlay, and for reporting the activities of Clay Finlay in managing the
Portfolio to the Fund's Board of Directors.
Clay Finlay is registered as an investment adviser with the SEC and is a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200 Park
Avenue, 56th Floor, New York, New York 10166. Clay Finlay, founded in 1982, has
extensive experience in international investments and as of December 31, 1996
had approximately $6.5 billion in assets under management.
Frances Dakers is the person primarily responsible for the day-to-day
management of the International Equity Portfolio's investments. Ms. Dakers, a
Principal and Senior Portfolio Manager of Clay Finlay, has been associated with
Clay Finlay since January, 1982 and has managed the International Equity
Portfolio since its inception.
For the services provided and expenses assumed pursuant to its sub-advisory
agreement with MVA, Clay Finlay receives from MVA a fee, computed daily and
payable monthly, at the annual rate of .75% of the first $50 million of the
International Equity Portfolio's average daily net assets, plus .50% of the next
$50 million of average daily net assets, plus .25% of average daily net assets
in excess of $100 million. Prior to August 29, 1996, Clay Finlay received from
MVA a fee, computed daily and paid monthly, at the annual rate of .75% of the
International Equity Portfolio's average daily net assets. For the fiscal year
ended November 30, 1996, Clay Finlay received sub-advisory fees at the effective
annual rate of .75% of the International Equity Portfolio's average daily net
assets. Clay Finlay bears all expenses incurred by it in connection with its
services under the sub-advisory agreement.
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ADMINISTRATOR
BISYS Fund Services Ohio, Inc. located at 3435 Stelzer Road, Columbus, Ohio
43219, acts as the Portfolios' Administrator.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Fund's arrangements under the Administrative Services Plan
described below. For its services, the Administrator is entitled to receive a
fee, computed daily and payable monthly, at the annual rate of .20% (.10% for
the Tax-Exempt Money Market Portfolio) of each Portfolio's average daily net
assets. For the fiscal year ended November 30, 1996, the Administrator received
administration fees (net of waivers) at the effective annual rate of .10% (.05%
with respect to the National Municipal Bond Portfolio) of the average daily net
assets of each 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. From time to time, the Administrator may voluntarily waive
all or a portion of the administration fees otherwise payable by a Portfolio in
order to increase the net income available for distribution to shareholders.
DISTRIBUTOR
Trust Shares in each Portfolio are sold continuously by the Distributor,
BISYS Fund Services, an affiliate of the Administrator. The Distributor is a
registered broker-dealer with principal offices at 3435 Stelzer Road, Columbus,
Ohio 43219.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to the
Trust Shares of the Portfolios. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .25%, for the Money Market
Portfolios, and up to .30%, for the Equity and Bond Portfolios, respectively, of
the average daily net assets of a Portfolio's Trust Shares owned beneficially by
a Service Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Trust Shares of a Portfolio, such as establishing and
maintaining accounts and records for their customers who invest in such Shares,
assisting customers in processing purchase, exchange and redemption requests,
and responding to customer inquiries concerning their investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in
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addition to any amounts which may be received by such Service Organization under
its Servicing Agreement with the Fund. The Fund's Servicing Agreements require a
Service Organization to disclose to its customers any compensation payable to
the Service Organization by a Portfolio and any other compensation payable by
its customers in connection with their investment in such Shares. Customers of
such Service Organizations receiving servicing fees should read this Prospectus
in light of the terms governing their accounts with their Service Organization.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of each Portfolio's assets. In addition,
Bankers Trust Company of New York, with principal offices at 16 Wall Street, New
York, New York 10005, serves as Sub-Custodian for the International Equity
Portfolio. BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent. Its address is 3435 Stelzer Road, Columbus,
Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolios. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing Shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolios contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal laws expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by the Portfolios 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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EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all expenses in connection with the
performance of their services, except that the Distributor is compensated
pursuant to the Distribution and Services Plans (as described below under "Other
Information Concerning the Fund and Its Shares"). Expenses are deducted from the
total income of each Portfolio before dividends and distributions are paid.
These expenses include, but are not limited to, fees paid to the Adviser and
Administrator, transfer agency fees, fees and expenses of officers and directors
who are not affiliated with the Adviser or the Distributor, taxes, interest,
legal fees, custodian fees, auditing fees, 12b-1 fees, servicing fees, certain
fees and expenses in registering and qualifying a Portfolio and its Shares for
distribution under federal and state securities laws, costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders, the expense of reports
to shareholders, shareholders' meetings and proxy solicitations, fidelity bond
and directors and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by the Adviser, Distributor or Administrator under their respective agreements
with the Fund. The Fund also pays for brokerage fees, commissions and other
transaction charges, if any, in connection with the purchase and sale of
portfolio securities. Any general expenses of the Fund that are not readily
identifiable as belonging to a particular Portfolio will be allocated among all
Portfolios by or under the direction of the Board of Directors in a manner the
Board determines to be fair and equitable. Any expenses relating only to a
particular class of Shares within a Portfolio will be borne solely by such
class. See "Certain Financial Information" and "Management of the Fund" above
for additional information regarding expenses of each Portfolio.
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized as a Maryland corporation on September 9, 1982 and
is a mutual fund of the type known as an "open-end management investment
company". The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which (except the Tax-Exempt Money Market and Missouri
Tax-Exempt Bond Portfolios) is classified as a diversified company under the
1940 Act: 1 billion Trust Shares, 300 million Institutional Shares and 100
million Investor A Shares, representing interests in the Treasury Money Market
Portfolio; 1.8 billion Trust Shares, 300 million Institutional Shares, 550
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Money Market Portfolio; 300 million Trust Shares and 50 million
Investor A Shares, representing interests in the Tax-Exempt Money Market
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares, representing interests in
the U.S. Government Securities Portfolio; 50 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares, representing interests in
the Intermediate Corporate Bond Portfolio; 25 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares representing interests in
the Bond Index Portfolio; 50 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
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<PAGE> 147
representing interests in the Government & Corporate Bond Portfolio; 25 million
Trust Shares and 25 million Investor A Shares, representing interests in the
Short-Intermediate Municipal Portfolio; 25 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Missouri Tax-Exempt Bond Portfolio; 50 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares representing interests in the
National Municipal Bond Portfolio; 50 million Trust Shares, 25 million
Institutional Shares, 25 million Investor A Shares and 25 million Investor B
Shares representing interests in the Equity Income Portfolio; 25 million Trust
Shares, 25 million Institutional Shares and 25 million Investor A Shares
representing interests in the Equity Index Portfolio; 50 million Trust Shares,
20 million Institutional Shares, 5 million Investor A Shares and 50 million
Investor B Shares, representing interests in the Growth & Income Equity
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares and 50 million Investor B
Shares, representing interests in the Small Cap Equity Portfolio; 10 million
Trust Shares, 10 million Institutional Shares, 10 million Investor A Shares and
50 million Investor B Shares, representing interests in the International Equity
Portfolio; and 15 million Trust Shares, 20 million Institutional Shares, 5
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Balanced Portfolio. Institutional, Investor A and/or Investor B
Shares of the Portfolios are described in separate prospectuses which are
available from the Distributor at the telephone number on the cover of this
Prospectus. Shares in the Fund's Portfolios will be issued without Share
certificates.
The Trust Shares of the Portfolios are described in this Prospectus. The
Portfolios also offer Investor A Shares and, in addition, each Portfolio except
the Tax-Exempt Portfolios offers Institutional Shares and each Portfolio except
the Treasury Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond,
Bond Index, Short-Intermediate Municipal and Equity Index Portfolios offers
Investor B Shares. Institutional Shares, which are offered to financial
institutions acting on behalf of accounts for which they do not exercise
investment discretion, are sold without a sales charge. Investor A Shares (other
than Investor A Shares of the Money Market Portfolios which are sold without a
sales charge) are sold with a maximum 4.5% (2.5% with respect to the U.S.
Government Securities, Bond Index, Short-Intermediate Municipal and Equity Index
Portfolios) front-end sales charge, and Investor B Shares are sold with a
maximum 5.0% contingent deferred sales charge. Investor A Shares and Investor B
Shares are sold through selected broker/dealers and other financial
intermediaries to individual or institutional customers. Trust Shares,
Institutional Shares, Investor A Shares and/or Investor B Shares bear their pro
rata portion of all operating expenses paid by a Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective Administrative Services Plans adopted for such Shares and Investor A
Shares and Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of a Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Institutional Shares
are made to Service Organizations for administrative services provided to the
Service Organizations' clients or account holders who are the beneficial owners
of Institutional Shares. Payments under the Administrative Services Plans may
not exceed .25% (on an annual basis) of the average daily net asset value of
outstanding Institutional Shares of the Money Market Portfolios or .30% (on an
annual basis) of the average daily net asset value of outstanding Institutional
Shares of the Equity and Bond Portfolios.
Payments under the Distribution and Services Plans for Investor A Shares
and Investor B Shares are made to (i) the Distributor or another person for
providing distribution assistance and assuming certain related expenses, and
(ii) Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of
Investor A Shares or Investor B Shares. Payments under the Distribution and
Services Plan for Investor A Shares may not exceed .25% (on an annual basis) of
the average daily net asset value of outstanding Investor A Shares of the Money
Market Portfolios or .30% (on an annual basis) of the average daily net asset
value of Investor A Shares of the Equity and Bond Portfolios. Payments under the
Distribution and Services Plan for Investor B Shares may not exceed 1.00% (on an
annual
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<PAGE> 148
basis) of the average daily net asset value of outstanding Investor B Shares of
a Portfolio. Distribution payments made under the Distribution and Services
Plans are subject to the requirements of Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares and Investor B Shares of a Portfolio that are not offered in connection
with the Portfolio's Trust or Institutional Shares, including an automatic
investment program and an automatic withdrawal plan. Each class of shares also
offers different exchange privileges. Investor B Shares convert automatically
into Investor A Shares eight years after the beginning of the calendar month in
which the Shares were purchased.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
Portfolios will vote together and not by class unless otherwise required by law
or permitted by the Board of Directors. All shareholders of a particular
Portfolio will vote together as a single class on matters relating to the
Portfolio's investment advisory (or sub-advisory) agreement and investment
objective and fundamental policies. Only holders of Trust Shares, however, will
vote on matters relating to the Administrative Services Plan for Trust Shares
and only holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares and only holders of Investor B Shares will
vote on matters pertaining to the Distribution and Services Plan for Investor B
Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding Shares (irrespective of
Portfolio or class) may elect all of the Directors. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Shares
will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of a Portfolio means, with respect to the approval of an investment
advisory or sub-advisory agreement or a change in an investment objective or
fundamental investment policy, the affirmative vote of the lesser of (a) more
than 50% of the outstanding Shares of such Portfolio (irrespective of class), or
(b) 67% or more of the Shares of such Portfolio (irrespective of class) present
at a meeting if more than 50% of the outstanding Shares of such Portfolio are
represented at the meeting in person or by proxy.
As of January 1, 1997, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolios may be directed to the Fund at
1-800-452-4015.
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIOS'
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIOS, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIOS, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
61
<PAGE> 1
Exhibit 17(f)
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> 2
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.
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<PAGE> 3
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> 4
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> 5
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> 6
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.)
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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.
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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> 10
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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<PAGE> 11
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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<PAGE> 12
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> 13
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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<PAGE> 14
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> 16
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> 18
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> 19
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> 20
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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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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<PAGE> 23
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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<PAGE> 24
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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<PAGE> 25
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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<PAGE> 26
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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<PAGE> 27
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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<PAGE> 28
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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<PAGE> 29
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> 30
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> 31
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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<PAGE> 32
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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<PAGE> 33
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> 34
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> 35
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
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<PAGE> 36
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> 37
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.
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<PAGE> 38
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> 39
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> 40
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.
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<PAGE> 41
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> 42
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
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<PAGE> 43
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> 44
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> 45
<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> 46
<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> 47
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:
-45-
<PAGE> 48
<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> 49
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> 50
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> 51
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> 52
<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> 53
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>
-51-
<PAGE> 54
<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>
_____________________
* For the period November 18, 1996 (commencement of operations)
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.
-52-
<PAGE> 55
(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> 56
<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
-54-
<PAGE> 57
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
-55-
<PAGE> 58
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>
-56-
<PAGE> 59
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>
-57-
<PAGE> 60
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> 61
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
-59-
<PAGE> 62
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
-60-
<PAGE> 63
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
-61-
<PAGE> 64
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
-62-
<PAGE> 65
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
-63-
<PAGE> 66
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> 67
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> 68
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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<PAGE> 69
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> 70
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> 71
<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
-69-
<PAGE> 72
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> 73
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> 74
<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> 75
________________________
(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> 76
<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> 77
<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>
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<PAGE> 78
<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> 79
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> 80
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> 81
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> 82
<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> 83
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> 84
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> 85
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> 86
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> 87
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>
-85-
<PAGE> 88
<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
-86-
<PAGE> 89
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.
-87-
<PAGE> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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.
-93-
<PAGE> 96
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> 97
"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> 98
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
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interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
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"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The
"BB" rating
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category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
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probable credit stature upon completion of construction or elimination of basis
of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
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"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
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principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by Thomson
BankWatch to long-term debt and indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited
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incremental risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment
of principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable
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Moody's Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following summarizes the
ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of
an investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
The 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,
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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.
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II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the
value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio will
decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange
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rates between the U.S. dollar and other currencies arising from multi-national
transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no price is paid or
received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-market. For example, when a Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where a Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. At any time prior to expiration of
the futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend to use
interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options
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contracts which are currently traded or which may subsequently become available
for trading. Such instruments may be employed in connection with the
Portfolios' hedging strategies if, in the judgment of the adviser, transactions
therein are necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
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EXHIBIT 17(g)
ARROW EQUITY PORTFOLIO
ARROW FIXED INCOME PORTFOLIO
ARROW MUNICIPAL INCOME PORTFOLIO
ARROW GOVERNMENT MONEY MARKET PORTFOLIO
(PORTFOLIOS OF ARROW FUNDS)
- -------------------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUSES DATED NOVEMBER 30, 1996
Effective April 25, 1997, in connection with the merger of Mark Twain
Bancshares, Inc., the parent company of Mark Twain Bank, into Mercantile
Bancorporation Inc., Mississippi Valley Advisors Inc. succeeded Mark Twain Bank
as the investment adviser to Arrow Funds. The terms of the investment advisory
contract between Arrow Funds and Mississippi Valley Advisors Inc. are
substantially similar to the investment advisory contract between Arrow Funds
and Mark Twain Bank. Mississippi Valley Advisors Inc. is a registered
investment adviser with its principal offices at One Mercantile Center, St.
Louis, Missouri 63166. As a consequence of the merger, all references in the
prospectuses to Mark Twain Bank as the investment adviser should be replaced
with references to Mississippi Valley Advisors Inc., as appropriate. In
addition, all references to Mark Twain Brokerage Services, Inc. should be
augmented with references to Mercantile Investment Services, Inc.
Mark Twain Bank will initially survive the merger and will continue to serve as
custodian to Arrow Funds until such time as shareholders are otherwise notified.
Please delete the section entitled "Adviser's Background" from each prospectus
and replace it with the following:
"Adviser's Background. Mississippi Valley Advisors Inc. is a wholly-owned
subsidiary of Mercantile Bank National Association, which is a wholly-owned
banking subsidiary of Mercantile Bancorporation Inc. Mississippi Valley
Advisors Inc. has managed the portfolios of ARCH Funds, Inc. since its
inception in 1982. Mercantile Bancorporation Inc., a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, is a
financial services company headquartered in St. Louis, Missouri. Through its
related banking subsidiaries, Mercantile Bancorporation Inc. provides banking
and banking-related services, primarily throughout Missouri, Illinois, Iowa,
Arkansas and Kansas. As of December 31, 1996, Mercantile Bank National
Association had total assets of approximately $19 billion. As of December 31,
1996, Mississippi Valley Advisors Inc.'s Investment Management Services held
approximately $7.9 billion of investment assets for a wide range of
institutional clients, including corporate, public sector, multi-employer,
endowment/foundation and mutual funds. As part of their regular banking
operations, Mercantile Bank National Association's affiliates may make loans to
public companies. Thus, it may be possible, from time to time, for a Fund to
hold or acquire the securities of issuers which are also lending clients of
Mercantile Bank National Association's affiliates. The lending relationship
will not be a factor in the selection of securities.
Carl C. Enloe has managed the Equity Fund since its inception, December 1992.
Mr. Enloe joined Mark Twain Bank, the Equity Fund's former adviser, in 1987, as
head of investments. Prior to joining Mark Twain Bank, he was head of
investments at another major Missouri bank for 17 years. He served as senior
portfolio manager at a private investment company and an analyst at a member
New York Stock Exchange firm. He is a graduate of the University of Missouri.
<PAGE> 2
Effective immediately, David A. Bethke, a Senior Associate with Mississippi
Valley Advisors, Inc., will manage the Fixed Income Fund. Mr. Bethke has been
the principal portfolio manager for the ARCH Government & Corporate Bond
Portfolio and ARCH U.S. Government Securities Portfolio since their inception
in 1988. Mr. Bethke joined Mississippi Valley Advisors Inc. in 1987. Mr. Bethke
holds a B.A. degree from the Upper Iowa University and an M.B.A. degree from
the University of Iowa. He is a Chartered Financial Analyst.
Effective immediately, Peter C. Merzian will manage the Municipal Income Fund.
Mr. Merzian has been the principal portfolio manager for ARCH Tax-Exempt Money
Market Portfolio and ARCH Missouri Tax-Exempt Bond Portfolio since 1993, and
for ARCH Short-Intermediate Municipal Portfolio and ARCH National Municipal
Bond Portfolio since their inception. Mr. Merzian joined Mississippi Valley
Advisors Inc. in 1993 and has over 8 years of investment experience. Prior to
joining Mississippi Valley Advisors Inc., he was employed at another financial
institution for four years, where he was a portfolio manager. Mr. Merzian
received his B.S. and M.B.A. degrees from St. Louis University."
April 25, 1997
<PAGE> 3
ARROW FUNDS
PROSPECTUS
Arrow Funds (the "Trust") is an open-end, management investment company (a
mutual fund). This combined prospectus offers investors interests in the
following three separate diversified investment portfolios (individually
referred to as the "Fund" or collectively as the "Funds"), each having a
distinct investment objective and policies:
* Arrow Equity Portfolio;
* Arrow Fixed Income Portfolio; and
* Arrow Municipal Income Portfolio.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF MARK
TWAIN BANK, ARE NOT GUARANTEED BY MARK TWAIN BANK, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This combined prospectus contains the information you should read and know
before you invest in any of the Funds. Keep this prospectus for future
reference.
Additional information about the Funds is contained in the Funds' Combined
Statement of Additional Information dated November 30, 1996, which has also been
filed with the Securities and Exchange Commission ("SEC"). The information
contained in the Combined Statement of Additional Information is incorporated by
reference into this prospectus. You may request a copy of the Combined Statement
of Additional Information free of charge by calling 1-800-866-6040. To obtain
other information, or make inquiries about any of the Funds, contact the Funds
at the address listed in the back of this prospectus. The Combined Statement of
Additional Information, material incorporated by reference into this document,
and other information regarding the Funds is maintained electronically with the
SEC at Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated November 30, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
SYNOPSIS 2
SUMMARY OF FUND EXPENSES 2
FINANCIAL HIGHLIGHTS 3
OBJECTIVE OF EACH FUND 6
Arrow Equity Portfolio 6
Investment Policies 6
Arrow Fixed Income Portfolio 6
Investment Policies 6
Arrow Municipal Income Portfolio 8
Investment Policies 8
PORTFOLIO INVESTMENTS AND STRATEGIES 9
Borrowing Money 9
Diversification 10
Restricted and Illiquid Securities 10
Repurchase Agreements 10
Investing in Securities of Other
Investment Companies 10
When-Issued and Delayed Delivery
Transactions 10
Put and Call Options 11
Futures and Options on Futures 11
Lending of Portfolio Securities 12
Investments in Foreign Securities 12
Ratings 12
ARROW FUNDS INFORMATION 13
Management of the Trust 13
Distribution of Shares of the Funds 14
Administration of the Funds 14
Brokerage Transactions 15
NET ASSET VALUE 15
INVESTING IN THE FUNDS 15
Share Purchases 15
Minimum Investment Required 16
What Shares Cost 16
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Reducing/Eliminating the Sales Charge 16
Systematic Investment Program 17
Certificates and Confirmations 17
Dividends and Distributions 18
EXCHANGE PRIVILEGE 18
REDEEMING SHARES 18
Through Mark Twain 18
Systematic Withdrawal Program 19
Accounts with Low Balances 20
SHAREHOLDER INFORMATION 20
Voting Rights 20
Massachusetts Partnership Law 20
EFFECT OF BANKING LAWS 20
TAX INFORMATION 21
Federal Income Tax 21
Additional Tax Information for
Municipal Income Fund 21
PERFORMANCE INFORMATION 21
ADDRESSES 22
</TABLE>
SYNOPSIS
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated July 1, 1992. The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be issued
in separate classes. This prospectus relates only to the three Funds described
herein. In addition, the Trust offers another investment portfolio, the Arrow
Government Money Market Portfolio. The Funds are designed for individuals and
institutions as a convenient means of accumulating interests in professionally
managed, diversified portfolios.
The following three Funds are offered in this prospectus:
* ARROW EQUITY PORTFOLIO ("EQUITY FUND") -- seeks capital appreciation by
investing primarily in equity securities;
* ARROW FIXED INCOME PORTFOLIO ("FIXED INCOME FUND") -- seeks current income
by investing primarily in a portfolio of U.S. government and investment
grade corporate securities; and
* ARROW MUNICIPAL INCOME PORTFOLIO ("MUNICIPAL INCOME FUND") -- seeks current
income which is exempt from federal regular income tax by investing primarily
in a diversified portfolio of municipal securities.
For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." A minimum initial investment of $1,000 is required for
each Fund, except for investments by individual retirement accounts ("IRAs") for
which the minimum initial investment is $250. Employees of Mark Twain
Bancshares, Inc. and its subsidiaries, their spouses and children under 21 may
purchase shares with a minimum initial investment of $500. Subsequent
investments by any investor must be in amounts of at least $100. Shares of each
Fund are sold at net asset value plus any applicable sales charge, and are
redeemed at net asset value. Information on redeeming shares may be found under
"Redeeming Shares." The Funds are advised by Mark Twain Bank.
RISK FACTORS. Investors should be aware of the following general considerations:
market values of fixed-income securities, which constitute a major part of the
investments of some Funds, may vary inversely in response to changes in
prevailing interest rates. The foreign securities in which two of the Funds may
invest may be subject to certain risks in addition to those inherent in U.S.
investments. One or more of the Funds may make certain investments and employ
certain investment techniques that involve other risks, including entering into
repurchase agreements, lending portfolio securities and entering into financial
futures contracts and related options as hedges. These risks and those
associated with investing in when-issued securities, options and variable rate
securities are described under "Objective of Each Fund" and "Portfolio
Investments and Strategies."
SUMMARY OF FUND EXPENSES
2
<PAGE> 5
<TABLE>
<CAPTION>
FIXED MUNICIPAL
EQUITY INCOME INCOME
SHAREHOLDER TRANSACTION EXPENSES FUND FUND FUND
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)(1) 3.50% 3.50% 3.50%
Maximum Sales Charge Imposed on
Reinvested Dividends
(as a percentage of offering price) None None None
Contingent Deferred Sales Charge (as a
percentage of original
purchase price or redemption proceeds, None None None
as applicable)
Redemption Fee (as a percentage of amount None None None
redeemed, if applicable)
Exchange Fee None None None
ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver if 0.75% 0.60% 0.11%
applicable)(2)
12b-1 Fees (after waiver)(3) 0.00% 0.00% 0.00%
Total Other Expenses 0.39% 0.65% 1.21%
Total Fund Operating Expenses(4) 1.14% 1.25% 1.32%
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by Mark
Twain Brokerage Services, Inc. are not subject to the sales charge.
However, an annual fee of 2.00% will be charged to these accounts.
(2) The management fee for the Municipal Income Fund is reduced to reflect the
voluntary waiver by the investment adviser. The maximum management fee for
the Municipal Income Fund is 0.70%.
(3) Each Fund can pay up to 0.25% of its average daily net assets as a 12b-1
fee. For the foreseeable future, the distributor plans to waive all 12b-1
fees.
(4) The Annual Operating Expenses in the table above are based on expenses
expected during the fiscal year ending September 30, 1997. The Total Fund
Operating Expenses for the Equity Fund, Fixed Income Fund and Municipal
Income Fund were 1.17%, 1.27% and 1.20%, respectively, for the fiscal year
ended September 30, 1996. The Total Fund Operating Expenses of the Equity
Fund, Fixed Income Fund, and Municipal Income Fund are expected to be
1.39%, 1.50%, and 2.16%, respectively, absent the voluntary waivers
detailed in notes (2) and (3).
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Arrow Funds Information" and "Investing in the Funds."
Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
maximum sales charge. The Funds charge no contingent deferred sales charge.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Equity Fund $46 $70 $ 96 $169
Fixed Income Fund 47 73 101 181
Municipal Income Fund 48 75 105 188
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
ARROW EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. Their report dated November 6, 1996 on the Fund's
financial statements for the period ended September 30, 1996 and on the
following table for the period then ended is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
from the Fund.
3
<PAGE> 6
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.80 $ 9.74 $ 10.02 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss)
on investments 1.32 4.05 (0.25) 0.02
Total from investment operations 1.44 4.15 (0.18) 0.06
LESS DISTRIBUTIONS
Distributions from net investment income (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain on
investments (0.07) -- (0.03) --
Total distributions (0.18) (0.09) (0.10) (0.04)
NET ASSET VALUE, END OF PERIOD $ 15.06 $ 13.80 $ 9.74 $ 10.02
TOTAL RETURN(B) 10.48% 42.90% (1.84%) 0.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.28% 0.30% 0.28% 0.30%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 55,573 $ 43,708 $30,282 $ 31,159
Average commission rate paid $ 0.0756 -- -- --
Portfolio turnover 5% 45% 127% 54%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1996, which can be obtained free of
charge.
ARROW FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. Their report dated November 6, 1996 on the Fund's
financial statements for the period ended September 30, 1996 and on the
following table for the period then ended is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.06 $ 9.31 $ 10.75 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.59 0.59 0.44
Net realized and unrealized gain
(loss) on investments (0.36) 0.75 (1.41) 0.75
Total from investment operations 0.21 1.34 (0.82) 1.19
LESS DISTRIBUTIONS
Distributions from net investment
income (0.57) (0.59) (0.59) (0.44)
Distributions from net realized gain
on investment transactions -- -- (0.03) --
Total distributions (0.57) (0.59) (0.62) (0.44)
NET ASSET VALUE, END OF PERIOD $ 9.70 $10.06 $ 9.31 $ 10.75
TOTAL RETURN(B) (7.85%) 12.09%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.27% 1.22% 1.15% 1.05%*
Net investment income 5.84% 6.17% 5.86% 5.71%*
Expense waiver/reimbursement(c) 0.26% 0.26% 0.26% 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 28,708 $30,661 $ 32,743 $ 42,715
Portfolio turnover 55% 33% 28% 28%
</TABLE>
4
<PAGE> 7
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1996, which can be obtained free of
charge.
ARROW MUNICIPAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick LLP, the Fund's
independent auditors. Their report dated November 6, 1996 on the Fund's
financial statements for the period ended September 30, 1996 and on the
following table for the period then ended is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.22 $ 9.87 $ 10.61 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47 0.46 0.47 0.32
Net realized and unrealized gain
(loss) on investments 0.04 0.35 (0.72) 0.61
Total from investment operations 0.51 0.81 (0.25) 0.93
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.46) (0.47) (0.32)
Distributions from net realized gain on
investments -- -- (0.02) --
Total distributions (0.47) (0.46) (0.49) (0.32)
NET ASSET VALUE, END OF PERIOD $ 10.26 $ 10.22 $ 9.87 $ 10.61
TOTAL RETURN(B) 5.04% 8.46% (2.41%) 9.43%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.20% 1.09% 0.85% 0.72%*
Net investment income 4.49% 4.70% 4.62% 4.71%*
Expense waiver/reimbursement(c) 0.84% 0.80% 0.81% 0.85%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 14,947 $ 17,736 $ 23,187 $ 24,087
Portfolio turnover 20% 38% 27% 14%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 1, 1993 (date of initial
public investment) to September 30,1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1996, which can be obtained free of
charge.
5
<PAGE> 8
OBJECTIVE OF EACH FUND
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Unless indicated otherwise, the investment policies and limitations of a Fund
may be changed by the Board of Trustees ("Trustees") without approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appears in
the "Portfolio Investments and Strategies" section of this prospectus and in the
Combined Statement of Additional Information.
ARROW EQUITY PORTFOLIO
The investment objective of the Fund is capital appreciation. The Fund pursues
this investment objective by investing primarily in equity securities of
companies selected on the basis of assessment of earnings and the risk and
volatility of each company's business. Other factors, such as product position
or market share, will also be considered by the Fund's investment adviser.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund invests primarily in equity securities of
companies selected by the Fund's investment adviser on the basis of traditional
research techniques. The equity securities in which the Fund invests are
primarily those of middle to large capitalization issuers whose shares are
listed on the New York and American Stock Exchanges. Company earnings are the
primary consideration in selecting portfolio securities. The Fund may invest in
preferred stocks, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stocks, although normally it will invest
at least 65% of its assets in common stocks. The lowest rated debt obligation in
which the Fund will invest will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch").
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of foreign
issuers which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depository receipts. Securities of a
foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability, or other national or international
restrictions. As a matter of practice, the Fund will not invest in the
securities of a foreign issuer if any such risk appears to the investment
adviser to be substantial. The Fund may not invest more than 5% of its assets in
securities of foreign issuers. For additional information on the risks of
foreign securities, see "Investments in Foreign Securities" under the section
"Portfolio Investments and Strategies."
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, prevailing market conditions warrant, the Fund may, for
temporary defensive purposes, invest in:
* short-term money market instruments;
* securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies, or instrumentalities; and
* repurchase agreements.
ARROW FIXED INCOME PORTFOLIO
The investment objective of the Fund is current income. The Fund pursues its
objective by investing in a portfolio of U.S. government and investment grade
corporate securities. Under normal circumstances, at least 65% of the value of
the Fund's total assets will be invested in a diversified portfolio of
investment grade fixed income securities.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. The Fund will only invest its assets in securities which
are rated at the time of purchase Baa or higher by Moody's or BBB or higher by
S&P or Fitch or which, if unrated, are deemed to be of comparable quality by the
Fund's investment adviser.
6
<PAGE> 9
The Fund's debt securities may include fixed rate, adjustable rate or stripped
bonds, debentures, notes, U.S. government securities, mortgage-related
asset-backed securities and debt securities convertible into, or exchangeable
for, preferred or common stock.
The Fund may also invest in preferred stock and units, which are debt securities
with stock or warrants to buy stock attached. In addition, the Fund may write
covered call and put options and may purchase call and put options. The Fund
will not invest in securities judged to be speculative or of poor quality, but
may invest in investment grade securities as described above.
When the adviser selects securities for the Fund, it will consider the ratings
of Moody's, S&P or Fitch assigned to various debt securities. In making its
investment decisions, the adviser also will consider many factors other than
current yield, including the preservation of capital, the potential for
realizing capital appreciation, maturity and yield to maturity. The adviser will
adjust its investments in particular securities or in types of debt securities
in response to its appraisal of changing economic conditions and trends. The
Fund may sell one security and purchase another security of comparable quality
and maturity to take advantage of what it believes to be short-term
differentials in market values or yield disparities.
The acceptable investments include, but are not limited to:
* domestic issues of corporate debt obligations having floating or fixed
rates of interest and rated at the time of purchase in one of the four
highest categories by a nationally recognized statistical rating
organization ("NRSRO") (rated Aaa, Aa, A, or Baa by Moody's; AAA, AA, A or
BBB by S&P or Fitch), or which, if unrated, are of comparable quality in
the judgment of the adviser;
* mortgage-related asset-backed securities, rated in one of the three
highest categories by a NRSRO, or which are of comparable quality in the
judgment of the adviser;
* notes, bonds, and discount notes of the U.S. government or its agencies or
instrumentalities;
* commercial paper which has received ratings in one of the top two
categories by one or more NRSRO. Such ratings would include: Prime-1 or
Prime-2 by Moody's, A-1 or A-2 by S&P, or F-1 or F-2 by Fitch;
* time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"),
both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"), including certificates of deposit and other time
deposits issued by foreign branches of FDIC insured banks;
* debt securities of foreign governments, foreign governmental agencies or
supranational institutions. In addition, the Fund will also invest in
investment quality debt securities issued by foreign corporations. These
securities will be rated in one of the four highest rating categories by
the above-mentioned NRSROs, or, if unrated, will be of comparable quality
in the judgment of the adviser. (The Fund may not invest more than 10% of
its assets in foreign securities.) For additional information on the risks
of foreign securities, see "Investments in Foreign Securities" under the
section "Portfolio Investments and Strategies"; and
* repurchase agreements collateralized by eligible investments.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
invests are either guaranteed or issued by the U.S. government, its
agencies, or instrumentalities. These securities include, but are not
limited to:
* direct obligations of the U.S. Treasury such as U.S. Treasury bills, notes
and bonds;
* notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities, supported by the full faith and credit of
the United States;
* notes, bonds, and discount notes of U.S. government agencies or
instrumentalities which receive or have access to federal funding; and
* notes, bonds, and discount notes of other U.S. government
instrumentalities supported only by the credit of the instrumentalities.
7
<PAGE> 10
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by:
* the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
* the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
* the credit of the agency or instrumentality.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are a form of asset-backed
security issued by single-purpose stand-alone finance subsidiaries or trusts of
financial institutions, government agencies, investment bankers, or companies
related to the construction industry. The Fund will invest only in CMOs which
are rated AAA by an NRSRO, and which may be: (a) collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or (c) securities in which the proceeds of the issuance
are invested in mortgage securities and payment of the principal and interest is
supported by the credit of any agency or instrumentality of the U.S. government.
Because the mortgages underlying mortgage-backed securities often may be prepaid
without penalty or premium, mortgage-backed securities are generally subject to
higher prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages to
take advantage of the more favorable rates. Depending upon market conditions,
the yield that the Fund receives from the reinvestment of such prepayments, or
any scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less effective
means of "locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized mortgage
obligations, prepayments may be allocated to one tranche of securities ahead of
other tranches, in order to reduce the risk of prepayment for the other
tranches. Prepayments may result in a capital loss to the Fund to the extent
that the prepaid mortgage securities were purchased at a market premium over
their stated principal amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
ARROW MUNICIPAL INCOME PORTFOLIO
The investment objective of the Fund is current income which is exempt from
federal regular income tax. Federal regular income tax does not include the
federal individual alternative minimum tax or the federal alternative minimum
tax for corporations. Interest income of the Fund that is exempt from federal
regular income tax retains its tax-free status when distributed to the Fund's
shareholders.
INVESTMENT POLICIES
ACCEPTABLE INVESTMENTS. As a matter of fundamental policy, which may not be
charged without shareholder approval, the Fund pursues its investment objective
by investing at least 80% of its total assets in a diversified portfolio of
municipal securities. The municipal securities in which the Fund invests are:
* debt obligations issued by or on behalf of any state, territory, or
possession of the United States, including the District of Columbia, or
any political subdivision of any of these; and
* participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond counsel
for the issuers or in the opinion of officers of the Fund and/or the
investment adviser to the Fund, exempt from federal regular income tax.
It is likely that shareholders who are subject to alternative minimum tax will
be required to include interest from a portion of the municipal securities owned
by the Fund in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
8
<PAGE> 11
CHARACTERISTICS. The municipal securities in which the Fund invests are:
* rated within the four highest ratings for municipal securities by Moody's
(Aaa, Aa, A or Baa), or by S&P or Fitch (AAA, AA, A or BBB);
* guaranteed at the time of purchase by the U.S. government as to the
payment of principal and interest;
* fully collateralized by an escrow of U.S. government or other securities
acceptable to the Fund's adviser;
* rated at the time of purchase within Moody's highest short-term municipal
obligation rating (MIG1/VMIG1), Moody's highest municipal commercial paper
rating (P-1), S&P's highest municipal commercial paper rating (SP-1) or
Fitch's highest short-term municipal obligation rating (F1+);
* unrated if, at the time of purchase, longer term municipal securities of
the issuer are rated Baa or better by Moody's or BBB or better by S&P or
Fitch; or
* determined by the Fund's investment adviser to be equivalent to municipal
securities which are rated Baa or better by Moody's or BBB or better by
S&P or Fitch.
PARTICIPATION INTERESTS. The Fund may purchase participation interests from
financial institutions such as commercial banks, savings associations, and
insurance companies. These participation interests give the Fund an undivided
interest in municipal securities. The financial institutions from which the Fund
purchases participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests are
of high quality. The Trustees will determine that participation interests meet
the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the municipal securities which the
Fund purchases may have variable interest rates. Variable interest rates are
normally based on a municipal interest index or a published interest rate or
interest rate index.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They are
also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities. Municipal securities include industrial development bonds issued by
or on behalf of public authorities to provide financing aid to acquire sites or
construct and equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate within
the sponsoring communities and thereby increases local employment. The two
principal classifications of municipal securities are "general obligation" and
"revenue" bonds. General obligation bonds are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Interest on and principal of revenue bonds, however, are payable only
from the revenue generated by the facility financed by the bond or other
specified sources of revenue. Revenue bonds do not represent a pledge of credit
or create any debt of or charge against the general revenues of a municipality
or public authority. Industrial development bonds are typically classified as
revenue bonds.
The Fund may invest more than 25% of the value of its assets in industrial
development bonds. The Fund will not invest more than 10% of its net assets in
municipal securities subject to restriction on resale.
INVESTMENT RISKS. Yields on municipal securities depend on a variety of factors,
including: the general conditions of the money market and the taxable and
municipal bond markets; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
municipal securities and participation interests, or the guarantors of either,
to meet their obligations for the payment of interest and principal when due.
PORTFOLIO INVESTMENTS AND STRATEGIES
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which a Fund sells a money market instrument for a
percentage of its cash value with an agreement to buy it back on a set
9
<PAGE> 12
date) or pledge securities except, under certain circumstances, a Fund may
borrow money up to one-third of the value of its total assets and pledge assets
as necessary to secure such borrowings. This policy cannot be changed without
the approval of holders of a majority of a Fund's shares.
DIVERSIFICATION
With respect to 75% of the value of its total assets, a Fund will not invest
more than 5% in the securities of any one issuer or acquire more than 10% of the
outstanding voting securities of any one issuer, other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by U.S.
government securities. This policy cannot be changed without the approval of
holders of a majority of a Fund's shares.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. A Fund will limit investments in illiquid securities (including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice) to no
more than 15% of its net assets.
A Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law, and is generally sold to institutional investors, such as one of the Funds,
who agree that they are purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section 4(2) commercial paper and
certain other restricted securities, which meet the criteria for liquidity
established by the Trustees, are quite liquid. Therefore, the Funds intend to
treat these securities as liquid and not subject to the investment limitation
applicable to illiquid securities. In addition, because these securities are
liquid, the Funds will not subject such securities to the limitation otherwise
applicable to restricted securities.
REPURCHASE AGREEMENTS
The securities in which the Funds invest may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, that Fund could
receive less than the repurchase price on any sale of such securities. The Funds
will only enter into repurchase agreements with banks and other recognized
financial institutions such as broker/dealers which are deemed by the Fund's
adviser to be creditworthy pursuant to guidelines established by the Trustees.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies, but a Fund
will not own more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of its total assets in any one
investment company, or invest more than 10% of its total assets in investment
companies in general. The Funds will invest in other investment companies
primarily for the purpose of investing short-term cash which has not yet been
invested in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment companies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market value of the securities purchased may vary
from the purchase prices.
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<PAGE> 13
The Fund may dispose of a commitment prior to settlement if the adviser deems it
appropriate to do so. In addition, the Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Fund may realize short-term profits or losses upon the sale of such
commitments.
PUT AND CALL OPTIONS
Each Fund may purchase put options on portfolio securities. These options will
be used as a hedge to attempt to protect securities which a Fund holds against
decreases in value. These Funds may also write covered call options on all or
any portion of their portfolio to generate income. A Fund may only write call
options on securities either held in its portfolio, or which it has the right to
obtain without payment of further consideration, or for which it has segregated
cash or U.S. government securities in the amount of any additional
consideration.
A Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by a Fund are not traded on an
exchange. A Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings associations)
deemed creditworthy by the investment adviser.
Over-the-counter options are two-party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. A Fund will not buy call options
or write put options, other than to close out open option positions, without
further notification to shareholders.
RISKS. When a Fund writes a call option, the Fund risks not participating in any
rise in the value of the underlying security. In addition, when a Fund purchases
puts on financial futures contracts to protect against declines in prices of
portfolio securities, there is a risk that the prices of the securities subject
to the futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures contract and its
corresponding put to react differently than the portfolio securities to market
changes. In addition, the Fund's investment adviser could be incorrect in its
expectations about the direction or extent of market factors such as interest
rate movements. In such an event, the Fund may lose the purchase price of the
put option. Finally, it is not certain that a secondary market for options will
exist at all times. Although the investment adviser will consider liquidity
before entering into option transactions, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option or at any
particular time. The Fund's ability to establish and close out option positions
depends on this secondary market.
FUTURES AND OPTIONS ON FUTURES
The Equity and Fixed Income Funds may purchase and sell futures contracts to
hedge against the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions. Futures contracts
call for the delivery of particular debt instruments at a certain time in the
future. The seller of the contract agrees to make delivery of the type of
instrument called for in the contract and the buyer agrees to take delivery of
the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the differences between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
The Equity and Fixed Income Funds may also write call options and purchase put
options on futures contracts as a hedge to attempt to protect their portfolio
securities against decreases in value. When a Fund writes a call option on a
futures contract, it is undertaking the obligation of selling a futures contract
at a fixed price at any time during a specified period if the option is
exercised. Conversely, as purchaser of a put option on a futures contract, a
Fund is entitled (but not obligated) to sell a futures contract at the fixed
price during the life of the option.
The Equity and Fixed Income Funds may also write put options and purchase call
options on futures contracts as a hedge against rising purchase prices of
portfolio securities. The Funds will use these transactions to attempt to
protect its ability to purchase portfolio securities in the future at price
levels existing at the time it enters into the transactions. When a Fund
11
<PAGE> 14
writes a put option on a futures contract, it is undertaking to buy a particular
futures contract at a fixed price at any time during a specified period if the
option is exercised. As a purchaser of a call option on a futures contract, the
Funds are entitled (but not obligated) to purchase a futures contract at a fixed
price at any time during the life of the option.
The Equity and Fixed Income Funds may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on a Fund's existing futures positions and premiums paid for related
options would exceed 5% of the market value of a Fund's total assets. When a
Fund purchases futures contracts, an amount of cash and cash equivalents, equal
to the underlying commodity value of the futures contracts (less any related
margin deposits), will be deposited in a segregated account with the custodian
(or the broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contracts are unleveraged. When a Fund sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
RISKS. When a Fund uses futures and options on futures as hedging devices, there
is a risk that the prices of the securities subject to the futures contracts may
not correlate perfectly with the prices of the securities in that Fund's
portfolio. This may cause the futures contract and any related options to react
differently than the portfolio securities to market changes. In addition, the
investment adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events, a Fund
may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the investment adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. A Fund's
ability to establish and close out futures and options positions depends on this
secondary market.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Equity Fund and Fixed Income Fund
may lend portfolio securities on a short-term or a long-term basis, or both, up
to one-third of the value of their total assets to broker/dealers, banks, or
other institutional borrowers of securities. This policy cannot be changed
without the approval of holders of a majority of a Fund's shares. The Funds will
only enter into loan arrangements with broker/dealers, banks, or other
institutions which the adviser has determined are creditworthy under guidelines
established by the Trustees and will receive collateral in the form of cash or
U.S. government securities equal to at least 100% of the value of the securities
loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Funds on a timely basis and the Funds may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
INVESTMENTS IN FOREIGN SECURITIES
Investments in foreign securities involve special risks that differ from those
associated with investments in domestic securities. The risks associated with
investments in foreign securities relate to political and economic developments
abroad, as well as those that result from the differences between the regulation
of domestic securities and issuers and foreign securities and issuers. These
risks may include, but are not limited to, expropriation, confiscatory taxation,
currency fluctuations, withholding taxes on interest, limitations on the use or
transfer of Fund assets, political or social instability and adverse diplomatic
developments. In addition, there are restrictions on foreign investments in
other jurisdictions and there tends to be difficulty in obtaining judgments from
abroad and effecting repatriation of capital invested abroad. Delays could occur
in settlement of foreign transactions, which could adversely affect shareholder
equity. Moreover, individual foreign economies may differ favorable or
unfavorably from the domestic economy in such respects as growth of gross
national product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
RATINGS
Securities rated Baa or BBB by an NRSRO have speculative characteristics.
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<PAGE> 15
Changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than higher rated
bonds. Downgrades will be evaluated on a case by case basis by the adviser. The
adviser will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. A description of the ratings
categories is contained in the Appendix to the Combined Statement of Additional
Information.
ARROW FUNDS INFORMATION
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the Trust's business affairs and for exercising all the
Trust's powers except those reserved for the shareholders. The Executive
Committee of the Board of Trustees handles the Board's responsibilities between
meetings of the Board.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Funds are made by Mark Twain Bank, the Funds'
adviser (the "Adviser"), subject to direction by the Trustees. The Adviser
continually conducts investment research and supervision for each Fund and is
responsible for the purchase or sale of portfolio instruments, for which it
receives an annual fee from the assets of each Fund.
Mark Twain Bank acts as the investment adviser for the Funds. Mark Twain
Brokerage Services, Inc. is a wholly owned subsidiary of Mark Twain Bank.
Possible conflicts of interest could arise between potential investors in the
Funds due to the affiliation of Mark Twain Bank and Mark Twain Brokerage
Services, Inc. and/or their existing clients. Please read this prospectus
carefully before you invest or send money.
ADVISORY FEES. The Adviser receives an investment advisory fee at annual rates
equal to percentages of the relevant Fund's average daily net assets as follows:
the Equity Fund -- 0.75%; the Fixed Income Fund -- 0.60%; and the Municipal
Income Fund -- 0.70%. The fee paid by the Equity Fund, while higher than the
advisory fee paid by other mutual funds in general, is comparable to fees paid
by many mutual funds with similar objectives and policies. The Adviser may
voluntarily choose to waive a portion of its fees or reimburse the Funds for
certain other expenses, but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.
ADVISER'S BACKGROUND. Mark Twain Bank, a Missouri state chartered bank, is a
wholly-owned subsidiary of Mark Twain Bancshares, Inc., a bank holding company
organized under the laws of Missouri. Mark Twain Bank is a commercial bank
offering a wide range of banking services to its customers. As of September 30,
1996, Mark Twain Bank managed assets in excess of $1.4 billion on a
discretionary basis and provided custody services for additional assets in
excess of $1.4 billion. Mark Twain Bank has advised the Trust since 1992. In
addition to the Arrow Funds, the Trust Division manages two commingled funds
with total assets of over $16 million. As part of their regular banking
operations, Mark Twain Bank may make loans to public companies. Thus, it may be
possible, from time to time, for a Fund to hold or acquire the securities of
issuers which are also lending clients of Mark Twain Bank. The lending
relationship will not be a factor in the selection of securities.
On October 27, 1996, Mark Twain Bancshares Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain Bancshares
Inc. would merge with Mercantile Bancorp Inc., a bank holding company
headquartered in St. Louis (the "Merger"). As a result, upon completion of the
Merger, all existing subsidiaries of Mark Twain Bancshares Inc., including Mark
Twain Bank, will be merged into Mercantile Bancorp Inc. and its subsidiaries.
The Merger is expected to be completed in the second quarter of 1997, pending
approval by both companies' shareholders as well as the receipt of various
regulatory approvals and the completion of other closing conditions.
The Merger will result in a termination of the Adviser's current investment
advisory contract with the Arrow Funds. Accordingly, prior to the completion of
the Merger, the Trustees of the Funds will meet to consider matters relating the
Merger. It is anticipated that a Special Meeting of Fund shareholders will be
held to seek, among other things, approval of a new investment advisory contract
with a subsidiary of Mercantile Bancorp Inc. It is anticipated that shareholders
of a certain record date in 1997 will receive proxy materials discussing these
matters in detail, and will be entitled to vote at the Special Meeting.
Carl C. Enloe has managed the Equity Fund since its inception, December 1992.
Mr. Enloe joined Mark Twain Bank, the Fund's adviser, in 1987, as head of
investments. Prior to joining Mark Twain, he was head of investments at another
major Missouri bank for 17 years. He served as senior portfolio
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<PAGE> 16
manager at a private investment company and an analyst at a member New York
Stock Exchange firm. He is a graduate of the University of Missouri.
Randy J. Schofield has managed the Fixed Income Fund since its inception,
December 1992. Mr. Schofield joined Mark Twain Bank in 1992 as Vice
President of the Fund's investment adviser. Prior to joining Mark Twain, he
was head of the investment department at a Missouri trust company for six
years. Mr. Schofield received his B.S. and B.A. from Central Missouri State
University.
Larry E. Kaestner has managed the Municipal Income Fund since its inception,
February 1, 1993. Mr. Kaestner joined Mark Twain Bank in 1988 as Vice
President of the Fund's investment adviser. Mr. Kaestner has in excess of 20
years of investment advisory and portfolio management experience, including
investment positions at two other major financial institutions. Mr. Kaestner
is a graduate of Southern Illinois University.
DISTRIBUTION OF SHARES OF THE FUNDS
Federated Securities Corp. serves as the principal distributor for shares of
the Funds. It is a Pennsylvania corporation organized on November 14, 1969,
and is the distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act Rule 12b-1 (the "Plan"), the Funds will pay to the
distributor an amount computed at an annual rate of 0.25% of the average daily
net asset value of each Fund's shares to finance any activity which is
principally intended to result in the sale of shares subject to the Plan.
The distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the distributor may, by notice to the Trust, voluntarily declare to be
effective.
The distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the distributor.
The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the distributor, including amounts expended by the
distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the distributor's overhead expenses. However, the distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.
OTHER PAYMENTS TO FINANCIAL INSTITUTIONS. The distributor may also pay
administrators a fee for providing distribution or administrative services. This
fee is in addition to the amounts paid under the Plan and, if paid, will be
reimbursed by the Adviser and not the Fund.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides administrative personnel and services (including
certain legal and financial reporting services) necessary to
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<PAGE> 17
operate each Fund. Federated Administrative Services provides these at an annual
rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS OF THE FUNDS
<S> <C>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund. Federated Administrative Services may choose voluntarily to reimburse
or waive a portion of its fee at any time.
CUSTODIAN. Mark Twain Bank, St. Louis, Missouri, is custodian for the
securities and cash of the Funds.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO RECORDKEEPER. Federated
Services Company, Boston, Massachusetts, a subsidiary of Federated Investors, is
transfer agent for the shares of the Funds and dividend disbursing agent for the
Funds. Federated Services Company also provides certain accounting and
recordkeeping services with respect to the portfolio investments of the Funds.
INDEPENDENT AUDITORS. The independent auditors for the Funds are KPMG Peat
Marwick LLP, Pittsburgh, Pennsylvania.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. In selecting among firms
believed to meet these criteria, the Adviser may give consideration to those
firms which have sold or are selling shares of a Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Board of Trustees.
Notwithstanding the foregoing, to the extent consistent with applicable
provisions of the Investment Company Act of 1940, Rule 17e-1, and other rules
and exemptions adopted by the Securities and Exchange Commission (the "SEC")
under that Act, the Board of Trustees of the Trust has determined that all
orders for transactions in securities or options on behalf of the Equity Fund
will be placed by Mark Twain Bank with broker/dealers selected by Mark Twain
Bank, including Mark Twain Brokerage Services, Inc. and other affiliated
brokers. The Equity Fund may use a Mark Twain Brokerage Services, Inc.
affiliated broker in a portfolio transaction when Mark Twain Bank believes that
the affiliated broker's charge for the transaction does not exceed usual and
customary levels and is likely to result in price and execution at least as
favorable as those of other qualified broker/dealers.
NET ASSET VALUE
The net asset value per share of each Fund fluctuates. It is determined by
dividing the sum of the market value of all securities and other assets, less
liabilities, by the number of shares outstanding.
INVESTING IN THE FUNDS
SHARE PURCHASES
Shares of the Funds are sold on days on which the New York Stock Exchange and
the Federal Reserve Wire System are open for business. A customer of Mark Twain
Bancshares, Inc. may purchase shares of the Funds through the appropriate
subsidiary of Mark Twain Bancshares, Inc. as described below. In connection with
the sale of shares of the Funds, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. The Funds reserve
the right to reject any purchase request.
THROUGH MARK TWAIN. To place an order for shares, investors may contact a broker
(1-800-866-6040), or a private banker (1-800-436-3666), as appropriate. Trust
customers may contact their trust officer (314-889-0715). Texas residents must
telephone Federated Services Company at 1-800-618-8573. Purchase orders must be
received by Mark Twain before 3:00 p.m. (St. Louis time) in order for shares to
be purchased at that day's price. Payment may be made to Mark Twain either by
check or federal funds. Purchases by check are considered received after payment
by check is converted into federal funds and received by Mark Twain. When
payment is made with federal funds, the order is considered received when
federal funds are received by Mark
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<PAGE> 18
Twain. Investors not purchasing through Mark Twain should consult their
financial institutions for wiring instructions.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in a Fund by an investor is $1,000 unless the
investment is in an IRA, in which case the minimum initial investment is
$250. Employees of Mark Twain Bancshares, Inc. and its subsidiaries, their
spouses and children under 21 may purchase shares with a minimum initial
investment of $500. Subsequent investments by any investor must be in
amounts of at least $100.
WHAT SHARES COST
Shares of the Funds are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
PERCENTAGE OF PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
<S> <C> <C>
Less than $100,000 3.50% 3.63%
$100,000 but less than $250,000 2.50% 2.56%
$250,000 but less than $1 million 1.50% 1.52%
$1 million or more 0.00% 0.00%
</TABLE>
The net asset value for each of the Funds is determined at the close of trading
(normally 4:00 p.m. New York time) on the New York Stock Exchange, Monday
through Friday, except on: (i) days on which there are not sufficient changes in
the value of a Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
PURCHASES AT NET ASSET VALUE. Shares of the Funds may be purchased at net asset
value, without a sales charge, by current and retired employees of Mark Twain
Bancshares, Inc. and its subsidiaries, Arrow Funds' Trustees, and their spouses
and children under 21, and all qualified retirement plans administered by Mark
Twain Bank. In addition, no sales charge is imposed for Fund shares purchased
through the Mark Twain Bank Trust Department or on customers purchasing pursuant
to a Mark Twain Brokerage Services, Inc. wrap fee program. Shareholders who wish
to obtain more information about the wrap fee program may contact Mark Twain
Brokerage Services, Inc.
DEALER CONCESSIONS. For sales of shares of a Fund, a dealer will normally
receive up to 88% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, the distributor will, periodically, uniformly offer to pay additional
amounts in the form of cash, or promotional incentives consisting of trips to
sales seminars at luxury resorts, tickets or other items, to all dealers selling
shares of a Fund. Such payments, all or a portion of which may be paid from the
sales charge the distributor normally retains or any other source available to
it, will be predicated upon the amount of shares of a Fund that are sold by that
dealer. The sales charge for shares sold other then through registered
broker/dealers will be retained by the distributor. The distributor may pay fees
to banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of shares.
REDUCING/ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of shares through:
* quantity discounts and accumulated purchases;
* signing a 13-month letter of intent;
* using the reinvestment privilege; or
* concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases of a Fund's shares reduce the sales charge paid. The
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<PAGE> 19
distributor will combine purchases made on the same day by the investors, their
spouses, and the investor's children under age 21 when it calculates the sales
charge. In addition, the sales charge, if applicable, is reduced for purchases
made at one time by a trustee or fiduciary for a single trust estate or a single
fiduciary account.
If an additional purchase of shares of a Fund is made, the distributor will
aggregate such additional purchases with previous purchases of shares of the
Fund, provided the prior purchase is still invested in the Fund. For example, if
a shareholder already owns shares having a current value at the public offering
price of $90,000 and he purchases $10,000 more at the current public offering
price, the sales charge on the additional purchase according to the schedule now
in effect would be 2.50%, not 3.50%.
To receive the sales charge reduction, the distributor must be notified in
writing by the shareholder or by Mark Twain Brokerage Services, Inc., or Mark
Twain Bank at the time the purchase is made that Fund shares are already owned
or that purchases are being combined. The Fund will reduce the sales charge
after it confirms the purchase.
LETTER OF INTENT. If a shareholder intends to purchase at least $100,000 of Fund
shares over the next 13 months, the sales charge may be reduced by signing a
letter of intent to that effect. This letter of intent includes a provision for
a sales charge adjustment depending on the amount actually purchased within the
13-month period and a provision for the Funds' custodian to hold up to 3.50% of
the total amount intended to be purchased in escrow (in shares of the Fund)
until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at the
end of the 13-month period unless the amount specified in the letter of intent
is not purchased. In this event, an appropriate number of escrowed shares may be
redeemed in order to realize the difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase shares, but
if he does, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. The letter may be dated
as of a prior date to include any purchases made within the past 90 days toward
the dollar fulfillment of the letter of intent. Prior trade prices will not be
adjusted.
REINVESTMENT PRIVILEGE. If shares in a Fund have been redeemed, the shareholder
has a one-time right, within six months, to reinvest the redemption proceeds at
the next-determined net asset value without any sales charge. The distributor
must be notified by the shareholder in writing or by Mark Twain Brokerage
Services, Inc. of the reinvestment, in order to eliminate a sales charge. If the
shareholder redeems his shares in a Fund, there may be tax consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge reduction, a
shareholder has the privilege of combining concurrent purchases of two or more
Funds in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in shares of one of the
Funds of the Trust with a sales charge, and $70,000 in shares of another Fund
with a sales charge, the sales charge would be reduced on both purchases.
To receive this sales charge reduction, Mark Twain Brokerage Services, Inc.,
Mark Twain Bank, or the distributor must be notified by the shareholder in
writing at the time the concurrent purchases are made. The Funds will reduce the
sales charge after they confirm the purchases.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received by the Fund, plus any applicable sales charge. A shareholder may apply
for participation in this program through Mark Twain Brokerage Services, Inc.,
Mark Twain Bank, or directly through the Fund.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting the Fund in writing.
Detailed statements that include account balances, information on each purchase
or redemption, and a report of dividends paid are sent to
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<PAGE> 20
shareholders not less frequently than quarterly.
DIVIDENDS AND DISTRIBUTIONS
With respect to the Fixed Income Fund and the Municipal Income Fund, dividends
are declared daily and paid monthly. With respect to the Equity Fund, dividends
are declared and paid quarterly.
Dividends are declared just prior to determining net asset value. Capital gains
realized by a Fund, if any, will be distributed at least once every 12 months.
Dividends and capital gains will be reinvested in additional shares on payment
dates at the ex-dividend date net asset value without a sales charge unless cash
payments are requested by shareholders by writing to the appropriate Fund or
Mark Twain, as appropriate.
EXCHANGE PRIVILEGE
A shareholder may exchange shares of one Fund for shares of any of the other
Funds in the Trust by calling or sending a written request to Mark Twain
Brokerage Services, Inc. or Mark Twain Bank.
Orders to exchange shares of one Fund for shares of any of the other Funds will
be executed by redeeming the shares owned at net asset value and purchasing
shares of any of the other Funds at the net asset value determined after the
exchange request is received. Orders for exchanges received by a Fund prior to
3:00 p.m. (St. Louis time) on any day that the Fund is open for business will be
executed as of the close of business that day. Orders for exchanges received
after 3:00 p.m. (St. Louis time) on any business day will be executed at the
close of the next business day. Telephone exchange instructions may be recorded.
When exchanging into and out of shares of the Funds in the Trust, shareholders
who have paid a sales charge once upon purchasing shares of any Fund, including
those shares obtained through the reinvestment of dividends, will not have to
pay a sales charge again on an exchange.
An excessive number of exchanges may be disadvantageous to the Trust. Therefore
the Trust, in addition to its right to reject any exchange, reserves the right
to modify or terminate the exchange privilege of any shareholder who makes more
than six exchanges of shares of the Funds in a year, or three in a calendar
quarter. Shareholders would be notified prior to any modification or
termination.
An exchange order must comply with the requirements for a redemption and must
specify the dollar value or number of shares to be exchanged. Exchanges are
subject to the minimum initial investment requirement of the Fund being
acquired. An exchange constitutes a sale for federal income tax purposes. Before
the exchange, a shareholder must receive a prospectus of the Fund for which the
exchange is being made.
If reasonable procedures are not followed by the Funds, they may be liable for
losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
Each Fund redeems shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes its net asset value. Telephone or written requests for redemption
must be received in proper form as described below and can be made through Mark
Twain by its respective customers or directly through the Fund by all other
investors.
THROUGH MARK TWAIN
BY TELEPHONE. In order to redeem shares, a shareholder may contact a broker
(1-800-866-6040) or private banker (1-800-436-3666), as appropriate. Trust
customers may contact their trust officer (314-889-0715). Telephone
redemption instructions may be recorded.
For calls received before 3:00 p.m. (St. Louis time), proceeds will normally be
wired within five business days to the shareholder's account at Mark Twain Bank,
or a check will be sent to the address of record. In no event will proceeds be
wired or a check sent more than seven days after a proper request for redemption
has been received. If at any time a Fund shall determine it necessary to
determine or modify this method of redemption, shareholders would be promptly
notified.
An authorization form permitting a Fund to accept telephone requests must first
be completed. Authorization forms and information on this service are available
from Mark Twain Brokerage Services, Inc., Mark Twain Bank, or the distributor.
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<PAGE> 21
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
If reasonable procedures are not followed by the Funds, they may be liable for
losses due to unauthorized or fraudulent telephone instructions.
BY MAIL. A shareholder who is a customer of Mark Twain Brokerage Services,
Inc. may redeem shares by sending a written request to:
Mark Twain Brokerage Services, Inc.
Attn: Arrow Funds
1630 South Lindbergh
St. Louis, MO 63131
A shareholder who is a private banking customer of Mark Twain Bank may redeem
shares by sending a written request to :
Mark Twain Bank
Attn: Private Banking
1630 South Lindbergh
St. Louis, MO 63131
The written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested and the proper
endorsement. If share certificates have been issued, they must be properly
endorsed and should be sent by registered or certified mail with the written
request. Shareholders should call Mark Twain Brokerage Services, Inc., or Mark
Twain Bank for assistance in redeeming by mail.
Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the appropriate Fund, or a redemption payable
other than to the shareholder of record must have their signatures guaranteed
by:
* a trust company or commercial bank whose deposits are insured by the BIF,
which is administered by the FDIC;
* a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
* a savings and loan association or savings bank whose deposits are insured
by the SAIF, which is administered by the FDIC; or
* any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and their transfer agent reserve the
right to amend these standards at any time without notice.
RECEIVING PAYMENT. Normally, a check for the proceeds is mailed to the
shareholder within one business day, but in no event more than seven days, after
receipt of a proper written redemption request.
Redemption proceeds from purchases made by check are not available for seven
calendar days.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Fund shares
are redeemed to provide for periodic withdrawal payments in an amount directed
by the shareholder not less than $100. Depending upon the amount of the
withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to Fund shares, and the fluctuation of the net asset
value of Fund shares redeemed under this program, redemptions may reduce, and
eventually deplete, the shareholder's investment in a Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in a Fund. To be eligible to participate in this
program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through Mark Twain
Brokerage Services, Inc. Due to the fact that shares are sold with a sales
charge, it is not advisable for shareholders to be purchasing shares while
participating in this program.
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<PAGE> 22
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $1,000.
Before redeeming shares to close an account, a Fund will notify the shareholder
in writing and allow the shareholder 30 days to purchase additional shares to
meet the minimum requirement.
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in the
Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances. As of November 4, 1996, the Trust Division of Mark
Twain Bank, acting in various capacities for numerous accounts, was the owner of
record of approximately 3,393,639 shares (90.54%) of the Equity Fund, 2,893,146
shares (98.21%) of the Fixed Income Fund, and 1,359,293 shares (96.04%) of the
Municipal Income Fund, and therefore, may, for certain purposes, be deemed to
control the Funds and be able to affect the outcome of certain matters presented
for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. The Trustees shall call a special meeting of shareholders upon the
written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require inclusion of this disclaimer in each agreement, obligation, or
instrument the Trust or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956 or
any affiliate thereof from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
and from issuing, underwriting, selling or distributing securities in general.
Such laws and regulations do not prohibit such a holding company or affiliate
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 their customers.
Some entities providing services to the Fund are subject to such banking laws
and regulations. They believe that they may perform those services for any Fund
contemplated by any agreement entered into with the Trust without violating
those laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent these entities from continuing to perform all or a part of the
above services for its customers and/or a Fund. In such event, changes in the
operation of a Fund may occur, including the possible alteration or termination
of any automatic or other Fund share investment or redemption services then
being provided by Mark Twain, and the Trustees would consider alternative means
of continuing available investment services. It is not expected that a Fund's
shareholders would suffer any
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<PAGE> 23
adverse financial consequences as a result of any of these occurrences.
TAX INFORMATION
FEDERAL INCOME TAX
The Funds will pay no federal income tax because each Fund expects to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
ADDITIONAL TAX INFORMATION FOR MUNICIPAL INCOME FUND
Shareholders are not required to pay the federal regular income tax on any
dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, as amended,
dividends representing net interest earned on certain "private activity" bonds
issued after August 7, 1986, may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations. The Fund may purchase all types of municipal bonds, including
private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares.
OTHER STATE AND LOCAL TAXES. Distributions representing net interest received on
tax-exempt municipal securities are not necessarily free from income taxes of
any state or local taxing authority. State laws differ on this issue and
shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
From time to time the Funds may advertise total return and yield. In addition,
the Municipal Income Fund may advertise its tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by each Fund
over a thirty-day period by the maximum offering price per share of each Fund on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
each Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
For the Municipal Income Fund, the tax-equivalent yield is calculated similarly
to the yield, but is adjusted to reflect the taxable yield that the Fund would
have had to earn to equal its actual yield, assuming a specific tax rate.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return, yield, and tax-equivalent yield.
From time to time, advertisements for the Funds may refer to ratings, rankings,
and other information in certain financial publications
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<PAGE> 24
and/or compare the Funds' performance to certain indices.
ADDRESSES
Arrow Equity Portfolio Federated Investors Tower
Arrow Fixed Income Portfolio Pittsburgh, Pennsylvania 15222-3779
Arrow Municipal Income Portfolio
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Investment Adviser
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
Custodian
Mark Twain Bank 8820 Ladue Road
St. Louis, Missouri 63124
Transfer Agent and Dividend Disbursing Agent
and Portfolio Recordkeeper
Federated Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
Independent Public Accountants
KPMG Peat Marwick LLP One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
[Graphic}
Arrow Funds
Arrow Equity Portfolio
Arrow Fixed Income Portfolio
Arrow Municipal Income Portfolio
Prospectus
Diversified Portfolios of the Arrow Funds, an Open-End,
Management Investment Company
November 30, 1996
Mark Twain Bank
Investment Adviser
[Graphic]
Mark Twain Bank
Investment Adviser
Federated Securities Corp., Distributor.
Cusip 042749101
Cusip 042749200
Cusip 042749309
2110904A (11/96)
22
<PAGE> 1
EXHIBIT 17(h)
ARROW FUNDS
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information relates only to the following
three portfolios (the "Funds") of Arrow Funds (the "Trust"):
ARROW EQUITY PORTFOLIO;
ARROW FIXED INCOME PORTFOLIO; AND
ARROW MUNICIPAL INCOME PORTFOLIO.
This Combined Statement of Additional Information should be read with the
combined prospectus of the Funds dated November 30, 1996. This Statement is not
a prospectus itself. To receive a copy of the prospectus, write or call the
Funds.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated November 30, 1996
AEP Cusip 042749101
AFIP Cusip 042749200
AMIP Cusip 042749309
2110904B (11/96)
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE TRUST 2
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS 2
Types of Investments 2
Equity Fund 2
Fixed Income Fund 2
Municipal Income Fund 4
Portfolio Investments and Strategies 5
Futures and Options Transactions 5
Futures Contracts 5
Stock Index Options 5
Put Options on Financial Futures Contracts 6
Call Options on Financial Futures Contracts 6
"Margin" in Futures Transactions 6
Purchasing Put Options on Portfolio Securities 7
Writing Covered Call Options on Portfolio Securities 7
Over-The-Counter Options 7
Restricted and Illiquid Securities 7
Temporary Investments 7
Repurchase Agreements 8
Reverse Repurchase Agreements 8
When-Issued and Delayed Delivery Transactions 8
Lending of Portfolio Securities 8
Investments in Foreign Securities 9
Portfolio Turnover 9
Investment Limitations 9
Investing in Securities of Other Investment Companies 11
ARROW FUNDS MANAGEMENT 12
Fund Ownership 15
Trustees Compensation 16
Trustee Liability 16
INVESTMENT ADVISORY SERVICES 16
Adviser to the Funds 16
Advisory Fees 16
ADMINISTRATIVE SERVICES 17
CUSTODIAN 17
SHAREHOLDER SERVICING ARRANGEMENTS 17
BROKERAGE TRANSACTIONS 17
PURCHASING SHARES 18
Distribution Plan 18
Conversion to Federal Funds 19
DETERMINING NET ASSET VALUE 19
Determining Market Value of Securities 19
REDEEMING SHARES 19
Redemption in Kind 19
TAX STATUS 20
The Funds' Tax Status 20
Shareholders' Tax Status 20
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C>
Capital Gains 20
TOTAL RETURN 20
YIELD 20
TAX-EQUIVALENT YIELD 21
Tax-Equivalency Table 21
PERFORMANCE COMPARISONS 21
Economic and Market Information 22
FINANCIAL STATEMENTS 23
APPENDIX 23
</TABLE>
GENERAL INFORMATION ABOUT THE TRUST
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated July 1, 1992, under the name Mark Twain Funds. Effective October
1, 1994, the Trust changed its name to Arrow Funds and each of the three Funds
to which this Combined Statement of Additional Information relates changed their
respective names from the Mark Twain Equity Portfolio, the Mark Twain Fixed
Income Portfolio and the Mark Twain Municipal Income Portfolio to the Arrow
Equity Portfolio ("Equity Fund"), the Arrow Fixed Income Portfolio ("Fixed
Income Fund") and the Arrow Municipal Income Portfolio ("Municipal Income
Fund"), respectively.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The combined prospectus discusses the objective of each Fund and the policies it
employs to achieve that objective. The following discussion supplements the
description of the Funds' investment policies in the prospectus. The Funds'
respective investment objectives cannot be changed without approval of
shareholders. Unless otherwise indicated, the investment policies described
below may be changed by the Board of Trustees ("Trustees") without shareholder
approval. Shareholders will be notified before any material change in these
policies becomes effective.
TYPES OF INVESTMENTS
EQUITY FUND
The Equity Fund invests primarily in equity securities of companies selected
by the Fund's adviser on the basis of assessment of earnings and the risk
and volatility of each company's businesses.
CONVERTIBLE SECURITIES
The Equity Fund may invest in convertible securities.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise the
Fund may hold or trade convertible securities. In selecting convertible
securities for the Fund, the Fund's adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Fund's adviser considers numerous factors, including
the economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
WARRANTS
The Equity Fund may invest in warrants. Warrants are basically options to
purchase common stock at a specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years or
may be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the warrant
will expire as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend to
be greater than the percentage increase or decrease in the market price of the
optioned common stock.
FIXED INCOME FUND
The Fixed Income Fund invests primarily in a portfolio of investment grade
bonds. The Fund will only invest its assets in securities which are rated at the
time of purchase in one of the four highest categories by a nationally
2
<PAGE> 3
recognized statistical rating organization (Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's"), AAA, AA, A or BBB by Standard & Poor's
Ratings Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch") or deemed to
be of comparable quality by the Fund's investment adviser. The investment
portfolio consists of the following securities:
* corporate debt securities such as bonds, notes, and debentures;
* U.S. government securities, including U.S. Treasury bills, notes, and
bonds, and securities issued by agencies and instrumentalities of the U.S.
government;
* commercial paper; and
* repurchase agreements.
MORTGAGE-RELATED ASSET-BACKED SECURITIES
The Fund may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
CMOs, real estate mortgage investment conduits, or other securities
collateralized by or representing an interest in real estate mortgages
(collectively, "mortgage securities"). The mortgage securities primarily will
have interest rates which reset at least annually and generally will be issued
or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities with adjustable rather than fixed
interest rates. The ARMS in which the Fund invests are issued by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC")
and are actively traded. The underlying mortgages which collateralize ARMS
issued by GNMA are fully guaranteed by the Federal Housing Administration
("FHA") or Veterans Administration ("VA"), while those collateralizing ARMS
issued by FHLMC or FNMA are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
Like other U.S. government securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market value of
ARMS generally declines when interest rates rise and generally rises when
interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
RESETS OF INTEREST
The interest rates paid on the ARMS and CMOs in which the Fund invests generally
are readjusted at intervals of one year or less to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant maturity
Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury
Bill rate, rates on longer-term Treasury securities, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate (LIBOR), the
prime rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury Note rate, closely mirror changes in
market interest rate levels.
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Others tend to lag behind changes in market rate levels and tend to be somewhat
less volatile.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS and CMOs in which the Fund
invests will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down: (1) per
reset or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even though
the interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.
MUNICIPAL INCOME FUND
CHARACTERISTICS OF INVESTMENTS
The municipal securities in which the Fund invests have the characteristics set
forth in the prospectus.
An unrated municipal security will be determined by the Fund's adviser to meet
the quality standards established by the Trustees if it is of comparable quality
to municipal securities within the Fund's rating requirements. The Trustees
and/or the adviser consider the creditworthiness of the issuer of a municipal
security, the issuer of a participation interest if the Fund has the right to
demand payment from such issuer, or the guarantor of payment by either of those
issuers. The Fund is not required to sell a municipal security if the security's
rating is reduced below the required minimum subsequent to its purchase by the
Fund. The investment adviser considers this event, however, in its determination
of whether the Fund should continue to hold the security in its portfolio. If
ratings made by Moody's, S&P, or Fitch change because of changes in those
organizations or in their rating systems, the Fund will try to use comparable
ratings as standards in accordance with the investment policies described in the
Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of municipal securities are:
* municipal notes and bonds and tax-exempt commercial paper;
* serial notes and bonds sold with a series of maturity dates;
* tax anticipation notes and bonds sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
* bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
* prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds are assured through the first
call date by the deposit in escrow of U.S. government securities); and
* general obligation bonds secured by a municipality's pledge of taxation.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation interests
frequently provide or secure from other financial institutions irrevocable
letters of credit or guarantees and give the Fund the right to demand payment on
specified notice (normally with thirty days) from the issuer of the letter of
credit or guarantee. These financial institutions may charge certain fees in
connection with their repurchase commitments, including a fee equal to the
excess of the interest paid on the municipal securities over the negotiated
yield at which the participation interests were purchased by the Fund. By
purchasing a participation interest, the Fund is buying a security meeting the
maturity and quality requirements of the Fund and is also receiving the tax-free
benefits of the underlying securities.
In the acquisition of participation interests, the Fund's investment adviser
will consider the following quality factors:
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* a high-quality underlying municipal security (of which the Fund takes
possession); or
* a high-quality issuer of the participation interest; or
* a guarantee or letter of credit from a high-quality financial institution
supporting the participation interest.
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations.
Many municipal securities with variable interest rates purchased by the Fund are
subject to repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the municipal obligations, the
issuer of the participation interest or a guarantor of either issuer.
PORTFOLIO INVESTMENTS AND STRATEGIES
FUTURES AND OPTIONS TRANSACTIONS
The Fixed Income and Equity Funds may engage in futures and options transactions
as described below.
As a means of reducing fluctuations in the net asset value of shares of the
Funds, the Funds may attempt to hedge all or a portion of their portfolio
through the purchase of put options on portfolio securities and put options on
financial futures contracts for portfolio securities. The Funds may attempt to
hedge all or a portion of their portfolio by buying and selling financial
futures contracts, and writing call options on futures contracts. The Funds may
also write covered call options on portfolio securities to attempt to increase
current income.
The Funds will maintain their position in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on an exchange
which provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Funds may enter into futures contracts. A futures contract is a firm
commitment by two parties: the seller who agrees to sell a specific type of
security called for in the contract ("going short") and the buyer who agrees to
purchase the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government at a certain time in the future. Stock
index futures contracts are similar to financial futures contracts, but their
price is based upon fluctuations in a particular index of stock prices during a
specified period, such as the S&P 500 Index. No physical delivery of the
underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract by a Fund is to
protect it from fluctuations in the value of securities caused by unanticipated
changes in interest rates or stock prices without necessarily buying or selling
securities. For example, in the fixed income securities market, price moves
inversely to interest rates. A rise in rates means a drop in price. Conversely,
a drop in rates means a rise in price. In order to hedge its holdings of fixed
income securities against a rise in market interest rates, a Fund could enter
into contracts to "go short" to protect itself against the possibility that the
prices of its fixed income securities may decline during the Fund's anticipated
holding period. The Fund would "go long" to hedge against a decline in market
interest rates.
STOCK INDEX OPTIONS
The Funds may purchase put options on stock indexes listed on national
securities exchanges or traded in the over-the-counter market. A stock index
fluctuates with changes in the market values of the stocks included in the
index.
The effectiveness of purchasing stock index options will depend upon the extent
to which price movements in the Fund's portfolio correlate with price
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movements of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Funds will realize a gain or loss from the
purchase of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the Funds of options on stock indexes will
be subject to the ability of the adviser to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Funds may purchase and write listed put options on financial futures
contracts. The Funds would use these options only to protect portfolio
securities against decreases in value resulting from market factors such as
anticipated increases in interest rates.
Unlike entering directly into a futures contract, which requires the purchaser
to buy a financial instrument on a set date at a specified price, the purchase
of a put option on a futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to assume a short
position at the specified price. Generally, if the hedged portfolio securities
decrease in value during the term of an option, the related futures contracts
will also decrease in value and the option will increase in value. In such an
event, a Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the sale of the
second option will be large enough to offset both the premium paid by a Fund for
the original option plus the realized decrease in value of the hedged
securities.
Alternatively, a Fund may exercise its put option to close out the position. To
do so, it would simultaneously enter into a futures contract of the type
underlying the option (for a price less than the strike price of the option) and
exercise the option. A Fund would then deliver the futures contract in return
for payment of the strike price. If a Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, a Fund may write listed call
options on financial futures contracts or over-the-counter call options on
futures contracts, to hedge their portfolios against an increase in market
interest rates. When a Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures position (selling a
futures contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise and cause the
price of futures to decrease, a Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the value of
a Fund's call option position to increase.
In other words, as the underlying future's price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that a
Fund keeps the premium received for the option. This premium can help
substantially offset the drop in value of a Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise of it by the
buyer, a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by a Fund for the initial option. The net premium income of a Fund will
then substantially offset the realized decrease in value of the hedged
securities.
A Fund will not maintain open positions in futures contracts it has sold or call
options it has written on financial futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market value
of its securities portfolio plus or minus the unrealized gain or loss on those
open positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, a Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Funds do not pay or receive money
upon the purchase or sale of a futures contract. Rather, the Funds are required
to deposit an amount of "initial margin" in cash or U.S. Treasury bills with its
custodian (or the broker, if legally permitted). The nature of initial margin in
futures transactions is different from that of margin
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in securities transactions in that a futures contract's initial margin does not
involve the borrowing by a Fund to finance the transactions. Initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day a Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead settlement
between a Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value, a Fund will
mark to market its open futures positions.
The Funds are also required to deposit and maintain margin when they write call
options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Funds, including the Municipal Income Fund, may purchase put options on
portfolio securities to protect against price movements in particular securities
in their respective portfolios. A put option gives a Fund, in return for a
premium, the right to sell the underlying security to the writer (seller) at a
specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Funds, including the Municipal Income Fund, may also write covered call
options to generate income. As the writer of a call option, a Fund has the
obligation, upon exercise of the option during the option period, to deliver the
underlying security upon payment of the exercise price. A Fund may sell call
options either on securities held in its portfolio or on securities which it has
the right to obtain without payment of further consideration (or securities for
which it has segregated cash in the amount of any additional consideration).
OVER-THE-COUNTER OPTIONS
The Funds, including the Municipal Income Fund, may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options for those options on portfolio securities
held by a Fund and not traded on an exchange.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Funds believe that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) to
the Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
* the frequency of trades and quotes for the security;
* the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
* dealer undertakings to make a market in the security; and
* the nature of the security and the nature of the marketplace trades.
TEMPORARY INVESTMENTS
The Equity and Municipal Income Funds may also invest in temporary investments
from time to time for defensive purposes.
MONEY MARKET INSTRUMENTS
The Funds may invest in the following money market instruments:
* instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the
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principal amount of the instrument is insured in full by the Bank
Insurance Fund ("BIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"), or the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC; and
* prime commercial paper (rated A-1 by S&P, Prime-1 by Moody's, or F-1 by
Fitch).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Funds may invest are
described in the combined prospectus under "U.S. Government Securities" and in
the section entitled "U.S. Government Obligations" under the Fixed Income Fund
in this Combined Statement of Additional Information.
REPURCHASE AGREEMENTS
The Funds require their custodian to take possession of the securities subject
to repurchase agreements, and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from a
Fund, a Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
a Fund and allow retention or disposition of such securities. The Funds will
only enter into repurchase agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed by the adviser to be
creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future it will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the applicable Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the applicable Fund sufficient to make payment for the
securities to be purchased are segregated on the Fund's records at the trade
date. These assets are marked to market daily and are maintained until the
transaction has been settled. The Funds do not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of their respective assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when a Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. A Fund would not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
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INVESTMENTS IN FOREIGN SECURITIES
In addition to the risks associated with foreign securities disclosed in the
combined prospectus under "Investments in Foreign Securities," additional
differences exist between investing in foreign and domestic securities.
Examples of such differences include:
* less publicly available information about foreign issuers;
* credit risks associated with certain foreign governments;
* the lack of uniform financial accounting standards applicable to foreign
issuers;
* less readily available market quotations on foreign issues;
* the likelihood that securities of foreign issuers may be less liquid or
more volatile;
* generally higher foreign brokerage commissions; and
* unreliable mail service between countries.
PORTFOLIO TURNOVER
Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in their portfolios will be sold whenever the adviser
believes it is appropriate to do so in light of the Fund's investment objective,
without regard to the length of time a particular security may have been held.
During the fiscal years ended September 30, 1996, and 1995, the Equity, Fixed
Income, and Municipal Income Funds' portfolio turnover rates were 45%, 45%, and
55%, and 33%, 20%, and 38%, respectively.
INVESTMENT LIMITATIONS
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities, except that a Fund may borrow money
directly or through reverse repurchase agreements in amounts up to one-third of
the value of its total assets, including the amount borrowed, and except to the
extent that the Equity and Fixed Income Funds may enter into futures contracts.
The Funds will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling a Fund to, for
example, meet redemption requests when the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous. In addition, the Municipal
Income Fund reserves the right to purchase municipal securities which the Fund
has the right or obligation to sell to a third party (including the issuer of a
participation interest). A Fund will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as are necessary for clearance of
purchases and sales of securities.
With regard to the Fixed Income and Equity Funds, the deposit or payment by the
Funds of initial or variation margin in connection with financial futures
contracts or related options transactions is not considered the purchase of a
security on margin.
LENDING CASH OR SECURITIES
The Funds will not lend any of their respective assets except portfolio
securities up to one-third of the value of total assets. The Municipal Income
Fund may acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or its Declaration of Trust. The
Funds shall not be prevented from purchasing or holding U.S. government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objective, policies, and limitations.
INVESTING IN COMMODITIES
None of the Funds will purchase or sell commodities, commodity contracts, or
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commodity futures contracts except to the extent that the Fixed Income and
Equity Funds may engage in transactions involving financial futures contracts or
options on financial futures contracts.
INVESTING IN REAL ESTATE
None of the Funds will purchase or sell real estate, including limited
partnership interests, although the Funds may invest in securities of issuers
whose business involves the purchase or sale of real estate or in securities
which are secured by real estate or which represent interests in real estate.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of their respective total assets, a Fund will
not purchase securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by such
securities), if as a result more than 5% of the value of their total assets
would be invested in the securities of that issuer. The Funds will not acquire
more than 10% of the outstanding voting securities of any one issuer.
For the Municipal Income Fund, under this limitation, each governmental
subdivision, including states and the District of Columbia, territories,
possessions of the United States, or their political subdivisions, agencies,
authorities, instrumentalities, or similar entities, will be considered a
separate issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own assets
and revenues.
Industrial development bonds backed only by the assets and revenues of a
nongovernmental user are considered to be issued solely by that user. If in the
case of an industrial development bond or government-issued security, a
governmental or some other entity guarantees the security, such guarantee would
be considered a separate security issued by the guarantor, subject to a limit on
investments in the guarantor of 10% of total assets.
CONCENTRATION OF INVESTMENTS
A Fund will not invest 25% or more of the value of its respective total assets
in any one industry. However, a Fund may invest more than 25% of the value of
its total assets in cash or certain money market instruments (including
instruments issued by a U.S. branch of a domestic bank or savings and loan
having capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment), securities issued or guaranteed by the U.S. government, its
agencies, or instrumentalities and repurchase agreements collateralized by such
securities.
The Municipal Income Fund does not intend to purchase securities (other than
securities guaranteed by the U.S. government or its agencies or direct
obligations of the U.S. government) if, as a result of such purchases, 25% or
more of the value of its total assets would be invested in a governmental
subdivision in any one state, territory, or possession of the United States.
This policy applies to securities which are related in such a way that an
economic, business, or political development affecting one security would also
affect the other securities (such as securities paid from revenues from selected
projects in transportation, public works, education, or housing).
UNDERWRITING
A Fund will not underwrite any issue of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933 in connection with
the sale of securities in accordance with its investment objective, policies,
and limitations.
The above limitations cannot be changed with respect to a Fund without approval
of the holders of a majority of that Fund's shares. The following limitations
may be changed by the Trustees without shareholder approval. Shareholders will
be notified before any material change in these limitations becomes effective.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets, except to secure
permitted borrowings. In these cases, the Funds may pledge assets having a
market value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets of a Fund at the time of the pledge. The purchase of
securities on a when-issued basis will not be deemed to be a pledge of a Fund's
assets. For purposes of this limitation the following will not be deemed to be
pledges of a Fund's assets: (a) the
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deposit of assets in escrow in connection with the writing of covered put or
call options and, with respect to the Fixed Income and Equity Funds, (b)
collateral arrangements with respect to (i) the purchase and sale of stock
options (and options on stock indexes) and (ii) initial or variation margin for
futures contracts.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 15% of the value of their respective net
assets in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options, certain
restricted securities not determined by the Trustees to be liquid, and
non-negotiable time deposits with maturities over seven days. For the Municipal
Income Fund, illiquid securities may also include participation interests and
variable rate municipal securities without a demand feature or with a demand
feature of longer than seven days and which the adviser believes cannot be sold
within seven days.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their respective investment in other investment companies
to no more than 3% of the total outstanding voting stock of any investment
company, invest no more than 5% of their respective total assets in any one
investment company, and invest no more than 10% of their respective total assets
in investment companies in general. The Funds will purchase securities of
closed-end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and, therefore, any investment by a
Fund in shares of another investment company would be subject to such duplicate
expenses.
INVESTING IN PUT OPTIONS
The Funds will not purchase put options on securities, unless the securities are
held in a Fund's portfolio and not more than 5% of the value of a Fund's total
assets would be invested in premiums on open put option positions.
WRITING COVERED CALL OPTIONS
The Funds will not write call options on securities unless the securities are
held in a Fund's portfolio or unless a Fund is entitled to them in deliverable
form without further payment or after segregating cash in the amount of any
further payment.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Equity Fund will not purchase securities of a company for the purpose of
exercising control or management.
INVESTING IN WARRANTS
The Equity Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall 5%
limit on investments in warrants, may be warrants which are not listed on the
New York Stock Exchange or the American Stock Exchange. For purposes of this
investment restriction, warrants will be valued at the lower of cost or market,
except that warrants acquired by the Fund in units with or attached to
securities may be deemed to be without value.
Except with respect to the Funds' policy of borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
To comply with registration requirements in certain states, the Funds (1) will
limit the aggregate value of the assets underlying covered call options or put
options written by a Fund to not more than 25% of its net assets, (2) will limit
the premiums paid for options purchased by a Fund to 5% of its net assets and
(3) will limit the margin deposits on futures contracts entered into by a Fund
to 5% of its net assets. In addition, to comply with restrictions in certain
states, the Equity Fund will limit its investment in restricted securities to 5%
of its net assets. (If state requirements change, these restrictions may be
revised without shareholder notification.)
The Fund does not expect to borrow money in excess of 5% of the value of its net
assets during the coming fiscal year.
For purposes of their policies and limitations, the Funds consider certificates
of deposit and demand and time deposits issued by a U.S. branch
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of a domestic bank or savings and loan having capital, surplus and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."
ARROW FUNDS MANAGEMENT
Officers and Trustees are listed with their addresses, birthdates, present
positions with Arrow Funds, and principal occupations.
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated
Research Corp. and Federated Global Research Corp.; Chairman, Passport
Research, Ltd.; Chief Executive Officer and Director or Trustee of the
Funds.
Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Trustee, University
of Pittsburgh; Director or Trustee of the Funds.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real
estate ventures in Southwest Florida; formerly, President, Naples Property
Management, Inc. and Northgate Village Development Corporation; Director or
Trustee of the Funds.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Trustee of the
Funds.
12
<PAGE> 13
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western
Region; Director or Trustee of the Funds.
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare,
Inc.; Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the
Funds.
13
<PAGE> 14
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University, U.S. Space Foundation and Czech
Management Center; President Emeritus, University of Pittsburgh; Founding
Chairman, National Advisory Council for Environmental Policy and Technology,
Federal Emergency Management Advisory Board and Czech Management Center;
Director or Trustee of the Funds.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public Relations/Marketing/Conference Planning, Manchester Craftsmen's
Guild; Restaurant Consultant, Frick Art & History Center; Conference
Coordinator, University of Pittsburgh Art History Department; Director or
Trustee of the Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated
Research Corp. and Federated Global Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated Shareholder Services Company, and
Federated Shareholder Services; Director, Federated Services Company;
President or Executive Vice President of the Funds; Director or Trustee of
some of the Funds. Mr. Donahue is the son of John F. Donahue, Chairman and
Trustee of the Company.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President , Secretary and Treasurer
Executive Vice President, Secretary, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated Management, and Federated Research;
Director, Federated Research Corp. and Federated Global Research Corp.;
14
<PAGE> 15
Trustee, Federated Shareholder Services Company; Director, Federated
Services Company; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and Secretary
of the Funds; Treasurer of some of the Funds.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of
the Funds; Director or Trustee of some of the Funds.
Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
Birthdate: March 23, 1960
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable
Rate U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund, Inc.;
Federated Fund for U.S. Government Securities, Inc.; Federated GNMA Trust;
Federated Government Income Securities, Inc.; Federated Government Trust;
Federated High Income Bond Fund, Inc.; Federated High Yield Trust; Federated
Income Securities Trust; Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Insurance Series; Federated Investment
Portfolios; Federated Investment Trust; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.; Federated
Stock Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities Fund:
1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years; Federated U.S.
Government Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Money Market Management, Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus Funds;
Trust for Financial Institutions; Trust for Government Cash Reserves; Trust for
Short-Term U.S. Government Securities; Trust for U.S. Treasury Obligations; and
World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding shares of each Fund.
As of November 4, 1996, the following shareholders of record owned 5% or more
shares of the Arrow Equity Fund: Mark Twain Trust Division, St. Louis, Missouri,
owned approximately 3,393,639 shares (90.54%); National Financial Services for
the exclusive benefit of their customers, New York, New York, owned
approximately 260,830 shares (6.96%).
15
<PAGE> 16
As of November 4, 1996, the following shareholder of record owned 5% or more of
the Arrow Fixed Income Fund and the Arrow Municipal Income Fund: Mark Twain
Trust Division, St. Louis, Missouri, owned approximately 2,893,146 shares
(98.21%) of the Arrow Fixed Income Fund and approximately 1,359,293 shares
(96.04%) of the Arrow Municipal Income Fund.
TRUSTEES COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM
TRUST TRUST(*#)
<S> <C>
John F. Donahue, $ 0
Chairman and Trustee
Thomas G. Bigley, $1273.61
Trustee
John T. Conroy, Jr., $1397.73
Trustee
William J. Copeland, $1397.73
Trustee
James E. Dowd, $1397.73
Trustee
Lawrence D. Ellis, M.D., $1273.61
Trustee
Edward L. Flaherty, Jr., $1397.73
Trustee
Edward D. Gonzales, $ 0
President, Treasurer
and Trustee
Peter E. Madden, $1273.61
Trustee
Gregor F. Meyer, $1273.61
Trustee
John E. Murray, Jr., $1273.61
Trustee
Wesley W. Posvar, $1273.61
Trustee
Marjorie P. Smuts, $1273.61
Trustee
</TABLE>
* Information is furnished for the fiscal year ended September 30, 1996. The
Trust is the only investment company in the Fund Complex.
# The aggregate compensation is provided for the Trust which is comprised of
four portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUNDS
The Trust's investment adviser is Mark Twain Bank, the Funds' adviser (the
"Adviser"), which is a wholly owned subsidiary of Mark Twain Bancshares, Inc.
Because of internal controls maintained by Mark Twain Bank to restrict the flow
of non-public information, investments by a Fund are typically made without any
knowledge of Mark Twain Bank's or its affiliates' lending relationship with an
issuer.
The Adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
16
<PAGE> 17
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal year ended September 30, 1996, the Funds' Adviser earned advisory
fees of $368,254, $175,494, and $119,078 for the Equity Fund, the Fixed Income
Fund and the Municipal Income Fund, respectively, of which $13,853, $3,239 and
$100,366 were waived. For the fiscal year ended September 30, 1995, the Funds
Adviser earned advisory fees of $253,371, $184,158, and $133,160 for the Equity
Fund, the Fixed Income Fund and the Municipal Income Fund, respectively, of
which $15,785, $3,366, and $105,456 were waived. For the fiscal year ended
September 30, 1994, the Funds Adviser earned advisory fees of $234,468,
$228,546, and $172,640 for the Equity Fund, the Fixed Income Fund and the
Municipal Income Fund, respectively, of which $9,037, $2,736, and $136,730 were
waived.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for the fees set forth in the
prospectus. For the fiscal year ended September 30, 1996, the Equity Fund, Fixed
Income Fund and Municipal Income Fund incurred costs for administrative services
of $71,420, $50,011, and $50,011, respectively. For the fiscal year ended
September 30, 1995, the Equity Fund, Fixed Income Fund and Municipal Income
Fund, respectively, incurred costs for administrative services of $52,746,
$50,000 and $50,000. For the fiscal year ended September 30, 1994, the Equity
Fund, Fixed Income Fund and Municipal Income Fund, respectively, incurred costs
for administrative services of $50,000, $57,500 and $50,000, respectively.
CUSTODIAN
Under the Custodian Agreement, Mark Twain Bank holds the Funds' portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For its services, the custodian receives an annual fee equal to
0.025 of 1% of each Fund's average daily net assets subject to a minimum fee of
$2,000 per month.
SHAREHOLDER SERVICING ARRANGEMENTS
The distributor may pay fees to brokers and dealers for distribution and
administrative services and to administrators for administrative services. The
administrative services include, but are not limited to, providing office space,
equipment, telephone facilities, and various personnel, including clerical,
supervisory, and computer, as is necessary or beneficial to establish and
maintain shareholders' accounts and records, process purchase and redemption
transactions, process automatic investments of client account cash balances,
answer routine client inquiries regarding a Fund, assist clients in changing
dividend options, account designations, and addresses, and providing such other
services as a Fund may reasonably request. These fees, if paid, will be
reimbursed by the Adviser, not the Funds.
BROKERAGE TRANSACTIONS
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
Adviser and may include: advice as t the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services provided by brokers and dealers may be sued by the Adviser or its
affiliates in advising the Fund and other accounts. To the extent that receipt
of these services may supplant services for which the adviser or its affiliates
might otherwise have paid, it would tend to reduce their expenses. The Adviser
exercises reasonable business judgment in selecting brokers who offer brokerage
and research services to execute securities transactions. They determines in
good faith that commissions charged by such persons are reasonable in
relationship to the value of the brokerage and research services provided.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by the Adviser, investments of the type a Fund may
make may also be made by those other accounts. When a Fund and one or more other
accounts managed by the Adviser are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or disposed of by a Fund. In other cases,
however, it is believed that coordination and the ability to participate in
volume transactions will be to the benefit of the Funds.
17
<PAGE> 18
The Trustees of the Trust have determined that portfolio transactions for the
Equity Fund may be executed through Mark Twain Brokerage Services, Inc. and
other affiliated broker/dealers if, in the judgment of Mark Twain Bank, the use
of Mark Twain Brokerage Services, Inc. or an affiliated broker is likely to
result in prices and execution at least as favorable as those of other qualified
broker/dealers and if, in such transactions, the affiliated broker/dealer
charges the Equity Fund a rate consistent with that charged to comparable
unaffiliated customers in similar transactions. Mark Twain Brokerage Services,
Inc. will not participate in commissions from brokerage given by the Equity Fund
to other brokers or dealers. In addition, pursuant to an exemption granted by
the SEC, the Equity Fund may engage in transactions involving certain money
market instruments with Mark Twain Brokerage Services, Inc. or particular
affiliates acting as principal. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
Under rules adopted by the SEC, Mark Twain Brokerage Services, Inc. may not
execute transactions for the Equity Fund on the floor of any national securities
exchange, but may effect transactions for the Equity Fund by transmitting orders
for execution, providing for clearance and settlement, and arranging for the
performance of those functions by members of the exchange not associated with
Mark Twain Brokerage Services, Inc. Mark Twain Brokerage Services, Inc. will be
required to pay fees charged by those persons performing the floor brokerage
elements out of the brokerage compensation it receives from the Equity Fund. The
Equity Fund has been advised by Mark Twain Brokerage Services, Inc. that on most
transactions, the floor brokerage generally constitutes from between
three-quarters of a cent and one cent per share, which may be as high as 20% of
the total commissions paid.
For the fiscal year ended September 30, 1996, 1995, and 1994 the Equity Fund
paid $71,770, $42,563, and $111,324, respectively, in brokerage commissions on
brokerage transactions.
For the fiscal years ended September 30, 1996, 1995, and 1994, the Equity
Fund did not execute any portfolio transactions through Mark Twain Brokerage
Services, Inc.
PURCHASING SHARES
Except under certain circumstances as described in the prospectus, shares of the
Funds are sold at their net asset value with a sales charge on days the New York
Stock Exchange is open for business. The procedure for purchasing shares of the
Funds is explained in the prospectus under "Investing in the Funds."
DISTRIBUTION PLAN
With respect to the Funds, the Trust has adopted a Plan pursuant to Rule 12b-1
(the "Plan") which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940. The Plan provides for payment of
fees to Federated Securities Corp. to finance any activity which is principally
intended to result in the sale of a Fund's shares subject to the Plan. Such
activities may include the advertising and marketing of shares of a Fund;
preparing, printing, and distributing prospectuses and sales literature to
prospective shareholders, brokers, or administrators; and implementing and
operating the Plan. Pursuant to the Plan, Federated Securities Corp. may pay
fees to brokers for distribution and administrative services and to
administrators for administrative services provided to a Fund. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to: communicating account openings; communicating account closings;
entering purchase transactions; entering redemption transactions; providing or
arranging to provide accounting support for all transactions, wiring funds and
receiving funds for purchases and redemptions of a Fund's shares, confirming and
reconciling all transactions, reviewing the activity in Fund accounts and
providing training and supervision of broker personnel; posting and reinvesting
dividends to Fund accounts or arranging for this service to be performed by the
Fund's transfer agent; and maintaining and distributing current copies of
prospectuses and shareholder reports to the beneficial owners of a Fund's shares
and prospective shareholders.
The Trustees expect that the adoption of the Plan will result in the sale of a
sufficient number of shares so as to allow a Fund to achieve economic viability.
It is also anticipated that an increase in the size of a Fund will facilitate
more efficient portfolio management and assist a Fund in seeking to achieve its
investment objectives.
For the fiscal year ended September 30, 1996, brokers and administrators
18
<PAGE> 19
(financial institutions) earned fees on behalf of the Equity Fund, the Fixed
Income Fund and the Municipal Income Fund in the amount of $122,734, $73,047,
and $42,531, respectively, pursuant to the Plan, all of which was voluntarily
waived. For the fiscal year ended September 30, 1995, brokers and administrators
(financial institutions) earned fees on behalf of the Equity Fund, the Fixed
Income Fund, and the Municipal Income Fund in the amounts of $84,456, $76,734,
and $47,858, respectively, pursuant to the Plan, all of which was voluntarily
waived. For the fiscal year ended September 30, 1994, brokers and administrators
(financial institutions) earned fees on behalf of the Equity Fund, the Fixed
Income Fund, and the Municipal Income Fund in the amounts of $78,171, $95,223,
and $61,650, respectively, pursuant to the Plan, all of which was voluntarily
waived.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest or dividends may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. Mark Twain Bank and
Federated Services Company act as the shareholder's agents in depositing checks
and converting them to federal funds.
DETERMINING NET ASSET VALUE
Net asset values of the Funds generally change each day. The days on which the
net asset value is calculated by these Funds are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market value of the Funds' portfolio securities are determined as follows:
* for equity securities, according to the last sale price on a national
securities exchange, if available;
* in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
* for unlisted equity securities, the latest bid prices;
* for bonds and other fixed income securities, as determined by an
independent pricing service;
* for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with remaining maturities of less than 60 days at the time of
purchase, at amortized cost; or
* for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Funds will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Trustees determine in good faith
that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
REDEEMING SHARES
Shares are redeemed at the next computed net asset value after a Fund receives
the redemption request. Redemption procedures are explained in the prospectus
under "Redeeming Shares."
REDEMPTION IN KIND
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of a Fund's net asset value
during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Trust will pay
all or a portion of the remainder of the redemption in portfolio instruments,
valued in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees
19
<PAGE> 20
deem fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
* derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
* derive less than 30% of its gross income from the sale of securities held
less than three months;
* invest in securities within certain statutory limits; and
* distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders of the Equity and Fixed Income Funds are subject to federal income
tax on dividends received as cash or additional shares. These dividends, and any
short-term capital gains, are taxable as ordinary income. With respect to the
Fixed Income Fund, no portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held shares.
TOTAL RETURN
The Equity Fund's average annual total returns for the one-year period ended
September 30, 1996 and for the period from January 4, 1993 (date of initial
public investment) to September 30, 1996 were 6.62%, and 11.55%, respectively.
The Fixed Income Fund's average annual total returns for the one-year period
ended September 30, 1996 and for the period from January 4, 1993 (date of
initial public investment) to September 30, 1996 were -1.41%, and 4.28%,
respectively.
The Municipal Income Fund's average annual total returns for the one-year period
ended September 30, 1996 and for the period from February 1, 1993 (date of
initial public investment) to September 30, 1996 were 1.37%, and 4.48%,
respectively.
The average annual return for a Fund is the average compounded rate of return
for a given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is computed by
multiplying the number of shares owned in such Fund at the end of the period by
the net asset value per share for such Fund at the end of the period. The number
of shares owned in a Fund at the end of the period is based on the number of
shares purchased in such Fund at the beginning of the period with $1,000, less
any applicable sales charge, adjusted over the period by any additional shares,
assuming monthly or quarterly reinvestment, as applicable, of all dividends and
distributions.
YIELD
The yield for the Equity Fund, the Fixed Income Fund, and the Municipal Income
Fund for the thirty-day period ended September 30, 1996 was 0.48%, 5.57%, and
4.92%, respectively.
The yield for the Funds is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a
20
<PAGE> 21
12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for the Municipal Income Fund for the thirty-day period
ended September 30, 1996 was 8.15%. The tax-equivalent yield of the Municipal
Income Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that the Fund would have had to earn to equal its actual yield,
assuming a 39.60% tax rate (the maximum effective federal rate for individuals)
and assuming that income is 100% tax-exempt.
TAX-EQUIVALENCY TABLE
The Municipal Income Fund may also use a tax-equivalency table in advertising
and sales literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax,* and is often
free from state and local taxes as well. As the table below indicates, a
"tax-exempt" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1996
MULTISTATE MUNICIPAL FUNDS
FEDERAL INCOME TAX BRACKET:
<TABLE>
<CAPTION>
15.00% 28.00% 31.00% 36.00% 39.60%
<S> <C> <C> <C> <C> <C>
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 263,750
<CAPTION>
Tax-Exempt
Yield Taxable Yield Equivalent
<C> <C> <C> <C> <C> <C>
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes paid on
comparable taxable investments were not used to increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS
Each Fund's performance depends upon such variables as:
* portfolio quality;
* average portfolio maturity;
21
<PAGE> 22
* type of instruments in which the portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in each Fund's expenses; and
* various other factors.
Each Fund's performance fluctuates on a daily basis largely because net earnings
and offering price per share fluctuate daily. Both net earnings and offering
price per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of a Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which a Fund uses in advertising may include:
* LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities and
finance. The average maturity of these bonds approximates nine years. Tracked by
Shearson Lehman Brothers, Inc., the index calculates total returns for
one-month, three-month, twelve-month and ten-year periods and year-to-date.
* LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the applicable funds
category in advertising sales literature.
* DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for the
stock market as a whole.
* STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, is a composite
index of common stocks in industry, transportation, and financial and public
utility companies. In addition, the Standard & Poor's index assumes reinvestment
of all dividends paid by stocks listed on the index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated in
the Standard & Poor's figures.
* LEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATION BONDS is an index comprised
of all state general obligation debt issues with maturities between four and six
years. These bonds are rated A or better and represent a variety of coupon
ranges. Index figures are total returns calculated for one-, three-, and
twelve-month periods as well as year-to-date. Total returns are also calculated
as of the index inception, December 31, 1979.
* LEHMAN BROTHERS TEN-YEAR STATE GENERAL OBLIGATION BONDS is an index comprised
of the same issues noted above except that the maturities range between nine and
eleven years. Index figures are total returns calculated for the same periods as
listed above.
Advertising and other promotional literature may include charts, graphs and
other illustrations using a Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, a Fund can compare
its performance, or performance for the types of securities in which it invests,
to a variety of other investment, such as bank savings accounts, certificates of
deposit, and Treasury bills.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how
22
<PAGE> 23
such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
twenty-seven percent of American households are pursuing their financial goals
through mutual funds. these investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available.
FINANCIAL STATEMENTS
The financial statements for the Arrow Equity Portfolio, the Arrow Fixed Income
Portfolio, and the Arrow Municipal Income Portfolio for the fiscal year ended
September 30, 1996 are incorporated herein by reference to the Combined Annual
Report to Shareholders of the Arrow Funds dated September 30, 1996.
APPENDIX
STANDARD & POOR'S RATINGS GROUP CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits 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.
NR -- NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P's may apply a plus (+)
or minus (-) to the above rating classifications to show relative standing
within the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE AND MUNICIPAL BOND RATING
DEFINITIONS
AAA -- Bonds which are rated Aaa 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 which are rated Aa 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 which are rated A 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 which are rated Baa are considered as 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.
NR -- Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security 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 issue ranks in the
23
<PAGE> 24
lower end of its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
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 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.
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL NOTE RATINGS
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE SHORT-TERM LOAN RATINGS
MIG1/VMIG1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG2/VMIG2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
"F-1+".
F-2 -- Good Credit Quality. Issues carrying 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-2" categories.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
P-1 -- Issuers (or supporting institutions) rated Prime-1 (P-1) have a superior
capacity for repayment of senior short-term promissory obligations. P-1
repayment capacity will often be evidenced by many of the following
characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
24
<PAGE> 25
* Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
P-2 -- Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
25
<PAGE> 1
EXHIBIT 17(I)
- --------------------
Semi-Annual Report
May 31, 1997
- --------------------
Money Market Portfolio
Treasury Money Market Portfolio
Tax-Exempt Money Market Portfolio
Growth & Income Equity Portfolio
Small Cap Equity Portfolio
International Equity Portfolio
Equity Income Portfolio
Equity Index Portfolio
Balanced Portfolio
Government & Corporate Bond Portfolio
U.S. Government Securities Portfolio
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio [LOGO OF THE ARCH FUNDS
APPEARS HERE]
National Municipal Bond Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
<PAGE> 2
THE ARCH FUND, INC.
MESSAGE FROM YOUR CHAIRMAN
Dear Shareholders,
We are pleased to present this report for The ARCH Fund, Inc. for the six
months ended May 31, 1997. During the period, the ARCH family of mutual funds
saw its assets increase to more than $3 billion.
We continually seek to bring to our shareholders new products that offer
exposure to various segments of the financial markets. To that end, we
introduced four new portfolios during the period: an Intermediate Corporate
Bond Portfolio, a Bond Index Portfolio, an Equity Income Portfolio and an
Equity Index Portfolio. You will find information on these new funds in this
report.
If you are a customer of the ARCH Asset Adviser program, you are aware that
your investment adviser, Mississippi Valley Advisors Inc., rebalanced and
reallocated its model portfolios during the recent period. We are committed to
constantly monitoring the financial markets and to allocating your assets
properly, depending on your risk tolerance and objectives.
PORTFOLIO REVIEW AND OUTLOOK
In the following interview with John H. Blixen, President of Mississippi
Valley Advisors Inc. (MVA), the Fund's investment adviser, you will find a
detailed discussion of the performance of each Portfolio of The ARCH Fund,
Inc. The portfolio-specific reports describe factors that contributed to the
Portfolios' returns for the period ended May 31, 1997. To fully understand the
performance of your investment in The ARCH Mutual Funds, I urge you to read
this report closely.
MESSAGE FROM YOUR INVESTMENT ADVISER, MISSISSIPPI VALLEY ADVISORS INC.
AN ECONOMY THAT FAVORED STOCKS
The recent six-month period was marked by excellent results from the
economy--growth in earnings, good job creation and relatively low inflation.
Consumer spending rose sharply as well. The financial markets did fluctuate
with changes in interest rates that reflected inflationary concerns, yet the
level of inflation remained relatively low. The combination of economic growth
and low inflation provided especially good conditions for the stock market.
Investors continued to favor stocks of large domestic companies that operate
in the U.S. and international markets. As a result, stocks of those firms have
outperformed the market as a whole, and account for much of the rise in market
indices such as the Standard and Poor's 500. We believe those stocks are
becoming fully valued relative to stocks of other companies. The broader
market should eventually catch up, which could benefit our diversified stock
portfolios.
The bond markets recently have provided returns which are on average more
than 3 percentage points higher than the rate of inflation, and bond yields
remain well in excess of the inflation rate. Bonds appear to offer good value
under most economic forecasts, which call for continued low inflation.
LOOKING AHEAD
The economy appears likely to grow at a 2.5% to 3% annual rate during 1997,
which is higher than many economists had expected. We estimate that corporate
profits will grow at a 5% to 10% annual pace through 1997. The inflation rate
is still very low at around 2.0% to 3.0%.
There is some risk, however, that rapid economic growth will lead to higher
inflation. In fact, the Federal Reserve may raise interest rates unless
economic growth slows to a more moderate pace. Moreover, stocks are relatively
expensive. In fact, stocks that make up the S&P 500 recently traded at an
average price/earnings ratio of 20--that is, their prices on average were
equal to 20 times the underlying firms' annual earnings. These are
historically high valuations.
THE ARCH FUNDS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY, ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
ANY BANK, THE DISTRIBUTOR OR ANY OF THEIR AFFILIATES, AND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
-1-
<PAGE> 3
Investors should consider assembling fund portfolios that take into account
some additional risk in the stock market. But such portfolios also should be
structured to benefit from pockets of value. For example, it is possible that
undervalued stocks of small and mid-sized companies will make up some of the
ground they have lost to stocks of the larger companies that have accounted
for most of the gains in market indices.
In this environment, we have adjusted our stock fund portfolios to include
more stocks of mid-sized or smaller companies. We also have sought out stocks
of companies in industries where good values are still available--such as
retail, automotive parts, financial services and transportation.
Our bond funds have taken a relatively neutral stance with respect to
maturities, reflecting the potential for volatility among longer term issues
as investors fret about the potential for higher inflation and interest rates.
We are finding value in areas such as government-guaranteed mortgage-backed
securities.
A LONG-TERM COMMITMENT
As always, we encourage investors to properly diversify their assets among
various types of investments, including stocks and bonds. And remember that
regardless of the financial markets' behavior during the next few months,
investing requires patience and a commitment to a long-term approach. Over
long periods, investors tend to profit more from exposure to stocks and bonds
than to other types of assets. Moreover, an appropriate mix of stocks, bonds
and reserves in short-term funds has the potential to deliver a good overall
return without exposing investors to excessive risk.
One other timely point: Investors in higher tax brackets may want to
consider bond funds that are exempt from federal and state income taxes. Their
after-tax yields recently have been relatively attractive for shareholders
whose tax situation is appropriate.
You will find a discussion of each portfolio of The ARCH Fund, Inc. in the
pages that follow. Those reports will help you to understand your investments,
their recent performances and their current prospects. If you would like more
information about any of the portfolios, please call your investment
representative or the ARCH Shareholder Servicing Center at 1-800-452-ARCH.
THE ARCH MONEY MARKET PORTFOLIO+
Q. What is the objective of this Portfolio?
A. The ARCH Money Market Portfolio seeks current income with liquidity and
stability of principal. The Portfolio's net assets on May 31, 1997 were
approximately $916 million.
Q. What were the conditions in the money markets during the six months ended
May 31, 1997?
A. Short-term interest rates were relatively stable during the period. Rates
declined somewhat in February when it was obvious to investors that the
Federal Reserve would leave the Federal funds rate alone. However, the Fed
raised short-term rates on March 25, 1997.
Q. What was your management strategy in that environment?
A. We kept the average maturity of the Portfolio between 35 and 40 days from
the beginning of the period until the end of March, when two things happened:
The Fed raised short-term rates, and the first quarter of 1997 ended. At the
end of each quarter, many issuers want to clean up their books and offer new
securities with high yields as incentives to investors. At that point, we
extended the Portfolio's average maturity to around 45 to 50 days in order to
pick up extra yield.
- ------
+ An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the portfolio will be able to
maintain a stable net asset value of $1.00 per share.
-2-
<PAGE> 4
Q. How did the composition of the Portfolio change during the period?
A. Commercial paper issued by various companies remained the Portfolio's
largest holding. A large number of high-quality issues with attractive yields
were available. We did add to our holdings of bank certificates of deposit and
bank notes, whose yields have become competitive relative to those of
commercial paper.*
Q. How will you manage the Portfolio during the next several months?
A. We will continue to look for opportunities to extend the Portfolio's
average maturity at the end of each quarter and at the end of the calendar
year, when issuers tend to offer securities with attractive yields. The
Portfolio will target an average maturity in the 45-50 day area.
THE ARCH TREASURY MONEY MARKET PORTFOLIO+
Q. What is the Portfolio's objective?
A. The ARCH Treasury Money Market Portfolio seeks a high level of current
income exempt from state income tax consistent with liquidity and stability of
principal. The Portfolio's net assets were around $169 million on May 31,
1997.
Q. How did you manage the Portfolio during the six months ended May 31,
1997?
A. We maintained a relatively neutral average maturity during the first half
of the period, in the mid- to upper- 40-day range. However, we extended the
average maturity to around the upper 50-day area later in the period. At the
end of the period, the Portfolio's average maturity stood at 56 days. We also
maintained a laddered approach, which helped to accommodate the Portfolio's
large cash flows.
Q. What types of Treasury securities did you hold?
A. Treasury Notes constituted 52% of the Portfolio's assets at the end of
the period, a larger-than-average percentage. We focused on notes when
Treasury Bills became extremely expensive relative to Treasury Notes, which
happened because investors moved cash into short-term securities in
anticipation of the Fed's decision to raise rates. Treasury Bills accounted
for 48% of assets at the end of the period.*
Q. What is your strategy going forward?
A. Looking ahead, we will continue to structure the Portfolio with a
laddered maturity. We will maintain an average maturity in the mid- to upper-
50-day range, provided shorter maturity securities remain expensive.
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO++
Q. How did the tax-exempt money markets perform during the six months ended
May 31, 1997?
A. Yields on tax-exempt money market securities continued to decline
relative to yields on short-term taxable securities such as Treasury bills.
There was little reason for issuers of short-term tax-exempt paper to offer
attractive rates, because a great deal of money was coming into the tax-exempt
money market area.
Q. How did you structure the Portfolio to address those conditions?
A. The ARCH Tax-Exempt Money Market Portfolio seeks as high a level of
current income exempt from federal income tax as is consistent with liquidity
and stability of principal. The Portfolio attempts to achieve this objective
while maintaining strict credit quality standards.
The Portfolio consisted primarily of daily and weekly variable rate
securities during the recent period.* We held these issues for two reasons:
They offered the best yields available; and they offer liquidity. We can sell
those
- ------
*Portfolio composition is subject to change.
+ An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the portfolio will be able to
maintain a stable net asset value of $1.00 per share.
++Investors may be subject to certain state and local taxes and, depending
upon an investor's tax status, the federal alternative minimum tax. An
investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the portfolio will be able to
maintain a stable net asset value of $1.00 per share.
-3-
<PAGE> 5
issues quickly when short-term notes come out offering more attractive yields.
Often, issuers will issue securities with attractive yields to fund a specific
project, even if interest rates are a bit high, and we wanted to be in a
position to purchase those securities when such opportunities arose.
Q. How did you manage the average maturity of the Portfolio during the
period?
A. The average maturity of the Portfolio was as long as 34 days and fell to
as short as 23 days during the period. Daily securities were more readily
available than longer term issues throughout the period.
Q. What is the Portfolio's strategy going forward?
A. We will attempt to enhance our positions in tax-exempt commercial paper
and notes as new issues become available. We will also look to extend the
Portfolio's average maturity if tax-exempt note yields become more attractive
relative to Treasury Bill yields. We don't see much reason to make significant
changes in the portfolio's strategy as long as the economy continues to grow
at a slow, steady pace.
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO+
Q. How did the municipal bond market perform during the six months ended May
31, 1997?
A. Municipal bonds with relatively long maturities outperformed long-term
taxable Treasuries during the period. This Portfolio has an average maturity
of between three and five years. The longer-term issues within those
parameters performed better than securities with shorter maturities, partly
because of the relatively low supply of shorter term issues.
Generally speaking, there is always a limited supply of municipal issues
relative to Treasuries out there. That's one reason why municipals have
outperformed taxable bonds.
Q. How did you position the Portfolio during the period?
A. At the beginning of the period, the Portfolio's average maturity stood at
around four years. By the end of the period, the average maturity had dropped
to around 3.8 years as the issues in the Portfolio aged.
Q. How did you manage credit risk during the period?
A. We maintained a relatively high credit rating of AA2. Investors continued
to favor higher quality issues, as yields on lower quality securities have not
been high enough to justify their additional credit risk.
Q. What is your outlook for the municipal market and the Portfolio going
forward?
A. The municipal market should continue to strengthen as concerns over tax
reform subside. There probably will not be any major moves in interest rates,
and supply should remain low. In that environment, we intend to extend the
Portfolio's average maturity somewhat. We also will continue to hold issues
with high credit quality.
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO+
Q. What were the conditions in the municipal bond market during the six
months ended May 31, 1997?
A. Demand for municipal bonds continued to be strong during the period.
Municipal bonds with relatively long maturities outperformed similar taxable
Treasury bonds.
Q. How did you manage the Portfolio in that environment?
A. We purchased bonds that mature in around 15 to 18 years to extend the
Portfolio's average maturity. At the end of the period, the Portfolio's
average maturity was around eight years.
- ------
+ Investors may be subject to certain state and local taxes and, depending on
an investor's tax status, the federal alternative minimum tax.
-4-
<PAGE> 6
Q. What was the average credit rating of the Portfolio's holdings?
A. The Portfolio's overall policy is to maintain a high credit quality.
Lower quality issues did not offer enough extra yield to investors to justify
taking on the bonds' additional credit risk. The average credit rating at the
end of the period was AA1.
Q. What is your strategy regarding the Portfolio during the months ahead?
A. We will look to enhance shareholders' total return by continuing to
extend the Portfolio's average maturity. We expect to increase the average
maturity to around 12 years during the coming months. Meanwhile, we will
maintain the Portfolio's high credit rating and focus on finding high-quality
issues at attractive prices.
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO+
Q. What was the environment like in the Missouri municipal bond market
during the six months ended May 31, 1997?
A. The Missouri market was strong during the recent period. There was a
relatively low supply of large Missouri issues, and demand for those issues
was strong. That made it challenging to purchase bonds at attractive prices
during the period.
Q. What was your management strategy in that environment?
A. The Portfolio's average maturity at the end of the period was around
10.75 years, down from approximately 11.5 to 12 years near the beginning of
the period. Typically, the Portfolio maintains a slightly lower average
maturity than other Missouri municipal funds. Moreover, the Portfolio's assets
grew by around 12% during the past six months. Since the supply of municipal
bonds was low, that extra cash buildup caused the Portfolio's average maturity
to decrease.
Q. What types of securities did you favor during the period?
A. We found attractive values primarily among general obligation bonds and
revenue bonds maturing in 15 to 18 years. We also favored larger issues with
very high credit quality: The Portfolio carried an average credit rating of
AA1 during the period. Smaller, lower quality issues did not offer investors
enough extra yield to justify their additional credit risk.
Q. What is your outlook for the Missouri municipal bond market?
A. The supply of new issues should continue to remain low, which should help
support prices. Municipalities are reluctant to issue a lot of new bonds when
they feel interest rates are high. There would need to be a significant
decrease in interest rates for issuers to issue new bonds in large quantities,
and we do not think that will happen as long as the economy continues to grow
at a slow, steady pace.
Q. How will you manage the Portfolio going forward?
A. We expect to increase the Portfolio's average maturity as we put the new
cash to work. We also will continue to favor securities with high credit
quality. These types of issues give shareholders the potential for competitive
returns without taking additional risk.
THE ARCH INTERNATIONAL EQUITY PORTFOLIO+++
Q. How did the global equity markets perform during the six-month period
ended May 31, 1997?
A. The Morgan Stanley Europe, Australia and Far East Index (EAFE), an
unmanaged index that is generally representative of the performance of
international stocks, gained 4.2% during the period, but many European
countries posted double-digit positive returns. In particular, Spain's stock
market gained 24%, and Switzerland's market rose 20%. Emerging markets in
Latin America also turned in solid performances, especially during the first
three months of the period. However, markets in the Pacific Basin
underperformed due mainly to banking and other financial problems.
- ------
+ Investors may be subject to certain state and local taxes and, depending
upon an investor's tax status, the federal alternative minimum tax.
++ International investing involves additional risk and volatility.
-5-
<PAGE> 7
Q. How did you manage the Portfolio in that environment?
A. We focused on careful stock selection, targeting shares of large, well-
established firms with steadily increasing growth rates that were trading at
reasonable prices. We prefer companies whose growth rates are higher than
their price-to-earnings ratios. We avoid outrageously high-priced multiples.
Firms also must have strong management to be included in the Portfolio.
Q. Where did you find those types of companies during the recent period?
A. We were rewarded by our careful stock selection in Japan, where we held
companies with strong exports such as Canon, Honda and Sony, totaling 3.0% of
the Portfolio. We also looked for companies in Europe that are restructuring.
Many European conglomerates are becoming aware that they must alter their
businesses to be more competitive with emerging economies in Eastern Europe,
where there is a surplus of cheap, skilled labor.
We also increased our exposure to Latin American markets from 2.5% of total
assets to 4.1%. The region is becoming more stable than it has been in the
past. We found some opportunity in the luxury goods market, which should
continue to strengthen as worldwide wealth continues to increase. One of our
holdings in that sector, Gucci (0.7%), has tremendous brand-name recognition
and will open more new stores going forward.++
Q. What other changes did you make in the Portfolio?
A. We reduced our exposure to Hong Kong and Malaysia and added to our
position in Australia, which is currently a more stable market than other
Pacific Basin markets.
Q. How will you manage the Portfolio going forward?
A. We are pleased with our current holdings in Japan, which currently
account for 24% of the Portfolio's assets. We may add to the stocks we own
there. We are somewhat concerned about the progress of creating a single
currency in continental Europe, and we will select our stocks there carefully
during the next few months.++
Regardless of how foreign financial markets perform in the months ahead, we
will continue to carefully select shares of large, solid firms that we believe
will be successful over the long term.
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO
Q. What was the overall environment in the stock market during the six
months ended May 31, 1997?
A. Except for a brief market correction in March, the stock market has
continued to set record highs. But those gains are almost all focused in a
relatively small group of stocks--those with the largest market
capitalizations.
However, during the period we began to see these gains broaden out a bit to
include some of the medium-sized and smaller capitalization stocks, as
investors began to focus more on stocks' fundamentals rather than stock price
momentum.
Q. How did you manage the Portfolio during the period?
A. We are relative-value investors, and as such we employ bottom-up stock
selection. This is the same strategy we've used for the past 15 years.
Recently, we've been buying shares of consumer cyclical companies such as J.C.
Penney. We also added to our holdings of Echlin. We felt these stocks were
undervalued versus the market.
Our Portfolio is broadly diversified across eight market sectors: 21% in
consumer growth; 16% in interest-rate sensitive stocks such as banks and
financial institutions; 14% in consumer staples; 13% in technology stocks; 12%
in industrial cyclicals; 10% in energy; 8% in consumer cyclical markets such
as airlines, automobiles and retail/general merchandise; and 6% in capital
goods.++
- ------
++ Portfolio composition is subject to change.
-6-
<PAGE> 8
The best performing stocks or market sectors during the recent period were
technology, pharmaceuticals and consumer non-durables. The worst performing
sectors were electrical utilities, petroleum companies and telecommunications.
Q. What changes did you make to the Portfolio during the period?
A. During the March market correction, we took advantage of lower stock
prices to add to some of our existing holdings. For example, in the technology
sector we added to our positions in Oracle (2.1%) and Computer Associates
(2.0%).*
We also sold a few stocks, such as H.J. Heinz, when their prices moved high
enough to reach our price targets. We then used that money to invest in stocks
with more attractive valuations or to add to our existing positions.
Q. What is your outlook for the stock market and the Portfolio going
forward?
A. We can't attempt to guess what's going to happen in the financial
markets. We're not market timers. But we expect that economic growth probably
will slow through 1997 to a more sustainable rate. Corporate profits will
continue to move higher, while inflation should stay in check.
If the trend we have seen continues, more investors will begin to focus on
company fundamentals and invest in medium-sized and smaller companies that
make up almost three quarters of the S&P 500. That should cause those shares
to perform better and should benefit the Portfolio.
THE ARCH EQUITY INCOME FUND
Q. What is the Portfolio's objective?
A. The Portfolio, which first opened to investors on March 10, 1997, seeks
to provide an above-average level of income consistent with long-term capital
appreciation. We emphasize a value approach to investing, looking at
fundamentals such as price-to-earnings ratios, cash flow and book value. We
generally invest in shares of large, high quality companies, as our benchmark
is the Russell 1000 Value Index, an unmanaged index that tracks the 1000
largest companies by market capitalization.
Q. How will the Portfolio attempt to add value to the Index?
A. The Portfolio generally will attempt to add value through individual
stock selection rather than by making large bets on particular sectors of the
market. We will keep cash within a range of 0-10% of the total portfolio.
Recently, the Portfolio included investments across the following industry
groups: banking (24%), medical (14%), financial services (10%), chemicals
(7%), utilities (6%) and electrical equipment (5%).*
Q. What type of investor should consider this Portfolio?
A. This is a relatively conservative investment. It may be suitable for
investors looking for a portfolio that seeks to generate a combination of
income and capital gains by investing in reasonably valued stocks of good
quality companies.
THE ARCH BALANCED PORTFOLIO
Q. What were the conditions that affected the Portfolio's performance during
the six months ended May 31, 1997?
A. The Portfolio and its performance was affected by conditions in both the
stock and fixed-income markets. Stocks continued to post strong gains during
the recent period, and the biggest gains continued to come from shares of
domestic large-company stocks. In the fixed-income markets, prices of longer-
term bonds declined during most of the period as concerns about rising
inflation caused interest rates to increase.
- ------
* Portfolio composition is subject to change.
-7-
<PAGE> 9
Q. How did you manage the Portfolio to address those conditions?
A. The Portfolio as a rule invests about 50% to 60% of its assets in stocks
with the remainder in bonds. The strength of the stock market caused us to
reduce the Portfolio's equity stake to around 55% of assets by the end of the
period on the grounds that share prices were becoming more fully valued.
Q. In what types of stocks did you find the best opportunities?
A. The Portfolio's equity portion is managed along the same lines as the
ARCH Growth & Income Equity Portfolio. That means we favor undervalued shares
of companies with strong earnings growth potential. During the recent period,
the Portfolio held stocks in the consumer growth sector, banks and other
financial service firms and the technology industry. Industrial cyclicals and
energy and utility companies were also represented.
Q. What types of bonds did the Portfolio hold?
A. The Portfolio's fixed-income holdings are similar to those in the ARCH
Government & Corporate Bond Portfolio: intermediate-term, high-quality
Treasury and U.S. Government agency issues.
We try to model the fixed-income portion of the Portfolio on the Lehman
Brothers Aggregate Bond Index, which is an unmanaged index comprised of the
Lehman Bros. Government/Corporate Bond Index and two Lehman Bros. asset-backed
securities indices. We remained relatively neutral to the Index in terms of
duration and average maturity, with the intention of trying to guard
investors' principal.
Q. How will you manage the Portfolio going forward?
A. We are not likely to alter the Portfolio's mix of 55% stocks, 37% bonds
and 8% cash equivalents during the next few months. However, the Investment
Adviser's investment management committee will continually observe the
financial markets and make any necessary changes to the Portfolio's asset
allocation that will benefit shareholders.
THE ARCH SMALL CAP EQUITY PORTFOLIO+
Q. What was the environment like for small-company stocks during the six
months ended May 31, 1997?
A. During the first five months of this period, small-company stocks
severely underperformed shares of larger companies. Small-company stocks
typically underperform during periods of economic uncertainty. In this case,
investors were concerned about the economy and the likelihood that the Federal
Reserve would raise interest rates, and that caused small stocks to lag the
rest of the market. There also were earnings disappointments among small-
company stocks, further contributing to their poor performance.
Q. Any signs of a turnaround in the small-company sector?
A. Yes. These stocks lagged behind the rest of the market so much that in
May investors began to recognize that the shares of smaller firms offered
relatively good value. The Portfolio's diversified holdings benefited from
this broadening of the market.
Q. How did you manage the Portfolio during the past six months?
A. We believe that periods of market weakness are good opportunities for our
disciplined relative-value stock selection style. Since many stocks were so
out of favor for most of the period, we found a number of good companies
trading at far more reasonable prices than we'd seen in the previous year. And
we were able to find good values across all market sectors and industries. For
example, we purchased shares of National Data Corp. (1.8% of portfolio), a
data processing services company, and Blyth Industries (1.3%), which produces
and markets household products.
During the past six months we also slightly increased our weighting in
industrial cyclical stocks. The general impression among investors is that the
economy is slowing down, and this has created some good values in such stocks.
We saw this as an opportunity to buy shares of companies whose prices have
suffered from perceived economic sensitivity, such as Minerals Technologies
(1.7%), which produces calcium carbonate for the whitening of paper products,
and OM Group (1.1%), a metals-based specialty chemical company.*
- ------
* Portfolio composition is subject to change.
+ Investing in small capitilization stock can involve additional risk, due to
their historic volatility.
-8-
<PAGE> 10
Q. What is your outlook for the economy and the Portfolio in the months
ahead?
A. We anticipate a slowdown in the economy's growth rate. The Federal
Reserve has made it clear that it will continue to slow the rate of economic
growth if it sees evidence of inflation. That should create a nice environment
for our broadly-diversified relative-value stock selection strategy. We still
believe that small-company stocks are inexpensive relative to large-company
shares and therefore represent some of the best opportunities in the market.
THE ARCH EQUITY INDEX PORTFOLIO
Q. Tell us about this new Portfolio, which opened to investors on May 1,
1997.
A. The Portfolio is an index fund, as its name suggests. It attempts to
mirror the performance of the Standard & Poor's 500 Index, the domestic stock
market's most widely used performance benchmark. The Standard & Poor's 500
Index is an unmanaged index generally representative of the U.S. stock market.
Q. What type of investor should consider the Portfolio?
A. The Portfolio may be appropriate for investors who want to aim for
returns before deduction of operating expenses that are roughly in line with
those of the S&P 500.
Q. Will the Portfolio show precisely the same gains and losses as the Index?
A. Index funds tend to lag their benchmarks by a small margin. Funds'
expenses are one reason for that difference. Another reason: The funds
generally hold a small amount of cash unless they rebalance their portfolios
every day, and that cash can act as a slight anchor on performance when the
market is rising. Going forward, we expect that the Portfolio's performance
should be very close to that of its benchmark index.
THE ARCH BOND INDEX PORTFOLIO
Q. What is the objective of this new Portfolio, and how have you pursued
that objective?
A. This Portfolio, which opened to investors on February 17, 1997, seeks to
match the returns of the Lehman Brothers Aggregate Bond Index, an unmanaged
index comprised of the Lehman Bros. Government/Corporate Bond Index and two
Lehman Bros. asset-backed securities indices. We track the index by holding
securities in roughly the same percentage weightings as the Index across
market sectors and average maturities. For example, the Lehman Brothers
Aggregate Bond Index is made up of 44% Treasuries; our Portfolio holds 43% in
Treasuries.*
Q. What is the reason for the slight variation?
A. There are some limitations as to how closely we can mirror the Index.
When the Index changes, we have to rebalance the Portfolio. But when we
rebalance, we must do so in trading-size blocks--typically in lot sizes of
$500,000 to $1 million. Working with those large trading blocks causes slight
variations in the Portfolio's holdings versus the Index.
Q. What is the Portfolio's average credit rating?
A. The Portfolio's underlying securities have an average credit rating of
AAA, since the Lehman Brothers Aggregate Bond Index has a high exposure to
U.S. Treasury and government agency debt.
Q. What type of investor should consider this Portfolio?
A. An investor who wants broad exposure to the domestic bond market through
a single fund.
- ------
* Portfolio composition is subject to change.
-9-
<PAGE> 11
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
Q. What were the conditions in the taxable bond markets during the period
ended May 31, 1997?
A. Interest rates rose throughout the period, beginning in December when
Federal Reserve Chairman Alan Greenspan hinted that the Fed might raise rates.
The market remained uncertain about the potential for inflation to heat up
until March, when the Fed did raise rates. The yield on the 10-year U.S.
Treasury began the period at 6.06% and rose to 6.65% at the end of May.
Q. How did you manage the Portfolio in that environment?
A. The Portfolio's duration began the period at 5.32 years, but we brought
that down to 4.42 years by May 31. The Portfolio's average maturity declined
from 9.5 years in December to 7.5 years at the end of the period. We achieved
this primarily by decreasing our stake in 30-year Treasuries and buying more
issues that mature in a ten year time period, or in a period of two years or
less. We purchased these shorter maturity securities to reduce the Portfolio's
interest rate risk.
We maintained a 35% stake in mortgage-backed securities, which represents a
full weighting in that sector of the market for this Portfolio. These
securities tend to perform quite well in rising interest rate environments.*
During the period we did not have a stake in corporate issues. We felt that
those securities' slight yield advantage over Treasuries and mortgage-backed
securities did not compensate for their increased credit risk. That additional
risk posed more of a threat than usual, because we anticipated an interest
rate increase, and corporate bonds tend to be somewhat illiquid. Recently,
though, we have begun to see some value in corporate issues, and we intend to
increase the Portfolio's holdings in the corporate sector.
Q. What was the average credit quality of the Portfolio?
A. The Portfolio's underlying securities have an average credit rating of
AAA, which has not changed since the beginning of the period.
Q. What is your outlook for the bond market and the Portfolio going forward?
A. We are maintaining a conservative posture due to the near-term
uncertainties in the market. We also are waiting for clearer economic
indicators that might tell us where interest rates are headed. But we expect
to buy more corporate issues in the next several months as they become
attractive.
THE ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO
Q. What is the objective of this new Portfolio?
A. This Portfolio, which opened to investors on February 17, 1997, seeks as
high a level of current income as is consistent with preservation of capital.
We pursue this goal by holding at least 65% of the Portfolio's assets in non-
convertible corporate debt.
Currently, we have 69% of the Portfolio's assets invested in corporate debt.
Mortgage-backed securities represent 23% of the Portfolio's holdings. Treasury
bonds and cash equivalents make up the remainder of the Portfolio.*
Q. What is the range of maturities in the Portfolio's holdings?
A. The average maturity of the Portfolio's holdings can range between three
and ten years. Currently, the Portfolio's average maturity stands at seven
years, where it has been since its inception in February. We are maintaining
that average maturity because it allows us to accomplish our objective of
generating the highest level of current income without taking on undue
interest rate risk. Relative yields on corporate issues were most attractive
in the seven- to ten-year range.
- ------
* Portfolio composition is subject to change.
-10-
<PAGE> 12
Q. What is the average credit rating of the Portfolio's holdings?
A. The current average credit rating is AA, which is fairly high for this
Portfolio. Lower-quality issues did not offer enough additional yield to
justify their purchase during the period. But as the spreads widen again
between AAA and A yields, we likely will begin to purchase some lower quality
corporate securities in pursuit of higher current income. We do not expect the
Portfolio's average credit rating to fall below A.
Q. Where did you find the best opportunities in the bond markets during the
period?
A. In the corporate markets, AA-rated bonds issued by strong industrial
names such as AT&T and General Electric provided the best returns. We
considered A-rated securities, but yields did not justify buying lower quality
issues yet.
Q. What is your outlook for the bond markets and the Portfolio?
A. We are continuing to look for value in the corporate sector. We expect
that there will be some widening of the spreads between the high-quality
industrial bonds and lower rated securities issued by banks and other
financial institutions. If that occurs, we will move into positions in these
lower rated bonds to increase the Portfolio's income.
The Portfolio is not making any interest rate bets. We believe that our
intermediate maturity structure makes us less risky than a long-term bond
portfolio. But over time, our commitment to high levels of current income has
the potential to provide an attractive total return for this type of fund.
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO
Q. What were the conditions in the Treasury market during the period from
December 1, 1996, through May 31, 1997?
A. Interest rates rose almost continually during the period. They began to
rise in December, when Federal Reserve Chairman Alan Greenspan hinted that the
Fed might have to raise short-term rates to head off inflation. The Fed did
indeed raise interest rates in March. The yield on the five-year Treasury rose
from 5.88% at the beginning of December to 6.49% at the end of the period.
Q. How did you manage the Portfolio in that environment?
A. We decreased the Portfolio's average duration from 2.91 to 2.64 years
during the period. The Portfolio's average maturity declined from 4.3 years to
3.8 years, mostly due to our decision to replace ten-year Treasuries with
securities that mature in two years or less.
We also maintained our relatively high 40% exposure to mortgage-backed
securities during the period, which represents a full position for the Fund.
Mortgage-backed securities tend to perform well in a rising interest rate
environment, and in fact, this sector far outperformed the other fixed-income
markets during the period.
Q. What about the Portfolio's credit quality?
A. The Portfolio's underlying securities have an average credit rating of
AAA, which remains unchanged, since we invest in high-quality Treasury and
government agency debt.
Q. What is your outlook for the Treasury market and your strategy going
forward?
A. We are looking for a clearer trend in inflation and the direction of
interest rates. That is why our duration and average maturity are neutral to
the market. The Federal Reserve has indicated that it will strike preemptively
if it sees further indications of inflation.
----------------
-11-
<PAGE> 13
In closing, we thank you for your continued confidence and trust in The ARCH
Mutual Funds and look forward to continuing to provide you with expert
investment management to help you meet your present and future financial
needs.
If you should require any assistance or additional information not contained
in this report, please feel free to call your Investment Representative or The
ARCH Shareholder Servicing Center at 1-800-452-ARCH.
Sincerely,
/s/ Jerry V. Woodham /s/ John H. Blixen
Jerry V. Woodham John H. Blixen
Chairman President
The ARCH Funds, Inc. Mississippi Valley Advisors Inc.
Investment Adviser
An investment in the Portfolios are neither insured nor guaranteed by the
U.S. Government, the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any government agency, are not obligations or guaranteed, or
endorsed by the bank, or the distributor. An investment in the Portfolios
involves investment risk, including the possible loss of principal. The Money
Market Portfolios' yields will fluctuate and there can be no assurance that
the funds will be able to maintain a stable net asset value of $1.00 per
share. The composition of the Portfolios' holdings is subject to change. This
material must be accompanied or preceded by a prospectus for The ARCH Funds.
The ARCH Mutual Funds are distributed by BISYS Fund Services.
-12-
<PAGE> 14
TABLE OF CONTENTS
Statements of Assets and Liabilities
Page 14
Statements of Operations
Page 24
Statements of Changes in Net Assets
Page 29
Schedules of Portfolio Investments
Page 37
Notes to Financial Statements
Page 86
Financial Highlights
Page 104
-13-
<PAGE> 15
THE ARCH FUND, INC.
Statements of Assets and Liabilities
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
------------------ ----------------- ------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $916,990,684; $167,752,614;
$136,294,224, respectively) ...................................... $916,990,684 $167,752,614 $136,294,224
Cash ............................................................... 353 616 --
Interest and dividends receivable .................................. 3,422,991 1,701,819 1,059,678
Prepaid expenses and other assets .................................. 8,686 12,624 2,267
----------------- ---------------- -----------------
Total Assets ............................................ 920,422,714 169,467,673 137,356,169
----------------- ---------------- -----------------
LIABILITIES:
Cash overdraft ..................................................... -- -- 6,977
Dividends payable .................................................. 3,977,977 651,834 386,950
Accrued expenses and other payables:
Investment advisory fees ..................................... 278,982 48,960 40,811
Administration fees .......................................... 10,006 1,878 1,506
Distribution and services fees ............................... 19,084 1,518 2,970
Administrative services fees ................................. 88,953 1,236 5,236
Accounting and custodian fees ................................ 29,034 5,062 5,268
Other ........................................................ 114,951 16,910 9,050
----------------- ---------------- -----------------
Total Liabilities ....................................... 4,518,987 727,398 458,768
----------------- ---------------- -----------------
NET ASSETS:
Capital ............................................................ 915,901,249 168,729,729 136,885,241
Undistributed net investment income ................................ 7,450 5,719 12,160
Accumulated undistributed net realized gains (losses) from
investment transactions .......................................... (4,972) 4,827 --
----------------- ---------------- -----------------
Net Assets .............................................. $ 915,903,727 $ 168,740,275 $ 136,897,401
================= ================ =================
</TABLE>
Continued
-14-
<PAGE> 16
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
------------------ ----------------- ------------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ............................................ $ 86,591,150 $ 5,993,478 $ 13,385,739
Investor B Shares ............................................ 85,298 -- --
Trust Shares ................................................. 806,187,406 162,313,318 123,511,662
Institutional Shares ......................................... 23,039,873 433,479 --
----------------- ---------------- -----------------
Total ................................................... $ 915,903,727 $ 168,740,275 $ 136,897,401
================= ================ =================
Outstanding shares of common stock
Investor A Shares ............................................ 86,590,943 5,993,459 13,385,700
Investor B Shares ............................................ 85,299 -- --
Trust Shares ................................................. 806,185,199 162,305,200 123,511,629
Institutional Shares ......................................... 23,039,808 433,485 --
----------------- ---------------- -----------------
Total ................................................... 915,901,249 168,732,144 136,897,329
================= ================ =================
Net asset value
Investor A Shares(a).......................................... $ 1.00 $ 1.00 $ 1.00
Investor B Shares*............................................ 1.00 -- --
Trust Shares(a)............................................... 1.00 1.00 1.00
Institutional Shares(a)....................................... 1.00 1.00 --
================= ================ =================
</TABLE>
- -------------
(a) Offering price and redemption price are the same.
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-15-
<PAGE> 17
THE ARCH FUND, INC.
Statements of Assets and Liabilities
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio Portfolio
--------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $327,491,968; $211,945,723; and
$52,661,016, respectively) ..................................... $435,726,534 $230,497,282 $63,008,772
Cash ............................................................. 658 860 1,503
Foreign currency ................................................. -- -- 1,250,829
Interest and dividends receivable ................................ 476,505 83,605 115,666
Receivable from brokers for investments sold ..................... -- 26,268 821,984
Receivable for portfolio shares issued ........................... 7,534 18,251 18,987
Reclaim receivable ............................................... -- -- 67,347
Unamortized organization costs ................................... -- -- 10,149
Prepaid expenses and other assets ................................ 4,580 12,942 3,633
------------- ------------- ------------
Total Assets ............................................. 436,215,811 230,639,208 65,298,870
------------- ------------- ------------
LIABILITIES:
Dividends payable ................................................ 414,783 -- --
Payable to brokers for investments purchased ..................... 905,107 958,403 160,132
Payable for portfolio shares redeemed ............................ 37,292 22,344 --
Accrued expenses and other payables:
Investment advisory fees ..................................... 199,348 140,324 54,455
Administration fees .......................................... 4,759 2,512 716
Distribution and services fees ............................... 14,439 4,392 1,180
Administrative services fees ................................. 20,503 8,024 1,640
Accounting and custodian fees ................................ 31,759 16,598 37,543
Other ........................................................ 58,619 19,168 5,057
------------- ------------- ------------
Total Liabilities ........................................ 1,686,609 1,171,765 260,723
------------- ------------- ------------
NET ASSETS:
Capital .......................................................... 281,220,646 201,361,605 53,964,139
Undistributed net investment income (loss) ....................... 114,100 (50,560) 119,465
Net unrealized appreciation from investments ..................... 108,234,566 18,551,559 11,507,852
Net unrealized depreciation from translation of assets and
liabilities in foreign currencies............................... -- -- (1,202,174)
Accumulated undistributed net realized gains (losses) from
investment transactions ........................................ 44,959,890 9,604,839 (1,129,337)
Accumulated undistributed net realized gains from foreign
currency transactions .......................................... -- -- 1,778,202
============= ============= ============
Net Assets ............................................... $434,529,202 $229,467,443 $65,038,147
============= ============= ============
</TABLE>
Continued
-16-
<PAGE> 18
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio Portfolio
------------- ------------- -------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ............................................. $ 41,436,697 $ 13,336,491 $ 2,990,598
Investor B Shares ............................................. 4,926,062 1,369,646 521,270
Trust Shares .................................................. 305,341,939 181,715,032 54,907,686
Institutional Shares .......................................... 82,824,504 33,046,274 6,618,593
------------ ------------ -----------
Total ..................................................... $434,529,202 $229,467,443 $65,038,147
============ ============ ===========
Outstanding shares of common stock
Investor A Shares ............................................. 2,192,999 985,531 240,025
Investor B Shares ............................................. 262,645 102,814 42,538
Trust Shares .................................................. 16,111,363 13,321,844 4,373,348
Institutional Shares .......................................... 4,383,240 2,450,073 532,009
------------ ------------ -----------
Total ..................................................... 22,950,247 16,860,262 5,187,920
============ ============ ===========
Net asset value
Investor A Shares--redemption price per share ................. $ 18.89 $ 13.53 $ 12.46
Investor B Shares--offering price per share *.................. 18.76 13.32 12.25
Trust Shares--offering and redemption price per share ......... 18.95 13.64 12.56
Institutional Shares--offering and redemption price per share . 18.90 13.49 12.44
============ ============ ===========
Maximum Sales Charge: Investor A Shares ........................... 4.50% 4.50% 4.50%
------------ ------------ -----------
Maximum Offering Price (100%/ (100%-Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share: Investor A
Shares........................................................... $ 19.78 $ 14.17 $ 13.05
============ ============ ===========
</TABLE>
- ----------
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-17-
<PAGE> 19
THE ARCH FUND, INC.
Statements of Assets and Liabilities
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Equity Equity
Income Index Balanced
Portfolio Portfolio Portfolio
------------- --------- ----------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $82,591,906; $25,163,040; and
$101,783,519, respectively) ............................. $120,403,654 $26,641,966 $116,946,416
Cash ...................................................... 744 561 317
Interest and dividends receivable ......................... 258,487 50,482 613,327
Receivable for portfolio shares issued .................... 286 -- --
Unamortized organization costs ............................ 29,728 -- 4,461
Prepaid expenses and other assets ......................... 4,700 -- 5,181
------------ ----------- ------------
Total Assets ...................................... 120,697,599 26,693,009 117,569,702
------------ ----------- ------------
LIABILITIES:
Dividends payable ......................................... 343,615 51,316 283,642
Payable to brokers for investments purchased .............. 405,965 -- 227,332
Accrued expenses and other payables:
Investment advisory fees .............................. -- -- 73,849
Administration fees ................................... 722 292 1,280
Distribution and services fees ........................ 16 -- 2,837
Administrative services fees .......................... -- -- 15,364
Accounting and custodian fees ......................... 1,285 -- 10,488
Other ................................................. 11,829 1,133 16,857
------------ ----------- ------------
Total Liabilities ................................. 763,432 52,741 631,649
------------ ----------- ------------
NET ASSETS:
Capital ................................................... 69,527,821 25,153,010 93,712,094
Undistributed net investment income ....................... 54,487 8,372 50,164
Net unrealized appreciation from investments .............. 37,811,748 1,478,926 15,162,897
Accumulated undistributed net realized gains (losses) from
investment transactions ................................. 12,540,111 (40) 8,012,898
------------ ----------- ------------
Net Assets ........................................ $119,934,167 $26,640,268 $116,938,053
============ =========== ============
</TABLE>
Continued
-18-
<PAGE> 20
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Equity Equity
Income Index Balanced
Portfolio Portfolio Portfolio
------------ ----------- ------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ...................................... $ 41,053 $ 2,118 $ 9,706,620
Investor B Shares ...................................... 6,860 -- 449,554
Trust Shares ........................................... 119,885,241 26,637,091 46,138,443
Institutional Shares ................................... 1,013 1,059 60,643,436
------------ ----------- ------------
Total .............................................. $119,934,167 $26,640,268 $116,938,053
============ =========== ============
Outstanding shares of common stock
Investor A Shares ...................................... 4,061 200 790,401
Investor B Shares ...................................... 678 -- 36,909
Trust Shares ........................................... 11,852,502 2,514,823 3,756,067
Institutional Shares ................................... 100 100 4,951,874
------------ ----------- ------------
Total .............................................. 11,857,341 2,515,123 9,535,251
============ =========== ============
Net asset value
Investor A Shares--redemption price per share .......... $ 10.11 $ 10.59 $ 12.28
Investor B Shares--offering price per share *........... 10.12 -- 12.18
Trust Shares--offering and redemption price per share .. 10.11 10.59 12.28
Institutional Shares--offering and redemption price per
share ................................................ 10.13 10.59 12.25
============ =========== ============
Maximum Sales Charge: Investor A Shares .................... 4.50% 2.50% 4.50%
------------ ----------- ------------
Maximum Offering Price (100%/ (100%-Maximum Sales Charge)
of net asset value adjusted to nearest cent) per share:
Investor A Shares ........................................ $ 10.59 $ 10.86 $ 12.86
============ =========== ============
</TABLE>
- ----------
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-19-
<PAGE> 21
THE ARCH FUND, INC.
Statements of Assets and Liabilities
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Government & U.S. Short-
Corporate Government Intermediate
Bond Securities Municipal
Portfolio Portfolio Portfolio
-------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $161,041,875; $81,684,694;
$27,800,132, respectively) ..................................... $161,378,982 $81,469,209 $27,800,445
Cash ............................................................. -- 30,984 --
Interest and dividends receivable ................................ 1,573,892 885,569 414,780
Unamortized organization costs ................................... -- -- 3,104
Prepaid expenses and other assets ................................ 5,477 4,214 7,287
------------- ------------ ------------
Total Assets ............................................. 162,958,351 82,389,976 28,225,616
------------- ------------ ------------
LIABILITIES:
Cash overdraft ................................................... 68,012 -- 24,996
Dividends payable ................................................ 776,572 397,247 96,493
Payable for portfolio shares redeemed ............................ -- 10,000 --
Accrued expenses and other payables:
Investment advisory fees ..................................... 61,583 31,298 --
Administration fees .......................................... 1,770 897 307
Distribution and services fees ............................... 1,645 1,756 --
Administrative and services fees ............................. 3,941 1,684 --
Accounting and custodian fees ................................ 13,590 6,890 2,669
Other ........................................................ 19,735 4,960 2,998
------------- ------------ ------------
Total Liabilities ........................................ 946,848 454,732 127,463
------------- ------------ ------------
NET ASSETS:
Capital .......................................................... 163,944,893 82,642,077 28,097,840
Undistributed net investment income .............................. 2,351 218,765 --
Net unrealized appreciation (depreciation) from investments ...... 337,107 (215,485) 313
Accumulated undistributed net realized losses from investment
transactions ................................................... (2,272,848) (710,113) --
------------- ------------ ------------
Net Assets ............................................... $162,011,503 $81,935,244 $28,098,153
============= ============ ============
</TABLE>
Continued
-20-
<PAGE> 22
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Government & U.S. Short-
Corporate Government Intermediate
Bond Securities Municipal
Portfolio Portfolio Portfolio
--------------- ------------- -------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ............................................ $ 4,606,807 $ 5,349,197 $ 31,280
Investor B Shares ............................................ 575,562 413,390 --
Trust Shares ................................................. 141,220,745 69,406,251 28,066,873
Institutional Shares ......................................... 15,608,389 6,766,406 --
------------- ------------ ------------
Total .................................................... $162,011,503 $81,935,244 $28,098,153
============= ============ ============
Outstanding shares of common stock
Investor A Shares ............................................ 458,760 510,176 3,126
Investor B Shares ............................................ 57,297 39,450 --
Trust Shares ................................................. 14,062,830 6,619,286 2,806,370
Institutional Shares ......................................... 1,554,202 647,489 --
------------- ------------ ------------
Total .................................................... 16,133,089 7,816,401 2,809,496
============= ============ ============
Net asset value
Investor A Shares............................................. $ 10.04 $ 10.49 $ 10.01
Investor B Shares*............................................ 10.05 10.48 --
Trust Shares.................................................. 10.04 10.49 10.00
Institutional Shares.......................................... 10.04 10.45 --
============= ============ ============
Maximum Sales Charge: Investor A Shares .......................... 4.50% 2.50% 2.50%
------------- ------------ ------------
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share: Investor A Shares $ 10.51 $ 10.76 $ 10.27
============= ============ ============
</TABLE>
- ----------
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-21-
<PAGE> 23
THE ARCH FUND, INC.
Statements of Assets and Liabilities
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Missouri National Intermediate
Tax-Exempt Municipal Corporate Bond
Bond Bond Bond Index
Portfolio Portfolio Portfolio Portfolio
------------- -------------- --------------- -------------
ASSETS:
<S> <C> <C> <C> <C>
Investments, at value (Cost $88,281,124;
$331,006,272; $38,672,237; $129,101,860,
respectively) ................................. $90,319,745 $336,965,617 $38,662,154 $129,411,455
Cash ............................................ 12,518 233 -- 63,457
Interest and dividends receivable ............... 1,397,161 5,659,660 583,798 1,297,473
Receivable for portfolio shares issued .......... -- 1,204 -- 317
Unamortized organization costs .................. -- 30,849 19,705 16,947
Prepaid expenses and other assets ............... 781 55,031 1,465 1,846
----------- ------------ ----------- ------------
Total Assets ............................ 91,730,205 342,712,594 39,267,122 130,791,495
----------- ------------ ----------- ------------
LIABILITIES:
Cash overdraft .................................. -- -- 2,806 --
Dividends payable ............................... 371,957 1,496,540 225,930 762,289
Payable to brokers for investments purchased .... -- 14,730,870 -- --
Payable for portfolio shares redeemed ........... 52,816 -- -- --
Accrued expenses and other payables:
Investment advisory fees .................... 34,821 -- -- --
Administration fees ......................... 997 1,959 978 5,990
Distribution and services fees .............. 4,858 65 -- 18
Accounting and custodian fees ............... 8,405 572 484 10,426
Other ....................................... 4,656 55,331 16,308 27,152
----------- ------------ ----------- ------------
Total Liabilities ....................... 478,510 16,285,337 246,506 805,875
----------- ------------ ----------- ------------
NET ASSETS:
Capital ......................................... 89,331,647 313,384,564 38,530,580 129,202,791
Undistributed net investment income ............. -- -- -- --
Net unrealized appreciation (depreciation) from
investments ................................... 2,038,621 5,959,345 (10,083) 309,595
Accumulated undistributed net realized gains
(losses) from investment transactions ......... (118,573) 7,083,348 500,119 473,234
----------- ------------ ----------- ------------
Net Assets .............................. $91,251,695 $326,427,257 $39,020,616 $129,985,620
=========== ============ =========== ============
</TABLE>
Continued
-22-
<PAGE> 24
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Missouri National Intermediate
Tax-Exempt Municipal Corporate Bond
Bond Bond Bond Index
Portfolio Portfolio Portfolio Portfolio
------------ ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Assets
Investor A Shares ........................... $23,564,899 $ 542,574 $ 65,587 $ 45,985
Investor B Shares ........................... 924,168 1,017 -- --
Trust Shares ................................ 66,762,628 325,883,666 38,954,033 129,938,635
Institutional Shares ........................ -- -- 996 1,000
------------ ------------- ------------ -------------
Total ................................... $91,251,695 $326,427,257 $39,020,616 $129,985,620
============ ============= ============ =============
Outstanding shares of common stock
Investor A Shares ........................... 2,032,871 54,515 6,674 4,658
Investor B Shares ........................... 79,808 102 -- --
Trust Shares ................................ 5,758,913 32,725,131 3,965,484 13,180,641
Institutional Shares ........................ -- -- 101 101
------------ ------------- ------------ -------------
Total ................................... 7,871,592 32,779,748 3,972,259 13,185,400
============ ============= ============ =============
Net asset value
Investor A Shares............................ $ 11.59 $ 9.95 $ 9.83 $ 9.87
Investor B Shares*........................... 11.58 9.96 -- --
Trust Shares................................. 11.59 9.96 9.82 9.86
Institutional Shares ........................ -- -- 9.83 9.87
============ ============= ============ =============
Maximum Sales Charge: Investor A Shares ......... 4.50% 4.50% 4.50% 2.50%
------------ ------------- ------------ -------------
Maximum Offering Price (100%/(100%-Maximum Sales
Charge) of net asset value adjusted to nearest
cent) per share: Investor A Shares............. $ 12.14 $ 10.42 $ 10.29 $ 10.12
============ ============= ============ =============
</TABLE>
- ----------
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-23-
<PAGE> 25
THE ARCH FUND, INC.
Statements of Operations
For the six months ended May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
-------------- -------------- --------------
<S> <C> <C> <C>
Investment Income:
Interest income .......................................... $ 24,578,819 $ 3,761,283 $ 2,421,275
------------ ------------ ------------
Total Income 24,578,819 3,761,283 2,421,275
------------ ------------ ------------
Expenses:
Investment advisory fees ................................. 1,779,205 289,552 275,948
Administration fees ...................................... 889,609 144,777 68,986
Distribution and services fees--Investor A Shares ........ 111,132 8,339 20,820
Distribution and services fees--Investor B Shares ........ 298 -- --
Administrative services fees--Trust Shares ............... 500,868 58,882 36,047
Administrative services fees--Institutional Shares ....... 26,871 395 --
Custodian and accounting fees ............................ 60,778 10,124 10,632
Legal and audit fees ..................................... 51,759 4,528 5,707
Organization costs ....................................... -- 105 --
Directors' fees and expenses ............................. 10,770 1,284 1,618
Transfer agent fees ...................................... 118,135 14,999 16,624
Registration and filing fees ............................. 29,030 6,196 7,965
Printing costs ........................................... 34,169 14,801 4,286
Other .................................................... 9,218 1,531 566
Expenses voluntarily reduced ............................. (667,201) (108,581) (34,494)
------------ ------------ ------------
Total Expenses ................................... 2,954,641 446,932 414,705
Net Investment Income .................................... 21,624,178 3,314,351 2,006,570
------------ ------------ ------------
Realized/Unrealized Gains (Losses) from Investment
Transactions:
Net realized gains from investment transactions .......... 1,566 4,470 --
------------ ------------ ------------
Net realized/unrealized gains from investment transactions 1,566 4,470 --
------------ ------------ ------------
Change in net assets resulting from operations ........... $ 21,625,744 $ 3,318,821 $ 2,006,570
============ ============ ============
</TABLE>
- ----------
See notes to financial statements
-24-
<PAGE> 26
THE ARCH FUND, INC.
Statements of Operations
For the six months ended May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio Portfolio
-------------- ------------ -------------
<S> <C> <C> <C>
Investment Income:
Interest income ........................................... $ 246,420 $ 199,624 $ 554,342
Dividend income ........................................... 3,280,983 757,863 --
Income from securities lending ............................ 16,208 61,243 --
Foreign tax withholding ................................... -- -- (57,113)
------------ ------------ -----------
Total Income ...................................... 3,543,611 1,018,730 497,229
------------ ------------ -----------
Expenses:
Investment advisory fees .................................. 1,110,574 813,391 308,190
Administration fees ....................................... 404,002 216,906 61,638
Distribution and services fees--Investor A Shares ......... 57,737 19,777 4,019
Distribution and services fees--Investor B Shares ......... 20,438 6,380 2,320
Administrative services fees--Institutional Shares ........ 112,484 46,096 9,249
Custodian and accounting fees ............................. 62,820 35,101 53,270
Legal and audit fees ...................................... 27,995 12,977 3,852
Organization costs ........................................ -- 3,276 2,730
Directors' fees and expenses .............................. 5,779 2,740 728
Transfer agent fees ....................................... 63,452 30,908 9,626
Registration and filing fees .............................. 8,490 16,565 7,384
Printing costs ............................................ 19,229 9,789 3,119
Other ..................................................... 4,608 2,281 728
Expenses voluntarily reduced .............................. (202,004) (108,451) (81,385)
------------ ------------ -----------
Total Expenses .................................... 1,695,604 1,107,736 385,468
------------ ------------ -----------
Net Investment Income (Loss) .............................. 1,848,007 (89,006) 111,761
------------ ------------ -----------
Realized/Unrealized Gains (Losses) from Investments
and Foreign Currency:
Net realized gains from investment transactions ........... 46,332,565(a) 9,605,811 658,010
Net realized losses foreign currency transactions ......... -- -- (41,192)
Change in unrealized appreciation from investments ........ 2,724,029(a) 6,902,419 3,277,528
Change in unrealized appreciation from translation of
assets and liabilities in foreign currencies ............ -- -- 5,490
------------ ------------ -----------
Net realized/unrealized gains from investments and foreign
currency ................................................ 49,056,594 16,508,230 3,899,836
------------ ------------ -----------
Change in net assets resulting from operations ............ $50,904,601 $16,419,224 $4,011,597
============ ============ ===========
</TABLE>
- ----------
(a) Includes appreciation from acquired common trust fund.
See notes to financial statements
-25-
<PAGE> 27
THE ARCH FUND, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Equity Equity
Income Index Balanced
Portfolio Portfolio Portfolio
---------------- --------------- --------------
For the period For the For the six
February 26, period May 1, months
1997 through 1997 through ended May
May 31, 1997(a) May 31, 1997(a) 31, 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Investment Income:
Interest income .......................................... $ 117,179 $ 15,437 $ 1,721,412
Dividend income .......................................... 573,307 51,352 518,151
Income from securities lending ........................... 1,616 -- 15,201
----------- ---------- -----------
Total Income ..................................... 692,102 66,789 2,254,764
----------- ---------- -----------
Expenses:
Investment advisory fees ................................. 197,973 6,451 423,995
Administration fees ...................................... 52,793 4,301 113,066
Distribution and services fees--Investor A Shares ........ 16 -- 13,822
Distribution and services fees--Investor B Shares ........ 17 -- 1,834
Administrative services fees--Institutional Shares ....... 1 -- 84,210
Custodian and accounting fees ............................ 1,692 -- 22,400
Legal and audit fees ..................................... 3,572 -- 7,028
Organization costs ....................................... 752 -- 2,548
Directors' fees and expenses ............................. 658 -- 1,613
Transfer agent fees ...................................... 11,656 -- 16,208
Registration and filing fees ............................. 6,486 -- 12,363
Printing costs ........................................... 2,350 -- 4,814
Other .................................................... 470 4,950 587
Expenses voluntarily reduced ............................. (236,248) (8,601) (56,532)
----------- ---------- -----------
Total Expenses ................................... 42,188 7,101 647,956
----------- ---------- -----------
Net Investment Income .................................... 649,914 59,688 1,606,808
----------- ---------- -----------
Realized/Unrealized Gains (Losses) from Investments
and Foreign Currency:
Net realized gains (losses) from investment transactions . 12,540,111(b) (40) 8,427,666(b)
Change in unrealized appreciation (depreciation) from
investments ............................................ 37,811,748(b) 1,478,926 (3,129,436)(b)
----------- ---------- -----------
Net realized/unrealized gains from investments ........... 50,351,859 1,478,886 5,298,230
----------- ---------- -----------
Change in net assets resulting from operations ........... $51,001,773 $1,538,574 $ 6,905,038
=========== ========== ===========
</TABLE>
- ----------
(a) Period from commencement of operations.
(b) Includes appreciation from acquired common trust fund.
See notes to financial statements
-26-
<PAGE> 28
THE ARCH FUND, INC.
Statements of Operations
For the six months ended May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Government & U.S. Short-
Corporate Government Intermediate
Bond Securities Municipal
Portfolio Portfolio Portfolio
------------- ------------- -------------
<S> <C> <C> <C>
Investment Income:
Interest income ...................................................... $ 5,233,026 $ 2,447,560 $ 624,361
Dividend income ...................................................... 47,134 33,323 5,235
Income from securities lending........................................ 23,886 11,067 --
------------ ------------ ----------
Total Income 5,304,046 2,491,950 629,596
------------ ------------ ----------
Expenses:
Investment advisory fees ............................................. 362,485 170,374 78,657
Administration fees .................................................. 161,118 75,722 28,603
Distribution and services fees--Investor A Shares .................... 6,916 9,496 115
Distribution and services fees--Investor B Shares .................... 2,653 1,979 --
Administrative services fees--Institutional Shares ................... 22,785 5,545 --
Custodian and accounting fees ........................................ 29,158 14,823 8,810
Legal and audit fees ................................................. 9,663 4,009 4,889
Organization costs ................................................... -- -- 5,278
Directors' fees and expenses ......................................... 1,967 915 369
Transfer agent fees .................................................. 22,112 10,232 4,520
Registration and filing fees ......................................... 7,774 8,020 8,108
Printing costs ....................................................... 6,610 2,993 4,720
Other ................................................................ 1,660 736 359
Expenses voluntarily reduced ......................................... (80,558) (37,860) (92,959)
------------ ------------ ----------
Total Expenses ............................................... 554,343 266,984 51,469
Net Investment Income ................................................ 4,749,703 2,224,966 578,127
------------ ------------ ----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized losses from investment transactions ..................... (916,929) (346,889) --
Change in unrealized depreciation from investments ................... (3,784,547) (866,388) (207,166)
------------ ------------ ----------
Net realized/unrealized losses from investments ...................... (4,701,476) (1,213,277) (207,166)
------------ ------------ ----------
Change in net assets resulting from operations ....................... $ 48,227 $ 1,011,689 $ 370,961
============ ============ ==========
</TABLE>
- ----------
See notes to financial statements
-27-
<PAGE> 29
THE ARCH FUND, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Missouri National Intermediate
Tax-Exempt Municipal Corporate Bond
Bond Bond Bond Index
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- ---------------- ----------------
For the six For the six For the period For the period
months months February 10, February 10,
ended ended 1997 through 1997 through
May 31, 1997 May 31, 1997 May 31, 1997(a) May 31, 1997(a)
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income ........................ $2,316,695, $ 8,949,939 $1,598,288 $6,130,657
Dividends income ....................... 72,104 70,682 13,580 22,913
Income from securities lending.......... -- -- 872 5,623
---------- ----------- ---------- ----------
Total Income ................... 2,388,799 9,020,621 1,612,740 6,159,193
---------- ----------- ---------- ----------
Expenses:
Investment advisory fees ............... 196,309 863,303 59,488 110,238
Administration fees .................... 87,249 156,963 21,632 73,493
Distribution and services fees--Investor
A Shares ............................. 24,550 407 2 28
Distribution and services fees--Investor
B Shares ............................. 3,665 5 -- --
Administrative services
fees--Institutional Shares ........... -- -- -- 1
Custodian and accounting fees .......... 18,363 5,131 1,998 12,245
Legal and audit fees ................... 5,087 19,366 2,886 8,103
Organization costs ..................... -- 3,159 888 1,554
Directors' fees and expenses ........... 895 4,956 444 1,332
Transfer agent fees .................... 10,374 27,773 14,097 6,216
Registration and filing fees ........... 6,230 39,648 5,772 10,212
Printing costs ......................... 4,642 16,491 1,665 7,215
Other .................................. 909 3,186 333 888
Expenses voluntarily reduced ........... (43,624) (934,038) (75,171) (146,984)
---------- ----------- ---------- ----------
Total Expenses ................. 314,649 206,350 34,034 84,541
---------- ----------- ---------- ----------
Net Investment Income .................. 2,074,150 8,814,271 1,578,706 6,074,652
---------- ----------- ---------- ----------
Realized/Unrealized Gains (Losses) from
Investments:
Net realized gains (losses) from
investment transactions .............. (31) 6,968,023 500,119(b) 473,234(b)
Change in unrealized appreciation
(depreciation) from investments ...... (657,885) (9,621,890) (10,083)(b) 309,595(b)
---------- ----------- ---------- ----------
Net realized/unrealized gains (losses)
from investments ..................... (657,916) (2,653,867) 490,036 782,829
---------- ----------- ---------- ----------
Change in net assets resulting from
operations ........................... $1,416,234 $ 6,160,404 $2,068,742 $6,857,481
========== =========== ========== ==========
</TABLE>
- ----------
(a) Period from commencement of operations.
(b) Includes appreciation from acquired common trust fund.
See notes to financial statements
-28-
<PAGE> 30
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Money Market Treasury Money
Portfolio Market Portfolio
-------------------------------- ------------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
---------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ..................... $ 21,624,178 $ 41,477,587 $ 3,314,351 $ 11,384,162
Net realized gains from investment
transactions ............................ 1,566 234 4,470 11,653
--------------- --------------- ------------- --------------
Change in net assets resulting from
operations ................................ 21,625,744 41,477,821 3,318,821 11,395,815
--------------- --------------- ------------- --------------
Distributions to Investor A shareholders:
From net investment income ................ (2,112,220) (3,378,057) (147,485) (214,227)
From net realized gains ................... -- (21) (164) (132)
In excess of net realized gains ........... -- (368) (305) --
Distributions to Investor B shareholders:
From net investment income ................ (1,199) (1,099) -- --
Distributions to Trust shareholders:
From net investment income ................ (18,999,566) (37,166,284) (3,159,879) (11,150,554)
From net realized gains ................... -- (205) (4,297) (11,519)
In excess of net realized gains ........... -- (4,060) (3,725) (527)
Distributions to Institutional shareholders:
From net investment income ................ (511,194) (932,147) (6,987) (19,381)
From net realized gains ................... -- (8) (9) (2)
In excess of net realized gains ........... -- (71) (10) --
--------------- --------------- ------------- --------------
Change in net assets from shareholder
distributions ............................. (21,624,179) (41,482,320) (3,322,861) (11,396,342)
--------------- --------------- ------------- --------------
Capital Transactions:
Proceeds from shares issued ............... 1,901,814,199 2,299,943,459 393,340,381 919,067,677
Dividends reinvested ...................... 9,259,808 14,874,622 1,515,553 3,510,783
Cost of shares redeemed ................... (1,819,564,404) (2,266,756,713) (365,399,579) (1,038,874,963)
--------------- --------------- ------------- --------------
Change in net assets from share transactions. 91,509,603 48,061,368 29,456,355 (116,296,503)
--------------- --------------- ------------- --------------
Change in net assets ........................ 91,511,168 48,056,869 29,452,315 (116,297,030)
Net Assets:
Beginning of period ....................... 824,392,559 776,335,690 139,287,960 255,584,990
--------------- --------------- ------------- --------------
End of period ............................. $ 915,903,727 $ 824,392,559 $ 168,740,275 $ 139,287,960
=============== =============== ============= ==============
Share Transactions:
Issued .................................... 1,901,814,199 2,299,943,459 393,340,381 919,067,677
Reinvested ................................ 9,259,808 14,874,622 1,515,552 3,510,783
Redeemed .................................. (1,819,564,404) (2,266,756,713) (365,399,579) (1,038,874,963)
--------------- --------------- ------------- --------------
Change in shares ............................ 91,509,603 48,061,368 29,456,354 (116,296,503)
=============== =============== ============= ==============
</TABLE>
- ----------
See notes to financial statements
-29-
<PAGE> 31
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Tax-Exempt Growth & Income
Money Market Portfolio Equity Portfolio
----------------------------- ------------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income .......................... $ 2,006,570 $ 2,853,695 $ 1,848,007 $ 5,818,734
Net realized gains from investment transactions. -- -- 46,332,565 36,039,992
Net change in unrealized appreciation from
investments .................................. -- -- 2,724,029 45,449,749
-------------- -------------- -------------- -------------
Change in net assets resulting from operations ... 2,006,570 2,853,695 50,904,601 87,308,475
-------------- -------------- -------------- -------------
Distributions to Investor A shareholders:
From net investment income ..................... (226,878) (265,973) (136,487) (375,855)
In excess of net investment income ............. -- -- (92,554) (1,697)
From net realized gains ........................ -- -- (2,994,418) (1,443,632)
In excess of net capital gains ................. -- (250) -- --
Distributions to Investor B shareholders:
From net investment income ..................... -- (133) (11,083)
In excess of net investment income ............. -- -- (16,391) (2,688)
From net realized gains ........................ -- -- (278,354) (49,605)
Distributions to Trust shareholders:
From net investment income ..................... (1,779,692) (2,587,722) (1,446,100) (4,795,604)
In excess of net investment income ............. -- -- (453,380) (49,002)
From net realized gains ........................ -- -- (27,212,591) (16,436,950)
In excess of net capital gains ................. -- (3,631) -- --
Distributions to Institutional shareholders:
From net investment income ..................... -- -- (265,287) (636,192)
In excess of net investment income ............. -- -- (181,463) (1,490)
From net realized gains ........................ -- -- (5,715,335) (2,330,241)
Change in net assets from shareholder -------------- -------------- -------------- -------------
distributions .................................. (2,006,570) (2,857,576) (38,792,493) (26,134,039)
-------------- -------------- -------------- -------------
Capital Transactions:
Proceeds from shares issued .................... 179,401,045 213,251,311 62,886,888 92,320,506
Dividends reinvested ........................... 418,092 562,557 31,469,288 22,057,938
Cost of shares redeemed ........................ (156,631,715) (183,534,633) (134,838,161) (65,290,328)
-------------- -------------- -------------- -------------
Change in net assets from share transactions ..... 23,187,422 30,279,235 (40,481,985) 49,088,116
-------------- -------------- -------------- -------------
Change in net assets ............................. 23,187,422 30,275,354 (28,369,877) 110,262,552
Net Assets:
Beginning of period ............................ 113,709,979 83,434,625 462,899,079 352,636,527
-------------- -------------- -------------- -------------
End of period .................................. $ 136,897,401 $ 113,709,979 $ 434,529,202 $462,899,079
============== ============== ============== =============
Share Transactions:
Issued ......................................... 179,401,044 213,251,311 4,183,282 5,578,024
Reinvested ..................................... 418,092 562,557 1,844,154 1,403,626
Redeemed ....................................... (156,631,715) (183,534,633) (7,832,973) (3,843,934)
-------------- -------------- -------------- -------------
Change in shares ................................. 23,187,421 30,279,235 (1,805,537) 3,137,716
============== ============== ============== =============
</TABLE>
- ----------
See notes to financial statements
-30-
<PAGE> 32
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
International Equity
Small Cap Equity Portfolio Portfolio
-------------------------------------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
------------- ------------- ----------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income (loss) ....................... $ (89,006) $ 232,304 $ 111,761 $ 248,827
Net realized gains (losses) from investment 9,605,811 13,981,122 658,010 (931,659)
transactions .....................................
Net realized gains (losses) from foreign currency
transactions ..................................... -- -- (41,192) 3,133,420
Net change in unrealized appreciation from 6,902,419 3,579,525 3,277,528 4,679,792
investments ......................................
Change in unrealized appreciation (depreciation)
from translation of assets and liabilities in -- -- 5,490 (1,058,982)
foreign currencies ...............................
------------- ------------- ------------ ------------
Change in net assets resulting from operations ....... 16,419,224 17,792,951 4,011,597 6,071,398
------------- ------------- ------------ ------------
Distributions to Investor A shareholders:
From net investment income ......................... (4,444) -- (1,852) --
In excess of net investment income ................. -- (6,160) (2,626) --
From net realized gains ............................ (588,881) (1,177,710) (30,593) --
In excess of net realized gains .................... (259,564) -- (36,429) --
Distributions to Investor B shareholders:
In excess of net investment income ................. -- -- (605) --
From net realized gains ............................ (56,137) (51,148) (5,208) --
In excess of net realized gains .................... (22,558) -- (6,173) --
Distributions to Trust shareholders:
From net investment income ......................... (115,260) (214,557) (96,137) --
In excess of net investment income ................. -- -- -- --
From net realized gains ............................ (7,603,156) (11,321,459) (557,039) --
In excess of net realized gains .................... (2,870,871) -- (778,674) --
Distributions to Institutional shareholders:
From net investment income ......................... (2,874) -- (3,668) --
In excess of net investment income ................. -- (13,982) (6,926) --
From net realized gains ............................ (1,357,637) (1,397,709) (65,170) --
In excess of net realized gains .................... (486,679) -- (91,103) --
------------- ------------- ------------ ------------
Change in net assets from shareholder distributions .. (13,368,061) (14,182,725) (1,682,203) --
------------- ------------- ------------ ------------
Capital Transactions:
Proceeds from shares issued ........................ 15,359,563 79,498,432 6,183,952 23,675,008
Dividends reinvested ............................... 11,915,591 12,406,113 987,073 --
Cost of shares redeemed ............................ (17,396,410) (51,937,381) (5,712,332) (8,420,843)
------------- ------------- ------------ ------------
Change in net assets from share transactions ......... 9,878,744 39,967,164 1,458,693 15,254,165
------------- ------------- ------------ ------------
Change in net assets ................................. 12,929,907 43,577,390 3,788,087 21,325,563
Net Assets:
Beginning of period ................................ 216,537,536 172,960,146 61,250,060 39,924,497
------------- ------------- ------------ ------------
End of period ...................................... $229,467,443 $216,537,536 $65,038,147 $61,250,060
============= ============= ============ ============
Share Transactions:
Issued ............................................. 1,203,641 6,245,178 527,913 2,083,892
Reinvested ......................................... 936,659 1,012,913 84,952 --
Redeemed ........................................... (1,366,683) (4,004,332) (484,106) (724,654)
------------- ------------- ------------ ------------
Change in shares ..................................... 773,617 3,253,759 128,759 1,359,238
============= ============= ============ ============
</TABLE>
See notes to financial statements
-31-
<PAGE> 33
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Equity Equity
Income Index
Portfolio Portfolio
-------------- --------------
February 26,
1997 to May 1,
May 31, 1997 to May
1997 (a) 31, 1997 (a)
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income ............................................... $ 649,914 $ 59,688
Net realized gains (losses) from investment transactions ............ 12,540,111 (40)
Net change in unrealized appreciation from investments .............. 37,811,748 1,478,926
------------ -----------
Change in net assets resulting from operations ........................ 51,001,773 1,538,574
------------ -----------
Distributions to Investor A shareholders:
From net investment income .......................................... (169) (3)
Distributions to Investor B shareholders:
From net investment income .......................................... (15) --
Distributions to Trust shareholders:
From net investment income .......................................... (595,238) (51,311)
Distributions to Institutional shareholders:
From net investment income .......................................... (5) (2)
------------ -----------
Change in net assets from shareholder distributions ................... (595,427) (51,316)
------------ -----------
Capital Transactions:
Proceeds from shares issued ......................................... 73,467,423 25,153,010
Dividends reinvested ................................................ 5,365 --
Cost of shares redeemed ............................................. (3,944,967) --
------------ -----------
Change in net assets from share transactions .......................... 69,527,821 25,153,010
------------ -----------
Change in net assets .................................................. 119,934,167 26,640,268
Net Assets:
Beginning of period ................................................. -- --
------------ -----------
End of period ....................................................... $119,934,167 $26,640,268
============ ===========
Share Transactions:
Issued .............................................................. 12,269,630 2,515,123
Reinvested .......................................................... 563 --
Redeemed ............................................................ (412,852) --
------------ -----------
Change in shares ...................................................... 11,857,341 2,515,123
============ ===========
</TABLE>
- ----------
(a) Period from commencement of operations.
See notes to financial statements
-32-
<PAGE> 34
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Government & Corporate
Balanced Portfolio Bond Portfolio
----------------------------- ----------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
-------------- -------------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ............................ $ 1,606,808 $ 3,743,265 $ 4,749,703 $ 9,481,729
Net realized gains (losses) from investment 8,427,666 7,057,146 (916,929) 1,012,372
transactions ...................................
Net change in unrealized appreciation
(depreciation) from investments ................ (3,129,436) 7,234,948 (3,784,547) (2,852,662)
------------- ------------- ------------- -------------
Change in net assets resulting from operations ..... 6,905,038 18,035,359 48,227 7,641,439
------------- ------------- ------------- -------------
Distributions to Investor A shareholders:
From net investment income ....................... (125,343) (235,477) (130,032) (325,323)
In excess of net investment income ............... (60,974) -- -- --
From net realized gains .......................... (528,611) (306,345) -- (10,112)
Distributions to Investor B shareholders:
From net investment income ....................... (3,706) (4,068) (13,078) (18,810)
In excess of net investment income ............... (2,342) -- -- --
From net realized gains .......................... (18,197) (1,338) -- (207)
Distributions to Trust shareholders:
From net investment income ....................... (715,595) (2,248,807) (4,178,684) (8,420,741)
In excess of net investment income ............... (311,601) -- -- --
From net realized gains .......................... (3,476,807) (2,656,748) -- (232,344)
Distributions to Institutional shareholders:
From net investment income ....................... (762,164) (1,181,916) (427,909) (716,855)
In excess of net investment income ............... (383,071) -- -- --
From net realized gains .......................... (3,088,298) (1,351,994) -- (17,276)
------------- ------------- ------------- -------------
Change in net assets from shareholder distributions (9,476,709) (7,986,693) (4,749,703) (9,741,668)
------------- ------------- ------------- -------------
Capital Transactions:
Proceeds from shares issued ...................... 12,557,161 25,923,740 16,107,613 42,646,634
Dividends reinvested ............................. 8,974,699 7,792,122 2,725,738 5,921,069
Cost of shares redeemed .......................... (28,223,305) (35,443,035) (13,861,273) (27,482,599)
------------- ------------- ------------- -------------
Change in net assets from share transactions ....... (6,691,445) (1,727,173) 4,972,078 21,085,104
------------- ------------- ------------- -------------
Change in net assets ............................... (9,263,116) 8,321,493 270,602 18,984,875
Net Assets:
Beginning of period .............................. 126,201,169 117,879,676 161,740,901 142,756,026
------------- ------------- ------------- -------------
End of period .................................... $116,938,053 $126,201,169 $162,011,503 $161,740,901
============= ============= ============= =============
Share Transactions:
Issued ........................................... 1,118,561 2,238,696 1,595,365 4,197,687
Reinvested ....................................... 763,204 684,060 269,405 580,294
Redeemed ......................................... (2,393,005) (3,006,390) (1,376,781) (2,689,747)
------------- ------------- ------------- -------------
Change in shares ................................... (511,240) (83,634) 487,989 2,088,234
============= ============= ============= =============
</TABLE>
- ----------
See notes to financial statements
-33-
<PAGE> 35
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Portfolio Municipal Portfolio
-------------------------- ---------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
----------- -------------- ------------ --------------
(Unaudited) (Unaudited)
From Investment Activities:
<S> <C> <C> <C> <C>
Operations:
Net investment income ................................ $ 2,224,966 $ 3,774,130 $ 578,127 $ 1,094,106
Net realized losses from investment transactions ..... (346,889) (408,957) -- --
Net change in unrealized depreciation from
investments ........................................ (866,388) (197,452) (207,166) (16,660)
------------- ------------ ------------ ------------
Change in net assets resulting from operations ......... 1,011,689 3,167,721 370,961 1,077,446
------------- ------------ ------------ ------------
Distributions to Investor A shareholders:
From net investment income ........................... (178,036) (445,187) (1,732) (1,458)
In excess of net realized gains ...................... -- (27,732) -- --
Distributions to Investor B shareholders:
From net investment income ........................... (9,753) (12,608) -- --
In excess of net realized gains ...................... -- (165) -- --
Distributions to Trust shareholders:
From net investment income ........................... (1,933,086) (3,231,786) (576,395) (1,092,648)
In excess of net realized gains ...................... -- (154,647) -- --
Distributions to Institutional shareholders:
From net investment income ........................... (104,091) (84,549) -- --
In excess of net realized gains ...................... -- (2,281) -- --
------------- ------------ ------------ ------------
Change in net assets from shareholder distributions .... (2,224,966) (3,958,955) (578,127) (1,094,106)
------------- ------------ ------------ ------------
Capital Transactions:
Proceeds from shares issued .......................... 23,706,894 20,374,470 2,571,434 9,484,969
Dividends reinvested ................................. 1,273,060 2,512,482 23,128 64,963
Cost of shares redeemed .............................. (11,655,093) (6,672,311) (3,812,328) (3,763,873)
------------- ------------ ------------ ------------
Change in net assets from share transactions ........... 13,324,861 16,214,641 (1,217,766) 5,786,059
------------- ------------ ------------ ------------
Change in net assets ................................... 12,111,584 15,423,407 (1,424,932) 5,769,399
Net Assets:
Beginning of period .................................. 69,823,660 54,400,253 29,523,085 23,753,686
------------- ------------ ------------ ------------
End of period ........................................ $ 81,935,244 $69,823,660 $28,098,153 $29,523,085
============= ============ ============ ============
Share Transactions:
Issued ............................................... 2,261,608 1,922,232 256,755 944,068
Reinvested ........................................... 120,844 236,847 2,310 6,499
Redeemed ............................................. (1,111,314) (627,360) (381,075) (377,354)
------------- ------------ ------------ ------------
Change in shares ....................................... 1,271,138 1,531,719 (122,010) 573,213
============= ============ ============ ============
</TABLE>
- ----------
See notes to financial statements
-34-
<PAGE> 36
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Missouri Tax-Exempt National Municipal Bond
Bond Portfolio Portfolio
--------------------------- ----------------------------
Six months Year Six months November 18,
ended ended ended 1996 to
May 31, November 30, May 31, May 31,
1997 1996 1997 1997(a)
------------ -------------- ----------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ............................. $ 2,074,150 $ 3,550,097 $ 8,814,271 $ 735,988
Net realized gains (losses) from investment
transactions .................................... (31) 70,177 6,968,023 115,325
Net change in unrealized appreciation
(depreciation) from investments ................. (657,885) (87,057) (9,621,890) 1,278,075
------------ ------------ ------------- -------------
Change in net assets resulting from operations ...... 1,416,234 3,533,217 6,160,404 2,129,388
------------ ------------ ------------- -------------
Distributions to Investor A shareholders:
From net investment income ........................ (566,200) (1,169,732) (8,290) (4)
Distributions to Investor B shareholders:
From net investment income ........................ (14,039) (25,005) (23) (3)
Distributions to Trust shareholders:
From net investment income ........................ (1,493,911) (2,355,360) (8,805,958) (735,973)
In excess of net investment income ................ -- -- (8) --
------------ ------------ ------------- -------------
Change in net assets from shareholder distributions . (2,074,150) (3,550,097) (8,814,279) (735,980)
------------ ------------ ------------- -------------
Capital Transactions:
Proceeds from shares issued ....................... 15,310,657 18,205,943 25,495,073 314,008,996
Dividends reinvested .............................. 599,480 1,325,915 3,312 --
Cost of shares redeemed ........................... (5,724,251) (10,722,765) (6,831,896) (4,987,761)
------------ ------------ ------------- -------------
Change in net assets from share transactions ........ 10,185,886 8,809,093 18,666,489 309,021,235
------------ ------------ ------------- -------------
Change in net assets ................................ 9,527,970 8,792,213 16,012,614 310,414,643
Net Assets:
Beginning of period ............................... 81,723,725 72,931,512 310,414,643 --
------------ ------------ ------------- -------------
End of period ..................................... $91,251,695 $81,723,725 $326,427,257 $310,414,643
============ ============ ============= =============
Share Transactions:
Issued ............................................ 1,323,928 1,584,195 2,568,534 31,400,289
Reinvested ........................................ 51,830 114,877 336 --
Redeemed .......................................... (495,728) (921,381) (691,228) (498,183)
------------ ------------ ------------- -------------
Change in shares .................................... 880,030 777,691 1,877,642 30,902,106
============ ============ ============= =============
</TABLE>
- ----------
(a) Period from commencement of operations.
See notes to financial statements
-35-
<PAGE> 37
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Intermediate
Corporate Bond Index
Bond Portfolio Portfolio
-------------- -------------
February 10, February 10,
1997 to 1997 to
May 31, May 31,
1997 (a) 1997 (a)
------------- -------------
(Unaudited) (Unaudited)
From Investment Activities:
<S> <C> <C>
Operations:
Net investment income ................................... $ 1,578,706 $ 6,074,652
Net realized gains from investment transactions ......... 500,119 473,234
Net change in unrealized appreciation (depreciation) from
investments ........................................... (10,083) 309,595
------------- -------------
Change in net assets resulting from operations ............ 2,068,742 6,857,481
------------- -------------
Distributions to Investor A shareholders:
From net investment income .............................. (66) (667)
Distributions to Trust shareholders:
From net investment income .............................. (1,578,599) (6,073,938)
Distributions to Institutional shareholders:
From net investment income .............................. (41) (47)
------------- -------------
Change in net assets from shareholder distributions ....... (1,578,706) (6,074,652)
------------- -------------
Capital Transactions:
Proceeds from shares issued ............................. 40,096,078 130,428,207
Dividends reinvested .................................... 24,420 16,182
Cost of shares redeemed ................................. (1,589,918) (1,241,598)
------------- -------------
Change in net assets from share transactions .............. 38,530,580 129,202,791
------------- -------------
Change in net assets ...................................... 39,020,616 129,985,620
Net Assets:
Beginning of period ..................................... -- --
------------- -------------
End of period ........................................... $39,020,616 $129,985,620
============= =============
Share Transactions:
Issued .................................................. 4,131,468 13,310,090
Reinvested .............................................. 2,497 1,650
Redeemed ................................................ (161,706) (126,340)
------------- -------------
Change in shares .......................................... 3,972,259 13,185,400
============= =============
</TABLE>
- ----------
(a) Period from commencement of operations.
See notes to financial statements
-36-
<PAGE> 38
THE ARCH FUND, INC.
Money Market Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ----------- -------------------------- -------------
<S> <C> <C>
Certificates of Deposit (13.8%):
25,000,000 Bayerische Landesbank
Co., 5.43%, 6/9/97..... $ 25,000,078
12,000,000 Morgan Guaranty, 5.71%,
1/6/98................. 11,998,212
15,000,000 Old Kent Bank & Trust,
5.42%, 6/30/97......... 15,000,000
25,000,000 Rabobank Yankee Cd,
5.76%, 9/24/97......... 25,001,552
30,000,000 U.S. Bancorp, 5.53%,
6/30/97................ 30,000,000
20,000,000 Wachovia Bank, 5.62%,
6/30/97................ 20,000,000
-------------
Total Certificates of Deposit 126,999,842
-------------
Commercial Paper (71.0%):
Aircraft Engines (2.1%):
19,010,000 AlliedSignal, 5.59%*,
6/18/97................ 18,959,998
-------------
Automotive (1.6%):
15,000,000 General Motors
Acceptance Corp.,
5.95%*, 11/10/97...... 14,609,850
-------------
Beverages (2.6%):
25,000,000 Anheuser-Busch Cos.,
Inc., 5.87%*, 12/17/97. 24,221,965
-------------
Brokerage (0.4%):
4,071,000 Merrill Lynch & Co.,
Inc., 5.51%*, 6/3/97... 4,069,756
-------------
Conglomerates (3.9%):
35,500,000 Philip Morris Cos.,
Inc., 5.67%*, 6/2/97... 35,494,409
-------------
Electric Utility (2.7%):
25,000,000 Virginia Electric &
Power Co., 5.59%*,
7/9/97................. 24,853,674
-------------
Electrical & Electronic (10.7%):
13,000,000 CSC Enterprises, 5.69%*,
6/6/97................. 12,989,744
15,000,000 CSC Enterprises, 5.56%*,
6/18/97................ 14,960,758
13,537,000 CSC Enterprises, 5.57%*,
6/18/97................ 13,501,522
17,054,000 General Electric
Capital, 5.61%*,
6/10/97................ 17,030,124
40,000,000 Texas Instruments, Inc.,
5.61%*, 6/4/97......... 39,981,333
-------------
98,463,481
-------------
Financial Services (16.6%):
20,000,000 ABN-AMBRO, 5.55%*,
9/5/97................. 19,712,000
21,000,000 Aes Barbers Point, Inc.,
5.54%*, 6/26/97........ 20,919,500
30,000,000 Dean Witter Discover,
5.59%*, 6/18/97........ 29,921,375
15,000,000 Morgan Stanley, 5.58%*,
6/18/97................ 14,960,688
25,000,000 Morgan Stanley, 5.55%*,
6/23/97................ 24,915,667
41,446,000 Xerox Credit, 5.60%,
6/2/97................. 41,439,554
-------------
151,868,784
-------------
Food Products (0.9%):
7,900,000 H.J. Heinz, 5.50%*,
6/20/97................ 7,877,693
-------------
Insurance (3.8%):
25,000,000 Aetna Services, Inc.,
5.58%*, 6/27/97........ 24,899,792
10,000,000 Aetna Services, Inc.,
5.58%*, 6/30/97........ 9,955,292
-------------
34,855,084
-------------
Leasing (4.4%):
40,000,000 PHH Corp., 5.51%*, 6/5/97 39,975,556
-------------
Office Equipment & Services (2.1%):
20,000,000 Pitney Bowes, 5.74%*,
8/27/97................ 19,729,333
-------------
Oil & Gas Exploration Production
& Services (4.0%):
10,000,000 PetroFina, 5.51%*, 6/2/97 9,998,472
27,022,000 PetroFina, 5.65%*, 6/2/97 27,017,759
-------------
37,016,231
-------------
Printing & Publishing (2.2%):
20,000,000 McGraw-Hill, 5.54%*,
8/6/97................. 19,801,267
-------------
</TABLE>
Continued
-37-
<PAGE> 39
THE ARCH FUND, INC.
Money Market Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ----------- -------------------------- -------------
<S> <C> <C>
Commercial Paper, continued:
Retail Stores (4.4%):
40,000,000 Sears Roebuck Acceptance
Corp., 5.53%*, 6/4/97.. $ 39,981,601
------------
Telecommunications (7.0%):
25,000,000 Ameritech Corp., 5.62%*,
6/26/97................ 24,903,819
39,146,000 Bell Communication
Research, 5.65%, 6/2/97 39,139,856
------------
64,043,675
------------
Transportation & Shipping (1.6%):
14,744,000 Matson Navigation Co.,
Inc., 5.58%*, 6/18/97.. 14,705,358
------------
Total Commercial Paper 650,527,715
------------
Corporate Bonds (2.2%):
Financial Services (2.2%):
20,000,000 Merrill Lynch, 5.70%**,
10/1/97................ 20,000,000
------------
Total Corporate Bonds 20,000,000
------------
Medium Term Note (4.4%):
Finance (4.4%):
20,000,000 Bear Stearns Co.,
5.72%**, 10/14/97...... 20,000,000
20,000,000 Fannie Mae, 5.71%,
3/18/98................ 19,981,726
------------
39,981,726
------------
Total Medium Term Note 39,981,726
------------
U.S. Government Agencies (8.7%):
Federal Farm Credit Bank:
20,000,000 5.85%, 8/1/97............ 20,003,167
Federal Home Loan Bank:
20,000,000 5.35%**, 12/10/97........ 19,995,938
14,450,000 5.88%, 3/18/98........... 14,413,339
Federal National Mortgage Assoc.:
25,060,000 5.68%, 10/7/97........... 25,068,957
------------
Total U.S. Government Agencies 79,481,401
------------
Total (Cost--$916,990,684)(a) $916,990,684
============
</TABLE>
- ----------
Percentages indicated are based on net assets of $915,903,727.
* Effective yield at date of purchase.
** Variable rate securities having liquidity sources through bank letters of
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 rate reflected on the Schedule of Portfolio Investments is the
rate in effect at May 31, 1997.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-38-
<PAGE> 40
THE ARCH FUND, INC.
Treasury Money Market Fund
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ----------- -------------------------- -------------
<S> <C> <C>
U.S. Treasury Bills (47.8%):
3,422,000 6/5/97.................... $ 3,420,071
5,842,000 6/12/97................... 5,833,671
4,519,000 6/19/97................... 4,507,452
28,416,000 7/10/97................... 28,272,009
21,056,000 7/24/97................... 20,903,170
2,442,000 8/7/97.................... 2,420,185
15,545,000 8/21/97................... 15,360,255
------------
Total U.S. Treasury Bills 80,716,813
------------
U.S. Treasury Notes (51.6%):
30,560,000 5.63%, 6/30/97............ 30,566,004
29,405,000 5.88%, 7/31/97............ 29,423,043
15,000,000 6.50%, 8/15/97............ 15,034,631
12,000,000 5.75%, 9/30/97............ 12,012,123
------------
Total U.S. Treasury Notes 87,035,801
------------
Total (Cost--$167,752,614)(a) $167,752,614
============
</TABLE>
- ----------
Percentages indicated are based on net assets of $168,740,275.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-39-
<PAGE> 41
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Amortized
Amount Description Cost
- ---------- ---------------------------- -------------
<S> <C> <C>
Commercial Paper (5.6%):
Texas (2.7%):
3,600,000 Houston Texas Series,
3.35%, 6/18/97............ $ 3,600,000
------------
Washington (2.9%):
4,000,000 King County Washington,
3.45%, 6/18/97............ 4,000,000
------------
Total Commercial Paper 7,600,000
------------
Municipal Bond (94.0%):
Alabama (2.9%):
4,000,000 Parrish Alabama Industrial
Development Board,
4.05%*, 6/1/15............ 4,000,000
------------
Arizona (2.8%):
975,000 Chandler, 4.00%*,
12/1/02.................. 975,000
2,900,000 Maricopa County Arizona,
Pollution Control,
4.05%, 6/2/97**........... 2,900,000
------------
3,875,000
------------
Delaware (4.4%):
6,000,000 Delaware St. Ciba-Geigy,
4.05%*, 3/1/26............ 6,000,001
------------
Florida (1.1%):
1,500,000 Florida State Board of
Education, 7.63%,
6/1/09 , Prerefunded @
102 6/1/97................ 1,530,000
Georgia (8.4%): ------------
5,500,000 Burke County, Development
Authority Pollution
Control, 4.05%*,
9/1/26.................... 5,500,000
6,000,000 Monroe County, 4.05%*,
7/1/25.................... 6,000,000
------------
11,500,000
------------
Illinois (9.1%):
1,000,000 Chicago, O'Hare
International Airport,
4.05%*, 12/1/17........... 1,000,000
5,000,000 Chicago, O'Hare
International Airport,
4.05%*, 12/1/17........... 5,000,000
900,000 Illinois Development
Finance Authority Series
A, 4.00%, 6/2/97**........ 900,000
5,540,000 Illinois Development
Finance Authority Series
D, 4.00%, 6/2/97**........ 5,540,000
------------
12,440,000
------------
Iowa (7.8%):
3,500,000 Iowa Finance Authority
Cedar River, 4.05%*,
6/1/24.................... 3,500,000
2,700,000 Iowa Finance Authority
Cedar River, 4.05%*,
5/1/25.................... 2,700,000
4,500,000 Iowa School Series, 4.25%,
1/30/98................... 4,517,316
------------
10,717,316
------------
Kentucky (3.4%):
700,000 Daviess County Kentucky,
4.15%*, 6/2/97............ 700,000
4,000,000 Daviess County Kentucky
Solid Waste Scott Paper
Co., 4.15%*, 12/1/23...... 4,000,000
------------
4,700,000
------------
Louisiana (6.4%):
1,200,000 Calcasieu Parish, 4.00%*,
2/1/16.................... 1,200,000
1,900,000 Louisiana Public
Facilities, 4.05%*,
9/1/15.................... 1,900,000
500,000 West Feliciana Parish
Louisiana Pollution
Control Rev., 4.05%*,
4/1/16.................... 500,000
5,200,000 West Felincia Parish, Gulf
States Utilities,
4.05%*, 12/1/15........... 5,200,000
------------
8,800,000
------------
Minnesota (4.7%):
4,000,000 Becker Northern States
Power, 3.45%,
8/20/97**................. 4,000,000
</TABLE>
Continued
-40-
<PAGE> 42
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Amortized
Amount Description Cost
- ---------- ---------------------------- -------------
<S> <C> <C>
Municipal Bond, continued:
Minnesota, continued:
2,450,000 Minneapolis PCR, 4.00%*,
3/1/11.................... $ 2,450,000
------------
6,450,000
------------
Missouri (9.7%):
2,000,000 Missouri Health &
Educational Facilities
Authority, 4.00%*,
6/1/06.................... 2,000,000
2,700,000 Missouri Health &
Educational Facilities
Authority, 3.85%*,
12/1/15................... 2,700,000
3,000,000 Missouri Health &
Educational Facilities
Authority, 3.85%*,
12/1/19................... 3,000,000
3,500,000 Missouri State
Environmental
Improvement, 3.95%,
6/1/98**.................. 3,500,000
1,000,000 Missouri State Health &
Educational Facilities
Revenue, 3.90%*,
9/1/10.................... 1,000,000
1,000,000 Monsanto County, 4.00%*,
6/1/23.................... 1,000,000
------------
13,200,000
------------
Montana (2.8%):
2,200,000 Forsyth Montana PCR Series
B, 3.90%*, 6/1/13......... 2,200,000
1,600,000 Forsyth PCR, 4.00%*, 6/1/13. 1,600,000
------------
3,800,000
------------
New York (2.2%):
3,000,000 Suffolk County N.Y.,
4.50%, 9/11/97............ 3,004,833
------------
North Carolina (2.3%):
3,100,000 North Carolina Medical
Care Commission Hospital
Revenue Series A,
4.05%*, 10/1/20........... 3,100,000
------------
Oregon (1.1%):
1,500,000 Oregon State Series 73 G,
3.85%, 6/4/97**........... 1,500,000
------------
Pennsylvania (0.3%):
400,000 Penn State Higher
Education, 4.05%,
6/2/97**.................. 400,000
------------
Tennessee (4.4%):
6,000,000 Bradley County, 4.00%*,
11/1/17................... 6,000,000
------------
Texas (15.3%):
6,000,000 Harris County Health Care
Facilities, 4.15%*,
12/1/25................... 6,000,000
3,000,000 Houston Texas, 4.50%,
6/30/97................... 3,001,373
3,900,000 North Central Health,
4.15%*, 10/1/15........... 3,900,000
2,200,000 Port Corpus Christi,
Nueces County Marine
Trem, 3.90%*, 9/1/14...... 2,200,000
4,000,000 Texas State - Tax &
Revenue Anticipation
Notes, 4.75%, 8/29/97..... 4,009,519
1,825,000 Trinity River Authority
Texas, 7.00%, 2/1/98...... 1,864,182
------------
20,975,074
------------
Utah (4.4%):
6,000,000 Salt Lake City Utah
Pollution Control,
4.15%, 8/1/07**........... 6,000,000
------------
Washington (0.5%):
700,000 Washington St. Health Care
Facilities, 4.00%,
6/2/97**.................. 700,000
------------
Total Municipal Bond 128,692,224
------------
Investment Companies (0.0%):
1,000 Federated Tax-Free Trust
Fund...................... 1,000
1,000 Nuveen Tax-Exempt Money
Market Fund............... 1,000
------------
Total Investment Companies 2,000
------------
Total (Cost--$136,294,224)(a) $136,294,224
============
</TABLE>
Continued
-41-
<PAGE> 43
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
Percentages indicated are based on net assets of $136,897,401.
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at May 31, 1997.
** Put and demand features exist allowing the fund to require the repurchase of
the investment within variable time periods ranging from daily, weekly,
monthly or semi-annually. Maturity date reflects the next put date.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-42-
<PAGE> 44
THE ARCH FUND, INC.
Growth and Income Equity Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- ------------------------------ -----------------
<S> <C> <C>
Commercial Paper (1.6%):
Insurance (1.6%):
7,010,000 Aetna Services, 5.70%*, 6/2/97. $ 7,008,890
---------------
Total Commercial Paper 7,008,890
---------------
Common Stocks (97.7%):
Airlines (1.7%):
293,000 Southwest Airlines............ 7,544,750
----------------
Automotive (0.9%):
117,600 Echlin, Inc. ................. 3,924,900
----------------
Banking (3.9%):
88,600 Chase Manhattan Corp. ........ 8,372,700
224,300 Crestar Financial Corp. ...... 8,523,400
----------------
16,896,100
----------------
Banking & Financial Services (1.8%):
220,200 Green Tree Financial Corp. ... 7,707,000
----------------
Beverages (2.2%):
261,200 PepsiCo, Inc. ................ 9,599,099
----------------
Business Services (4.0%):
177,800 Automatic Data Processing, Inc 8,734,425
220,000 First Data Corp.(b)........... 8,800,000
----------------
17,534,425
----------------
Chemicals (3.9%):
183,874 Millipore Corp. .............. 7,929,566
166,950 Praxair, Inc. ................ 8,785,744
----------------
16,715,310
----------------
Communications Equipment (1.2%):
211,000 DSC Communications Corp. ..... 5,393,688
----------------
Computer Software (5.1%):
156,700 Computer Associates
International, Inc. ...... 8,579,325
35,800 Microsoft, Inc.(b)(c)......... 4,439,200
198,050 Oracle Corp.(c)............... 9,234,081
----------------
22,252,606
----------------
Consumer Goods & Services (1.7%):
321,600 CUC International Inc.(b)..... 7,396,800
----------------
Containers & Packaging (4.1%):
236,804 Avery Dennison Corp. ......... 8,909,751
150,350 Crown Cork & Seal Co., Inc. .. 8,757,888
----------------
17,667,639
----------------
Diversified Operations (2.1%):
149,200 General Electric Co. ......... 9,007,950
----------------
Electrical & Electronic (1.3%):
202,266 Analog Devices, Inc. ......... 5,410,616
----------------
Electrical Equipment (2.0%):
106,952 Grainger (W.W.), Inc. ........ 8,582,898
----------------
Financial Services (6.9%):
221,800 First USA, Inc. .............. 10,979,099
159,335 PMI Group, Inc.(b)............ 8,743,508
47,829 Student Loan Marketing
Association............... 5,817,202
198,700 United Cos. Financial Corp.(b) 4,545,263
----------------
30,085,072
----------------
Food & Related (3.4%):
282,400 IBP, Inc. .................... 6,636,400
195,200 Sara Lee Corp. ............... 7,978,800
----------------
14,615,200
----------------
Health Care (2.2%):
129,716 Bristol-Myers Squibb Co. ..... 9,517,911
----------------
Health Care-Drugs (9.7%):
124,700 American Home Products Corp. . 9,508,374
57,550 Eli Lilly & Co. .............. 5,352,150
85,450 Pfizer, Inc. ................. 8,790,669
102,378 Schering-Plough Corp. ........ 9,290,804
102,800 SmithKline Beecham PLC, ADR... 8,995,000
----------------
41,936,997
----------------
Manufacturing-Consumer Goods (2.1%):
240,627 Newell Co. ................... 9,203,983
----------------
Medical Equipment & Supplies (2.0%):
142,550 Allergan, Inc. ............... 4,223,044
139,600 Bard (C.R.), Inc. ............ 4,467,200
----------------
8,690,244
----------------
</TABLE>
Continued
-43-
<PAGE> 45
THE ARCH FUND, INC.
Growth and Income Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- -------------------------------------- -----------------
<S> <C> <C>
Common Stocks, continued:
Medical-Hospital Services (1.6%):
185,100 Columbia/HCA Healthcare Corp.(b).....
$ 6,779,288
-----------------
Metals & Mining (1.1%):
100,000 UCAR International, Inc.............. 4,800,000
-----------------
Oil & Gas Equipment/Services (8.1%):
226,000 Baker Hughes, Inc.................... 8,475,000
278,700 Dresser Industries, Inc.............. 9,545,474
200,650 Tidewater, Inc....................... 8,452,381
255,100 Vastar Resources..................... 8,832,838
-----------------
35,305,693
-----------------
Oil & Gas Exploration, Production & Services (2.0%):
435,750 Union Texas Petroleum Holdings, Inc.. 8,769,469
-----------------
Paper & Related (1.1%):
71,400 Mead Corp............................ 4,551,750
-----------------
Retail Stores (1.0%):
116,654 Consolidated Stores.................. 4,462,016
-----------------
Retail Stores - Discount (2.0%):
293,463 Wal-Mart Stores, Inc.(b)............. 8,730,524
-----------------
Retail Stores - General Merchandise (0.9%):
76,077 J.C. Penney, Inc..................... 3,917,966
-----------------
Retail Stores - Grocery (1.6%):
207,750 Albertson's Inc...................... 6,959,625
-----------------
Common Stocks, continued:
Retail Stores - Specialty (3.2%):
73,700 Home Depot, Inc...................... $ 4,643,100
196,260 Nordstrom, Inc.(b)................... 9,420,479
-----------------
14,063,579
-----------------
Technology (2.1%):
139,950 Motorola, Inc........................ 9,289,181
-----------------
Tire & Rubber (2.0%):
149,150 Goodyear Tire & Rubber Co............ 8,725,275
-----------------
Tobacco (2.1%):
211,200 Philip Morris Cos., Inc.............. 9,292,800
-----------------
Transportation & Shipping (1.8%):
96,500 Burlington Northern Santa Fe......... 8,009,500
-----------------
Utilities - Gas & Electric (3.0%):
163,800 Baltimore Gas & Electric............. 4,299,750
206,450 Central & South West Corp.(b)........ 4,387,063
130,250 Western Resources, Inc............... 4,249,406
-----------------
12,936,219
-----------------
Wholesale Distribution (1.9%):
237,235 Sysco Corp........................... 8,273,571
-----------------
Total Common Stocks 424,549,644
-----------------
Investment Companies (1.0%):
4,168,000 Cash Assets Trust Money Market Fund..
4,168,000
-----------------
Total Investment Companies 4,168,000
-----------------
Total (Cost--$327,491,968)(a) $ 435,726,534
=================
</TABLE>
- -------------
Percentages indicated are based on net assets of $434,529,202.
* Effective yield at purchase date.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation ...................................................... $ 113,204,778
Unrealized depreciation ...................................................... (4,970,212)
-----------------
Net unrealized appreciation .................................................. $ 108,234,566
=================
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
(c) Represents non-income producing securities.
See notes to financial statements
-44-
<PAGE> 46
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- ------------------------------ -----------------
<S> <C> <C>
Commercial Paper (7.1%):
Insurance (4.0%):
9,270,000 Aetna Services, 5.70%*,
6/2/97.................... $ 9,268,531
----------------
Telecommunications (3.1%):
7,000,000 Bell Commerce Research,
5.65%, 6/2/97............. 6,998,900
----------------
Total Commercial Paper 16,267,431
----------------
Common Stocks (92.9%):
Banking (5.3%):
30,000 CCB Financial Corp.(c)........ 2,107,500
68,600 Charter One Financial, Inc. .. 3,215,625
50,000 First Commerce Corp.(c)....... 2,256,250
80,000 First Financial Corp. ........ 2,230,000
70,000 St. Paul Bancorp, Inc. ....... 2,222,500
----------------
12,031,875
----------------
Beverages (1.6%):
120,767 Canandaigua Wine, Inc.,
Class A(b)(c)............. 3,728,681
----------------
Broadcasting (2.1%):
59,000 Evergreen Media Corp.(b)(c)... 2,293,625
80,000 SFX Broadcasting, Inc.(b)(c).. 2,580,000
----------------
4,873,625
----------------
Building Products (0.6%):
30,000 Rayonier, Inc. ............... 1,286,250
----------------
Business Services (5.0%):
65,000 Interim Services, Inc.(b)(c).. 2,535,000
95,000 National Data Corp.(c)........ 4,168,125
87,000 SunGard Data Systems,
Inc.(b)(c)................ 3,697,500
100,000 Western Staff Services,
Inc.(b)................... 1,015,625
----------------
11,416,250
----------------
Chemicals (8.1%):
62,200 Cytec Industries, Inc.(b)(c).. 2,433,575
208,000 Hanna (M.A.) Co.(c)........... 4,810,000
140,000 International Specialty Products,
Inc.(b).................... 1,907,500
100,736 Minerals Technologies Inc.(c). 3,979,072
78,500 OM Group Inc.(c).............. 2,472,750
160,000 RPM, Inc.(c).................. 3,040,000
----------------
18,642,897
----------------
Commercial Services (1.0%):
100,000 Unitog Co. ................... 2,350,000
----------------
Computer Hardware (3.4%):
69,474 Komag, Inc.(b)(c)............. 2,006,062
191,088 Zebra Technologies Corp.(b)(c) 5,875,956
----------------
7,882,018
----------------
Computer Software (2.8%):
100,000 Active Voice Corp.(b)......... 1,200,000
73,000 Allin Communications Corp.(b). 219,000
114,850 Network General Corp.(b)...... 2,110,369
239,036 Systemsoft Corp.(c)........... 2,868,432
----------------
6,397,801
----------------
Containers (1.3%):
102,500 Ball Corp.(c)................. 2,985,313
----------------
Electrical Equipment (1.6%):
80,000 Hubbell, Inc., Class B........ 3,640,000
----------------
Financial Services (9.4%):
182,500 Aames Financial Corp.(c)...... 2,349,688
145,000 Cityscape Financial Corp.(b)(c) 2,102,500
68,000 CMAC Investment Corp.(c)...... 2,830,500
145,000 Credit Acceptance Corp.(b)(c). 2,048,125
38,000 Finova Group, Inc. ........... 2,831,000
60,000 RCSB Financial, Inc. ......... 2,456,250
107,000 Resource Bancshares Mortgage
Group, Inc. .............. 1,591,625
136,500 Southern Pacific Funding
Corp.(b)(c)............... 1,911,000
103,600 Union Acceptance Corp.(b)..... 912,975
108,400 United Cos. Financial Corp.(c) 2,479,650
----------------
21,513,313
----------------
Food & Related (2.8%):
115,000 Hormel Foods Corp. ........... 2,903,750
172,500 Performance Food Group........ 3,579,375
----------------
6,483,125
----------------
</TABLE>
Continued
-45-
<PAGE> 47
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- -------------------------------------- -----------------
Common Stocks, continued:
<S> <C> <C>
Health Care-Drugs (0.4%):
84,000 ChiRex Inc.(b)....................... $ 966,000
-----------------
Insurance (1.0%):
59,100 American States Financial Corp....... 2,267,963
-----------------
Machinery & Equipment (1.7%):
115,000 Albany International Corp............ 2,616,250
24,000 Tecumseh Products Co. Class A(c)..... 1,359,000
-----------------
3,975,250
-----------------
Manufacturing - Consumer Goods (2.8%):
40,000 AptaraGroup, Inc..................... 1,775,000
67,600 Blyth Industries, Inc.(b)(c)......... 3,008,200
50,000 Libbey, Inc.......................... 1,668,750
-----------------
6,451,950
-----------------
Manufacturing-Miscellaneous (0.8%):
75,000 Lydall, Inc.(b)...................... 1,715,625
-----------------
Medical Equipment & Supplies (10.7%):
125,000 Allergan, Inc........................ 3,703,125
68,000 Dentsply International, Inc.(c)...... 3,417,000
93,000 Fisher Scientfic International....... 3,371,250
54,000 Lunar Corp.(b)....................... 1,080,000
125,000 Nellcor Puritan Bennett, Inc.(b)..... 2,671,875
222,000 OrthoLogic Corp.(b).................. 1,304,250
160,000 Penederm, Inc.(b)(c)................. 1,780,000
89,300 Polymer Group, Inc.(b)............... 1,294,850
60,100 ResMed, Inc.(b)...................... 1,262,100
88,500 Scherer (R.P.) Corp.(b).............. 4,646,250
-----------------
24,530,700
-----------------
Medical Services (9.3%):
168,000 Apria Healthcare Group, Inc.(b)...... 3,024,000
210,000 Beverly Enterprises, Inc.(b)(c)...... 2,966,250
66,000 Emeritus Corp.(b).................... 1,006,500
130,000 Horizon/CMS Healthcare Corp.(b)(c)... 2,372,500
105,000 Living Centers of America(b)(c)...... 4,003,125
90,000 Multicare Cos. Inc.(b)(c)............ 2,238,750
68,200 Sterling House Corp.(b)(c)........... 1,048,575
285,032 Sun Healthcare Group, Inc.(b)(c)..... 4,774,286
-----------------
21,433,986
-----------------
Oil & Exploration Products & Services (5.7%):
127,403 Global Industries Limited(b)......... 2,802,866
80,000 J. Ray McDermott, S.A.(b)(c)......... 2,180,000
158,000 Union Texas Petroleum Holdings, Inc.. 3,179,750
64,955 United Meridian Corp.(b)............. 2,338,380
74,623 Weatherford Enterra, Inc.(b)......... 2,546,510
-----------------
13,047,506
-----------------
Paper & Related (0.8%):
60,000 Caraustar Industries Inc............. 1,732,500
-----------------
Printing & Publishing (0.8%):
170,000 K-III Communications Corp.(b)(c)..... 1,891,250
-----------------
Restaurants (1.5%):
55,000 Ruby Tuesday, Inc.(b)................ 1,182,500
174,000 Ryan's Family Steak Houses, Inc.(b).. 1,587,750
30,000 Showbiz Pizza Time, Inc.(b).......... 675,000
-----------------
3,445,250
-----------------
Retail Stores - Specialty (3.5%):
70,000 Discount Auto Parts, Inc.(b)......... 1,303,750
145,000 Marks Bros. Jewelers, Inc.(b)........ 1,576,875
120,460 Micro Warehouse, Inc.(b)............. 2,077,935
90,000 The Sports Authority, Inc.(b)(c)..... 1,620,000
75,000 Tractor Supply Co.(b)................ 1,537,500
-----------------
8,116,060
-----------------
Steel (0.7%):
130,000 J&L Specialty Steel, Inc............. 1,657,500
-----------------
Telecommunications (1.8%):
213,900 Arch Communications Group, Inc.(b)... 1,657,725
</TABLE>
Continued
-46-
<PAGE> 48
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------- --------------------------------------- ------------
<S> <C> <C>
Common Stocks, continued:
Telecommunications, continued:
205,000 Mobile Telecom Tech
Corp.(b)(c)........................... $ 2,498,438
------------
4,156,163
------------
Transportaton & Shipping (2.4%):
137,000 American Freightways Corp.............. 1,883,750
75,000 Simon Transportation
Services, Inc.(b)..................... 1,387,500
91,000 U.S. Freightways Corp.(c).............. 2,206,750
------------
5,478,000
------------
Utilities - Gas & Electric (2.1%):
75,000 Central Louisiana Electric............. 1,893,750
61,000 Tejas Gas Corp.(b)(c).................. 2,859,375
------------
4,753,125
------------
Wholesale Distribution (1.9%):
90,000 Barnett, Inc........................... 2,002,500
133,000 Peak Technologies Group,
Inc.(b)............................... 2,377,375
------------
4,379,875
------------
Total Common Stocks 213,229,851
------------
Investment Companies (0.4%):
1,000,000 Cash Assets Trust Money
Market Fund........................... 1,000,000
------------
Total Investment Companies 1,000,000
------------
Total (Cost--$211,945,723)(a) $230,497,282
============
</TABLE>
- -------------
Percentages indicated are based on net assets of $229,467,443.
* Effective yield at purchase date.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securitites as follows:
<TABLE>
<S> <C>
Unrealized appreciation ...................................................... $ 33,140,602
Unrealized depreciation ...................................................... (14,589,043)
---------------
Net unrealized appreciation .................................................. $ 18,551,559
===============
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of May 31, 1997
See notes to financial statements
-47-
<PAGE> 49
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- --------- ------------------------------ --------------
<S> <C> <C>
Common Stocks (95.2%):
Australia (1.8%):
Diversified Operations (0.9%):
159,000 Southcorp Holdings Limited... $ 593,103
-----------
Metals & Mining (0.9%):
41,000 Broken Hill Proprietary Co,
Ltd........................ 588,595
-----------
Total Australia 1,181,698
-----------
Finland (1.6%):
Banking (0.8%):
148,000 Merita....................... 506,800
-----------
Telecommunications (0.8%):
8,400 Nokia AB-Preference(b)....... 549,464
-----------
Total Finland 1,056,264
-----------
France (10.4%):
Banking (1.2%):
19,000 Banque Nationale de Paris.... 781,238
-----------
Building Products (1.2%):
5,550 Compagnie de Saint-Gobain.... 767,743
-----------
Construction - Domestic (1.2%):
7,800 Technip SA................... 802,812
-----------
Diversified Operations (1.1%):
25,000 Lagardere S.C.A.............. 736,787
-----------
Electrical & Electronic (1.1%):
1,340 Le Carbone-Lorraine.......... 311,655
8,700 Schneider Sa................. 418,729
-----------
730,384
-----------
Health Care-Drugs (1.2%):
24,700 Rhone-Poulenc-A.............. 801,684
-----------
Insurance (1.1%):
23,200 Assurances Generales de
France..................... 706,691
-----------
Oil & Gas Exploration, Production & Services (1.0%):
6,200 Elf Aquitaine................ 620,915
-----------
Oil Companies - Integrated (1.3%):
9,000 Total SA-B................... 824,785
-----------
Total France 6,773,039
-----------
Germany (8.2%):
Automotive (2.8%):
11,400 Daimler-Benz AG.............. 878,928
1,900 Volkswagen AG Preferred...... 935,741
-----------
1,814,669
-----------
Business Services (1.2%):
4,150 SAP AG....................... 756,713
-----------
Chemicals (1.2%):
5,400 SGL Carbon AG................ 782,012
-----------
Health Care-Drugs (1.9%):
880 Altana....................... 813,133
6,200 Gehe AG...................... 439,845
-----------
1,252,978
-----------
Utilities (1.1%):
12,800 VEBA AG...................... 724,953
-----------
Total Germany 5,331,325
-----------
Hong Kong (4.9%):
Banking (0.8%):
102,000 Dao Heng Bank Group Ltd...... 522,604
-----------
Diversified Operations (1.3%):
55,000 Hutchison Whampoa Ltd........ 457,831
51,000 Swire Pacific Ltd.'A'........ 427,825
-----------
885,656
-----------
Financial Services (1.1%):
388,000 Peregrine Investment
Holdings Ltd............... 691,024
30,200 Peregrine Investment
Holdings Warrants.......... 8,380
-----------
699,404
-----------
Real Estate (1.7%):
63,000 Cheung Kong.................. 644,350
182,000 Wheelock & Co. Ltd........... 445,105
-----------
1,089,455
-----------
Total Hong Kong 3,197,119
-----------
Italy (2.2%):
Banking (0.8%):
200,000 Banca Fideuram............... 516,018
-----------
</TABLE>
Continued
-48-
<PAGE> 50
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- --------- ------------------------------ --------------
<S> <C> <C>
Common Stocks, continued:
Italy, continued:
Telecommunications (1.4%):
310,000 Telecom Italia Mobile........ $ 910,687
-----------
Total Italy 1,426,705
-----------
Japan (24.3%):
Audio/Video Products (3.4%):
11,000 Sony Corp. .................. 926,028
8,000 TDK Corp. ................... 613,748
34,000 Yamaha Corp. ................ 644,812
-----------
2,184,588
-----------
Automotive (0.4%):
9,000 Honda Motor.................. 264,138
-----------
Business Services (1.0%):
9,000 Secom & Co. ................. 647,215
-----------
Chemicals (0.8%):
48,000 Sekisui Chemical Co. ........ 498,412
-----------
Computer Software (0.9%):
23,300 Meitec....................... 613,842
-----------
Construction (1.1%):
31,000 Matsushita Electric Works
Ltd. ...................... 343,173
13,000 Sho-bond Corp. .............. 372,608
-----------
715,781
-----------
Cosmetics & Toiletries (0.5%):
24,000 Shiseido Co., Ltd. .......... 350,124
-----------
Distribution/Wholesale (0.7%):
48,000 Mitsui & Co. ................ 424,268
-----------
Electrical & Electronic (6.0%):
4,070 Keyence Corp. ............... 586,767
31,000 Mitsumi Electric............. 750,193
7,000 Rohm Co. .................... 726,851
40,000 Taiyo Yuden Co., Ltd. ....... 638,462
9,000 Tokyo Electron............... 453,360
40,000 Yamatake-Honeywell........... 751,738
-----------
3,907,371
-----------
Financial Services (1.3%):
4,100 Nichiei Co. ................. 383,506
7,500 Orix Corp. .................. 450,528
-----------
834,034
-----------
Health Care-Drugs (0.2%):
8,000 Eisai Co. Ltd. .............. 160,645
-----------
Machinery - Electrical (1.0%):
7,800 SMC.......................... 635,888
-----------
Media (0.7%):
1,200 Nippon Television Network.... 478,847
-----------
Multilevel Direct Selling (0.6%):
10,700 Amway Japan Ltd. ............ 412,280
-----------
Office Automation & Equipment (1.1%):
27,000 Canon, Inc. ................. 683,515
-----------
Real Estate (0.8%):
40,000 Mitsubishi Estate Co. Ltd. .. 545,782
-----------
Recreation (1.1%):
8,800 Nintendo..................... 687,205
-----------
Rubber - Tires (0.5%):
13,000 Bridgestone.................. 293,401
-----------
Telecommunications (2.2%):
74 DDI Corp. ................... 551,841
95 Nippon Telegraph & Telephone. 904,917
-----------
1,456,758
-----------
Total Japan 15,794,094
-----------
Malaysia (2.1%):
Diversified Operations (1.5%):
241,000 Hicom Holdings Bhd........... 489,155
275,000 Multi-Purpose Holdings Bhd... 435,587
10,500 YTL Corp. Power Rights....... 15,462
-----------
940,204
-----------
Financial Services (0.6%):
86,000 Hong Leong Credit Bhd........ 414,136
-----------
Rights/Warrants (0.0%):
196,000 Rights Multi Purpose Holdings 780
-----------
Total Malaysia 1,355,120
-----------
Netherlands (8.4%):
Audio/Video (1.0%):
13,600 PolyGram NV.................. 642,151
-----------
</TABLE>
Continued
-49-
<PAGE> 51
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- --------- ------------------------------ --------------
<S> <C> <C>
Common Stocks, continued:
Netherlands, continued:
Financial Services (1.5%):
21,318 Ing Groep NV................. $ 943,245
-----------
Food Products (1.2%):
40,800 Koninklijke Bols Wessanen NV. 778,236
-----------
Machinery - General Industrial (1.0%):
14,800 Stork NV..................... 655,618
-----------
Office Furnishing (1.2%):
12,635 Koninklijke Ahrend Groep NV.. 800,059
-----------
Retail General Merchandise (1.3%):
15,000 Vendex International N.V..... 842,714
-----------
Warehousing & Transportation Services (1.2%):
23,300 Koninklijke Pakhoed NV....... 789,295
-----------
Total Netherlands 5,451,318
-----------
Portugal (1.5%):
Telecommunications (1.5%):
25,300 Portugal Telecom SA.......... 972,152
-----------
Total Portugal 972,152
-----------
Spain (3.2%):
Insurance (0.6%):
6,200 Mapfre Vida.................. 419,793
-----------
Oil Companies - Integrated (1.1%):
17,100 Repsol SA.................... 716,969
-----------
Telecommunications (1.5%):
33,100 Telefonica de Espana......... 956,561
-----------
Water Utility (0.0%):
167 Aguas de Barcelona-New(b).... 6,608
-----------
Total Spain 2,099,931
-----------
Sweden (2.7%):
Insurance (1.4%):
25,400 Skandia Forsakrings AB....... 898,903
-----------
Telecommunications (1.3%):
25,100 Ericsson (L.M.).............. 883,414
-----------
Total Sweden 1,782,317
-----------
Switzerland (4.8%):
Health Care-Drugs (3.4%):
540 Ares-Serono Group............ 734,785
555 Novartis AG-Registered....... 753,234
81 Roche Holding AG-Genussshein. 720,280
-----------
2,208,299
-----------
Insurance (1.4%):
655 Swiss Reinsurance Registered. 879,692
-----------
Total Switzerland 3,087,991
-----------
United Kingdom (11.4%):
Banking (1.6%):
64,400 Standard Chartered Bank...... 1,019,422
-----------
Business Services (1.1%):
233,000 Corporate Services Group PLC. 691,909
-----------
Computer Services (1.7%):
43,800 Misys PLC.................... 976,400
6,100 SEMA Group PLC............... 126,900
-----------
1,103,300
-----------
Diversified Operations (2.6%):
50,400 GKN PLC...................... 873,671
214,000 Rentokil Initial PLC......... 824,558
-----------
1,698,229
-----------
Electrical & Electronic (1.0%):
98,400 Electrocomponents PLC........ 643,174
-----------
Financial Services (1.5%):
100,600 Lloyds TSB Group PLC......... 1,010,610
-----------
Oil Companies - Integrated (0.7%):
36,600 British Petroleum............ 433,847
-----------
Telecommunications (1.2%):
99,200 Cable Wireless............... 809,895
-----------
Total United Kingdom 7,410,386
-----------
United States (7.7%):
Closed End Investment Companies (2.3%):
18,100 Genesis Chile Fund........... 850,700
8,450 India Magnum Fund............ 401,375
3,170 Korea International
Investment Fund............ 246,943
-----------
1,499,018
-----------
</TABLE>
Continued
-50-
<PAGE> 52
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- --------- ------------------------------ --------------
<S> <C> <C>
Common Stocks, continued:
United States, continued:
Financial Services (0.7%):
8,400 Brazilian Investment Co...... $ 454,524
-----------
Healthcare (1.5%):
23,000 Elan-ADR..................... 943,000
-----------
Multiple Industry (1.3%):
34,000 Argentinian Investor Co...... 873,800
-----------
Retail (0.4%):
6,270 Fila Holdings ADR............ 264,908
-----------
Telecommunications (0.8%):
3,800 Telebras ADR................. 514,425
-----------
Textile (0.7%):
6,275 Gucci Group ADR.............. 429,838
-----------
Total United States 4,979,513
-----------
Total Common Stocks 61,898,972
-----------
U.S. Government Agencies (1.0%):
Federal Home Loan Mortgage Assoc::
670,000 0.00%, 6/2/97* ............. 669,800
-----------
Total U.S. Government Agencies 669,800
-----------
Investment Companies (0.7%):
40 Taipei Fund.................. 440,000
-----------
Total Investment Companies 440,000
-----------
Total (Cost--$52,661,016)(a) $63,008,772
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $65,038,147.
* Represents discount Note.
(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 .......................... $11,432,774
Unrealized depreciation .......................... (1,085,018)
-----------
Net unrealized appreciation ...................... $10,347,756
===========
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements
-51-
<PAGE> 53
THE ARCH FUND, INC.
Equity Income Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- -------------------------------------- -----------------
<S> <C> <C>
Commercial Paper (2.9%):
Financial Services (2.9%):
3,506,000 Xerox Credit, 5.60%, 6/2/97............ $ 3,505,454
-----------------
Total Commercial Paper 3,505,454
-----------------
Common Stocks (94.5%):
Automotive (3.4%):
62,000 Echlin, Inc. .......................... 2,069,250
34,000 PPG Industries, Inc. .................. 1,976,250
-----------------
4,045,500
-----------------
Banking (23.8%):
48,004 Barnett Banks, Inc.(b)................. 2,526,211
42,700 Chase Manhattan Corp. ................. 4,035,149
30,200 Comerica, Inc. ........................ 1,887,500
41,000 CoreStates Financial Corp. ............ 2,167,875
65,000 Crestar Financial Corp. ............... 2,470,000
15,000 First Union Corp.(b)................... 1,288,125
40,000 KeyCorp................................ 2,175,000
26,700 Mellon Bank Corp. ..................... 2,336,250
28,900 National City Corp.(b)................. 1,488,350
42,000 Norwest Corp. ......................... 2,247,000
50,000 PNC Financial Corp. ................... 2,093,750
30,000 Union Planters Corp. .................. 1,736,250
35,000 Wachovia Corp.(b)...................... 2,130,625
-----------------
28,582,085
-----------------
Banking & Financial Services (1.5%):
52,000 Green Tree Financial Corp. ............ 1,820,000
-----------------
Chemicals (1.3%):
19,000 Dow Chemical Co.(b).................... 1,584,125
-----------------
Chemicals - Industrial Gas (0.7%):
16,200 Praxair, Inc. ......................... 852,525
-----------------
Chemicals--Specialty (0.6%):
39,000 RPM, Inc. ............................. 741,000
-----------------
Containers & Packaging (2.3%):
40,000 Avery Dennison Corp. .................. 1,505,000
22,200 Crown Cork & Seal Co., Inc. ........... 1,293,150
-----------------
2,798,150
-----------------
Diversified Operations (2.4%):
48,000 General Electric Co. .................. 2,898,000
-----------------
Electrical Equipment (2.0%):
15,970 Grainger (W.W.), Inc. ................. 1,281,593
15,000 Honeywell, Inc. ....................... 1,091,250
-----------------
2,372,843
-----------------
Financial Services (7.8%):
74,400 Fannie Mae............................. 3,245,699
19,000 First USA, Inc. ....................... 940,500
63,375 MBNA Corp. ............................ 2,146,828
26,600 PMI Group, Inc.(b)..................... 1,459,675
6,987 Student Loan Marketing Association..... 849,794
33,000 United Financial Corp.(b).............. 754,875
-----------------
9,397,371
-----------------
Food & Related (3.0%):
71,000 IBP, Inc. ............................. 1,668,500
47,400 Sara Lee Corp. ........................ 1,937,475
-----------------
3,605,975
-----------------
Health Care-Drugs (11.2%):
31,300 Abbott Laboratories.................... 1,971,900
41,300 American Home Products Corp. .......... 3,149,124
28,600 Bristol-Myers Squibb Co................ 2,098,525
34,200 Schering-Plough Corp................... 3,103,649
34,800 SmithKline Beecham PLC, ADR............ 3,045,000
-----------------
13,368,198
-----------------
Instruments - Scientific (1.2%):
32,500 Millipore Corp......................... 1,401,563
-----------------
Manufacturing-Consumer Goods (2.1%):
64,900 Newell Co. ............................ 2,482,425
-----------------
Medical Equipment & Supplies (2.1%):
39,700 Allergan, Inc.......................... 1,176,113
40,000 Bard (C.R.), Inc. ..................... 1,280,000
-----------------
2,456,113
-----------------
Oil & Exploration Products & Services (0.3%):
20,100 Union Texas Petroleum Holdings, Inc. .. 404,513
-----------------
</TABLE>
Continued
-52-
<PAGE> 54
THE ARCH FUND, INC.
Equity Income Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- -------------- -------------------------------------- -----------------
<S> <C> <C>
Common Stocks, continued:
Oil & Gas Equipment/Services (3.5%):
83,100 Dresser Industries, Inc. ............ $ 2,846,175
30,900 Tidewater, Inc. ..................... 1,301,663
----------------
4,147,838
----------------
Oil Companies - Integrated (3.3%):
22,600 Amoco Corp. ......................... 2,019,875
10,000 Mobil Corp. ......................... 1,398,750
2,500 Royal Dutch Petroleum Co. ........... 488,125
----------------
3,906,750
----------------
Paper Products (1.9%):
42,500 Consolidated Papers Inc. ............ 2,316,250
----------------
Retail Stores - Department (2.3%):
30,433 J.C. Penney, Inc. ................... 1,567,300
26,000 May Department Stores Co. ........... 1,225,250
----------------
2,792,550
----------------
Retail Stores - Grocery (0.8%):
27,000 Albertson's, Inc. ................... 904,500
----------------
Technology (1.4%):
25,900 Motorola, Inc. ...................... 1,719,113
----------------
Tire & Rubber (1.9%):
38,000 Goodyear Tire & Rubber Co. .......... 2,223,000
----------------
Tobacco (2.2%):
60,000 Philip Morris Co., Inc. ............. 2,640,000
----------------
Transportation & Shipping (2.4%):
16,200 Burlington Northern Santa Fe......... 1,344,600
20,000 CSX Corp.(b)......................... 1,060,000
7,500 Union Pacific Corp. ................. 508,125
----------------
2,912,725
----------------
Utilities - Gas & Electric (5.6%):
62,000 Baltimore Gas & Electric Co. ........ 1,627,500
57,000 Central & South West Corp. .......... 1,211,250
80,000 PacifiCorp. ......................... 1,590,000
36,000 Union Electric Co.(b)................ 1,318,500
30,000 Western Resources, Inc. ............. 978,750
----------------
6,726,000
----------------
Utilities - Telecommunications (3.0%):
26,000 Bell Atlantic Corp.(b)............... 1,820,000
30,000 SBC Communications, Inc. ............ 1,755,000
----------------
3,575,000
----------------
Wholesale Distribution (0.5%):
17,500 Sysco Corp. ......................... 610,313
----------------
Total Common Stocks 113,284,425
----------------
Convertible Bonds (1.7%):
Banking (0.3%):
500,000 Cityscape Financial Corp., 6.00%,
5/1/06............................ 375,625
Financial Services (0.7%):
1,000,000 Southern Pacific Funding, 6.75%,
10/15/06.......................... 881,250
Oil & Gas Exploration, Production & Services (0.7%):
37,200 Arco Lyonell Notes, 9.01%, 9/15/97... 799,800
----------------
Total Convertible Bonds 2,056,675
----------------
Real Estate Investment Trust (1.3%):
Health Care (1.1%):
60,400 Nationwide Health Properties, Inc.... 1,298,600
----------------
Office Property (0.2%):
11,000 Prentiss Properties Trust............ 258,500
----------------
Total Real Estate Investment Trust 1,557,100
----------------
Total (Cost--$82,591,906)(a) $ 120,403,654
================
</TABLE>
- -------------------------
Percentages indicated are based on net assets of $119,934,167.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation ...................................................... $ 39,240,231
Unrealized depreciation ...................................................... (1,428,483)
===============
Net unrealized appreciation .................................................. $ 37,811,748
===============
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
See notes to financial statements
-53-
<PAGE> 55
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- ----------------------------------------- ----------------
<S> <C> <C>
Commercial Paper (0.2%):
Financial Services (0.2%):
48,000 Xerox Credit, 5.60%, 6/2/97.............. $ 47,993
----------------
Total Commercial Paper 47,993
----------------
Common Stocks (99.8%):
Aerospace (0.1%):
236 Northrop Grumman Corp.................... 20,001
----------------
Aerospace/Defense (1.6%):
1,463 Boeing Co................................ 153,980
258 General Dynamics Corp.................... 19,318
787 Lockheed Martin Corp..................... 73,683
866 McDonnell Douglas Corp................... 55,749
964 Raytheon Co.............................. 46,031
969 United Technologies Corp................. 77,883
----------------
426,644
----------------
Aircraft Engines & Engine Parts (0.3%):
1,155 AlliedSignal............................. 88,646
----------------
Airlines (0.3%):
372 AMR Corp(b).............................. 36,968
299 Delta Air Lines.......................... 28,031
592 Southwest Airlines Co.................... 15,244
262 US Airways Group, Inc.(b)................ 9,105
----------------
89,348
----------------
Aluminum (0.1%):
924 Alcan Aluminum Ltd....................... 33,149
----------------
Apparel (0.3%):
1,178 Nike, Inc................................ 67,146
----------------
Apparel/Shoes (0.2%):
314 Fruit of the Loom........................ 10,951
292 Liz Claiborne, Inc....................... 13,323
227 Reebok International Ltd................. 9,307
156 Russell Corp............................. 4,778
203 Stride Rite Corp......................... 3,096
260 VF Corp.................................. 20,313
----------------
61,768
----------------
Automotive (1.3%):
4,842 Ford Motor Co............................ 181,574
3,087 General Motors Corp...................... 176,730
----------------
358,304
----------------
Automotive Cars/Trucks (0.4%):
2,869 Chrysler Corp............................ $ 91,091
300 Navistar International Corp.............. 4,988
318 PACCAR, Inc.............................. 14,390
----------------
110,469
----------------
Automotive Parts & Equipment (0.3%):
161 Cummins Engine Co........................ 10,264
416 Dana Corp................................ 15,028
255 Echlin, Inc.............................. 8,511
738 Genuine Parts Co......................... 24,723
519 TRW, Inc................................. 27,767
----------------
86,293
----------------
Banking (8.1%):
1,745 Banc One Corp............................ 75,471
1,602 Bank of New York, Inc.................... 68,285
1,465 BankAmerica Corp......................... 171,221
625 BankBoston Corp.......................... 45,625
334 Bankers Trust New York Corp.............. 28,265
852 Barnett Banks, Inc....................... 44,837
1,792 Chase Manhattan Corp..................... 169,343
1,892 Citicorp................................. 216,397
439 Comerica, Inc............................ 27,438
913 CoreStates Financial Corp................ 48,275
432 Fifth Third Bancorp...................... 33,372
549 First Bank System, Inc................... 45,018
1,302 First Chicago Corp....................... 77,144
1,159 First Union Corp......................... 99,529
1,071 Fleet Financial Group, Inc............... 65,465
562 Great Western Financial Corp............. 27,257
431 H.F. Ahmanson & Co....................... 17,563
756 J. P. Morgan & Co., Inc.................. 81,270
921 KeyCorp.................................. 50,079
1,365 MBNA Corp................................ 46,239
529 Mellon Bank Corp......................... 46,288
623 Morgan Stanley Group, Inc................ 42,053
912 National City Corp....................... 46,968
2,998 NationsBank Corp......................... 176,506
1,512 Norwest Corp............................. 80,892
1,370 PNC Financial Corp....................... 57,369
226 Republic New York Corp................... 22,544
</TABLE>
Continued
-54-
<PAGE> 56
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------ -----------------
<S> <C> <C>
Common Stocks, continued:
Banking, continued:
329 State Street Corp........................ $ 14,682
911 Sun Trust Banks, Inc..................... 48,625
617 U.S. Bancorp............................. 37,868
675 Wachovia Corp............................ 41,091
378 Wells Fargo Co........................... 99,603
----------------
2,152,582
----------------
Beverages (4.1%):
155 Adolph Coors Co.......................... 3,778
2,039 Anheuser-Busch Co........................ 87,422
282 Brown-Forman Corp........................ 14,417
6,395 PepsiCo, Inc............................. 235,015
1,514 Seagram Co. Ltd.......................... 60,939
10,212 The Coca-Cola Co......................... 696,968
----------------
1,098,539
----------------
Broadcasting/Cable (0.3%):
2,712 Tele-Communications - Class A(b)......... 41,019
2,551 U.S. West Media Group(b)................. 50,701
----------------
91,720
----------------
Building Products (0.2%):
655 Masco Corp............................... 25,463
213 Owens Corning............................ 8,893
701 Sherwin-Williams Co...................... 21,030
----------------
55,386
----------------
Business Services (0.8%):
1,193 Automatic Data Processing, Inc........... 58,606
332 Ceridian Corp............................ 12,201
312 Computer Science(b)...................... 24,141
695 Dun & Bradstreet Corp.................... 18,157
1,828 First Data Corp.......................... 73,120
331 Interpublic Group Cos., Inc.............. 19,819
----------------
206,044
----------------
Capital Equipment (0.2%):
135 Giddings & Lewis, Inc.................... 2,559
1,012 Illinois Tool Works, Inc................. 50,221
----------------
52,780
----------------
Chemicals (2.6%):
456 Air Products & Chemicals, Inc............ 35,454
2,299 E. I. du Pont de Nemours & Co............ 250,303
317 Eastman Chemical Co...................... 18,862
1,361 Eastman Chemical Co...................... 112,793
587 Engelhard Corp........................... 12,694
246 Great Lakes Chemical Corp................ 12,023
418 Hercules, Inc............................ 19,594
2,402 Monsanto Co.............................. 105,688
581 Morton International Inc................. 18,737
275 Nalco Chemical Co........................ 10,209
639 Praxair, Inc............................. 33,627
261 Rohm & Haas Co........................... 22,511
408 Sigma-Aldrich Corp....................... 12,495
520 Union Carbide Corp....................... 24,310
289 W.R. Grace & Co.......................... 15,100
----------------
704,400
----------------
Commercial Services (0.2%):
870 Browning-Ferris Industries, Inc.......... 28,493
264 Ecolab, Inc.............................. 10,989
425 H & R Block.............................. 14,025
----------------
53,507
----------------
Communications Equipment (0.9%):
806 Bay Networks, Inc........................ 19,747
1,333 Comcast Corp............................. 23,161
479 DSC Communications Corp.................. 12,244
159 Harris Corp.............................. 14,091
2,606 Lucent Technologies, Inc................. 165,806
----------------
235,049
----------------
Computer Software (3.3%):
275 Adobe Systems, Inc....................... 12,272
1,483 Computer Associates International, Inc... 81,194
4,914 Microsoft, Inc.(b)....................... 609,335
1,413 Novell, Inc.(b).......................... 11,127
2,761 Oracle Corp.(b).......................... 128,731
521 Parametric Technology Corp.(b)........... 23,380
----------------
866,039
----------------
</TABLE>
Continued
-55-
<PAGE> 57
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------ -----------------
<S> <C> <C>
Common Stocks, continued:
Computers & Peripherals (4.6%):
719 3Com Corp.(b)............................ $ 34,872
496 Amdahl Corp.(b).......................... 4,960
509 Apple Computer, Inc.(b).................. 8,462
636 Cabletron Systems(b)..................... 27,984
2,685 Cisco Systems Inc.(b).................... 181,908
1,106 Compaq Computer Corp.(b)................. 119,725
163 Data General Corp.(b).................... 3,484
715 Dell Computer Corp.(b)................... 80,438
642 Digital Equipment Corp.(b)............... 23,032
1,004 EMC Corp/Mass(b)......................... 40,035
4,142 Hewlett-Packard Co....................... 213,312
194 Intergraph Corp.(b)...................... 1,370
4,228 International Business Machines Corp..... 365,721
1,010 Seagate Technology, Inc.(b).............. 41,031
720 Silicon Graphics, Inc.(b)................ 13,590
1,503 Sun Microsystems, Inc.................... 48,472
714 Unisys Corp.(b).......................... 4,909
----------------
1,213,305
----------------
Computers--Main & Mini (0.0%):
485 Tandem Computers, Inc.(b)................ 6,911
-----------------
Construction (0.3%):
169 Armstrong World Industries, Inc.......... 11,492
118 Centex Corp.............................. 4,705
447 Ingersol-Rand Co......................... 24,362
159 Kaufman & Broad Home Corp................ 2,385
749 PPG Industries, Inc...................... 43,536
95 Pulte Corp............................... 3,004
----------------
89,484
----------------
Consumer Goods & Services (2.2%):
385 Black & Decker........................... 13,379
211 Clorox Co................................ 26,639
1,200 Colgate-Palmolive........................ 74,400
1,620 CUC International, Inc................... 37,260
1,140 Gap, Inc................................. 39,045
158 Jostens, Inc............................. 3,891
2,775 Procter & Gamble Co...................... 382,602
612 Rubbermaid Inc........................... 17,060
----------------
594,276
----------------
Containers & Packaging (0.2%):
426 Avery Dennison Corp...................... 16,028
125 Ball Corp................................ 3,641
214 Bemis Co................................. 8,560
524 Crown Cork & Seal Co., Inc............... 30,523
405 Stone Container Corp..................... 5,569
----------------
64,321
----------------
Cosmetics & Toiletries (1.0%):
228 Alberto-Culver Co........................ 6,498
543 Avon Products, Inc....................... 34,616
2,266 Gillette Co.............................. 201,390
451 International Flavors & Fragrances....... 20,013
----------------
262,517
----------------
Diversified Operations (6.0%):
115 Aeroquip-Vickers, Inc.................... 4,988
695 American Brands, Inc.(b)................. 34,055
695 Cognizant Corp........................... 25,715
491 Coopers Industries, Inc.................. 25,041
934 Corning Glass............................ 47,050
188 Crane Co................................. 7,708
992 Dow Chemical Co.......................... 82,708
83 Eastern Enterprises...................... 2,864
315 Eaton Corp............................... 25,121
152 FMC Corp.(b)............................. 10,944
13,523 General Electric Co...................... 816,450
475 ITT Corp................................. 28,322
483 ITT Industries Inc....................... 11,954
1,707 Minnesota Mining & Manufacturing......... 156,616
185 National Service Industries Inc.......... 8,117
182 Raychem Corp............................. 13,491
697 Tenneco, Inc............................. 31,191
338 Textron, Inc............................. 40,053
681 Tyco International Ltd................... 43,244
654 Unilever NV New York Shares.............. 126,712
2,467 Westinghouse Electric Corp............... 49,957
424 Whitman Corp............................. 10,229
----------------
1,602,530
----------------
Electrical & Electronic (1.3%):
897 Amp, Inc................................. 36,889
</TABLE>
Continued
-56-
<PAGE> 58
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------ -----------------
Common Stocks, continued:
<S> <C> <C>
Electrical & Electronic, continued:
1,826 Emerson Electric......................... $ 98,604
204 General Signal Corp...................... 8,594
217 Grainger (W.W.), Inc..................... 17,414
2,421 Motorola, Inc............................ 160,693
238 Tandy Corp............................... 12,852
135 Tektronix, Inc........................... 7,746
217 Thomas & Betts Corp...................... 11,040
----------------
353,832
----------------
Engineering (0.1%):
343 Fluor Corp............................... 18,136
166 Foster Wheeler Corp...................... 6,433
----------------
24,569
----------------
Entertainment (0.6%):
420 Harrah's Entertainment Inc.(b)........... 7,823
219 Meredith Corp............................ 5,667
2,322 Time Warner, Inc......................... 107,973
1,445 Viacom, Inc.(b).......................... 42,898
----------------
164,361
----------------
Environmental Services (0.2%):
238 Safety-Kleen Corp........................ 3,719
1,850 Waste Management, Inc.................... 58,738
----------------
62,457
----------------
Financial Guarantee Insurances (0.1%):
177 MBIA Inc................................. 19,005
-----------------
Financial Services (3.1%):
1,935 American Express Co...................... 134,482
221 Beneficial Corp.......................... 14,199
1,313 Dean Witter Discover & Co.(b)............ 54,161
4,460 Fannie Mae............................... 194,567
2,921 Federal Home Loan Mortgage Corp.......... 96,393
234 Golden West Financial Corp............... 15,854
561 Green Tree Financial Corp................ 19,635
396 Household International.................. 38,907
673 Merrill Lynch & Co....................... 71,338
241 MGIC Investment Corp..................... 21,449
445 Salomon, Inc............................. 23,863
2,609 Travelers, Inc........................... 143,168
----------------
828,016
----------------
Food & Related (1.4%):
981 ConAgra, Inc............................. 58,983
154 Fleming Cos., Inc........................ 2,926
660 General Mills, Inc....................... 41,745
1,504 H. J. Heinz Co........................... 64,672
627 Hershey Foods............................ 35,190
861 Kellogg Co............................... 63,499
1,965 Sara Lee Corp............................ 80,319
273 SUPERVALU, Inc........................... 9,111
475 Wrigley (Wm) Jr Co....................... 28,144
----------------
384,589
----------------
Food Processing (1.0%):
2,219 Archer-Daniels Midland Co................ 44,380
1,908 Campbell Soup Co......................... 87,768
587 CPC International, Inc................... 50,482
336 Pioneer Hi-Bred International, Inc....... 23,436
555 Quaker Oats Co........................... 22,894
434 Ralston Purina Group..................... 36,999
----------------
265,959
----------------
Funeral Services (0.1%):
963 Service Corp. International.............. 33,946
-----------------
Gas Utility (0.1%):
225 Columbia Gas System, Inc................. 14,484
347 Pacific Enterprises...................... 11,364
143 People's Energy Corp..................... 5,077
----------------
30,925
----------------
Health Care (0.3%):
227 Bausch & Lomb, Inc....................... 9,137
1,286 HEALTHSOUTH Corp.(b)..................... 29,417
257 Manor Care, Inc.......................... 7,357
752 United Healthcare Corp................... 42,488
----------------
88,399
----------------
Health Care-Drugs (8.5%):
3,173 Abbott Laboratories...................... 199,898
2,608 American Home Products Corp.............. 198,859
4,091 Bristol-Myers Squibb Co.................. 300,176
2,254 Eli Lilly & Co........................... 209,621
5,439 Johnson & Johnson........................ 325,659
4,923 Merck & Co., Inc......................... 442,454
</TABLE>
Continued
-57-
<PAGE> 59
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------ -----------------
<S> <C> <C>
Common Stocks, continued:
Health Care-Drugs, continued:
2,633 Pfizer, Inc. ............................ $ 270,869
2,075 Pharmacia & Upjohn, Inc. ................ 71,847
1,509 Schering-Plough Corp. ................... 136,941
1,108 Warner-Lambert Co. ...................... 111,631
----------------
2,267,955
----------------
Hospital Supply & Management (0.1%):
664 Humana, Inc.(b) ......................... 15,023
-----------------
Hotels & Lodging (0.4%):
643 HFS, Inc.(b) ............................ 34,642
1,009 Hilton Hotels Corp. ..................... 28,504
523 Marriott International, Inc. ............ 30,203
----------------
93,349
----------------
Household--Major Appliances (0.1%):
409 Maytag .................................. 10,941
304 Whirlpool Corp. ......................... 15,162
----------------
26,103
----------------
Instrumentation (0.3%):
193 EG&G Inc. ............................... 3,764
518 Honeywell, Inc. ......................... 37,685
340 Johnson Controls, Inc. .................. 14,408
177 Millipore Corp. ......................... 7,633
304 Parker-Hannifin Corp. ................... 15,998
178 Perkin-Elmer Corp. ...................... 13,528
----------------
93,016
----------------
Insurance-Life/Health (0.7%):
831 American General Corp. .................. 36,772
663 Aon Corp. ............................... 32,321
744 Conseco Inc. ............................ 29,760
289 Jefferson Pilot ......................... 18,388
287 Torchmark Corp. ......................... 18,834
271 Transamerica Corp. ...................... 24,627
299 UNUM Corp. .............................. 23,658
140 USLIFE Corp. ............................ 6,825
----------------
191,185
----------------
Insurance--Multiline (2.9%):
616 Aetna Services, Inc. .................... 62,216
1,816 Allstate Corp. .......................... 133,702
1,918 American International Group, Inc. ...... 259,648
307 Cigna Corp. ............................. 53,341
336 General Re Corp. ........................ 58,884
480 Hartford Financial Services Group ....... 37,440
426 Lincoln National Corp. .................. 25,933
470 Loews Corp. ............................. 45,708
334 March & McLennan Cos., Inc. ............. 44,005
383 Providian Corp. ......................... 22,932
515 SAFECO Corp. ............................ 22,403
472 USF&G Corp. ............................. 10,148
----------------
776,360
----------------
Insurance--Property & Casualty (0.3%):
711 Chubb Corp. ............................. 43,371
339 Saint Paul Companies, Inc. .............. 24,281
----------------
67,652
----------------
Integrated Oil (1.0%):
2,031 Amoco Corp. ............................. 181,520
190 Pennzoil Co. ............................ 10,521
1,023 Unocal Corp. ............................ 43,605
1,174 USX-Marathon Group ...................... 34,927
----------------
270,573
----------------
Iron/Steel (0.3%):
712 Alleghany Teledyne, Inc. ................ 18,334
435 Armco, Inc.(b) .......................... 1,631
456 Bethlehem Steel Corp.(b) ................ 4,560
200 Inland Steel ............................ 4,925
358 Nucor Corp. ............................. 21,122
346 USX-US Steel Group, Inc. ................ 11,159
394 Worthington Industries .................. 7,289
----------------
69,020
----------------
Leisure & Tourism (0.9%):
402 Brunswick Corp. ......................... 12,261
2,757 The Walt Disney Co. ..................... 225,728
----------------
237,989
----------------
Machinery & Equipment (0.9%):
300 Case Corp. .............................. 17,700
782 Caterpillar, Inc. ....................... 76,343
163 Cincinnati Milacron, Inc. ............... 3,769
1,045 Deere & Co. ............................. 53,426
</TABLE>
Continued
-58-
<PAGE> 60
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------ -----------------
<S> <C> <C>
Common Stocks, continued:
Machinery & Equipment, continued:
459 Dover Corp............................... $ 26,278
201 Harnischfeger Industries, Inc............ 8,618
224 McDermott International, Inc............. 6,216
33 Nacco Industries, Inc.................... 1,679
249 Snap-on, Inc............................. 9,929
363 Stanley Works............................ 14,883
610 Thermo Electron(b)....................... 21,045
----------------
239,886
----------------
Manufacturing (0.1%):
219 Western Atlas Inc.(b).................... 14,865
-----------------
Manufacturing-Consumer Goods (0.2%):
118 Briggs & Stratton........................ 6,092
145 Fleetwood Enterprises.................... 3,915
649 Newell Co................................ 24,824
514 Pall Corp................................ 12,143
254 Tupperware Corp.......................... 9,208
----------------
56,182
----------------
Medical Equipment & Supplies (1.1%):
267 Allergan, Inc............................ 7,910
345 Alza Corp.(b)............................ 10,178
233 Bard (C.R.), Inc......................... 7,456
1,115 Baxter International, Inc................ 58,816
502 Becton Dickinson & Co.................... 24,724
467 Biomet, Inc.............................. 8,727
792 Boston Scientific Corp.(b)............... 42,273
303 Guidant Corp............................. 23,520
302 Mallinckrodt, Inc........................ 11,287
980 Medtronic, Inc........................... 72,520
381 St. Jude Medical, Inc.(b)................ 12,906
286 US Surgical Corp......................... 9,653
----------------
289,970
----------------
Medical Services (0.3%):
1,080 Amgen, Inc.(b)........................... 72,225
406 Beverly Enterprises, Inc.(b)............. 5,735
96 Shared Medical Systems Corp.............. 5,088
----------------
83,048
----------------
Medical-Hospital Services (0.5%):
2,742 Columbia/HCA Healthcare Corp............. 100,426
1,230 Tenet Healthcare Corp.(b)................ 33,825
----------------
134,251
----------------
Metals & Mining (0.6%):
708 Aluminum Co. of America.................. 52,127
175 Asarco, Inc.............................. 5,447
381 Cyprus Amax Minerals Co.................. 9,287
789 Freeport McMoRan......................... 22,980
687 Inco Ltd................................. 22,671
265 Phelps Dodge Corp........................ 22,161
297 Reynolds Metals.......................... 20,159
----------------
154,832
----------------
Natural Gas Utility (0.4%):
387 Consolidated Natural Gas Co.............. 20,559
203 NICOR, Inc............................... 6,978
561 NorAm Energy Corp........................ 8,555
112 ONEOK Inc................................ 3,388
617 PanEnergy Corp........................... 28,845
641 Williams Cos., Inc....................... 28,284
----------------
96,609
----------------
Office Equipment & Supplies (0.6%):
336 Deluxe Corp.............................. 10,920
550 Ikon Office Solutions Inc................ 15,950
126 John H. Harland Co....................... 2,882
408 Moore Corp. Ltd.......................... 9,078
606 Pitney Bowes, Inc........................ 42,572
1,326 Xerox Corp............................... 89,837
----------------
171,239
----------------
Oil & Gas Equipment/Services (0.2%):
594 Baker Hughes, Inc........................ 22,275
718 Dresser Industries, Inc.................. 24,592
284 ENSERCH Corp............................. 6,071
----------------
52,938
----------------
Oil & Gas Exploration, Production & Services (1.0%):
510 Burlington Resources..................... 23,715
430 Coastal Corp............................. 21,554
198 Kerr-McGee Corp.......................... 12,821
</TABLE>
Continued
-59-
<PAGE> 61
THE ARCH FUND, INC.
Equity Index Portfolio
<TABLE>
<CAPTION>
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
Shares
or
Principal Security Market
Amount Description Value
- --------- ------------------------------------------ -----------------
<S> <C> <C>
Common Stocks, continued:
Oil & Gas Exploration, Production & Services, continued:
140 Louisiana Land & Exploration............. $ 7,210
428 Oryx Energy Co.(b)....................... 9,898
349 Rowan Cos., Inc.(b)...................... 8,071
421 Santa Fe Energy Resources(b)............. 6,368
1,006 Schlumberger Ltd......................... 119,840
352 Sonat, Inc............................... 20,240
1,020 Union Pacific Resources.................. 29,453
----------------
259,170
----------------
Oil Companies - Integrated (6.1%):
380 Amerada Hess Corp........................ 20,330
2,665 Chevron Corp............................. 186,549
10,193 Exxon Corp............................... 603,934
102 Helmerich & Payne, Inc................... 5,725
1,609 Mobil Corp............................... 225,058
1,343 Occidental Petroleums Corp............... 31,225
2,189 Royal Dutch Petroleum Co................. 427,401
298 Sun Co., Inc............................. 8,903
1,080 Texaco, Inc.............................. 117,855
----------------
1,626,980
----------------
Oil Field Services (0.1%):
511 Halliburton Co........................... 39,539
-----------------
Paper & Related Products (1.4%):
198 Boise Cascade Corp....................... 7,524
390 Champion International Corp.............. 19,256
373 Georgia Pacific Corp..................... 32,917
1,226 International Paper Co................... 58,848
352 James River Corp. of Virginia............ 12,364
2,308 Kimberly-Clark Corp...................... 115,689
444 Louisiana-Pacific Corp................... 8,658
213 Mead Corp................................ 13,579
118 Potlatch Corp............................ 5,059
226 Temple-Inland, Inc....................... 13,673
284 Union Camp Corp.......................... 14,910
416 Westvaco Corp............................ 13,000
810 Weyerhaeuser Co.......................... 40,399
226 Williamette Industries, Inc.............. 16,837
----------------
372,713
----------------
Petroleum--Domestic (0.6%):
303 Ashland, Inc............................. 14,506
Petroleum--Domestic, continued:
658 Atlantic Richfield Co.................... $ 95,739
1,075 Phillips Petroleum Co.................... 45,688
----------------
155,933
----------------
Photography (0.0%):
186 Polaroid Corp............................ 9,486
-----------------
Pipelines (0.2%):
1,039 Enron Corp............................... 42,339
-----------------
Precious Metals (0.4%):
1,459 Barrick Gold Corp........................ 36,840
917 Battle Mountain Gold Co.................. 5,617
569 Echo Bay Mines Ltd....................... 3,485
599 Homestake Mining Co...................... 8,311
637 Newmont Mining Corp...................... 24,919
978 Placer Dome, Inc......................... 17,849
----------------
97,021
----------------
Printing & Publishing (0.8%):
306 American Greetings....................... 10,481
395 Dow Jones & Co. Inc...................... 15,356
576 Gannett Co., Inc......................... 53,280
383 Knight-Ridder, Inc....................... 16,517
406 McGraw-Hill Cos., Inc.................... 22,178
395 New York Times Co........................ 18,195
616 R.R. Donnelley Co........................ 22,869
382 Times Mirror Co.......................... 21,440
503 Tribune Co............................... 21,755
----------------
202,071
----------------
Restaurants (0.6%):
653 Darden Restaurants, Inc.................. 5,469
2,850 McDonald's Corp.......................... 143,212
528 Wendy's International, Inc............... 12,342
----------------
161,023
----------------
Retail General Merchandise (0.1%):
849 Federated Department Stores(b)........... 31,413
-----------------
Retail Stores (0.0%):
247 Pep Boys-Manny Moe & Jack................ 7,719
-----------------
Retail Stores - Discount (1.3%):
1,978 K-Mart Corp.............................. 27,692
317 TJX Cos., Inc............................ 15,216
</TABLE>
Continued
-60-
<PAGE> 62
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------- -----------------
Common Stocks, continued:
<S> <C>
Retail Stores - Discount, continued:
9,418 Wal-Mart Stores, Inc..................... $ 280,185
547 Woolworth Corp........................... 13,196
---------------
336,289
---------------
Retail Stores - Grocery (0.5%):
1,025 Albertson's, Inc......................... 34,338
595 American Stores Co....................... 27,073
245 Giant Food, Inc.......................... 8,070
156 Great Atlantic & Pacific Tea Co.......... 4,310
1,030 Kroger Co.(b)............................ 26,394
613 Winn-Dixie Stores, Inc................... 23,447
---------------
123,632
---------------
Retail Stores - Specialty (0.8%):
614 AutoZone, Inc............................ 14,352
400 Circuit City Stores, Inc................. 15,800
1,962 Home Depot, Inc.......................... 123,606
707 Lowe's Cos............................... 27,838
1,186 Toys 'R' Us, Inc.(b)..................... 36,914
---------------
218,510
---------------
Retail Stores-Drug (0.4%):
432 CVS Corp................................. 20,682
159 Longs Drug Stores, Inc................... 3,776
501 Rite-Aid Corp............................ 23,297
1,005 Walgreen Co.............................. 46,984
---------------
94,739
---------------
Retail-Department Store (1.0%):
886 Dayton Hudson Corp....................... 42,639
464 Dillard Department Stores................ 15,660
290 Harcourt General, Inc.................... 13,739
1,009 J.C. Penney, Inc......................... 51,964
1,000 May Department Stores Co................. 47,125
150 Mercantile Stores Co., Inc............... 8,063
1,599 Sears, Roebuck & Co...................... 78,551
---------------
257,741
---------------
Retail--Apparel (0.2%):
430 Charming Shoppes......................... 2,258
1,107 Limited, Inc............................. 22,417
328 Nordstrom, Inc........................... 15,744
---------------
40,419
---------------
Semiconductors (2.9%):
558 Advanced Micro Devices(b)................ 22,320
739 Applied Materials, Inc.(b)............... 48,220
3,351 Intel Corp............................... 507,676
574 LSI Logic Corp.(b)....................... 23,965
856 Micron Technology, Inc.(b)............... 36,380
570 National Semiconductor Corp.(b).......... 16,031
894 Rockwell International Corp.............. 57,663
778 Texas Instruments, Inc................... 69,923
---------------
782,178
---------------
Technology-Software (0.0%):
195 Autodesk, Inc............................ 7,581
---------------
Telecommunications (0.7%):
2,048 AirTouch Communication, Inc.(b).......... 57,088
669 Frontier Corp............................ 12,293
2,797 MCI Communications....................... 107,335
---------------
176,716
---------------
Telecommunications-Services & Equipment (0.8%):
371 Andrew Corp.(b).......................... 10,110
153 King World Productions, Inc.............. 5,757
1,055 Northern Telecom Ltd..................... 88,620
316 Scientific-Atlanta, Inc.................. 5,728
732 Tellabs, Inc.(b)......................... 36,783
1,958 US West Communications Group............. 71,712
---------------
218,710
---------------
Telephone Long Distance (0.4%):
3,535 WorldCom, Inc............................ 104,724
---------------
Textile Products (0.0%):
82 Springs Industries, Inc.................. 4,151
---------------
Tire & Rubber (0.2%):
219 B. F. Goodrich Co........................ 9,417
336 Cooper Tire & Rubber..................... 7,518
635 Goodyear Tire & Rubber Co................ 37,148
---------------
54,083
---------------
Tobacco (1.7%):
10,028 Philip Morris Cos., Inc.................. 441,231
760 UST, Inc................................. 21,660
---------------
462,891
---------------
</TABLE>
Continued
-61-
<PAGE> 63
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------- -----------------
<S> <C> <C>
Common Stocks, continued:
Toys (0.2%):
528 Hasbro, Inc.............................. $ 15,312
1,180 Mattel, Inc.............................. 35,253
----------------
50,565
----------------
Transportation & Shipping (1.0%):
625 Burlington Northern Santa Fe............. 51,875
886 CSX Corp................................. 46,958
466 Federal Express Corp.(b)................. 24,407
1,282 Laidlaw, Inc............................. 17,307
511 Norfolk Southern Corp.................... 49,631
1,000 Union Pacific Corp....................... 67,750
----------------
257,928
----------------
Transportation & Shipping (0.0%):
128 Timken Co................................ 8,784
----------------
Trucking & Leasing (0.1%):
160 Caliber System, Inc...................... 5,120
310 Ryder Systems, Inc....................... 10,269
----------------
15,389
----------------
Utilities - Electric (0.1%):
974 Public Service Enterprise Group, Inc..... 24,107
----------------
Utilities - Gas & Electric (2.3%):
765 American Electric Power, Inc............. 31,174
603 Baltimore Gas & Electric................. 15,829
618 Carolina Power & Light................... 21,476
861 Central & South West Corp................ 18,296
644 CINergy Corp............................. 22,540
960 Consolidated Edison Co. of New York, Inc. 27,960
736 Dominion Resources Inc/VA................ 25,484
593 DTE Energy Co............................ 15,789
823 Duke Power Co............................ 37,035
1,769 Edison International..................... 41,350
943 Entergy Corp............................. 24,872
747 FPL Group, Inc........................... 34,736
492 GPU, Inc................................. 17,220
957 Houston Industries Inc................... 19,858
590 Niagara Mohawk Power Corp.(b)............ 5,163
282 Northern States Power Co................. 13,818
623 Ohio Edison Co........................... 13,239
1,203 PacifiCorp............................... 23,910
909 Peco Energy Co........................... 17,271
1,684 PG & E Corp.............................. 38,943
663 PP & L Resources, Inc.................... 13,343
2,751 Southern Co.............................. 58,459
917 Texas Utilities Co....................... 31,522
881 Unicom Corp.............................. 20,043
417 Union Electric Co........................ 15,273
----------------
604,603
----------------
Utilities--Telephone (4.9%):
765 Alltel Corp.............................. 25,149
2,244 Ameritech Corp........................... 146,981
6,667 AT&T Corp................................ 245,845
1,788 Bell Atlantic Corp....................... 125,160
4,048 BellSouth Corp........................... 183,677
3,928 GTE Corp................................. 173,322
1,797 Nynex Corp............................... 96,589
3,745 SBC Communications, Inc.................. 219,082
1,758 Sprint Corp.............................. 85,922
----------------
1,301,727
----------------
Wholesale Distribution (0.3%):
450 Cardinal Health, Inc..................... 26,213
857 Costo Companies, Inc.(b)................. 28,924
721 Sysco Corp............................... 25,145
----------------
80,282
----------------
Wire & Cable Products (0.1%):
559 General Instrument Corp.(b).............. 13,556
----------------
Total Common Stocks 26,593,973
----------------
Total (Cost--$25,163,040)(a) $ 26,641,966
================
</TABLE>
Continued
-62-
<PAGE> 64
THE ARCH FUND, INC.
Equity Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<S> <C>
Percentages indicated are based on net assets of $26,640,268.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
Unrealized appreciation ............................... $ 1,586,187
Unrealized depreciation ............................... (107,261)
------------
Net unrealized appreciation ........................... $ 1,478,926
============
(b) Represents non-income producing securities.
</TABLE>
See notes to financial statements
-63-
<PAGE> 65
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------- -------------
<S> <C> <C>
Commercial Paper (7.6%):
Financial Services (4.3%):
5,000,000 Xerox Credit, 5.60%, 6/2/97 $ 4,999,221
Telecommunications (3.3%):
3,854,000 Bell Commerce Research,
5.65%, 6/2/97............ 3,853,395
------------
Total Commercial Paper 8,852,616
------------
Common Stocks (54.6%):
Airlines (1.0%):
45,000 Southwest Airlines......... 1,158,750
------------
Automotive (0.5%):
19,000 Echlin, Inc. .............. 634,125
------------
Banking (2.2%):
13,000 Chase Manhattan Corp. ..... 1,228,500
35,000 Crestar Financial Corp. ... 1,330,000
------------
2,558,500
------------
Beverages (1.1%):
35,450 PepsiCo, Inc. ............. 1,302,788
------------
Business Services (3.0%):
31,200 Analog Devices, Inc. ...... 834,600
28,756 Automatic Data Processing,
Inc. .................... 1,412,639
33,200 First Data Corp.(b)........ 1,328,000
------------
3,575,239
------------
Chemicals (2.3%):
29,800 Millipore Corp. ........... 1,285,125
26,800 Praxair, Inc. ............. 1,410,350
------------
2,695,475
------------
Computer Software (3.2%):
30,000 Computer Associates
International, Inc. ..... 1,642,500
6,400 Microsoft Corp.(c)......... 793,600
27,000 Oracle Corp.(b)(c)......... 1,258,875
------------
3,694,975
------------
Consumer Goods & Services (0.9%):
45,000 CUC International Inc. .... 1,035,000
------------
Containers & Packaging (2.1%):
30,252 Avery Dennison Corp. ...... 1,138,232
Containers & Packaging, continued:
22,000 Crown Cork & Seal Co., Inc. 1,281,500
------------
2,419,732
------------
Diversified Operations (1.9%):
23,880 General Electric Co. ...... 1,441,755
30,291 Whitman Corp. ............. 730,770
------------
2,172,525
------------
Electrical Equipment (1.1%):
16,300 Grainger (W.W.), Inc. ..... 1,308,075
------------
Financial Services (4.7%):
31,200 First USA, Inc. ........... 1,544,400
31,200 Green Tree Financial Corp.. 1,092,000
22,377 PMI Group, Inc. ........... 1,227,938
8,009 Student Loan Marketing
Association.............. 974,095
28,000 United Cos. Financial
Corp.(b)................. 640,500
------------
5,478,933
------------
Food & Related (2.1%):
53,000 IBP, Inc. ................. 1,245,500
28,700 Sara Lee Corp. ............ 1,173,113
------------
2,418,613
------------
Health Care (1.1%):
16,940 Bristol Myers Squibb Co. .. 1,242,973
------------
Health Care-Drugs (4.4%):
18,000 American Home Products
Corp. ................... 1,372,500
8,600 Eli Lilly & Co. ........... 799,800
14,824 Pfizer, Inc. .............. 1,525,019
17,138 SmithKline Beecham PLC, ADR 1,499,575
------------
5,196,894
------------
Manufacturing-Consumer Goods (1.1%):
34,000 Newell Co. ................ 1,300,500
------------
Medical Equipment & Supplies (1.0%):
18,000 Allergan, Inc. ............ 533,250
20,400 Bard (C.R.), Inc. ......... 652,800
------------
1,186,050
------------
</TABLE>
Continued
-64-
<PAGE> 66
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------- -------------
<S> <C> <C>
Common Stocks, continued:
Medical-Hospital Services (1.0%):
31,000 Columbia/HCA Healthcare
Corp.(b)................. $ 1,135,375
-------------
Metals & Mining (0.4%):
10,000 UCAR International, Inc. .. 480,000
-------------
Oil & Gas Equipment/Services (3.2%):
32,000 Baker Hughes, Inc. ........ 1,200,000
40,000 Dresser Industries, Inc. .. 1,370,000
26,700 Tidewater, Inc. ........... 1,124,738
-------------
3,694,738
-------------
Oil & Gas Exploration, Production & Services (2.0%):
56,400 Union Texas Petroleum
Holdings, Inc. .......... 1,135,050
35,000 Vastar Resources........... 1,211,875
-------------
2,346,925
-------------
Oil Companies - Integrated (0.8%):
22,700 Phillips Petroleum Co. .... 964,750
-------------
Paper & Related (0.6%):
11,000 Mead Corp. ................ 701,250
-------------
Pharmaceuticals (1.3%):
16,322 Schering-Plough Corp. ..... 1,481,222
-------------
Retail Stores - Discount (1.7%):
15,800 Consolidated Stores........ 604,350
47,893 Wal-Mart Stores, Inc. ..... 1,424,817
-------------
2,029,167
-------------
Retail Stores - General Merchandise (0.5%):
11,063 J.C. Penney, Inc. ......... 569,745
-------------
Retail Stores - Grocery (0.5%):
18,000 Albertson's Inc. .......... 603,000
-------------
Retail Stores - Specialty (1.7%):
10,500 Home Depot, Inc. .......... 661,500
29,000 Nordstrom, Inc. ........... 1,392,000
-------------
2,053,500
-------------
Technology (1.1%):
20,000 Motorola, Inc. ............ 1,327,500
-------------
Tire & Rubber (1.1%):
22,500 Goodyear Tire & Rubber Co.. 1,316,250
-------------
Tobacco (1.2%):
31,800 Philip Morris Cos., Inc. .. $ 1,399,200
-------------
Transportation & Shipping (1.1%):
15,300 Burlington Northern Santa 1,269,900
Fe.......................
-------------
Utilities - Gas & Electric (1.6%):
15,000 Baltimore Gas & Electric... 393,750
35,500 Central & South West Corp.. 754,375
23,000 Western Resources, Inc. ... 750,375
-------------
1,898,500
-------------
Wholesale Distribution (1.1%):
35,669 Sysco Corp. ............... 1,243,956
-------------
Total Common Stocks 63,894,125
-------------
Medium Term Note (2.5%):
Automotive (0.9%):
1,000,000 General Motors Acceptance
Corp., 6.60%, 1/17/01.... 992,500
Finance (1.6%):
2,000,000 Federal Home Loan Bank,
5.35%, 2/7/01............ 1,920,500
-------------
Total Medium Term Note 2,913,000
-------------
U.S. Government Agencies (12.6%):
Federal Home Loan Mortgage Corp.:
163,636 9.50%, 2/1/98 ............ 168,186
204,785 7.00%, 3/1/98 ............ 205,743
430,875 6.00%, 4/1/98 ............ 421,448
85,350 6.50%, 4/1/98 ............ 84,629
329,947 6.50%, 4/1/98 ............ 327,162
92,628 7.00%, 4/1/98 ............ 93,061
547,729 6.50%, 4/1/08 ............ 534,890
254,280 7.00%, 4/1/08 ............ 252,927
227,364 7.00%, 4/1/08 ............ 226,154
763,747 6.50%, 1/1/09 ............ 745,845
Government National Mortgage Assoc.:
364,241 7.00%, 7/15/09 ........... 363,443
451,513 6.50%, 10/20/10 .......... 439,096
2,084,514 6.50%, 7/15/11 ........... 2,042,824
14,356 8.50%, 6/15/17 ........... 14,880
406,271 8.00%, 7/15/22 ........... 414,141
254,499 7.00%, 11/15/22 .......... 247,500
</TABLE>
Continued
-65-
<PAGE> 67
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------- -------------
<S> <C> <C>
U.S. Government Agencies, continued:
Government National Mortgage Assoc., continued:
346,475 7.00%, 11/15/22 .......... $ 336,947
657,009 7.50%, 3/15/23 ........... 654,545
9,886 8.50%, 3/15/23 ........... 10,247
338,879 7.50%, 4/15/23 ........... 337,608
589,792 8.50%, 8/15/24 ........... 611,355
549,031 8.50%, 9/15/24 ........... 569,104
139,778 8.50%, 9/15/24 ........... 144,888
142,881 8.50%, 1/15/25 ........... 148,105
130,990 8.50%, 2/15/25 ........... 135,779
372,159 8.50%, 3/15/25 ........... 385,765
175,378 8.50%, 4/15/25 ........... 181,790
416,257 8.00%, 8/15/25 ........... 424,320
23,721 7.50%, 9/15/25 ........... 23,632
24,152 7.50%, 10/15/25 .......... 24,061
37,642 7.50%, 10/15/25 .......... 37,501
876,657 7.50%, 10/15/25 .......... 873,369
25,472 7.50%, 10/15/25 .......... 25,377
899,444 7.50%, 10/15/25 .......... 896,071
144,505 6.50%, 1/15/26 ........... 136,691
672,849 6.50%, 1/15/26 ........... 636,468
24,366 6.50%, 3/15/26 ........... 23,048
488,054 6.50%, 4/15/26 ........... 461,665
495,560 6.50%, 4/15/26 ........... 468,765
473,525 6.50%, 4/15/26 ........... 447,922
183,575 6.50%, 5/15/26 ........... 173,649
------------
Total U.S. Government Agencies 14,750,601
------------
U.S. Treasury Bonds (7.9%):
300,000 10.75%, 8/15/05(b)......... 376,524
2,750,000 12.00%, 8/15/13............ 3,841,943
1,000,000 8.13%, 5/15/21(b).......... 1,128,450
1,000,000 8.13%, 8/15/21(b).......... 1,128,860
1,200,000 8.00%, 11/15/21(b)......... 1,337,952
1,500,000 6.25%, 8/15/23............. 1,367,220
------------
Total U.S. Treasury Bonds 9,180,949
------------
U.S. Treasury Notes (14.4%):
2,250,000 5.75%, 9/30/97(b).......... 2,253,240
2,000,000 5.00%, 2/15/99(b).......... 1,964,080
3,000,000 5.88%, 2/28/99(b).......... 2,987,700
3,000,000 7.50%, 5/15/02(b).......... 3,126,450
3,000,000 6.38%, 8/15/02(b).......... 2,983,260
1,000,000 6.25%, 2/15/03(b).......... 986,720
2,500,000 7.00%, 7/15/06............. 2,553,675
------------
Total U.S. Treasury Notes 16,855,125
------------
Investment Companies (0.4%):
500,000 Cash Assets Trust Money
Market Fund.............. 500,000
------------
Total Investment Companies 500,000
------------
Total (Cost--$101,783,519)(a) $116,946,416
============
</TABLE>
- ----------
Percentages indicated are based on net assets of $116,938,053.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation ......................... $16,432,263
Unrealized depreciation ......................... (1,269,366)
------------
Net unrealized appreciation ..................... $15,162,897
============
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
(c) Represents non-income producing securities.
See notes to financial statements
-66-
<PAGE> 68
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------------- ------------------------------------ -----------------
<S> <C> <C>
U.S. Government Agencies (34.8%):
Federal Home Loan Mortgage Corp.:
1,409,622 6.50%, 2/1/98 .................... $ 1,397,724
850,324 6.50%, 3/1/98 .................... 843,147
56,740 8.50%, 5/1/01 .................... 58,336
122,129 8.50%, 11/1/01 ................... 125,105
92,307 8.00%, 3/1/02 .................... 93,951
30,217 8.00%, 3/1/02 .................... 30,755
128,219 7.50%, 4/1/02 .................... 128,658
55,520 8.00%, 5/1/02 .................... 56,509
5,234 8.00%, 6/1/02 .................... 5,327
302,306 8.00%, 6/1/02 .................... 307,690
67,773 8.00%, 6/1/02 .................... 68,980
15,928 8.00%, 6/1/02 .................... 16,211
27,207 8.00%, 7/1/02 .................... 27,692
169,488 8.00%, 7/1/02 .................... 172,506
107,859 8.50%, 3/1/05 .................... 110,487
9,266 8.50%, 4/1/05 .................... 9,492
1,000,000 7.46%, 8/3/05(b) ................. 998,620
54,575 8.50%, 9/1/05 .................... 55,905
39,100 8.50%, 4/1/06 .................... 40,431
983,031 6.50%, 1/1/12 .................... 959,989
2,273,886 8.00%, 1/1/23 .................... 2,318,636
541,152 8.00%, 1/1/23 .................... 551,802
Federal National Mortgage Assoc.:
1,337,627 6.00%, 11/1/00, Pool #190070 ...... 1,292,897
4,813,768 6.00%, 5/1/11, Pool #345652 ...... 4,603,166
4,808,849 7.00%, 7/1/11 .................... 4,780,284
947,714 6.50%, 12/1/11, Pool #367178F ..... 924,609
3,884,948 6.50%, 12/1/11, Pool #367838F ..... 3,790,233
986,384 6.00%, 1/1/12, Pool #366788 ...... 943,230
3,119,577 8.00%, 7/1/24 .................... 3,175,136
Government National Mortgage Assoc.:
17,265 9.50%, 2/15/01 ................... 18,317
33,545 9.50%, 9/15/01 ................... 35,589
191,553 8.00%, 1/15/02 ................... 196,998
39,289 8.00%, 3/15/02 ................... 40,406
181,696 8.00%, 3/15/02 ................... 186,861
185,621 8.00%, 4/15/02 ................... 190,898
135,812 8.00%, 7/15/02 ................... 139,673
90,505 9.50%, 10/15/02 .................. 96,020
103,670 9.50%, 1/15/06 ................... 109,986
151,408 8.00%, 5/15/06 ................... 155,713
68,507 9.50%, 7/15/07 ................... 72,681
399,750 8.00%, 11/15/07 .................. 411,115
430,306 8.00%, 12/15/07 .................. 442,540
686,185 9.50%, 8/15/09, Pool #400219 ...... 727,995
198,426 9.50%, 9/15/09 ................... 210,516
742,790 9.50%, 2/15/10 ................... 788,048
41,877 8.00%, 5/15/10 ................... 43,068
175,264 6.50%, 8/15/10 ................... 171,758
203,138 8.00%, 9/15/10 ................... 208,913
1,023,551 8.00%, 11/12/10 .................. 1,052,651
263,240 8.00%, 11/15/10 .................. 270,724
326,889 8.00%, 11/15/10 .................. 336,183
425,640 6.50%, 3/15/11 ................... 417,127
118,651 6.50%, 3/15/11 ................... 116,278
368,996 6.50%, 4/15/11 ................... 361,616
113,575 6.50%, 4/15/11 ................... 111,304
475,555 6.50%, 4/15/11 ................... 466,044
659,613 6.50%, 5/15/11 ................... 646,420
469,131 6.50%, 5/15/11 ................... 459,749
78,412 6.50%, 5/15/11 ................... 76,844
604,833 6.50%, 6/15/11 ................... 592,737
112,563 6.50%, 6/15/11 ................... 110,312
315,697 6.50%, 6/15/11 ................... 309,383
756,450 6.50%, 6/15/11 ................... 741,321
354,167 6.50%, 7/15/11 ................... 347,084
414,020 6.50%, 8/15/11 ................... 405,739
2,504,885 8.50%, 4/15/17 ................... 2,596,464
1,539,276 8.00%, 4/15/22 ................... 1,569,092
3,741,402 7.50%, 1/15/23 ................... 3,727,372
2,221,940 8.00%, 1/15/23 ................... 2,264,979
1,016,638 7.50%, 4/15/23 ................... 1,012,825
1,480,163 9.00%, 3/15/25 ................... 1,557,398
4,898,466 6.50%, 6/15/26 ................... 4,633,606
-----------------
Total U.S. Government Agencies 56,317,855
-----------------
</TABLE>
Continued
-67-
<PAGE> 69
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------------- ------------------------------------ -----------------
<S> <C> <C>
U.S. Treasury Bonds (13.4%):
1,375,000 9.25%, 2/15/16..................... $ 1,699,624
1,675,000 8.75%, 5/15/17(b).................. 1,989,532
2,865,000 8.88%, 8/15/17..................... 3,444,217
4,150,000 8.88%, 2/15/19(b).................. 5,011,042
2,183,000 8.75%, 8/15/20(b).................. 2,617,744
7,600,000 6.25%, 8/15/23..................... 6,927,248
-----------------
Total U.S. Treasury Bonds 21,689,407
-----------------
U.S. Treasury Notes (49.7%):
32,300,000 5.13%, 2/28/98(b).................. 32,141,085
1,750,000 6.38%, 5/15/99(b).................. 1,755,460
11,800,000 6.00%, 10/15/99(b)................. 11,745,012
7,500,000 6.13%, 7/31/00(b).................. 7,447,275
2,000,000 5.63%, 2/28/01(b).................. 1,946,980
25,600,000 6.63%, 5/15/07..................... 25,534,208
-----------------
Total U.S. Treasury Notes 80,570,020
-----------------
Investment Companies (1.7%):
2,801,700 Federated Money Market Trust Fund..
2,801,700
-----------------
Total Investment Companies 2,801,700
-----------------
Total (Cost--$161,041,875)(a) $ 161,378,982
=================
</TABLE>
- -------------
Percentages indicated are based on net assets of $162,011,503.
(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 ....................... $ 1,622,359
Unrealized depreciation ....................... (1,285,252)
---------------
Net unrealized appreciation ................... $ 337,107
===============
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
See notes to financial statements
-68-
<PAGE> 70
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- --------------------------- ------------
<S> <C> <C>
U.S. Government Agencies (40.0%):
Federal Home Loan Mortgage Corp.:
174,442 7.50%, 8/1/97 ........... $ 176,895
458,536 6.50%, 2/1/98 ........... 454,666
257,344 9.50%, 2/1/98 ........... 264,501
544,562 6.00%, 5/1/98 ........... 532,647
19,135 9.50%, 9/1/04 ........... 20,176
500,000 7.46%, 8/3/05 ........... 499,310
297,065 8.50%, 3/1/06 ........... 307,183
564,387 7.50%, 4/1/08,
Pool #E4-5929 .......... 570,911
847,830 6.50%, 2/1/11, Pool
#E00419 ................ 827,957
484,934 7.00%, 11/1/11, Pool
#E65619 ................ 482,354
992,861 6.50%, 1/1/12 ........... 969,588
1,490,452 6.00%, 2/1/12, Pool
#E66284 ................ 1,426,631
754,899 6.50%, 2/1/12, Pool
#E66172 ................ 737,205
846,297 6.50%, 2/1/12, Pool
#E66272 ............... 826,460
998,761 6.00%, 3/1/12, Pool
#E66474 ................ 955,994
Federal National Mortgage Assoc.:
668,813 6.00%, 11/1/00, Pool
#190070 ................ 646,448
965,391 6.50%, 5/1/11, Pool
#335713 ............... 941,854
778,997 6.50%, 5/1/11, Pool
#346276 ................ 760,005
1,930,566 6.50%, 7/1/11, Pool
#250613 ................ 1,883,499
956,024 6.50%, 7/1/11, Pool
#351761 ............... 932,716
370,707 7.00%, 11/1/11, Pool
#250738 ................ 368,505
344,432 7.00%, 11/1/11, Pool
#349630 ................ 342,386
248,119 7.00%, 11/1/11, Pool
#351122 ................ 246,645
1,939,514 6.50%, 12/1/11, Pool
#250781 ................ 1,892,229
971,683 6.50%, 12/1/11, Pool
#368127 ................ 947,993
981,173 6.50%, 12/1/11, Pool
#367868 ................ 957,252
1,559,788 8.00%, 7/1/24 ........... 1,587,568
Government National Mortgage Assoc.:
280,340 8.00%, 1/15/07 .......... 288,310
80,156 6.50%, 5/15/08 .......... 78,552
336,928 9.00%, 7/15/09 .......... 352,511
468,291 9.00%, 11/15/09 ......... 489,950
828,291 8.00%, 10/15/10 ......... 851,839
124,164 6.50%, 11/15/10 ......... 121,681
385,665 6.50%, 2/15/11 .......... 377,952
398,392 6.50%, 3/15/11 .......... 390,424
407,098 6.50%, 3/15/11 .......... 398,956
440,086 6.50%, 3/15/11 .......... 431,284
710,029 6.50%, 3/15/11 .......... 695,828
64,143 6.50%, 3/15/11 .......... 62,860
775,675 6.50%, 4/15/11 .......... 760,162
423,715 6.50%, 4/15/11 .......... 415,240
382,669 6.50%, 5/15/11 .......... 375,016
58,872 6.50%, 5/15/11 .......... 57,695
149,191 6.50%, 5/15/11 .......... 146,207
265,060 6.50%, 6/15/11 .......... 259,759
116,397 6.50%, 6/15/11 .......... 114,069
398,205 6.50%, 7/15/11 .......... 390,241
860,228 6.50%, 7/15/11 .......... 843,023
182,626 8.50%, 5/15/17 .......... 189,303
174,854 8.50%, 6/15/21 .......... 181,247
1,105,249 7.50%, 12/15/22 ......... 1,101,104
646,631 8.00%, 5/15/23, Pool
#0352469 ............... 659,157
258,425 9.50%, 1/15/25 .......... 278,290
675,126 9.50%, 2/15/25, Pool
#365292 ................ 727,023
17,407 9.50%, 2/15/25 .......... 18,745
453,096 9.50%, 2/15/25, Pool
#401796 ................ 487,925
358,398 9.50%, 3/15/25, Pool
#407257 ................ 385,949
242,677 9.50%, 4/15/25, Pool
#386741 ................ 261,331
------------
Total U.S. Government Agencies 32,751,211
------------
U.S. Treasury Notes (57.4%):
2,500,000 7.25%, 2/15/98(b)......... 2,524,275
17,400,000 5.13%, 2/28/98(b)......... 17,314,393
3,300,000 7.12%, 10/15/98........... 3,346,002
3,600,000 7.00%, 4/15/99............ 3,652,200
6,750,000 6.38%, 5/15/99(b)......... 6,771,060
</TABLE>
Continued
-69-
<PAGE> 71
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- --------------------------- ------------
<S> <C> <C>
U.S. Treasury Notes, continued:
6,650,000 7.75%, 11/30/99(b)........ $ 6,869,251
1,250,000 7.75%, 12/31/99(b)........ 1,292,138
5,300,000 6.63%, 5/15/07............ 5,286,379
-----------
Total U.S. Treasury Notes 47,055,698
-----------
Investment Companies (2.0%):
1,662,300 Federated U.S. Treasury
Obligation Fund......... $ 1,662,300
-----------
Total Investment Companies 1,662,300
-----------
Total (Cost--$81,684,694)(a) $81,469,209
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $81,935,244.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation ................................ $ 201,008
Unrealized depreciation ................................ (416,493)
---------
Net unrealized depreciation ............................ $(215,485)
=========
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
See notes to financial statements
-70-
<PAGE> 72
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------- ------------
<S> <C> <C>
Municipal Bonds (96.1%):
Alabama (3.6%):
1,000,000 Alabama State GO, 4.40%,
12/1/00 .................. $ 1,001,249
------------
Alaska (1.1%):
300,000 Anchorage, 5.40%,
8/1/98 ................... 304,875
------------
Colorado (4.0%):
390,000 Aurora-Colorado Springs,
5.40%, 9/1/98 ............ 394,988
720,000 El Paso County Colorado
School District No. 020,
5.15%, 12/15/99 .......... 734,400
------------
1,129,388
------------
Hawaii (5.6%):
1,000,000 Hawaii State, 4.10%,
11/1/01 .................. 978,749
600,000 Hawaii State Highway
Revenue, 4.80%, 7/1/03 ... 605,250
------------
1,583,999
------------
Illinois (9.3%):
500,000 Chicago, Water Revenue,
4.70%, 12/1/99 ........... 503,125
500,000 Dupage County, 5.90%,
11/1/01 .................. 525,625
400,000 Illinois State GO, 5.25%,
4/1/01 ................... 409,000
400,000 Illinois State GO
Refunding, 5.60%,
10/1/99 .................. 411,500
750,000 Toll Highway Authority,
4.75%, 1/1/02 ............ 750,000
------------
2,599,250
------------
Indiana (1.8%):
500,000 Muncie, School Board,
4.95%, 1/15/02 ........... 503,750
------------
Iowa (1.6%):
425,000 Ottumwa County, 5.10%,
6/1/01 ................... 435,625
------------
Kentucky (1.4%):
380,000 Kenton County, Water
Revenue, 5.60%, 2/1/99 ... 388,075
------------
Maine (2.9%):
800,000 Maine Municipal Bond
Refunding, 4.90%,
11/1/02 .................. 811,000
------------
Maryland (3.2%):
400,000 Department of
Transportation, 4.10%,
12/15/00 ................. $ 393,500
500,000 Washington, Suburban
Sanitation District,
5.00%, 6/1/00 ............ 509,375
------------
902,875
------------
Michigan (5.9%):
400,000 Chelsea, 5.25%, 5/1/01 ... 410,500
800,000 Kent City, Building
Authority GO, 4.50%,
12/1/01 .................. 799,000
450,000 Oakland County, Building
Authority, 4.75%,
4/1/00 ................... 454,500
------------
1,664,000
------------
Minnesota (3.1%):
365,000 Duluth, 4.65%, 2/1/02 .... 366,369
500,000 Minnesota State, 5.50%,
8/1/98 ................... 509,375
------------
875,744
------------
Mississippi (1.8%):
500,000 Mississippi State Capital
Improvement, 5.00%,
8/1/99 ................... 508,750
------------
Missouri (1.2%):
320,000 Jefferson County, School
District, 4.70%,
3/1/01 ................... 322,800
------------
Nevada (5.0%):
900,000 Sparks GO, 4.80%, 3/1/04 898,875
500,000 Washoe County, 5.30%,
8/1/00 ................... 513,750
------------
1,412,625
------------
New Mexico (3.7%):
345,000 Albuquerque, 4.40%,
7/1/00 ................... 345,431
700,000 New Mexico State Capital
Projects GO, 4.60%,
8/1/00 ................... 704,375
------------
1,049,806
------------
New York (1.8%):
500,000 New York Power Authority,
5.85%, 1/1/00 ............ 516,875
------------
Pennsylvania (3.2%):
500,000 Bucks County, 5.60%,
3/1/98 ................... 506,230
</TABLE>
Continued
-71-
<PAGE> 73
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------- ------------
<S> <C> <C>
Municipal Bonds, continued:
Pennsylvania, continued:
400,000 Delaware County, 4.35%,
10/1/00................... $ 399,000
-----------
905,230
-----------
Rhode Island (3.2%):
900,000 Commonwealth Construction
Capital Development,
4.60%, 11/1/03............ 884,250
-----------
South Carolina (3.0%):
400,000 Charleston S.C. GO, 4.50%,
2/1/00.................... 401,000
450,000 Charleston School District,
4.40%, 2/1/98............. 451,571
-----------
852,571
-----------
South Dakota (2.3%):
640,000 South Dakota Building
Authority, Finance Bonds,
5.00%, 9/1/02............. 646,400
-----------
Texas (7.6%):
450,000 Dallas, Water & Sewer Revenue,
4.60%, 4/1/01............. 451,688
800,000 Houston, Series C, 5.50%,
4/1/01.................... 826,000
400,000 San Antonio GO, 4.88%,
8/1/99 .................. 405,500
450,000 Tarrant Water Control,
5.60%, 3/1/00............. 464,625
-----------
2,147,813
-----------
Utah (5.8%):
675,000 Box Elder School District,
4.80%, 6/15/01............ 685,969
560,000 North Davis County Sewer
District, 5.70%, 3/1/02... 585,200
350,000 North Davis County Sewer
District, GO, 5.70%,
3/1/03.................... 366,625
-----------
1,637,794
-----------
Vermont (1.0%):
270,000 Vermont Municipal Bond,
4.50%, 12/1/01............ $ 270,000
-----------
Virginia (2.9%):
400,000 Virginia Beach GO, 4.20%,
7/15/98................... 401,500
400,000 Virginia Public Building
Refunding, 5.70%,
8/1/00.................... 414,500
-----------
816,000
-----------
Washington (7.5%):
500,000 Clark County, 4.60%,
1/1/01.................... 499,375
500,000 Grant County Public
Utilities District,
4.80%, 1/1/04............. 498,125
600,000 Seattle, 4.80%, 5/1/02.... 605,250
250,000 Seattle Water System
Refunding Bonds, 4.70%,
12/1/00................... 252,813
250,000 Washington State Refunding
Bonds, Series R-92C,
5.75%, 9/1/02............. 262,813
-----------
2,118,376
-----------
Wisconsin (2.6%):
325,000 Brown County, 4.80%,
11/1/01................... 328,250
380,000 Milwaukee County, Refunding
Bonds, Series A, 5.25%,
9/1/00.................... 388,075
-----------
716,325
-----------
Total Municipal Bonds 27,005,445
-----------
Investment Companies (2.8%):
467,000 Federated Tax-Free Trust
Mutual Fund............... 467,000
328,000 Nuveen Tax Exempt Money
Market Fund............... 328,000
-----------
Total Investment Companies 795,000
-----------
Total (Cost--$27,800,132)(a)......... $27,800,445
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $28,098,153.
(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 ......................... $66,755
Unrealized depreciation ......................... (66,442)
--------
Net unrealized appreciation ..................... $ 313
========
</TABLE>
See notes to financial statements
-72-
<PAGE> 74
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------- ------------
<S> <C> <C>
Municipal Bonds (96.0%):
Missouri (92.1%):
300,000 Christian County School District R-6, 7.05%, 3/1/11 .................................... $ 322,875
1,255,000 Columbia GO, 5.50%, 10/1/03 ............................................................ 1,317,750
1,000,000 Columbia Water & Electrical Revenue, 6.13%, 10/1/12 .................................... 1,037,500
750,000 Franklin County Union Reorganized School District Series 1993, 5.75%, 3/1/13 ........... 761,250
1,000,000 Hazelwood School District Series 1994, 5.85%, 3/1/09 ................................... 1,032,500
1,000,000 Jefferson City, School District, 6.70%, 3/1/11 ......................................... 1,135,000
150,000 Kansas City Municipal Assistance Corp., 7.15%, 4/15/04 ................................. 164,063
2,415,000 Kansas City School District Building, 5.15%, 2/1/08 .................................... 2,421,038
1,000,000 Kansas City School District Building Series D, 5.00%, 2/1/14, Insured by FGIC........... 945,000
1,000,000 Kansas City School District Series 1993 C, 5.38%, 7/1/05, Insured by FGIC............... 1,026,250
1,000,000 Kansas City Sewer Revenue, 7.25%, 4/1/99, Prerefunded 4/1/99 @ 100...................... 1,053,750
2,200,000 Kansas City Water Revenue, 5.00%, 12/1/16 .............................................. 2,076,250
700,000 Lincoln County IDR, 7.50%, 5/1/05 ...................................................... 742,000
1,500,000 Mehlville School District 09, 6.00%, 2/15/13 ........................................... 1,565,625
1,500,000 Missouri Board Public Buildings, 6.40%, 12/1/09 ........................................ 1,590,000
2,000,000 Missouri Building, Series A, 5.40%, 8/1/09 ............................................. 2,052,500
1,000,000 Missouri Environmental Improvement & Energy, 5.88%, 1/1/15 ............................. 1,012,500
1,000,000 Missouri Environmental Resources Authority, 6.45%, 7/1/08 .............................. 1,080,000
720,000 Missouri Environmental Resources Authority, 7.00%, 10/1/10 ............................. 783,900
1,100,000 Missouri Environmental Resources Authority, 6.88%, 6/1/14 .............................. 1,190,750
500,000 Missouri Environmental Resources Authority, 6.55%, 7/1/14 .............................. 535,625
1,250,000 Missouri Environmental Resources Authority, 5.63%, 7/1/16 .............................. 1,256,250
200,000 Missouri Environmental Resources Authority, 7.40%, 5/1/20 .............................. 216,500
100,000 Missouri Environmental Resources Authority, 7.40%, 5/1/20 .............................. 108,375
1,000,000 Missouri GO, 5.25%, 8/1/08 ............................................................. 1,011,250
1,000,000 Missouri GO, 5.13%, 8/1/09 ............................................................. 1,003,750
1,000,000 Missouri Health & Education Facilities Authority, 6.75%, 5/15/12 ....................... 1,140,000
1,300,000 Missouri Health & Educational Facilities Authority, 4.15%*, 12/1/05 .................... 1,300,000
800,000 Missouri Health & Educational Facilities Authority, 7.75%, 6/1/07 ...................... 829,464
600,000 Missouri Health & Educational Facilities Authority, 6.63%, 11/1/09 ..................... 662,250
500,000 Missouri Health & Educational Facilities Authority, 7.13%, 12/15/12, Prerefunded
12/15/00 @ 102........................................................................ 553,125
2,000,000 Missouri Health & Educational Facilities Authority, 5.10%, 11/15/13 .................... 1,897,500
1,000,000 Missouri Health & Educational Facilities Authority, 5.38%, 2/15/14 ..................... 986,250
750,000 Missouri Health & Educational Facilities Authority, 6.25%, 6/1/15 ...................... 788,438
2,000,000 Missouri Health & Educational Facilities Authority, 6.25%, 6/1/16 ...................... 2,090,000
2,500,000 Missouri Health & Educational Facilities Authority, 5.25%, 5/15/21 ..................... 2,393,750
1,200,000 Missouri Health & Educational Facilities Authority Child Mercy, 5.63%, 5/15/12 ......... 1,206,000
1,000,000 Missouri Higher Education Loan Authority, 5.75%, 2/15/02 ............................... 1,031,250
500,000 Missouri Housing Development, 7.00%, 9/1/10 ............................................ 530,625
490,000 Missouri Housing Development, 6.90%, 7/1/18 ............................................ 510,825
</TABLE>
Continued
-73-
<PAGE> 75
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------- ------------
<S> <C> <C>
Municipal Bonds, continued:
Missouri, continued:
980,000 Missouri Housing Development, 6.60%, 7/1/24 ............................................ $ 1,015,525
1,000,000 Missouri Sewer, 5.75%, 3/1/01 .......................................................... 1,042,500
750,000 Missouri Southern State College, 5.25%, 12/1/12 ........................................ 731,250
200,000 Missouri Water PCR, 7.13%, 12/1/10 ..................................................... 218,500
1,000,000 Missouri Water PCR, 5.75%, 8/1/12 ...................................................... 1,022,500
2,085,000 Missouri Water Pollution Control, Series A, 5.75%, 8/1/18 .............................. 2,124,094
1,000,000 Missouri Western State College, 5.40%, 10/1/16 ......................................... 985,000
570,000 O'Fallon GO, 5.75%, 3/1/10 ............................................................. 578,550
600,000 Phelps County Hospital Revenue, 8.20%, 3/1/05, Prerefunded 3/1/00 @ 102................. 669,750
1,000,000 Sikeston Electric Revenue, 5.00%, 6/1/22 ............................................... 921,250
1,000,000 Sikeston Electric Revenue, 6.25%, 6/1/22, Prerefunded 6/1/02 @ 102...................... 1,087,500
500,000 Southeast Missouri Correctional Facilities, 5.75%, 10/15/08 ............................ 511,250
500,000 Southeast Missouri Correctional Facilities, 5.75%, 10/15/16 ............................ 498,750
2,000,000 Springfield School District R-12, 5.25%, 3/1/11 ........................................ 1,977,500
400,000 Springfield School District R-12 Series A, 6.75%, 3/1/11 ............................... 431,500
2,000,000 Springfield Water Works Revenue, 5.60%, 5/1/23 ......................................... 1,980,000
500,000 St. Charles County GO, 5.70%, 2/15/05 .................................................. 519,375
1,000,000 St. Charles County GO, 6.00%, 2/15/09 .................................................. 1,037,500
500,000 St. Charles County Public Facilities, 6.38%, 3/15/07 ................................... 536,250
750,000 St. Louis County Paltonville R-3 School District, 6.25%, 2/1/10 ........................ 803,438
1,000,000 St. Louis County Rockwood School District R-6, 5.00%, 2/1/04 ........................... 1,003,750
2,500,000 St. Louis County Series B, 5.50%, 2/1/13 ............................................... 2,500,000
800,000 St. Louis County, IDR, 7.38%, 2/1/14 ................................................... 859,000
400,000 St. Louis IDR, 6.65%, 5/1/16 ........................................................... 449,500
500,000 St. Louis Water Revenue, 6.00%, 7/1/14 ................................................. 519,375
1,740,000 St. Peters GO, 5.80%, 1/1/09 ........................................................... 1,796,550
1,065,000 St. Peters GO, 5.85%, 1/1/13 ........................................................... 1,079,644
3,000,000 University of Missouri Health & Education, 5.60%, 11/1/26 .............................. 2,981,249
1,400,000 University of Missouri Industrial Development, 5.95%, 12/20/25 ......................... 1,407,000
3,000,000 University of Missouri Revenue, 5.50%, 11/1/21 ......................................... 2,954,999
3,000,000 University of Missouri Revenue, 5.80%, 11/1/27 ......................................... 3,029,999
925,000 University of Missouri Revenue Bonds, 6.50%, 11/1/11 ................................... 1,002,469
2,000,000 University of Missouri Revenue Bonds, 5.50%, 11/1/23 ................................... 1,962,500
400,000 Webster Groves, 6.60%, 2/1/10 .......................................................... 450,500
-------------
84,050,245
-------------
Puerto Rico (3.9%):
500,000 Commonwealth, 6.45%, 7/1/17 ............................................................ 536,250
1,000,000 Commonwealth GO Series A, 6.00%, 7/1/06 ................................................ 1,051,250
</TABLE>
Continued
-74-
<PAGE> 76
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------- ------------
<S> <C> <C>
Municipal Bonds, continued:
Puerto Rico, continued:
2,000,000 Public Buildings Authority, 5.50%, 7/1/21 .............................................. $ 1,920,000
------------
3,507,500
------------
Total Municipal Bonds 87,557,745
------------
Investment Companies (3.0%):
2,409,000 Federated Tax-Free Trust Fund........................................................... 2,409,000
353,000 Nuveen Tax Exempt Money Market Fund..................................................... 353,000
------------
Total Investment Companies 2,762,000
------------
Total (Cost--$88,281,124)(a) $90,319,745
============
- ----------
</TABLE>
Percentages indicated are based on net assets of $91,251,695.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation .......... $2,354,032
Unrealized depreciation .......... (315,411)
----------
Net unrealized appreciation ...... $2,038,621
==========
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at May 31, 1997.
See notes to financial statements
-75-
<PAGE> 77
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds (101.5%):
Alabama (1.6%):
2,000,000 Birmingham, Series A, 5.70%, 6/1/13 .................................................. $ 2,027,500
3,000,000 Birmingham, Series A, 5.90%, 6/1/18 .................................................. 3,015,000
--------------
5,042,500
--------------
Alaska (0.3%):
1,000,000 State Housing Finance Corp., Series A, 5.70%, 12/1/11 ................................ 1,011,250
--------------
Arizona (3.0%):
1,000,000 Mohave County Unified School District No. 1, Series A, 5.90%, 7/1/15 ................. 1,036,250
6,400,000 Salt River Project Agricultural Impact, Series C, 6.20%, 1/1/12 ...................... 6,696,000
1,000,000 Salt River Project Agriculture Impact, 6.00%, 1/1/13 ................................. 1,032,500
1,000,000 State Transportation Board Excise Tax, Series B, 5.75%, 7/1/05 ....................... 1,057,500
--------------
9,822,250
--------------
California (0.9%):
1,000,000 California State, 6.00%, 9/1/09 ...................................................... 1,082,500
2,000,000 Southern California Public Power Authority, Series A, 5.00%, 7/1/15 .................. 1,855,000
--------------
2,937,500
--------------
Colorado (2.1%):
6,655,000 Adams County Colorado School District, 5.40%, 12/15/13 ............................... 6,679,956
--------------
Connecticut (3.6%):
3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 .......................................... 3,135,000
8,785,000 Connecticut State, Series A, 5.25%, 3/1/13 ........................................... 8,587,338
--------------
11,722,338
--------------
Florida (6.6%):
2,000,000 Brevard County, 6.00%, 9/1/11 ........................................................ 2,075,000
5,525,000 Florida State Department of Transportation, 5.25%, 7/1/17 ............................ 5,379,969
5,000,000 Florida State Environmental, 5.50%, 7/1/13 ........................................... 5,062,500
8,000,000 Palm Beach County Solid Waste Authority, 5.38%, 10/1/11 .............................. 7,940,000
1,000,000 State Board of Education Capital Outlay Pub. Ed., Series A, 5.88%, 6/1/16 ............ 1,022,500
--------------
21,479,969
--------------
Georgia (0.7%):
1,000,000 Atlanta, Series A, 6.10%, 12/1/19 .................................................... 1,041,250
1,000,000 Georgia State, Series B, 6.30%, 3/1/09 ............................................... 1,113,750
--------------
2,155,000
--------------
Hawaii (4.4%):
8,000,000 Hawaii State, Series CN, 5.50%, 3/1/14, Insured by FGIC............................... 8,000,000
5,815,000 Honolulu City & County, 6.00%, 1/1/09 ................................................ 6,214,781
--------------
14,214,781
--------------
</TABLE>
Continued
-76-
<PAGE> 78
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds, continued:
Illinois (10.8%):
3,000,000 Chicago, 6.00%, 1/1/11, Insured by AMBAC.............................................. $ 3,146,250
1,000,000 Chicago Metropolitan Water Reclamation, 5.40%, 12/1/06 ............................... 1,027,500
1,000,000 Chicago Metropolitan Water Reclamation, 5.50%, 12/1/08 ............................... 1,031,250
9,090,000 Cook County, 6.25%, 11/15/12 ......................................................... 9,885,375
2,000,000 Cook County, 5.90%, 11/15/16, Insured by FGIC......................................... 2,040,000
1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 ............................................... 1,040,000
1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA........................................ 1,016,250
3,000,000 Illinois State, 5.88%, 8/1/12 ........................................................ 3,082,500
8,400,000 Illinois State, 5.25%, 2/1/13 ........................................................ 8,127,000
2,000,000 Illinois State, 5.63%, 7/1/13 ........................................................ 2,010,000
2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA........................................ 1,975,000
1,000,000 Illinois State, 5.75%, 7/1/16 ........................................................ 1,006,250
--------------
35,387,375
--------------
Indiana (5.6%):
5,000,000 Goshen-Chandler School Building, 5.75%, 1/15/10 ...................................... 5,093,750
3,000,000 Hammond Multi-School Building Corp., 5.80%, 1/15/15 .................................. 3,018,750
5,000,000 Hammond Multi-School Building Corp., 5.85%, 1/15/20 .................................. 5,031,250
3,500,000 Transportation Finance Authority, Series A, 5.75%, 6/1/12 ............................ 3,622,500
1,500,000 Whitko Middle School Building Corp., 5.88%, 7/15/12 .................................. 1,543,125
--------------
18,309,375
--------------
Kentucky (1.8%):
6,000,000 Daviess County Kentucky, 4.15%*, 6/2/97 .............................................. 6,000,000
--------------
Louisiana (0.2%):
700,000 Calcasieu Parish Louisiana, 4.00%, 2/1/16 ............................................ 700,000
--------------
Massachusetts (3.8%):
4,975,000 Massachusetts Bay Transportation Authority, 5.40%, 3/1/08 ............................ 5,118,031
7,115,000 Massachusetts State Water Pollution Abatement Trust, 5.63%, 2/1/15 ................... 7,212,831
--------------
12,330,862
--------------
Michigan (1.2%):
1,000,000 Greenville Public Schools, 5.75%, 5/1/11 ............................................. 1,027,500
1,000,000 Johannesburg-Lewistown Area Schools, 5.00%, 5/1/13 ................................... 947,500
2,000,000 Redford School District, 5.95%, 5/1/15 ............................................... 2,067,500
--------------
4,042,500
--------------
Minnesota (2.5%):
1,000,000 Minneapolis Special School District, Series A, 5.70%, 2/1/09 ......................... 1,038,750
6,000,000 Monticello Minnesota Independent Schools, 5.40%, 2/1/15 .............................. 5,925,000
1,000,000 Northern Municipal Power Agency, Series A, 5.90%, 1/1/08 ............................. 1,046,250
--------------
8,010,000
--------------
</TABLE>
Continued
-77-
<PAGE> 79
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds, continued:
Mississippi (0.3%):
1,000,000 Mississippi State, 6.20%, 2/1/08 ..................................................... $ 1,075,000
--------------
Missouri (1.2%):
1,000,000 Independence Electrical Utility Revenue, 7.10%, 6/1/04, Prerefunded 12/1/98 @ 100..... 1,038,750
1,500,000 State Health & Education Facilities, Series B, 7.00%, 6/1/05 ......................... 1,665,000
1,200,000 State Health & Educational Facilities, 7.75%, 6/1/07 ................................. 1,244,196
--------------
3,947,946
--------------
Nebraska (0.6%):
1,000,000 Omaha Public Power District Electric Revenue, Series B, 6.00%, 2/1/07 ................ 1,080,000
1,000,000 Public Power District Revenue, Series A, 5.50%, 1/1/13 ............................... 993,750
--------------
2,073,750
--------------
Nevada (4.0%):
5,000,000 Clark County Nevada School District, 5.50%, 6/15/11 .................................. 5,037,500
5,000,000 Nevada State Water Utility Improvements, 5.13%, 9/1/11 ............................... 4,881,250
3,000,000 Nevada State Water Utility Improvements, 6.50%, 12/1/12 .............................. 3,258,750
--------------
13,177,500
--------------
New Hampshire (0.3%):
1,000,000 Concord, 6.15%, 10/15/10 ............................................................. 1,065,000
--------------
New Jersey (3.3%):
2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 ........................................... 2,120,000
8,000,000 New Jersey State, Series E, 6.00%, 7/15/09 ........................................... 8,660,000
--------------
10,780,000
--------------
North Carolina (3.4%):
2,000,000 Eastern Municipal Power Agency, Series B, 6.00%, 1/1/13 .............................. 2,045,000
1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 .......................................... 1,003,750
8,000,000 North Carolina State School Improvements, 5.20%, 3/1/13 .............................. 7,980,000
--------------
11,028,750
--------------
Ohio (0.6%):
2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%, 5/1/13 ................................ 2,095,000
--------------
Oklahoma (0.3%):
1,000,000 Tulsa, 6.25%, 6/1/11 ................................................................. 1,052,500
--------------
Pennsylvania (4.7%):
1,000,000 Allegheny County Series C-40, 16.88%, 5/1/07 ......................................... 1,055,000
1,500,000 Burrell School District, 5.65%, 11/15/16 ............................................. 1,515,000
1,000,000 Easttown Township Public/Highway Improvements, 5.65%, 8/1/17 ......................... 1,005,000
9,000,000 Pennsylvania State, 5.13%, 9/15/11, Insured by AMBAC.................................. 8,786,250
2,000,000 State Higher Education Facilities, Series A, 5.88%, 1/1/15 ........................... 2,037,500
1,000,000 State Higher Education Facilities, Series B, 5.88%, 1/1/15 ........................... 1,018,750
--------------
15,417,500
--------------
</TABLE>
Continued
-78-
<PAGE> 80
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------------------------------------------------------------- --------------
<S> <C>
Municipal Bonds, continued:
Tennessee (1.0%):
1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 ....................................... $ 1,043,750
1,000,000 Metropolitan Government Nashville & Davidson County, 5.75%, 1/1/15 ................... 1,006,250
1,000,000 Metropolitan Government Nashville & Davidson County, 6.13%, 5/15/19 .................. 1,036,250
--------------
3,086,250
--------------
Texas (12.5%):
3,000,000 Austin Independent School District, 5.75%, 8/1/15 .................................... 3,045,000
3,400,000 Harris County Health Facilities, Series B, 4.05%, 2/15/16 ............................ 3,400,000
8,000,000 Harris County Texas Health, 5.50%, 6/1/17 ............................................ 7,800,000
2,500,000 Harris County Texas Health Care Facilities, 4.05%*, 6/2/97 ........................... 2,500,000
1,000,000 Humble Independent School District, 6.25%, 2/1/07 .................................... 1,072,500
1,000,000 Manor Independent School District, 5.70%, 8/1/10 ..................................... 1,030,000
1,000,000 Royse City Independent School District, 5.50%, 2/15/15 ............................... 1,000,000
1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 ............................................ 1,017,500
3,000,000 State Public Finance Authority, Series A, 5.95%, 10/1/15 ............................ 3,101,250
1,000,000 State Public Financing Authority, Series A, 5.70%, 10/1/07 ........................... 1,031,250
6,750,000 Texas State Water Development, 5.40%, 8/1/21 ......................................... 6,513,750
7,500,000 University of Texas, Series B, 5.10%, 8/15/13 ........................................ 7,190,625
2,000,000 Water Development Board Revenue Series A, 5.75%, 7/15/15 ............................. 2,032,500
--------------
40,734,375
--------------
Utah (1.6%):
4,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/12 ............... 4,095,000
1,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/15 ............... 1,000,090
--------------
5,095,090
--------------
Virginia (2.8%):
1,000,000 Newport News, Series A, 6.13%, 6/1/10 ................................................ 1,058,750
2,200,000 Peninsula Port Authority Revenue - Shell Co., 4.00%*, 6/2/97 ......................... 2,200,000
1,000,000 State Public School Authority, 5.90%, 7/15/11 ........................................ 1,037,500
4,920,000 Virginia State Trust Brd., 5.13%, 5/15/12 ............................................ 4,772,400
--------------
9,068,650
--------------
Washington (10.2%):
1,000,000 Grant County Public Utility, Series F, 5.70%, 1/1/15 ................................. 1,002,500
1,000,000 King County Library System, 6.05%, 12/1/07 ........................................... 1,072,500
1,500,000 King County School District No. 415, 5.75%, 6/1/11 ................................... 1,543,125
2,000,000 King County School District No. 415, 5.88%, 6/1/16 ................................... 2,035,000
1,000,000 King County, Series A, 6.00%, 12/1/09 ................................................ 1,041,250
1,000,000 Seattle Municipal Light & Power Revenue, 6.20%, 7/1/06 ............................... 1,086,250
1,000,000 Seattle Municipal Light & Power Revenue, 6.25%, 7/1/07 ............................... 1,082,500
1,000,000 Snohomish County Public Utility District 001, 6.45%, 1/1/06 .......................... 1,105,000
2,000,000 Snohomish County Public Utility District 001, 6.50%, 1/1/12 .......................... 2,142,500
</TABLE>
Continued
-79-
<PAGE> 81
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds, continued:
Washington, continued:
3,000,000 Snohomish County Public Utility District 001, 6.00%, 1/1/13 .......................... $ 3,082,500
1,000,000 Snohomish County School District No. 2, 6.20%, 12/1/12 ............................... 1,061,250
3,000,000 Spokane Regular Solid Waste Management, 5.50%, 12/1/10 ............................... 3,033,750
1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 .............................................. 1,046,250
8,000,000 Washington State Motor Vehicle Fuel Tax Series, 5.38%, 1/1/22 ........................ 7,810,000
4,190,000 Washington State Series, 5.50%, 1/1/17 ............................................... 4,148,100
1,000,000 Washington State, Series DD-14 & Series B, 5.75%, 9/1/07 ............................. 1,043,750
--------------
33,336,225
--------------
West Virginia (2.4%):
7,940,000 West Virginia School Building, 5.40%, 7/1/10 ......................................... 7,949,925
--------------
Wisconsin (2.5%):
1,000,000 Dane County, Series A, 5.65%, 3/1/12 ................................................. 1,013,750
1,000,000 Green Bay Area Public School District, Series A, 5.50%, 4/1/12 ....................... 1,003,750
3,000,000 Kenosha, Series B, 5.85%, 12/1/11 .................................................... 3,082,500
3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 ............................................ 3,097,500
--------------
8,197,500
--------------
Wyoming (0.7%):
2,200,000 Uinta County Wyoming Chevron USA, 4.00%*, 6/2/97 ..................................... 2,200,000
--------------
Total Municipal Bonds 331,226,617
--------------
Investment Companies (1.7%):
2,710,000 Federated Tax-Free Trust Mutual Fund.................................................. 2,710,000
3,029,000 Nuveen Tax-Exempt Money Market Fund................................................... 3,029,000
--------------
Total Investment Companies 5,739,000
--------------
Total (Cost--$331,006,272)(a) $336,965,617
==============
</TABLE>
- ----------
Percentages indicated are based on net assets of $326,427,257.
(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 ........................... $6,223,969
Unrealized depreciation ........................... (264,624)
-----------
Net unrealized appreciation ....................... $5,959,345
===========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at May 31, 1997.
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Corp.
MBIA--Municipal Bond Insurance Association
See notes to financial statements
-80-
<PAGE> 82
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------- ---------------------------- ------------
<S> <C> <C>
Corporate Bonds (61.4%):
Banking (9.8%):
200,000 BankAmerica Corp., 8.13%,
2/1/02.................... $ 209,250
500,000 Bankers Trust New York,
7.25%, 1/15/03(b)......... 504,375
400,000 Boatmen's Bancshares,
8.62%, 11/15/03........... 430,500
500,000 Chase Manhattan Corp.,
7.12%, 3/1/05(b).......... 498,125
500,000 NationsBank Corp., 7.75%,
8/15/04................... 516,875
600,000 NationsBank Corp., 6.88%,
2/15/05................... 587,250
750,000 Toronto-Dominion Bank-NY,
7.88%, 8/15/04............ 758,438
300,000 Wells Fargo & Co., 8.38%,
5/15/02................... 317,625
-----------
3,822,438
-----------
Beverages (6.2%):
200,000 Anheuser-Busch Cos, Inc.,
8.75%, 12/1/99............ 210,750
1,000,000 Anheuser-Busch Cos. Inc.,
6.75%, 8/1/03(b).......... 996,250
1,000,000 Brown-Forman, Corp., 7.38%,
5/10/05................... 1,012,500
200,000 Coca Cola Co., 7.88%,
9/15/98................... 204,526
-----------
2,424,026
-----------
Electrical & Electronic (2.7%):
1,000,000 Motorola Inc., 7.60%,
1/1/07(b)................. 1,041,250
-----------
Entertainment (2.5%):
1,000,000 Walt Disney Co. - Global
Bond, 6.75%, 3/30/06...... 978,750
-----------
Financial Services (12.5%):
500,000 Bear Stearns Co. Inc.,
9.13%, 4/15/98............ 513,315
500,000 Bear Stearns Co. Inc.,
8.25%, 2/1/02(b).......... 524,375
1,000,000 CIT Group Holdings, 6.80%,
4/17/00................... 1,007,500
200,000 Ford Motor Credit, 9.38%,
12/15/97.................. 203,914
800,000 Ford Motor Credit, 7.50%,
1/15/03................... 820,000
500,000 General Motors Acceptance
Corp., 8.50%, 2/4/02...... 531,250
500,000 GMAC Global Bond, 6.75%,
2/7/02.................... 497,500
300,000 Merrill Lynch & Co., 7.75%,
3/1/99.................... 306,750
175,000 U.S. Leasing International
Inc., 7.00%, 11/1/97...... 176,234
300,000 United Postal Savings,
9.00%, 7/26/99............ 314,625
-----------
4,895,463
-----------
Food Products (6.4%):
1,000,000 Campbell Soup Co., 6.90%,
10/15/06.................. 993,750
200,000 General Mills, 8.47%,
12/15/98.................. 206,702
1,000,000 General Mills, 8.90%,
3/15/06................... 1,121,250
150,000 Quaker Oats Co., 9.00%,
12/7/01................... 161,499
-----------
2,483,201
-----------
Health Care (2.8%):
1,000,000 Eli Lilly & Co., 8.38%,
12/1/06................... 1,088,750
-----------
Industrial Goods & Services (7.6%):
150,000 BP Amercia, 9.38%, 11/1/00.. 162,375
200,000 BP America, 8.50%, 4/15/01.. 212,000
100,000 Clorox, 8.80%, 7/15/01...... 107,250
200,000 E.I. du Pont de Nemours,
8.50%, 2/15/03............ 211,000
1,000,000 E.I. du Pont de Nemours,
8.13%, 3/15/04(b)......... 1,065,000
200,000 Kimberly-Clark, 8.62%,
5/1/01(b)................. 213,250
1,000,000 Texaco Capital, 7.09%,
2/1/07(b)................. 1,000,000
-----------
2,970,875
-----------
Retail Stores - Discount (2.7%):
400,000 Wal-Mart Stores, 8.62%,
4/1/01.................... 425,500
</TABLE>
Continued
-81-
<PAGE> 83
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------- ------------
<S> <C> <C>
Corporate Bonds, continued:
Retail Stores - Discount, continued:
600,000 Wal-Mart Stores, 7.50%,
5/15/04................... $ 618,000
-----------
1,043,500
-----------
Telecommunications (7.7%):
1,000,000 AT&T Corp., 6.75%, 4/1/04(b) 986,250
1,000,000 Lucent Technologies Inc.,
7.25%, 7/15/06(b)......... 1,008,750
1,000,000 Pacific Bell, 7.25%, 7/1/02. 1,018,750
-----------
3,013,750
-----------
Transportation & Shipping (0.5%):
200,000 Union Pacific Co., 7.88%,
2/15/02................... 205,750
-----------
Total Corporate Bonds 23,967,753
-----------
Medium Term Notes (7.7%):
Financial Services (2.7%):
1,000,000 General Electric Capital
Corp., 7.66%, 8/2/04...... 1,047,500
-----------
Health Care-Drugs (2.5%):
1,000,000 SmithKline Beecham, 6.63%,
10/1/01................... 993,750
-----------
Telecommunications (2.5%):
1,000,000 Southwestern Bell, 6.56%,
11/15/05.................. 967,500
-----------
Total Medium Term Notes 3,008,750
-----------
U.S. Government Agencies (23.2%):
Federal Farm Credit Bank:
500,000 8.95%, 6/1/06 ............. 563,565
Federal Home Loan Mortgage Corp.:
1,966,062 6.50%, 1/1/12 ............. 1,919,976
Federal National Mortgage Assoc.:
837,207 7.00%, 11/1/10, Pool
#328614 .................. 832,234
988,445 7.00%, 6/1/11, Pool #349980 982,574
988,618 6.50%, 3/1/12, Pool #372705 964,516
987,973 6.50%, 3/1/12, Pool #372719 963,886
Government National Mortgage Assoc.:
1,005,413 6.00%, 4/15/26, Pool
#345610 .................. 922,778
1,006,979 6.50%, 1/15/27 ............ 952,532
996,427 7.00%, 1/15/27 ............ 969,025
-----------
Total U.S. Government Agencies 9,071,086
-----------
U.S. Treasury Bonds (3.7%):
1,500,000 5.88%, 11/15/05............. 1,423,800
-----------
Total U.S. Treasury Bonds 1,423,800
-----------
U.S. Treasury Notes (1.6%):
500,000 7.25%, 8/15/04.............. 518,025
100,000 6.63%, 5/15/07.............. 99,743
-----------
Total U.S. Treasury Notes 617,768
-----------
Investment Companies (1.5%):
572,997 Federated Money Market
Trust Shares of
Beneficial Interest....... 572,997
-----------
Total Investment Companies 572,997
-----------
Total (Cost--$38,672,237)(a) $38,662,154
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $39,020,616.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation .......................... $578,916
Unrealized depreciation .......................... (588,999)
========
Net unrealized depreciation ...................... $(10,083)
========
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
See notes to financial statements
-82-
<PAGE> 84
THE ARCH FUND, INC.
Bond Index Portfolio
Schedule of Portfolio Investments
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------- --------------------------- -------------
<S> <C> <C>
Corporate Bonds (23.0%):
Automotive (4.0%):
2,000,000 Ford Motor Credit, 7.00%,
9/25/01(b)............... $ 2,010,000
1,000,000 Ford Motor Credit, 7.75%,
11/15/02................. 1,038,750
2,000,000 General Motors Corp.,
8.88%, 5/15/03........... 2,182,500
------------
5,231,250
------------
Entertainment (1.5%):
1,000,000 Walt Disney Co., 6.38%,
3/30/01.................. 990,000
1,000,000 Walt Disney Co. - Global
Bond, 6.75%, 3/30/06..... 978,750
------------
1,968,750
------------
Financial Services (9.8%):
1,800,000 American Express Credit,
6.50%, 8/1/00............ 1,793,250
1,000,000 Dean Witter Discover,
6.25%, 3/15/00........... 991,250
1,500,000 Dean Witter Discover,
6.75%, 8/15/00........... 1,505,625
2,000,000 General Electric Capital
Corp., 8.85%, 4/1/05..... 2,225,000
1,000,000 General Electric Capital
Corp., 8.50%, 7/24/08.... 1,105,000
1,000,000 Household Finance Corp.,
8.38%, 11/15/01.......... 1,056,250
1,000,000 Household Finance Corp.,
6.88%, 3/1/07(b)......... 973,750
2,000,000 Merrill Lynch & Co.,
6.70%, 8/1/00............ 1,997,500
1,000,000 Merrill Lynch & Co.,
8.00%, 2/1/02............ 1,042,500
------------
12,690,125
------------
Oil & Exploration Products & Services (1.2%):
1,500,000 Texaco Capital, 9.45%,
3/1/00................... 1,608,750
Retail Stores - Discount (1.7%):
2,000,000 Wal-Mart Stores, Inc.,
9.10%, 7/15/00(b)........ 2,137,500
Telecommunications (4.0%):
1,000,000 Bell Telephone Penn,
8.75%, 8/15/31........... 1,142,500
3,000,000 Lucent Technologies, Inc.,
6.90%, 7/15/01........... 3,015,000
1,000,000 Pacific Bell, 7.25%, 7/1/02 1,018,750
------------
5,176,250
------------
Yankee Corporate Bond (0.8%):
1,000,000 Household Finance Co.,
7.45%, 4/1/00............ 1,016,250
------------
Total Corporate Bonds 29,828,875
------------
Medium Term Note (2.3%):
Food Products (2.3%):
3,000,000 Pepsico Inc., 6.80%,
5/15/00.................. 3,018,750
------------
Total Medium Term Note 3,018,750
------------
U.S. Government Agencies (30.5%):
Federal Home Loan Mortgage Corp.:
223,472 6.50%, 1/1/98, Gold Pool
#L90010 ................. 221,586
986,968 6.00%, 4/1/98, Gold Pool
#M17791 ................. 965,373
222,932 6.50%, 4/1/98, Gold Pool
#M17876 ................. 221,050
182,813 6.50%, 5/1/98, Gold Pool
#M18001 ................. 181,270
55,785 8.50%, 10/1/01, Pool
#200055 ................. 57,144
206,188 9.00%, 3/1/03, Pool
#380019 ................. 213,081
69,088 9.00%, 5/1/03, Pool
#380021 ................ 71,398
432,962 7.00%, 11/1/10, Gold Pool
#E62010 ................. 430,659
392,352 7.00%, 11/1/10, Gold Pool
#E20202 ................. 390,265
962,208 6.00%, 3/1/11, Gold Pool
#E63503 ................. 921,006
975,719 6.00%, 4/1/11, Gold Pool
#E63515 ................. 933,939
976,597 6.00%, 6/1/11, Gold Pool
#E00439 ................. 934,779
</TABLE>
Continued
-83-
<PAGE> 85
THE ARCH FUND, INC.
Bond Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------- -------------
<S> <C> <C>
U.S. Government Agencies, continued:
1,500,000 6.00%, 3/1/12, Gold Pool
#E66538 ................. $ 1,435,770
266,801 6.00%, 2/1/26, Gold Pool
#D68286F ................ 246,124
881,600 6.00%, 3/1/26, Gold Pool
#C80393F ................ 813,276
442,686 6.00%, 4/1/26, Gold Pool
#D70772F ................ 408,377
398,619 6.00%, 4/1/26, Gold Pool
#D70405F ................ 367,726
118,937 6.00%, 4/1/26, Gold Pool
#C803465 ................ 109,719
503,476 8.00%, 11/1/26, Gold Pool
#D76134 ................. 513,385
28,909 6.00%, 12/1/26, Gold Pool
#D76870F ................ 26,669
859,668 6.00%, 12/1/26, Gold Pool
#C80465 ................. 793,044
961,628 8.00%, 12/1/26, Gold Pool
#D76530 ................. 980,553
460,034 8.00%, 12/1/26, Gold Pool
#D76906 ................. 469,088
996,625 7.00%, 1/1/27, Gold Pool
#D77743 ................. 972,018
2,009,241 7.00%, 1/1/27, Gold Pool
#D77720 ................. 1,959,633
963,618 8.00%, 1/1/27, Gold Pool
#C00490 ................. 982,582
Federal National Mortgage Assoc.:
500,000 8.35%, 11/10/99 .......... 524,525
668,813 6.00%, 11/1/00, Pool
#190070 ................. 646,448
990,824 6.00%, 5/1/11, Pool
#337194 ................. 947,475
998,350 6.00%, 2/1/12, Pool
#250917 ................. 954,672
993,152 6.00%, 3/1/12, Pool
#359504 ................. 949,702
1,000,217 6.00%, 3/1/12, Pool
#373131 ................. 956,458
991,971 6.00%, 3/1/12, Pool
#374638 ................. 948,573
498,939 9.00%, 10/1/26, Pool
#353671 ................. 524,509
498,050 9.00%, 10/1/26, Pool
#358137 ................. 523,576
498,936 9.00%, 10/1/26, Pool
#361800 ................. 524,507
414,758 9.00%, 11/1/26, Pool
#358703 ................. 436,015
498,922 9.00%, 11/1/26, Pool
#364453 ................. 524,492
368,078 9.00%, 12/1/26, Pool
#368686 ................. 386,942
Government National Mortgage Assoc.:
208,988 7.50%, 4/15/02, Pool
#210173 ................. 211,926
35,460 7.50%, 7/15/02, Pool
#216193 ................. 35,959
484,427 7.50%, 7/15/08, Pool
#349404 ................. 491,238
161,253 7.50%, 8/15/10, Pool
#413412 ................. 163,520
103,838 7.50%, 9/15/10, Pool
#413117 ................. 105,298
468,998 7.50%, 11/15/10, Pool
#415775 ................. 475,592
52,274 6.00%, 3/15/11, Pool
#425964 ................. 50,118
24,932 6.50%, 3/15/11, Pool
#419123 ................. 24,433
447,991 6.00%, 4/15/11, Pool
#393849 ................. 429,511
60,522 6.00%, 4/15/11, Pool
#421800 ................. 58,025
497,263 6.00%, 4/15/11, Pool
#429397 ................. 476,751
54,550 6.00%, 5/15/11, Pool
#345647 ................. 52,300
665,222 6.00%, 5/15/11, Pool
#421871 ................. 637,781
540,151 6.00%, 5/15/11, Pool
#432659 ................. 517,870
616,880 6.50%, 5/15/11, Pool
#412598 ................. 604,542
419,886 6.50%, 5/15/11, Pool
#432640 ................. 411,488
</TABLE>
Continued
-84-
<PAGE> 86
THE ARCH FUND, INC.
Bond Index Portfolio
Schedule of Portfolio Investments, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------- -------------
<S> <C> <C>
U.S. Government Agencies, continued:
280,899 6.00%, 6/15/11, Pool
#406582 ................. $ 269,312
350,331 6.00%, 6/15/11, Pool
#423828 ................. 335,880
548,974 6.50%, 6/15/11, Pool
#426173 ................. 537,995
394,362 6.50%, 8/15/11, Pool
#421746 ................. 386,475
494,755 6.50%, 2/15/12, Pool
#39334 .................. 484,860
461,685 6.50%, 3/15/12, Pool
#399161 ................. 452,451
367,180 8.50%, 11/15/21, Pool
#297863 ................. 380,604
537,074 8.00%, 5/15/23, Pool
#350495 ................. 547,477
576,646 9.00%, 5/15/25, Pool
#386743 ................. 606,736
310,387 9.00%, 5/15/25, Pool
#401372 ................. 326,583
488,059 9.50%, 8/15/25, Pool
#414557 ................. 525,576
473,512 7.50%, 10/15/25, Pool
#366152 ................. 471,737
492,697 7.50%, 10/15/25, Pool
#366154 ................. 490,850
70,696 6.50%, 3/15/26, Pool
#419578 ................. 66,873
998,462 6.50%, 4/15/26 ............ 944,475
85,711 6.50%, 5/15/26, Pool
#428852 ................. 81,077
823,932 6.50%, 6/15/26 ........... 779,382
591,087 7.00%, 8/20/26, Pool
#226660 ................. 572,243
538,716 9.50%, 9/15/26, Pool
#438724 ................. 580,127
186,388 9.50%, 10/15/26, Pool
#436991 ................. 200,715
U.S. Government Agencies, continued:
396,069 9.50%, 10/15/26, Pool
#438728 ................. $ 426,515
377,268 9.50%, 11/15/26, Pool
#436994 ................. 406,268
550,063 9.50%, 11/15/26, Pool
#438731 ................. 592,346
-------------
Total U.S. Government Agencies 39,680,317
-------------
U.S. Treasury Bonds (17.4%):
500,000 11.63%, 11/15/04........... 644,975
4,975,000 12.75%, 11/15/10........... 6,873,559
2,055,000 12.00%, 8/15/13............ 2,870,979
1,250,000 7.50%, 11/15/16(b)......... 1,318,525
1,500,000 8.75%, 5/15/17............. 1,781,670
6,000,000 8.13%, 8/15/19............. 6,753,900
2,000,000 8.75%, 8/15/20............. 2,398,300
-------------
Total U.S. Treasury Bonds 22,641,908
-------------
U.S. Treasury Notes (25.5%):
500,000 8.88%, 11/15/98............ 519,330
8,500,000 6.38%, 5/15/99(b).......... 8,526,519
9,000,000 6.00%, 10/15/99(b)......... 8,958,059
1,000,000 6.25%, 8/31/00(b).......... 996,100
4,000,000 5.75%, 10/31/00(b)......... 3,922,320
1,000,000 5.50%, 12/31/00(b)......... 970,600
500,000 6.38%, 9/30/01............. 497,800
3,400,000 6.50%, 5/15/05............. 3,368,686
5,000,000 7.63%, 11/15/22............ 5,362,350
-------------
Total U.S. Treasury Notes 33,121,764
-------------
Investment Companies (0.9%):
1,119,841 Federated Money Market
Trust Shares of
Beneficial Interest...... 1,119,841
-------------
Total Investment Companies 1,119,841
-------------
Total (Cost--$129,101,860)(a) $129,411,455
=============
</TABLE>
- ----------
Percentages indicated are based on net assets of $129,985,620.
(a) Represents cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation .............................. $1,575,456
Unrealized depreciation .............................. (1,265,861)
-----------
Net unrealized appreciation .......................... $ 309,595
===========
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
See notes to financial statements
-85-
<PAGE> 87
THE ARCH FUND, INC.
Notes to Financial Statements
May 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 May 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, Equity Income, Equity Index, Balanced, Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond, National Municipal Bond, Intermediate Corporate
Bond, and Bond Index Portfolios (referred to individually as a "Portfolio"
and collectively, the "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 Portfolio's investment objectives are as follows: Money Market seeks
current income with liquidity and stability of principal. Treasury Money
Market seeks a high level of current income exempt from state income tax
consistent with liquidity and security of principal. Tax-Exempt Money
Market seeks a high level of current interest income exempt from federal
income tax as is consistent with liquidity and stability of principal.
Growth & Income Equity seeks long-term capital growth, with income a
secondary consideration. Small Cap Equity seeks capital appreciation.
International Equity seeks capital growth consistent with reasonable
investment risk. Equity Income seeks to provide an above-average level of
income consistent with long-term capital appreciation. Equity Index seeks
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. Balanced seeks to
maximize total return through a combination of growth of capital and
current income consistent with the preservation of capital. Government &
Corporate Bond seeks the highest level of current income that is
consistent with conservation of capital. U.S. Government Securities seeks
a high rate of current income that is consistent with relative stability
of principal. Short-Intermediate Municipal seeks as high a level of
current income, exempt from regular federal income tax, as is consistent
with preservation of capital. Missouri Tax-Exempt Bond seeks as high a
level of interest income exempt from federal income tax as is consistent
with conservation of capital. National Municipal Bond seeks as high a
level of current interest income exempt from federal income tax as is
consistent with conservation of capital. Intermediate Corporate Bond seeks
as high a level of current income as is consistent with the preservation
of capital. Bond Index seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield
performance of U.S. Government, mortgage-backed, asset-backed and
corporate debt securities, as represented by the Lehman Brothers Aggregate
Bond Index.
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 Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios (collectively, "the money market portfolios") are
valued at amortized cost. Amortized cost valuation involves
Continued
-86-
<PAGE> 88
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
valuing an instrument at its cost initially and, thereafter, assuming a
constant amortization to maturity of any discount or premium, regardless
of the effect of fluctuating interest rates on the market value of the
instrument. In addition, the money market portfolios may not (a) purchase
any instrument with a remaining maturity greater than 397 days unless such
instrument is subject to a demand feature, or (b) maintain a
dollar-weighted-average portfolio maturity which exceeds 90 days. The
securities of the Growth & Income Equity, Small Cap Equity, International
Equity, Equity Income, Equity Index, Balanced, Government & Corporate
Bond, U.S. Government Securities, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond, National Municipal Bond, Intermediate Corporate Bond, and
Bond Index Portfolios (collectively, "the variable net asset value
portfolios") that are traded on a recognized exchange are valued at the
last sale price on the national 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 (or
the sub-investment adviser) in accordance with guidelines approved by the
Fund's Board of Directors. Quotations of foreign securities in foreign
currency are converted to the U.S. dollar equivalent at the prevailing
exchange rate on the date of conversion. 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.
Repurchase agreements:
The Portfolios may engage in repurchase agreement transactions. Under the
terms of a typical repurchase agreement, a Portfolio takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Portfolio's
holding period. This arrangement results in a fixed rate of return that is
not subject to market fluctuations during the Portfolio's holding period.
The value of the collateral exceeds at all times the total amount of the
repurchase obligations, including interest. In the event of counterparty
default, the Portfolio has the right to use the collateral to offset
losses incurred. There is potential for loss to the Portfolio in the event
the Portfolio is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while
the Portfolio seeks to assert its rights. The Portfolios' investment
adviser, acting under the supervision of the Board of Directors, reviews
the value of the collateral and the creditworthiness of those banks and
dealers with which the Portfolios enter into repurchase agreements to
evaluate potential risks.
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.
Foreign currency translation:
The market value of investment securities, other assets and liabilities of
the International Equity Portfolio denominated in a foreign currency are
translated into U.S. dollars at the current exchange rate. Purchases and
Continued
-87-
<PAGE> 89
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
sales of securities, income receipts and expense payments are translated
into U.S. dollars at the exchange rate on the dates of the transactions.
The International Equity Portfolio isolates that portion of the results of
operations resulting from changes in foreign exchange rates on investments
from the fluctuation arising from changes in market prices of securities
held.
Reported net realized foreign exchange gains or losses arise from sales
and maturities of foreign securities, sales of foreign currencies,
currency exchange fluctuations between the trade and settlement dates on
securities transactions, and the difference between the amount of assets
and liabilities recorded and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities,
including investments in securities, resulting from changes in exchange
rates.
Risks associated with foreign securities and currencies:
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers.
Such risks include future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental
laws and restrictions. In addition, with respect to certain countries,
there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which
could adversely affect investments in those countries.
Certain countries may also impose substantial restrictions on investments
in their capital markets by foreign entities, including restrictions on
investments in issuers of industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available
in the International Equity Portfolio and result in a lack of liquidity
and a high price volatility with respect to securities of issuers from
developing countries.
Forward currency exchange contracts:
The International Equity Portfolio may enter into a forward foreign
currency exchange contract ("forwards"). A forward is an agreement between
two parties to buy and sell a currency at a set price on a future date.
The market value of the forward fluctuates with changes in currency
exchange rates. The forward is marked-to-market daily and the change in
market value is recorded by the Fund as unrealized appreciation or
depreciation. When the forward is closed, the Portfolio records a realized
gain or loss equal to the fluctuation in value during the period the
forward was opened. The Portfolio could be exposed to risk if a counter
party is unable to meet the terms of a forward or if the value of the
currency changes unfavorably.
Securities lending:
To increase return, the Growth & Income Equity, Small Cap Equity,
International Equity, Equity Income, Balanced, Government & Corporate
Bond, U.S. Government Securities, Short-Intermediate Municipal, National
Municipal Bond, Intermediate Corporate Bond and Bond Index Portfolios 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,
Continued
-88-
<PAGE> 90
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
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 lending Portfolio. By lending its
securities, a 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 Portfolios, 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 a 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 Portfolios must compensate the borrower
for the deficiency. At May 31, 1997, the Portfolios had securities with
the following market values on loan:
<TABLE>
<CAPTION>
Market Value of Loaned
Portfolio Securities
------------- ------------------------
<S> <C>
Growth & Income Portfolio............................ $40,340,410
Small Cap Equity Portfolio........................... 31,313,078
Balanced Portfolio................................... 22,372,192
Equity Income Portfolio.............................. 10,269,413
U.S. Government Securities Portfolio................. 17,353,996
Government & Corporate Bond Portfolio................ 40,746,551
Bond Index Portfolio................................. 35,820,072
Intermediate Corporate Bond Portfolio................ 5,337,354
</TABLE>
Dividends and distributions to shareholders:
Dividends on each share of the Portfolios 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 Money Market, Treasury Money Market, Tax-Exempt Money
Market, Government & Corporate Bond, U.S. Government Securities,
Short-Intermediate Bond, Missouri Tax-Exempt, National Municipal Bond,
Intermediate Corporate Bond, and Bond Index Portfolios 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 investment
income for the Growth & Income Equity, Equity Income, Equity Index and
Balanced Portfolios as declared and paid monthly as a dividend to
shareholders of record. The Small Cap Equity, and International Equity
Portfolios declare and pay dividends from net investment income quarterly.
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.
Continued
-89-
<PAGE> 91
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
Federal income taxes:
It is the policy of each of the Portfolios 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 Portfolios bear all costs in connection with their 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 dates each Portfolio commenced operations: December 2,
1991, for the Treasury Money Market Portfolio; from May 1, 1992, for the
Small Cap Equity Portfolio; from April 1, 1993, for the Balanced
Portfolio; from April 4, 1994, for the International Equity Portfolio; and
from July 10, 1995, for the Short-Intermediate Municipal Portfolio, from
February 26, 1997 for the Equity Income Portfolio, from May 1, 1997 for
the Equity Index Portfolio, from February 10, 1997 for the Intermediate
Corporate Bond Portfolio and the Bond Index Portfolio. As of November 30,
1995, all costs were fully amortized for the Money Market, Tax-Exempt
Money Market, Growth & Income Equity, Government & Corporate Bond, U.S.
Government Securities, Missouri Tax-Exempt Bond Portfolios.
Other:
Operating expenses of the Fund not directly attributable to a 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 four classes of Portfolio shares in each
Portfolio (except as noted): Investor A Shares, Investor B Shares (except
the Treasury Money Market, Tax-Exempt Money Market, Equity Index,
Short-Intermediate Municipal, Intermediate Corporate Bond and Equity Index
Portfolios), Trust Shares, and Institutional Shares (except the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond, Short-Intermediate Municipal and
National Municipal Bond Portfolios). Investor A shares of the variable net
asset value portfolios are sold with front-end sales charges. Investor B
Shares of the variable net asset value portfolios 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>
One or less.................................. 5.0%
More than one, but less than two............. 4.0%
Two, but less than three..................... 3.0%
Three, but less than four.................... 3.0%
Four, but less than five..................... 2.0%
Five, and up to & including six.............. 1.0%
More than six................................ None
</TABLE>
Continued
-90-
<PAGE> 92
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
Investor B Shares of the Money Market Portfolio may not be purchased
directly but are available only through exchanges of Investor B Shares of
the variable net asset value portfolios. Each class of shares in a
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 a Portfolio into Investor A Shares of
that Portfolio eight years after purchase.
As of May 31, 1997, 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 to such authority, as of May 31, 1997, the
Fund's shares were classified as follows:
<TABLE>
<CAPTION>
Represent Interests In:
----------------------------------------------------------
Class Shares (000) Portfolio Class
--------------------------------------- ---------------- -------------------------------------- -------------------
<S> <C> <C> <C>
Class A Shares......................... 550,000 Money Market Investor A
Class A--Special Series 1 Shares........ 1,800,000 Money Market Trust
Class A--Special Series 2 Shares........ 300,000 Money Market Investor B
Class A--Special Series 3 Shares........ 50,000 Money Market Institutional
Class B Shares......................... 100,000 Treasury Money Market Investor A
Class B--Special Series 1 Shares........ 1,000,000 Treasury Money Market Trust
Class B--Special Series 2 Shares........ 300,000 Treasury Money Market Investor B
Class C Shares......................... 5,000 Growth & Income Equity Investor A
Class C--Special Series 1 Shares........ 50,000 Growth & Income Equity Trust
Class C--Special Series 2 Shares........ 20,000 Growth & Income Equity Investor B
Class C--Special Series 3 Shares........ 50,000 Growth & Income Equity Institutional
Class D Shares......................... 5,000 Government & Corporate Bond Investor A
Class D--Special Series 1 Shares........ 50,000 Government & Corporate Bond Trust
Class D--Special Series 2 Shares........ 20,000 Government & Corporate Bond Investor B
Class D--Special Series 3 Shares........ 50,000 Government & Corporate Bond Institutional
Class E Shares......................... 5,000 U.S. Government Securities Investor A
Class E--Special Series 1 Shares........ 15,000 U.S. Government Securities Trust
Class E--Special Series 2 Shares........ 20,000 U.S. Government Securities Investor B
Class E--Special Series 3 Shares........ 50,000 U.S. Government Securities Institutional
Class F Shares......................... 5,000 Emerging Growth Investor A
Class F--Special Series 1 Shares........ 15,000 Emerging Growth Trust
Class F--Special Series 2 Shares........ 20,000 Emerging Growth Investor B
Class F--Special Series 3 Shares........ 50,000 Emerging Growth Institutional
Class G Shares......................... 5,000 Balanced Investor A
Class G--Special Series 1 Shares........ 15,000 Balanced Trust
Class G--Special Series 2 Shares........ 20,000 Balanced Investor B
Class G--Special Series 3 Shares........ 50,000 Balanced Institutional
</TABLE>
Continued
-91-
<PAGE> 93
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Represent Interests In:
------------------------------------------------------
Class Shares (000) Portfolio Class
------------------------------------------- ------------ ------------------------------------- ---------------
<S> <C> <C> <C>
Class H Shares........................... 10,000 International Equity Investor A
Class H--Special Series 1 Shares.......... 10,000 International Equity Trust
Class H--Special Series 2 Shares.......... 10,000 International Equity Investor B
Class H--Special Series 3 Shares.......... 50,000 International Equity Institutional
Class I Shares........................... 25,000 Short-Intermediate Municipal Investor A
Class I--Special Series 1 Shares.......... 25,000 Short-Intermediate Municipal Trust
Class J Shares........................... 50,000 Tax-Exempt Money Market Investor A
Class J--Special Series 1 Shares.......... 300,000 Tax-Exempt Money Market Trust
Class K Shares........................... 25,000 Missouri Tax-Exempt Bond Investor A
Class K--Special Series 1 Shares.......... 25,000 Missouri Tax-Exempt Bond Trust
Class K--Special Series 2 Shares.......... 10,000 Missouri Tax-Exempt Bond Investor B
Class L Shares........................... 25,000 Kansas Tax-Exempt Bond Investor A
Class L--Special Series 1 Shares.......... 25,000 Kansas Tax-Exempt Bond Trust
Class L--Special Series 2 Shares.......... 10,000 Kansas Tax-Exempt Bond Investor B
Class M Shares........................... 25,000 Equity Income Investor A
Class M--Special Series 1 Shares.......... 50,000 Equity Income Trust
Class M--Special Series 2 Shares.......... 25,000 Equity Income Investor B
Class M--Special Series 3 Shares.......... 25,000 Equity Income Institutional
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
Class O Shares........................... 25,000 Intermediate Corporate Bond Investor A
Class O--Special Series 1 Shares.......... 50,000 Intermediate Corporate Bond Trust
Class O--Special Series 2 Shares.......... 25,000 Intermediate Corporate Bond Investor B
Class P Shares........................... 25,000 Equity Index Investor A
Class P--Special Series 1 Shares.......... 50,000 Equity Index Trust
Class P--Special Series 2 Shares.......... 25,000 Equity Index Institutional
Class Q Shares........................... 25,000 Bond Index Investor A
Class Q--Special Series 1 Shares.......... 50,000 Bond Index Trust
Class Q--Special Series 2 Shares.......... 25,000 Bond Index Institutional
Unclassified.............................. 1,225,000
</TABLE>
Each Portfolio share represents an equal, proportionate interest in the
Portfolio with respect to other shares outstanding, irrespective of series.
Continued
-92-
<PAGE> 94
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
4. Capital Share Transactions
Transactions in portfolio shares of the Fund were as follows:
<TABLE>
<CAPTION>
Money Market
Portfolio
-------------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
-------------------- ------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued .............................. $ 48,378,692 $ 104,686,425
Dividends reinvested ..................................... 2,074,551 3,310,910
Cost of shares redeemed .................................. (55,027,777) (81,696,699)
-------------------- --------------------
Change in net assets from Investor A share
transactions ............................................ $ (4,574,534) $ 26,300,636
==================== ====================
Investor B Shares:
Proceeds from shares issued .............................. $ 45,619 $ 64,563
Dividends reinvested ..................................... 1,016 954
Cost of shares redeemed .................................. (2,268) (24,585)
-------------------- --------------------
Change in net assets from Investor B share
transactions ............................................ $ 44,367 $ 40,932
==================== ====================
Trust Shares:
Proceeds from shares issued .............................. $ 1,811,984,698 $ 2,117,336,443
Dividends reinvested ..................................... 7,174,570 11,554,554
Cost of shares redeemed .................................. (1,730,238,692) (2,109,752,319)
-------------------- --------------------
Change in net assets from Trust share
transactions ............................................ $ 88,920,576 $ 19,138,678
==================== ====================
Institutional Shares:
Proceeds from shares issued .............................. $ 41,405,191 $ 77,856,028
Dividends reinvested ..................................... 9,668 8,204
Cost of shares redeemed .................................. (34,295,668) (75,283,110)
-------------------- --------------------
Change in net assets from Institutional share
transactions ........................................... $ 7,119,191 $ 2,581,122
==================== ====================
<CAPTION>
SHARE TRANSACTIONS:
Investor A Shares:
Issued ................................................... 48,378,692 104,686,425
Reinvested ............................................... 2,074,551 3,310,910
Redeemed ................................................. (55,027,777) (81,696,699)
-------------------- --------------------
Change in Investor A Shares .............................. (4,574,534) 26,300,636
==================== ====================
Investor B Shares:
Issued ................................................... 45,619 64,563
Reinvested ............................................... 1,017 954
Redeemed ................................................. (2,268) (24,585)
-------------------- --------------------
Change in Investor B Shares .............................. 44,368 40,932
==================== ====================
Trust Shares:
Issued ................................................... 1,811,984,698 2,117,336,443
Reinvested ............................................... 7,174,571 11,554,554
Redeemed ................................................. (1,730,238,692) (2,109,752,319)
-------------------- --------------------
Change in Trust Shares ................................... 88,920,577 19,138,678
==================== ====================
Institutional Shares:
Issued ................................................... 41,405,191 77,856,028
Reinvested ............................................... 9,668 8,204
Redeemed ................................................. (34,295,667) (75,283,110)
-------------------- --------------------
Change in Institutional Shares ........................... 7,119,192 2,581,122
==================== ====================
<CAPTION>
Treasury Money
Market Portfolio
-----------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
-------------------- -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued .............................. $ 6,310,297 $ 14,064,613
Dividends reinvested ..................................... 147,710 198,801
Cost of shares redeemed .................................. (8,131,403) (9,372,706)
------------------ --------------------
Change in net assets from Investor A share
transactions ............................................ $ (1,673,396) $ 4,890,708
================== ====================
Investor B Shares:
Proceeds from shares issued ..............................
Dividends reinvested .....................................
Cost of shares redeemed ..................................
Change in net assets from Investor B share
transactions ............................................
Trust Shares:
Proceeds from shares issued .............................. $ 386,518,708 $ 899,191,996
Dividends reinvested ..................................... 1,367,679 3,311,570
Cost of shares redeemed .................................. (356,891,319) (1,023,961,242)
------------------ --------------------
Change in net assets from Trust share
transactions ............................................ $ 30,995,068 $ (121,457,676)
================== ====================
Institutional Shares:
Proceeds from shares issued .............................. $ 511,376 $ 5,811,068
Dividends reinvested ..................................... 164 412
Cost of shares redeemed .................................. (376,857) (5,541,015)
------------------ --------------------
Change in net assets from Institutional share
transactions ........................................... $ 134,683 $ 270,465
================== ====================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ................................................... 6,310,297 14,064,613
Reinvested ............................................... 147,709 198,801
Redeemed ................................................. (8,131,403) (9,372,706)
------------------ --------------------
Change in Investor A Shares .............................. (1,673,397) 4,890,708
================== ====================
Investor B Shares:
Issued ...................................................
Reinvested ...............................................
Redeemed .................................................
Change in Investor B Shares ..............................
Trust Shares:
Issued ................................................... 386,518,708 899,191,996
Reinvested ............................................... 1,367,679 3,311,570
Redeemed ................................................. (356,891,319) (1,023,961,242)
------------------ --------------------
Change in Trust Shares ................................... 30,995,068 (121,457,676)
================== ====================
Institutional Shares:
Issued ................................................... 511,376 5,811,068
Reinvested ............................................... 164 412
Redeemed ................................................. (376,857) (5,541,015)
------------------ --------------------
Change in Institutional Shares ........................... 134,683 270,465
================== ====================
</TABLE>
Continued
-93-
<PAGE> 95
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Tax-Exempt Money
Market Portfolio
----------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
------------------ -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ...................................... $ 9,450,245 $ 27,071,489
Dividends reinvested ............................................. 234,309 235,312
Cost of shares redeemed .......................................... (14,282,918) (14,725,931)
------------------ ------------------
Change in net assets from Investor A share
transactions .................................................... $ (4,598,364) $ 12,580,870
================== ==================
Investor B Shares:
Proceeds from shares issued ...................................... -- --
Dividends reinvested ............................................. -- --
Cost of shares redeemed .......................................... -- --
------------------ ------------------
Change in net assets from Investor B share
transactions .................................................... -- --
================== ==================
Trust Shares:
Proceeds from shares issued ...................................... $ 169,950,800 $ 186,179,822
Dividends reinvested ............................................. 183,784 327,245
Cost of shares redeemed .......................................... (142,348,796) (168,808,702)
------------------ ------------------
Change in net assets from Trust share transactions ............... $ 27,785,788 $ 17,698,365
================== ==================
Institutional Shares:
Proceeds from shares issued ...................................... -- --
Dividends reinvested ............................................. -- --
Cost of shares redeemed .......................................... -- --
------------------ ------------------
Change in net assets from Institutional share
transactions .................................................... -- --
================== ==================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ........................................................... 9,450,245 27,071,489
Reinvested ....................................................... 234,309 235,312
Redeemed ......................................................... (14,282,918) (14,725,931)
------------------ ------------------
Change in Investor A Shares ...................................... (4,598,364) 12,580,870
================== ==================
Investor B Shares:
Issued ........................................................... -- --
Reinvested ....................................................... -- --
Redeemed ......................................................... -- --
------------------ ------------------
Change in Investor B Shares ...................................... -- --
================== ==================
Trust Shares:
Issued ........................................................... 169,950,800 186,179,822
Reinvested ....................................................... 183,784 327,245
Redeemed ......................................................... (142,348,796) (168,808,702)
------------------ ------------------
Change in Trust Shares ........................................... 27,785,788 17,698,365
================== ==================
Institutional Shares:
Issued ........................................................... -- --
Reinvested ....................................................... -- --
Redeemed ......................................................... -- --
------------------ ------------------
Change in Institutional Shares ................................... -- --
================== ==================
<CAPTION>
Growth & Income
Equity Portfolio
-------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
------------------ -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ...................................... $ 3,549,111 $ 9,870,808
Dividends reinvested ............................................. 3,156,529 1,806,750
Cost of shares redeemed .......................................... (4,276,381) (3,418,441)
------------------ -----------------
Change in net assets from Investor A share
transactions .................................................... $ 2,429,259 $ 8,259,117
================== =================
Investor B Shares:
Proceeds from shares issued ...................................... $ 1,110,904 $ 2,406,329
Dividends reinvested ............................................. 291,838 62,055
Cost of shares redeemed .......................................... (156,806) (141,771)
------------------ -----------------
Change in net assets from Investor B share
transactions .................................................... $ 1,245,936 $ 2,326,613
================== =================
Trust Shares:
Proceeds from shares issued ...................................... $ 50,279,455 $ 55,386,626
Dividends reinvested ............................................. 21,924,989 17,221,218
Cost of shares redeemed .......................................... (124,495,331) (57,945,665)
------------------ -----------------
Change in net assets from Trust share transactions ............... $ (52,290,887) $ 14,662,179
================== =================
Institutional Shares:
Proceeds from shares issued ...................................... $ 7,947,420 24,656,743
Dividends reinvested ............................................. 6,095,932 2,967,915
Cost of shares redeemed .......................................... (5,909,644) (3,784,451)
------------------ -----------------
Change in net assets from Institutional share
transactions .................................................... $ 8,133,708 $ 23,840,207
================== =================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ........................................................... 203,411 598,426
Reinvested ....................................................... 185,263 115,115
Redeemed ......................................................... (243,326) (204,520)
------------------ -----------------
Change in Investor A Shares ...................................... 145,348 509,021
================== =================
Investor B Shares:
Issued ........................................................... 63,980 146,675
Reinvested ....................................................... 17,230 3,961
Redeemed ......................................................... (8,962) (8,326)
------------------ -----------------
Change in Investor B Shares ...................................... 72,248 142,310
================== =================
Trust Shares:
Issued ........................................................... 3,462,543 3,359,483
Reinvested ....................................................... 1,283,873 1,095,493
Redeemed ......................................................... (7,245,179) (3,405,972)
------------------ -----------------
Change in Trust Shares ........................................... (2,498,763) 1,049,004
================== =================
Institutional Shares:
Issued ........................................................... 453,348 1,473,440
Reinvested ....................................................... 357,788 189,057
Redeemed ......................................................... (335,506) (225,116)
------------------ -----------------
Change in Institutional Shares ................................... 475,630 1,437,381
================== =================
</TABLE>
Continued
-94-
<PAGE> 96
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Small Cap Equity
Portfolio
---------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
----------------- -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ..................................... $ 689,641 $ 8,330,915
Dividends reinvested ............................................ 843,177 1,175,137
Cost of shares redeemed ......................................... (2,185,008) (10,568,422)
----------------- -----------------
Change in net assets from Investor A share transactions ......... $ (652,190) $ (1,062,370)
================= =================
Investor B Shares:
Proceeds from shares issued ..................................... $ 117,771 $ 668,648
Dividends reinvested ............................................ 78,176 51,148
Cost of shares redeemed ......................................... (108,754) (82,619)
----------------- -----------------
Change in net assets from Investor B share transactions ......... $ 87,193 $ 637,177
================= =================
Trust Shares:
Proceeds from shares issued ..................................... $ 10,648,378 $ 57,112,437
Dividends reinvested ............................................ 9,147,048 9,768,137
Cost of shares redeemed ......................................... (11,883,159) (38,246,394)
----------------- -----------------
Change in net assets from Trust share transactions .............. $ 7,912,267 $ 28,634,180
================= =================
Institutional Shares:
Proceeds from shares issued ..................................... $ 3,903,774 $ 13,386,432
Dividends reinvested ............................................ 1,847,189 1,411,691
Cost of shares redeemed ......................................... (3,219,488) (3,039,946)
----------------- -----------------
Change in net assets from Institutional share transactions ...... $ 2,531,475 $ 11,758,177
================= =================
SHARE TRANSACTIONS:
Investor A Shares:
Issued .......................................................... 54,570 652,412
Reinvested ...................................................... 66,549 96,278
Redeemed ........................................................ (171,831) (832,375)
----------------- -----------------
Change in Investor A Shares ..................................... (50,712) (83,685)
================= =================
Investor B Shares:
Issued .......................................................... 9,319 53,222
Reinvested ...................................................... 6,249 4,217
Redeemed ........................................................ (8,828) (6,486)
----------------- -----------------
Change in Investor B Shares ..................................... 6,740 50,953
================= =================
Trust Shares:
Issued .......................................................... 832,580 4,475,488
Reinvested ...................................................... 717,487 796,399
Redeemed ........................................................ (930,367) (2,922,899)
----------------- -----------------
Change in Trust Shares .......................................... 619,700 2,348,988
================= =================
Institutional Shares:
Issued .......................................................... 307,172 1,064,056
Reinvested ...................................................... 146,372 116,019
Redeemed ........................................................ (255,655) (242,572)
----------------- -----------------
Change in Institutional Shares .................................. 197,889 937,503
================= =================
<CAPTION>
International Equity
Portfolio
---------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
--------------- -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ..................................... $ 451,017 $ 1,165,994
Dividends reinvested ............................................ 70,515 --
Cost of shares redeemed ......................................... (214,151) (393,881)
--------------- ----------------
Change in net assets from Investor A share transactions ......... $ 307,381 $ 772,113
=============== ================
Investor B Shares:
Proceeds from shares issued ..................................... $ 87,828 $ 314,369
Dividends reinvested ............................................ 11,989 --
Cost of shares redeemed ......................................... (33,509) (7,784)
--------------- ----------------
Change in net assets from Investor B share transactions ......... $ 66,308 $ 306,585
=============== ================
Trust Shares:
Proceeds from shares issued ..................................... $ 4,614,904 $ 18,402,546
Dividends reinvested ............................................ 737,704 --
Cost of shares redeemed ......................................... (4,604,055) (7,672,403)
--------------- ----------------
Change in net assets from Trust share transactions .............. $ 748,553 $ 10,730,143
=============== ================
Institutional Shares:
Proceeds from shares issued ..................................... $ 1,030,202 $ 3,792,099
Dividends reinvested ............................................ 166,866 --
Cost of shares redeemed ......................................... (860,617) (346,775)
--------------- ----------------
Change in net assets from Institutional share transactions ...... $ 336,451 $ 3,445,324
=============== ================
SHARE TRANSACTIONS:
Investor A Shares:
Issued .......................................................... 38,563 103,191
Reinvested ...................................................... 6,094 --
Redeemed ........................................................ (18,221) (35,253)
--------------- ----------------
Change in Investor A Shares ..................................... 26,436 67,938
=============== ================
Investor B Shares:
Issued .......................................................... 7,627 27,867
Reinvested ...................................................... 1,050 --
Redeemed ........................................................ (2,830) (672)
--------------- ----------------
Change in Investor B Shares ..................................... 5,847 27,195
=============== ================
Trust Shares:
Issued .......................................................... 394,001 1,619,798
Reinvested ...................................................... 63,363 --
Redeemed ........................................................ (389,190) (658,505)
--------------- ----------------
Change in Trust Shares .......................................... 68,174 961,293
=============== ================
Institutional Shares:
Issued .......................................................... 87,722 333,036
Reinvested ...................................................... 14,446 --
Redeemed ........................................................ (73,866) (30,224)
--------------- ----------------
Change in Institutional Shares .................................. 28,302 302,812
=============== ================
</TABLE>
Continued
-95-
<PAGE> 97
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Equity Income Equity Index
Portfolio Portfolio
----------------- ----------------
February 26, May 1,
1997 to 1997 to
May 31, May 31,
1997 (a) 1997 (a)
----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ................................................ $ 36,981 $ 2,000
Dividends reinvested ....................................................... 53 --
------------ ------------
Change in net assets from Investor A share transactions .................... $ 37,034 $ 2,000
============ ============
Investor B Shares:
Proceeds from shares issued ................................................ $ 6,886 --
Dividends reinvested ....................................................... 1 --
------------ ------------
Change in net assets from Investor B share transactions .................... $ 6,887 --
============ ============
Trust Shares:
Proceeds from shares issued ................................................ $73,422,556 $25,150,010
Dividends reinvested ....................................................... 5,309 --
Cost of shares redeemed .................................................... (3,944,967) --
------------ ------------
Change in net assets from Trust share transactions ......................... $69,482,898 $25,150,010
============ ============
Institutional Shares:
Proceeds from shares issued ................................................ $ 1,000 1,000
Dividends reinvested ....................................................... 2 --
------------ ------------
Change in net assets from Institutional share transactions ................. $ 1,002 1,000
============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ..................................................................... 4,055 200
Reinvested ................................................................. 6 --
Redeemed ................................................................... -- --
------------ ------------
Change in Investor A Shares ................................................ 4,061 200
============ ============
Investor B Shares:
Issued ..................................................................... 678 --
------------ ------------
Change in Investor B Shares ................................................ 678 --
============ ============
Trust Shares:
Issued ..................................................................... 12,264,796 2,514,823
Reinvested ................................................................. 557 --
Redeemed ................................................................... (412,851) --
------------ ------------
Change in Trust Shares ..................................................... 11,852,502 2,514,823
============ ============
Institutional Shares:
Issued ..................................................................... 100 100
------------ ------------
Change in Institutional Shares ............................................. 100 100
============ ============
</TABLE>
(a) Period from commencement of operations.
Continued
-96-
<PAGE> 98
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Balanced Government & Corporate
Portfolio Bond Portfolio
--------------------------- ---------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
----------- ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued .......................... $ 1,096,960 $ 1,279,888 $ 338,578 $ 1,081,992
Dividends reinvested ................................. 684,775 540,237 110,308 288,701
Cost of shares redeemed .............................. (1,216,424) (1,566,057) (618,482) (1,822,047)
------------ ------------ ------------ ------------
Change in net assets from Investor A share
transactions ....................................... $ 565,311 $ 254,068 $ (169,596) $ (451,354)
============ ============ ============ ============
Investor B Shares:
Proceeds from shares issued .......................... $ 119,159 $ 255,917 $ 77,034 $ 431,722
Dividends reinvested ................................. 21,151 5,128 10,738 12,973
Cost of shares redeemed .............................. (9,067) (2,897) (8,416) (42,309)
------------ ------------ ------------ ------------
Change in net assets from Investor B share
transactions ....................................... $ 131,243 $ 258,148 $ 79,356 $ 402,386
============ ============ ============ ============
Trust Shares:
Proceeds from shares issued .......................... $ 2,583,904 $ 8,437,415 $ 13,634,714 $ 33,574,691
Dividends reinvested ................................. 4,177,029 4,712,847 2,176,335 4,910,841
Cost of shares redeemed .............................. (21,009,116) (29,178,365) (11,922,861) (22,962,197)
------------ ------------ ------------ ------------
Change in net assets from Trust share transactions ... $(14,248,183) $(16,028,103) $ 3,888,188 $ 15,523,335
============ ============ ============ ============
Institutional Shares:
Proceeds from shares issued .......................... $ 8,757,138 $ 15,950,520 $ 2,057,288 $ 7,558,229
Dividends reinvested ................................. 4,091,745 2,533,910 428,359 708,554
Cost of shares redeemed .............................. (5,988,699) (4,695,716) (1,311,515) (2,656,046)
------------ ------------ ------------ ------------
Change in net assets from Institutional share
transactions ........................................ $ 6,860,184 $ 13,788,714 $ 1,174,132 $ 5,610,737
============ ============ ============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ............................................... 93,004 111,445 33,666 105,753
Reinvested ........................................... 58,149 47,412 10,899 28,274
Redeemed ............................................. (102,325) (134,124) (61,216) (180,569)
------------ ------------ ------------ ------------
Change in Investor A Shares .......................... 48,828 24,733 (16,651) (46,542)
============ ============ ============ ============
Investor B Shares:
Issued ............................................... 10,141 22,386 7,671 42,182
Reinvested ........................................... 1,810 447 1,061 1,284
Redeemed ............................................. (765) (249) (838) (4,176)
------------ ------------ ------------ ------------
Change in Investor B Shares .......................... 11,186 22,584 7,894 39,290
============ ============ ============ ============
Trust Shares:
Issued ............................................... 272,356 732,718 1,350,332 3,312,003
Reinvested ........................................... 354,650 413,590 215,095 481,194
Redeemed ............................................. (1,786,651) (2,470,952) (1,184,079) (2,242,645)
------------ ------------ ------------ ------------
Change in Trust Shares ............................... (1,159,645) (1,324,644) 381,348 1,550,552
============ ============ ============ ============
Institutional Shares:
Issued ............................................... 743,059 1,372,147 203,697 737,749
Reinvested ........................................... 348,596 222,611 42,349 69,542
Redeemed ............................................. (503,264) (401,065) (130,648) (262,357)
------------ ------------ ------------ ------------
Change in Institutional Shares ....................... 588,391 1,193,693 115,398 544,934
============ ============ ============ ============
</TABLE>
Continued
-97-
<PAGE> 99
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Portfolio Municipal Portfolio
----------------------------------------------------------------
Six months Year Six months Year
ended ended ended ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
-------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ................................ $ 61,222 $ 322,833 $ 205,699 $ 50,234
Dividends reinvested ....................................... 160,431 467,398 1,124 1,301
Cost of shares redeemed .................................... (1,906,627) (1,672,421) (225,172) --
-------------- -------------- --------------- -------------
Change in net assets from Investor A share transactions .... $ (1,684,974) $ (882,190) $ (18,349) $ 51,535
============== ============== =============== =============
Investor B Shares:
Proceeds from shares issued ................................ $ 69,784 $ 316,733 -- --
Dividends reinvested ....................................... 9,155 11,390 -- --
Cost of shares redeemed .................................... (18,460) (8,781) -- --
-------------- -------------- --------------- -------------
Change in net assets from Investor B share transactions .... $ 60,479 $ 319,342 -- --
============== ============== =============== =============
Trust Shares:
Proceeds from shares issued ................................ $ 17,668,161 $ 17,936,354 $ 2,365,735 $ 9,434,735
Dividends reinvested ....................................... 1,020,324 1,953,246 22,004 63,662
Cost of shares redeemed .................................... (8,296,627) (4,671,823) (3,587,156) (3,763,873)
-------------- -------------- --------------- -------------
Change in net assets from Trust share transactions ......... $ 10,391,858 $ 15,217,777 $ (1,199,417) $ 5,734,524
============== ============== =============== =============
Institutional Shares:
Proceeds from shares issued ................................ $ 5,907,728 $ 1,798,550 -- --
Dividends reinvested ....................................... 83,150 80,448 -- --
Cost of shares redeemed .................................... (1,433,379) (319,286) -- --
-------------- -------------- --------------- -------------
Change in net assets from Trust share transactions ......... $ 4,557,499 $ 1,559,712 -- --
============== ============== =============== =============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ..................................................... 5,821 30,791 20,507 4,971
Reinvested ................................................. 15,226 43,886 113 131
Redeemed ................................................... (181,392) (157,854) (22,597) --
-------------- -------------- --------------- -------------
Change in Investor A Shares ................................ (160,345) (83,177) (1,977) 5,102
============== ============== =============== =============
Investor B Shares:
Issued ..................................................... 6,646 29,636 -- --
Reinvested ................................................. 870 1,081 -- --
Redeemed ................................................... (1,764) (835) -- --
-------------- -------------- --------------- -------------
Change in Investor B Shares ................................ 5,752 29,882 -- --
============== ============== =============== =============
Trust Shares:
Issued ..................................................... 1,681,351 1,690,682 236,248 939,097
Reinvested ................................................. 96,816 184,241 2,198 6,368
Redeemed ................................................... (790,085) (438,058) (358,479) (377,354)
-------------- -------------- --------------- -------------
Change in Trust Shares ..................................... 988,082 1,436,865 (120,033) 568,111
============== ============== =============== =============
Institutional Shares:
Issued ..................................................... 567,788 171,123 -- --
Reinvested ................................................. 7,932 7,639 -- --
Redeemed ................................................... (138,073) (30,613) -- --
-------------- -------------- --------------- -------------
Change in Trust Shares ..................................... 437,647 148,149 -- --
============== ============== =============== =============
</TABLE>
Continued
-98-
<PAGE> 100
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Missouri Tax-Exempt
Bond Portfolio
-------------------------------------
Six months Year
ended ended
May 31, November 30,
1997 1996
---------------- ------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ........................................ $ 1,068,965 $ 2,404,280
Dividends reinvested ............................................... 429,291 884,429
Cost of shares redeemed ............................................ (2,859,111) (2,791,258)
---------------- ----------------
Change in net assets from Investor A share transactions ............ $ (1,360,855) $ 497,451
================ ================
Investor B Shares:
Proceeds from shares issued ........................................ $ 336,424 $ 284,623
Dividends reinvested ............................................... 7,408 9,017
Cost of shares redeemed ............................................ (92,106) (52,123)
---------------- ----------------
Change in net assets from Investor B share transactions ............ $ 251,726 $ 241,517
================ ================
Trust Shares:
Proceeds from shares issued ........................................ $ 13,905,267 $ 15,517,040
Dividends reinvested ............................................... 162,783 432,469
Cost of shares redeemed ............................................ (2,773,034) (7,879,384)
---------------- ----------------
Change in net assets from Trust share transactions ................. $ 11,295,016 $ 8,070,125
================ ================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ............................................................. 92,440 210,587
Reinvested ......................................................... 37,114 76,641
Redeemed ........................................................... (247,841) (242,599)
---------------- ----------------
Change in Investor A Shares ........................................ (118,287) 44,629
================ ================
Investor B Shares:
Issued ............................................................. 29,375 24,662
Reinvested ......................................................... 641 784
Redeemed ........................................................... (8,007) (4,537)
---------------- ----------------
Change in Investor B Shares ........................................ 22,009 20,909
================ ================
Trust Shares:
Issued ............................................................. 1,202,113 1,348,946
Reinvested ......................................................... 14,075 37,452
Redeemed ........................................................... (239,880) (674,245)
---------------- ----------------
Change in Trust Shares ............................................. 976,308 712,153
================ ================
<CAPTION>
National Municipal
Bond Portfolio
--------------------------------------
Six months November 18,
ended 1996 to
May 31, November 30,
1997 1996 (a)
---------------- -------------------
(Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ........................................ $ 973,386 $ 1,000
Dividends reinvested ............................................... 1,202 --
Cost of shares redeemed ............................................ (433,505) --
---------------- -----------------
Change in net assets from Investor A share transactions ............ $ 541,083 $ 1,000
================ =================
Investor B Shares:
Proceeds from shares issued ........................................ -- $ 1,000
Dividends reinvested ............................................... 21 --
Cost of shares redeemed ............................................ -- --
---------------- -----------------
Change in net assets from Investor B share transactions ............ $ 21 $ 1,000
================ =================
Trust Shares:
Proceeds from shares issued ........................................ $ 24,521,687 $ 314,006,996
Dividends reinvested ............................................... 2,089 --
Cost of shares redeemed ............................................ (6,398,390) (4,987,761)
---------------- -----------------
Change in net assets from Trust share transactions ................. $ 18,125,386 $ 309,019,235
================ =================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ............................................................. 98,097 100
Reinvested ......................................................... 122 --
Redeemed ........................................................... (43,804) --
---------------- -----------------
Change in Investor A Shares ........................................ 54,415 100
================ =================
Investor B Shares:
Issued ............................................................. -- 100
Reinvested ......................................................... 2 --
Redeemed ........................................................... -- --
---------------- -----------------
Change in Investor B Shares ........................................ 2 100
================ =================
Trust Shares:
Issued ............................................................. 2,470,437 31,400,089
Reinvested ......................................................... 212 --
Redeemed ........................................................... (647,424) (498,183)
---------------- -----------------
Change in Trust Shares ............................................. 1,823,225 30,901,906
================ =================
</TABLE>
(a) Period from commencement of operations.
Continued
-99-
<PAGE> 101
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Intermediate Bond
Corporate Bond Index
Portfolio Portfolio
-------------------- -------------------
February 10, February 10,
1997 to 1997 to
May 31, May 31,
1997 (a) 1997 (a)
-------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ......................................... $ 65,346 $ 200,267
Dividends reinvested ................................................ 14 407
Cost of shares redeemed ............................................. -- (155,750)
---------------- -----------------
Change in net assets from Investor A share transactions ............. $ 65,360 $ 44,924
================ =================
Trust Shares:
Proceeds from shares issued ......................................... $ 40,029,731 $ 130,226,939
Dividends reinvested ................................................ 24,393 15,763
Cost of shares redeemed ............................................. (1,589,918) (1,085,848)
---------------- -----------------
Change in net assets from Trust share transactions .................. $ 38,464,206 $ 129,156,854
================ =================
Institutional Shares:
Proceeds from shares issued ......................................... $ 1,000 $ 1,000
Dividends reinvested ................................................ 14 13
---------------- -----------------
Change in net assets from Institutional share transactions .......... $ 1,014 $ 1,013
================ =================
SHARE TRANSACTIONS:
Investor A Shares:
Issued .............................................................. 6,673 20,517
Reinvested .......................................................... 1 42
Redeemed ............................................................ -- (15,901)
---------------- -----------------
Change in Investor A Shares ......................................... 6,674 4,658
================ =================
Trust Shares:
Issued .............................................................. 4,124,696 13,289,473
Reinvested .......................................................... 2,494 1,607
Redeemed ............................................................ (161,706) (110,439)
---------------- -----------------
Change in Trust Shares .............................................. 3,965,484 13,180,641
================ =================
Institutional Shares:
Issued .............................................................. 100 100
Reinvested .......................................................... 1 1
---------------- -----------------
Change in Institutional Shares ...................................... 101 101
================ =================
</TABLE>
(a) Period from commencement of operations.
Continued
-100-
<PAGE> 102
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
5. Purchases and Sales of Investment Securities
Purchases and sales of securities (excluding short-term securities) during
the six months ended May 31, 1997 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales
------------ ----------
<S> <C> <C>
Growth & Income Equity............... $128,864 $200,480
Small Cap Equity..................... 83,551 98,775
International Equity................. 22,981 24,606
Equity Income........................ 95,765 29,226
Equity Index......................... 25,164 54
Balanced............................. 30,327 45,066
Government & Corporate Bond.......... 104,964 134,574
U.S. Government Securities........... 51,906 57,588
Short-Intermediate Municipal......... -- --
Missouri Tax-Exempt Bond............. 12,268 2,966
National Municipal Bond.............. 176,294 157,819
Intermediate Corporate Bond.......... 59,614 23,990
Bond Index........................... 177,717 51,221
</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
of St. Louis 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
Portfolios for serving as officers of the Fund. Under the terms of the
administration agreement, the Company receives fees computed as 0.20%
(0.10% for the Tax-Exempt Money Market Portfolio) of the average daily net
assets of each 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
variable net asset value portfolios. For the six month period ended May
31, 1997, BISYS received approximately $236,735 from commissions earned on
sales of Investor A Shares and redemptions of Investor B Shares of which
BISYS re-allowed $207,099 to dealers of the Fund's shares.
With respect to Investor A Shares of the Portfolios, the Fund has adopted
a Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, each portfolio may pay (i) up to 0.10% of
the average daily net assets of each Portfolio's outstanding Investor A
Shares to BISYS or another organization for distribution services
performed and expenses assumed relating to the Fund's Investor A shares
and (ii) up to 0.20% (0.15% for the money market portfolios) of the
average daily net assets of each Portfolio's
Continued
-101-
<PAGE> 103
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
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 "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, a 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 Fund'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 and Institutional Shares of the Portfolios, the Fund
has adopted separate Administrative Services Plans pursuant to which Trust
Shares are sold to banks and other financial institutions on behalf of
their qualified accounts and Institutional Shares are sold to banks and
other financial institutions acting on behalf of their accounts for which
they do not exercise investment discretion. A 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% (0.25% for money market portfolios) of the average
daily net assets of the Portfolio's Trust or Institutional Shares,
respectively.
Fees may be voluntarily reduced to assist the Portfolios in maintaining
competitive expense ratios.
Information regarding these transaction is as follows for the year ended
May 31, 1997:
<TABLE>
<CAPTION>
Investment Advisory Administration
Fees Fees
------------------------- ------------------
Annual Fee
before
voluntary Voluntary Fund
fees fees Voluntary fee Custodian Accounting Transfer
reductions reductions reductions Fees Fees Agent Fees
----------- ------------ ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio................ 0.40% $222,405 $444,796 $60,182 $ 596 $118,135
Treasury Money Market Portfolio....... 0.40% 36,194 72,387 10,109 15 14,999
Tax-Exempt Money Market Portfolio..... 0.40% 34,494 -- 9,919 713 16,624
Growth & Income Portfolio............. 0.55% -- 202,005 61,900 920 63,452
Small Cap Equity Portfolio............ 0.75% -- 108,451 33,463 1,638 30,908
International Equity Portfolio........ 1.00% -- -- 53,255 15 9,626
Equity Income Portfolio............... 0.75% 197,973 38,275 94 1,598 11,656
Equity Index Portfolio................ 0.30% 6,451 2,150 -- -- --
Balanced Portfolio.................... 0.75% -- 56,532 17,673 4,727 16,208
Government & Corporate Bond Portfolio. 0.45% -- 80,558 24,366 4,792 22,112
U.S. Government Securities Portfolio.. 0.45% -- 37,860 11,380 3,443 10,232
Short-Intermediate Municipal Portfolio 0.55% 78,658 14,301 4,477 4,333 4,520
Missouri Tax Exempt Bond Portfolio.... 0.45% -- 43,624 13,272 5,091 10,374
National Municipal Bond Portfolio..... 0.55% 863,303 70,635 1,294 3,837 27,773
Intermediate Corporate Bond Portfolio. 0.55% 59,488 15,683 110 1,870 13,970
Bond Index Portfolio.................. 0.30% 110,238 36,746 11,134 1,099 6,160
</TABLE>
Continued
-102-
<PAGE> 104
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
May 31, 1997
(Unaudited)
7. Concentration of Credit Risk
The Missouri Tax-Exempt Bond Portfolio invests a substantial proportion of
its assets in debt obligations issued by the State of Missouri and its
political subdivisions, agencies and public authorities. The Portfolio is
more susceptible to factors adversely affecting issuers of Missouri
municipal securities than a fund that is not concentrated in these issuers
to the same extent.
8. Conversion of Common Trust Funds:
On February 15, 1997 the Bond Index and Intermediate Corporate Bond
Portfolios issued Trust Shares to acquire all of the assets and
liabilities of certain common trust funds of the Merchantile Bank of St.
Louis National Association. On March 8, 1997 the Equity Income Portfolio
issued Trust Shares to acquire all of the assets and liabilities of
certain common trust funds of Merchantile Bank of St. Louis National
Association. The following is a summary of shares issued, net assets
converted, and net asset values per share, and unrealized appreciation as
of the conversion date (amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
Net Asset Unrealized
Shares Net Assets Value Appreciation
-------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Bond Index Portfolio.......................... 12,688 $127,309 $10.03 $ 2,983
Intermediate Corporate Bond Portfolio......... 3,657 $ 36,723 $10.04 $ 1,280
Equity Income Portfolio....................... 11,901 $118,889 $ 9.99 $48,912
</TABLE>
Continued
-103-
<PAGE> 105
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended --------------------------------------------------------
May 31, 1997 1996 1995 1994 (a) 1993
-------------- ----------- ----------- ----------- -----------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
-------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ----------- ----------- ----------- -----------
Investment Activities
Net investment income .................................. 0.024 0.047 0.052 0.033 0.025
---------- ----------- ----------- ----------- -----------
Total from Investment Activities .................. 0.024 0.047 0.052 0.033 0.025
---------- ----------- ----------- ----------- -----------
Distributions
Net investment income .................................. (0.024) (0.047) (0.052) (0.033) (0.025)
---------- ----------- ----------- ----------- -----------
Total Distributions ............................... (0.024) (0.047) (0.052) (0.033) (0.025)
---------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== =========== =========== ===========
Total Return (excludes sales charge) ...................... 2.39%(b) 4.81% 5.33% 3.37% 2.52%
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................... $ 86,591 $ 91,166 $ 64,865 $ 48,384 $ 46,920
Ratio of expenses to average net assets ................ 0.77%(c) 0.78% 0.77% 0.78% 0.79%
Ratio of net investment income to average net assets ... 4.75%(c) 4.70% 5.20% 3.35% 2.50%
Ratio of expenses to average net assets* ............... 0.92%(c) 0.93% 0.92% 0.93% 0.93%
Ratio of net investment income to average net assets* .. 4.60%(c) 4.55% 5.05% 3.20% 2.36%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-104-
<PAGE> 106
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months January 26, 1996
Ended to
May 31, 1997 November 30, 1996 (a)
----------------- -----------------------
Investor B Investor B
Shares Shares
----------------- -----------------------
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning of Period .................................. $ 1.00 $ 1.00
--------- ---------
Investment Activities
Net investment income .............................................. 0.020 0.033
--------- ---------
Total from Investment Activities .............................. 0.020 0.033
--------- ---------
Distributions
Net investment income .............................................. (0.020) (0.033)
--------- ---------
Total Distributions ........................................... (0.020) (0.033)
--------- ---------
Net Asset Value, End of Period ........................................ $ 1.00 $ 1.00
========= =========
Total Return (excludes sales charge) .................................. 2.01%(b) 3.35%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .................................. $ 85 $ 41
Ratio of expenses to average net assets ............................ 1.52%(c) 1.47%(c)
Ratio of net investment income to average net assets ............... 4.03%(c) 3.73%(c)
Ratio of expenses to average net assets* ........................... 1.67%(c) 1.68%(c)
Ratio of net investment income to average net assets* .............. 3.88%(c) 3.52%(c)
</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.
See notes to financial statements
-105-
<PAGE> 107
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended --------------------------------------------------
May 31, 1997 1996 1995 1994 1993
------------ -------- -------- -------- --------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------------ -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income ................................ 0.024 0.049 0.054 0.035 0.026
-------- -------- -------- -------- ---------
Total from Investment Activities ................. 0.024 0.049 0.054 0.035 0.026
-------- -------- -------- -------- ---------
Distributions
Net investment income ................................ (0.024) (0.049) (0.054) (0.035) (0.026)
-------- -------- -------- -------- ---------
Total Distributions .............................. (0.024) (0.049) (0.054) (0.035) (0.026)
-------- -------- -------- -------- ---------
Net Asset Value, End of Period ......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =========
Total Return ........................................... 2.45%(a) 4.99% 5.52% 3.55% 2.72%
Ratios/Supplementary Data:
Net Assets at end of period (000) .................... $806,187 $717,265 $698,131 $544,952 $621,717
Ratio of expenses to average net assets .............. 0.65%(b) 0.61% 0.59% 0.61% 0.59%
Ratio of net investment income to average
net assets ......................................... 4.87%(b) 4.88% 5.38% 3.45% 2.70%
Ratio of expenses to average net assets* ............. 0.80%(b) 0.76% 0.74% 0.93% 0.80%
Ratio of net investment income to average
net assets* ........................................ 4.72%(b) 4.73% 5.23% 3.13% 2.49%
</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) Not annualized.
(b) Annualized.
See notes to financial statements
-106-
<PAGE> 108
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended -----------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
------------- ------------- ------------- ---------- ----------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
------------- ------------- ------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Investment Activities
Net investment income ...................................... 0.024 0.047 0.052 0.033 0.025
------- ------- ------- ------- -------
Total from Investment Activities ...................... 0.024 0.047 0.052 0.033 0.025
------- ------- ------- ------- -------
Distributions
Net investment income ...................................... (0.024) (0.047) (0.052) (0.033) (0.025)
------- ------- ------- ------- -------
Total Distributions ................................... (0.024) (0.047) (0.052) (0.033) (0.025)
------- ------- ------- ------- -------
Net Asset Value, End of Period ................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return .................................................. 2.39%(b) 4.81% 5.33% 3.34% 2.52%
Ratios/Supplementary Data:
Net Assets at end of period (000) .......................... $23,040 $15,921 $13,340 $10,295 $46,920
Ratio of expenses to average net assets .................... 0.77%(c) 0.78% 0.77% 0.78% 0.79%
Ratio of net investment income to average net assets........ 4.75%(c) 4.70% 5.20% 3.48% 2.50%
Ratio of expenses to average net assets* ................... 0.92%(c) 0.93% 0.92% 0.95% 0.93%
Ratio of net investment income to average net assets* ...... 4.60%(c) 4.55% 5.05% 3.31% 2.36%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented for
the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
(b) Not annualized.
(c) Annualized
See notes to financial statements
-107-
<PAGE> 109
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Investor A Shares
<TABLE>
<CAPTION>
Financial Highlights
Six Months Years Ended November 30,
Ended ----------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
------------ ----------- ----------- ----------- ---------
Investor Investor A Investor A Investor A Investor
Shares A Shares Shares Shares Shares
------------ ----------- ----------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------ -------
Investment Activities
Net investment income ........................ 0.022 0.044 0.048 0.031 0.024
------- ------ ------ ------ -------
Total from Investment Activities ......... 0.022 0.044 0.048 0.031 0.024
------- ------ ------ ------ -------
Distributions
Net investment income ........................ (0.022) (0.044) (0.048) (0.031) (0.024)
------- ------ ------ ------ -------
Total Distributions ...................... (0.022) (0.044) (0.048) (0.031) (0.024)
------- ------ ------ ------ -------
Net Asset Value, End of Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ====== =======
Total Return ................................... 2.23%(b) 4.46% 4.93% 3.16% 2.43%
Ratios/Supplementary Data:
Net Assets at end of period (000) ............ $ 5,993 $7,667 $2,776 $1,713 $ 1,411
Ratio of expenses to average net assets ...... 0.77%(c) 0.81% 0.78% 0.71% 0.64%
Ratio of net investment income to average net
assets ..................................... 4.42%(c) 4.35% 4.84% 3.14% 2.41%
Ratio of expenses to average net assets* ..... 0.92%(c) 0.96% 0.93% 0.94% 0.97%
Ratio of net investment income to average net
assets* .................................... 4.27%(c) 4.20% 4.69% 2.90% 2.08%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-108-
<PAGE> 110
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Trust Shares
<TABLE>
<CAPTION>
Financial Highlights
Six Months Years Ended November 30,
Ended --------------------------------------------------
May 31, 1997 1996 1995 1994 1993
------------ -------- -------- -------- ---------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------------ -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income .................. 0.023 0.045 0.050 0.033 0.026
-------- -------- -------- -------- --------
Total from Investment Activities ... 0.023 0.045 0.050 0.033 0.026
-------- -------- -------- -------- --------
Distributions
Net investment income .................. (0.023) (0.045) (0.050) (0.033) (0.026)
-------- -------- -------- -------- --------
Total Distributions ................ (0.023) (0.045) (0.050) (0.033) (0.026)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return ............................. 2.31%(a) 4.64% 5.12% 3.38% 2.67%
Ratios/Supplementary Data:
Net Assets at end of period (000) ...... $162,313 $131,322 $252,780 $242,099 $256,503
Ratio of expenses to average net assets. 0.61%(b) 0.61% 0.60% 0.49% 0.41%
Ratio of net investment income to
average net assets ................... 4.58%(b) 4.55% 5.01% 3.26% 2.64%
Ratio of expenses to average net 0.76%(b) 0.76% 0.75% 0.94% 0.85%
assets* ..............................
Ratio of net investment income to
average net assets* .................. 4.43%(b) 4.40% 4.86% 2.82% 2.21%
</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) Not annualized.
(b) Annualized.
See notes to financial statements
-109-
<PAGE> 111
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Year January 26, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
----------------- ----------------- -----------------
Institutional Institutional Institutional
Shares Shares Shares
----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ....................... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Investment Activities
Net investment income .................................... 0.022 0.044 0.042
------- ------- --------
Total from Investment Activities ..................... 0.022 0.044 0.042
------- ------- --------
Distributions
Net investment income .................................... (0.022) (0.044) (0.042)
------- ------- --------
Total Distributions .................................. (0.022) (0.044) (0.042)
------- ------- --------
Net Asset Value, End of Period ............................. $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return ............................................... 2.23%(b) 4.46% 4.94%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................ $ 433 $ 299 $ 28
Ratio of expenses to average net assets .................. 0.77%(c) 0.79% 0.92%(c)
Ratio of net investment income to average net assets ..... 4.42%(c) 4.39% 5.76%(c)
Ratio of expenses to average net assets* ................. 0.92%(c) 0.94% 1.07%(c)
Ratio of net investment income to average net assets* .... 4.27%(c) 4.24% 5.61%(c)
</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.
(d) Represents total return for the Investor A Shares from December 1, 1994 to
January 25, 1995 plus the total return for the Institutional Shares from
January 26, 1995 to November 30, 1995.
See notes to financial statements
-110-
<PAGE> 112
THE ARCH FUND, INC.
TAX-EXEMPT MONEY MARKET PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Six Months Ended Ended Years Ended May 31,
Ended November 30, November 30, ---------------------------------
May 31, 1997 1996 1995 (d) 1995(a) 1994 1993
------------ -------------- -------------- -------- --------- ---------
Investor A Investor A Investor A Investor Investor Investor
Shares Shares Shares Shares Shares Shares
------------ -------------- -------------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------ -------
Investment Activities
Net investment income .......... 0.014 0.028 0.014 0.027 0.017 0.019
------- ------- ------- ------- ------ -------
Total from Investment
Activities ............... 0.014 0.028 0.014 0.027 0.017 0.019
------- ------- ------- ------- ------ -------
Distributions
Net investment income .......... (0.014) (0.028) (0.014) (0.027) (0.017) (0.019)
------- ------- ------- ------- ------ -------
Total Distributions ........ (0.014) (0.028) (0.014) (0.027) (0.017) (0.019)
------- ------- ------- ------- ------ -------
Net Asset Value, End of Period ... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ====== =======
Total Return ..................... 1.38%(b) 2.83% 1.45%(b) 2.70% 1.73% 1.90%
Ratios/Supplementary Data:
Net Assets at end of period $13,386 $17,984 $ 5,403 $ 5,138 $8,631 $ 6,837
(000) ........................
Ratio of expenses to average
net assets ................... 0.77%(c) 0.75% 0.94%(c) 0.84% 0.76% 0.80%
Ratio of net investment income
to average net assets......... 2.72%(c) 2.78% 2.87%(c) 2.63% 1.72% 1.88%
Ratio of expenses to average
net assets* .................. 0.82%(c) 0.80% 0.99%(c) 0.93% 0.86% 0.90%
Ratio of net investment income
to average net assets*........ 2.67%(c) 2.73% 2.82%(c) 2.54% 1.62% 1.78%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon merging into the ARCH Fund, Inc., the Tax-Exempt Money Market Portfolio
changed its fiscal year end from May 31 to November 30.
See notes to financial statements
-111-
<PAGE> 113
THE ARCH FUND, INC.
TAX-EXEMPT MONEY MARKET PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Six Months Ended Ended Years Ended May 31,
Ended November 30, November 30, ----------------------------------
May 31, 1997 1996 1995 (c) 1995 1994 1993
-------------- -------------- ------------- -------- -------- -------
Trust Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares Shares
-------------- -------------- ------------- -------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- ------- -------- ------- --------- --------
Investment Activities
Net investment income .... 0.015 0.030 0.016 0.029 0.020 0.021
--------- ------- -------- ------- --------- ---------
Total from Investment
Activities ......... 0.015 0.030 0.016 0.029 0.020 0.021
--------- ------- -------- ------- --------- ---------
Distributions
Net investment income .... (0.015) (0.030) (0.016) (0.029) (0.020) (0.021)
--------- ------- -------- ------- --------- ---------
Total Distributions .. (0.015) (0.0300) (0.016) (0.029) (0.020) (0.021)
--------- ------- -------- ------- --------- ---------
Net Asset Value, End of
Period ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======= ======== ======= ========= ========
Total Return ............... 1.48%(a) 3.06% 1.57%(a) 2.93% 1.97% 2.16%
Ratios/Supplementary
Data:
Net Assets at end of
period (000) ........... $ 123,512 $95,726 $ 78,031 $85,324 $ 112,594 $137,602
Ratio of expenses to
average net assets ..... 0.58%(b) 0.53% 0.70%(b) 0.61% 0.52% 0.52%
Ratio of net investment
income to average net
assets ................. 2.93%(b) 3.01% 3.10%(b) 2.87% 1.95% 2.13%
Ratio of expenses to
average net assets* .... 0.63%(b) 0.58% 0.75%(b) 0.70% 0.86% 0.62%
Ratio of net investment
income to average net
assets* ................ 2.88%(b) 2.96% 3.05%(b) 2.78% 1.61% 2.03%
</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) Not annualized.
(b) Annualized.
(c) Upon merging into the ARCH Fund, Inc., the Tax-Exempt Money Market Portfolio
changed its fiscal year end from May 31 to November 30.
See notes to financial statements
-112-
<PAGE> 114
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended -----------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
------------- ----------- ---------- --------- --------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
------------- ----------- ---------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 18.67 $ 16.30 $ 12.70 $ 14.74 $ 14.49
------- ------- ------- -------- -------
Investment Activities
Net investment income ...................... 0.06 0.20 0.23 0.20 0.25
Net realized and unrealized gains (losses)
from investments ......................... 1.72 3.32 3.74 (0.17) 1.06
------- ------- ------- -------- -------
Total from Investment Activities ....... 1.78 3.52 3.97 0.03 1.31
------- ------- ------- -------- -------
Distributions
Net investment income ...................... (0.06) (0.20) (0.23) (0.21) (0.25)
In excess of net investment income ......... (0.04) (0.01) -- -- --
Net realized gains ......................... (1.46) (0.94) (0.14) (0.18) (0.81)
In excess of net realized gains ............ -- -- -- (1.68) --
------- ------- ------- -------- -------
Total Distributions .................... (1.56) (1.15) (0.37) (2.07) (1.06)
------- ------- ------- -------- -------
Net Asset Value, End of Period ............... $ 18.89 $ 18.67 $ 16.30 $ 12.70 $ 14.74
======= ======= ======= ======== =======
Total Return (excludes sales charge) ......... 10.52%(b) 22.99% 31.95% 0.20% 9.65%
Ratios/Supplementary Data:
Net Assets at end of period (000) .......... $41,437 $38,229 $25,082 $ 18,343 $11,157
Ratio of expenses to average net assets .... 1.04%(c) 1.05% 1.05% 1.05% 0.74%
Ratio of net investment income to average
net assets ............................... 0.71%(c) 1.20% 1.59% 1.45% 1.74%
Ratio of expenses to average net assets* ... 1.14%(c) 1.15% 1.15% 1.15% 0.96%
Ratio of net investment income to average
net assets* .............................. 0.61%(c) 1.10% 1.49% 1.35% 1.52%
Portfolio turnover**........................ 32.33% 63.90% 58.50% 65.00% 41.00%
Average commission rate paid (d)............ $0.0600 -- -- -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-113-
<PAGE> 115
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
-------------- --------------- ---------------
Investor B Investor B Investor B
Shares Shares Shares
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 18.58 $ 16.23 $ 13.43
--------- --------- ---------
Investment Activities
Net investment income ................................... 0.02 0.11 0.14
Net realized and unrealized gains from investments and
foreign currency ...................................... 1.70 3.30 2.81
--------- --------- ---------
Total from Investment Activities .................... 1.72 3.41 2.95
--------- --------- ---------
Distributions
Net investment income ................................... (0.02) (0.11) (0.15)
In excess of net investment income ...................... (0.06) (0.01) --
Net realized gains ...................................... (1.46) (0.94) --
--------- --------- ---------
Total Distributions ................................. (1.54) (1.06) (0.15)
--------- --------- ---------
Net Asset Value, End of Period ............................ $ 18.76 $ 18.58 $ 16.23
========= ========= =========
Total Return (excludes sales charge) ...................... 10.17%(d) 22.29% 31.20%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ....................... $ 4,926 $ 3,537 $ 781
Ratio of expenses to average net assets ................. 1.74%(c) 1.75% 1.75%(c)
Ratio of net investment income to average net assets .... 0.01%(c) 0.49% 0.87%(c)
Ratio of expenses to average net assets* ................ 1.84%(c) 1.85% 1.85%(c)
Ratio of net investment income (loss) to average net (0.09)%(c) 0.39% 0.77%(c)
assets* ...............................................
Portfolio turnover**..................................... 32.33% 63.90% 58.50%
Average commission rate paid (e)......................... $ 0.0600 -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On September 27, 1994, the Portfolio
authorized the issuance of a series designated as "Investor B" Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from March
1, 1995 to November 30, 1995.
(c) Annualized.
(d) Not annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-114-
<PAGE> 116
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended --------------------------------------------------
May 31, 1997 1996 1995 1994 1993
------------- --------- --------- ---------- ---------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------------- --------- --------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .... $ 18.71 $ 16.32 $ 12.72 $ 14.74 $ 14.49
-------- -------- -------- --------- --------
Investment Activities
Net investment income ................. 0.10 0.24 0.27 0.22 0.25
Net realized and unrealized gains
(losses) from investments ........... 1.72 3.34 3.74 (0.17) 1.06
-------- -------- -------- --------- --------
Total from Investment Activities .. 1.82 3.58 4.01 0.05 1.31
-------- -------- -------- --------- --------
Distributions
Net investment income ................. (0.10) (0.24) (0.27) (0.21) (0.25)
In excess of net investment income .... (0.02) (0.01) -- -- --
Net realized gains .................... (1.46) (0.94) (0.14) (0.18) (0.81)
In excess of net realized gains ....... -- -- -- (1.68) --
-------- -------- -------- --------- --------
Total Distributions ............... (1.58) (1.19) (0.41) (2.07) (1.06)
-------- -------- -------- --------- --------
Net Asset Value, End of Period .......... $ 18.95 $ 18.71 $ 16.32 $ 12.72 $ 14.74
======== ======== ======== ========= ========
Total Return ............................ 10.71%(a) 23.45% 32.27% 0.36% 9.65%
Ratios/Supplementary Data:
Net Assets at end of period (000) ..... $305,342 $348,183 $286,546 $ 235,955 $238,771
Ratio of expenses to average net 0.74%(b) 0.75% 0.75% 0.75% 0.74%
assets ..............................
Ratio of net investment income to
average net assets .................. 1.01%(b) 1.50% 1.89% 1.72% 1.74%
Ratio of expenses to average net 0.84%(b) 0.85% 0.85% 1.15% 0.96%
assets* .............................
Ratio of net investment income to
average net assets* ................. 0.91%(b) 1.40% 1.79% 1.32% 1.52%
Portfolio turnover**................... 32.33% 63.90% 58.50% 65.00% 41.00%
Average commission rate paid (c)....... $ 0.0600 -- -- -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
(c) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-115-
<PAGE> 117
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended --------------------------------------------------
May 31, 1997 1996 1995 1994 (a) 1993
-------------- ------------- ------------- ----------- ---------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
-------------- ------------- ------------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 18.67 $ 16.29 $ 12.70 $ 14.74 $ 14.49
-------- -------- -------- --------- --------
Investment Activities
Net investment income .................... 0.06 0.20 0.23 0.20 0.25
Net realized and unrealized gains
(losses) from investments .............. 1.73 3.33 3.74 (0.17) 1.06
-------- -------- -------- --------- --------
Total from Investment Activities ..... 1.79 3.53 3.97 0.03 1.31
-------- -------- -------- --------- --------
Distributions
Net investment income .................... (0.06) (0.20) (0.24) (0.21) (0.25)
In excess of net investment income ....... (0.04) (0.01) -- -- --
Net realized gains ....................... (1.46) (0.94) (0.14) (0.18) (0.81)
In excess of net realized gains .......... -- -- -- (1.68) --
-------- -------- -------- --------- --------
Total Distributions .................. (1.56) (1.15) (0.38) (2.07) (1.06)
-------- -------- -------- --------- --------
Net Asset Value, End of Period ............. $ 18.90 $ 18.67 $ 16.29 $ 12.70 $ 14.74
======== ======== ======== ========= ========
Total Return ............................... 10.58%(b) 23.08% 31.88% 0.19% 9.65%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........ $82,825 $72,950 $40,228 $ 21,897 $11,157
Ratio of expenses to average net assets .. 1.04%(c) 1.05% 1.05% 1.05% 0.74%
Ratio of net investment income to average
net assets ............................. 0.71%(c) 1.19% 1.58% 1.41% 1.74%
Ratio of expenses to average net assets* . 1.14%(c) 1.15% 1.15% 1.16% 0.96%
Ratio of net investment income to average
net assets* ............................ 0.61%(c) 1.09% 1.48% 1.30% 1.52%
Portfolio turnover**...................... 32.33% 63.90% 58.50% 65.00% 41.00%
Average commission rate paid (d).......... $0.0600 -- -- -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented for
the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-116-
<PAGE> 118
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ------------------------------------------------
May 31, 1997 1996 1995 1994 (a) 1993
------------ ------------ ---------- ------------ ---------
Investor A Investor A Investor A Investor A Investor
Shares Shares Shares Shares Shares
------------ ------------ ----------- ------------ ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 13.40 $ 13.44 $ 11.99 $ 13.14 $11.23
-------- -------- --------- -------- -------
Investment Activities
Net investment income (loss) .............. (0.03) (0.01) -- (0.03) 0.03
Net realized and unrealized gains from
investments ............................. 0.98 1.03 2.36 0.89 2.14
-------- -------- --------- -------- -------
Total from Investment Activities ...... 0.95 1.02 2.36 0.86 2.17
-------- -------- --------- -------- -------
Distributions
Net investment income ..................... -- -- -- -- (0.05)
In excess of net investment income ........ -- (0.01) -- -- --
Net realized gains ........................ (0.82) (1.05) (0.91) (1.78) (0.21)
In excess of net realized gains ........... -- -- -- (0.23) --
-------- -------- --------- -------- -------
Total Distributions ................... (0.82) (1.06) (0.91) (2.01) (0.26)
-------- -------- --------- -------- -------
Net Asset Value, End of Period .............. $ 13.53 $ 13.40 $ 13.44 $ 11.99 $13.14
======== ======== ========= ======== =======
Total Return (excludes sales charge) ........ 7.53%(b) 8.36% 21.47% 7.38% 19.75%
Ratios/Supplementary Data:
Net Assets at end of period (000) ......... $13,336 $13,889 $ 15,056 $10,899 $4,559
Ratio of expenses to average net assets ... 1.25%(c) 1.26% 1.26% 1.25% 0.61%
Ratio of net investment income (loss) to
average net assets ...................... (0.32)%(c) (0.13)% (0.12)% (0.44)% 0.19%
Ratio of expenses to average net assets* .. 1.35%(c) 1.36% 1.36% 1.36% 1.23%
Ratio of net investment loss to average
net assets* ............................. (0.42)%(c) (0.23)% (0.22)% (0.55)% (0.43)%
Portfolio turnover**....................... 40.00% 65.85% 83.13% 85.00% 65.00%
Average commission rate paid (d)........... $0.0599 -- -- -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-117-
<PAGE> 119
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
-------------- --------------- --------------
Investor B Investor B Investor B
Shares Shares Shares
-------------- --------------- --------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ....................... $ 13.24 $ 13.37 $11.83
-------- -------- --------
Investment Activities
Net investment loss ...................................... (0.06) (0.07) (0.03)
Net realized and unrealized gains from investments ....... 0.96 0.99 1.57
-------- -------- --------
Total from Investment Activities ..................... 0.90 0.92 1.54
-------- -------- --------
Distributions
Net realized gains ....................................... (0.82) (1.05) --
------- --------- --------
Total Distributions .................................. (0.82) (1.05) --
-------- -------- --------
Net Asset Value, End of Period ............................. $ 13.32 $ 13.24 $13.37
======== ======== ========
Total Return (excludes sales charge) ....................... 7.19%(c) 7.63% 20.83%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................ $ 1,370 $ 1,272 $ 603
Ratio of expenses to average net assets .................. 1.95%(d) 1.96% 1.96%(d)
Ratio of net investment loss to average net assets ....... (1.02)%(d) (0.83)% (0.78)%(d)
Ratio of expenses to average net assets* ................. 2.05%(d) 2.06% 2.06%(d)
Ratio of net investment loss to average net assets* ...... (1.12)%(d) (0.93)% (0.88)%(d)
Portfolio turnover**...................................... 40.00% 65.85% 83.13%
Average commission rate paid (e).......................... $0.0599 -- --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On September 27, 1994, the Portfolio
authorized the issuance of a series designated as "Investor B" Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from March
1, 1995 to November 30, 1995.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-118-
<PAGE> 120
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended -------------------------------------------------------
May 31, 1997 1996 1995 1994 1993
--------------- ---------- ---------- ---------- ----------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
--------------- ---------- --------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .............. $ 13.49 $ 13.49 $ 12.01 $ 13.14 $ 11.23
---------- ---------- --------- -------- ---------
Investment Activities
Net investment income (loss) ................... -- 0.02 0.03 (0.01) 0.03
Net realized and unrealized gains from
investments .................................. 0.98 1.05 2.36 0.89 2.14
---------- ---------- --------- -------- ---------
Total from Investment Activities ........... 0.98 1.07 2.39 0.88 2.17
---------- ---------- --------- -------- ---------
Distributions
Net investment income .......................... -- (0.02) -- -- (0.05)
In excess of net investment income ............. (0.01) -- -- -- --
Net realized gains ............................. (0.82) (1.05) (0.91) (1.78) (0.21)
In excess of net realized gains ................ -- -- -- (0.23) --
---------- ---------- --------- -------- ---------
Total Distributions ........................ (0.83) (1.07) (0.91) (2.01) (0.26)
---------- ---------- --------- -------- ---------
Net Asset Value, End of Period .................... $ 13.64 $ 13.49 $ 13.49 $ 12.01 $ 13.14
========== ========== ========= ======== =========
Total Return ...................................... 7.68%(a) 8.72% 21.70% 7.56% 19.75%
Ratios/Supplementary Data:
Net Assets at end of period (000) .............. $ 181,715 $ 171,295 $ 139,681 $ 77,690 $ 47,473
Ratio of expenses to average net assets ........ 0.95%(b) 0.96% 0.96% 0.95% 0.61%
Ratio of net investment income (loss) to
average net assets............................ (0.02)%(b) 0.17% 0.18% (0.16)% 0.19%
Ratio of expenses to average net assets* ....... 1.05%(b) 1.06% 1.06% 1.36% 1.23%
Ratio of net investment income (loss) to
average net assets* .......................... (0.12)%(b) 0.07% 0.08% (0.56)% (0.43)%
Portfolio turnover**............................ 40.00% 65.85% 83.13% 85.00% 65.00%
Average commission rate paid (c)................ $ 0.0599 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
(c) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-119-
<PAGE> 121
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ---------------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
-------------- -------------- ------------- --------------- --------
Institutional Institutional Institutional Institutional Investor
Shares Shares Shares Shares Shares
-------------- -------------- ------------- --------------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 13.36 $ 13.40 $ 11.96 $ 13.14 $ 11.23
--------- ---------- --------- -------- --------
Investment Activities
Net investment income (loss) ..................... (0.02) (0.01) (0.01) (0.03) 0.03
Net realized and unrealized gains from
investments .................................... 0.97 1.03 2.36 0.86 2.14
--------- ---------- --------- -------- --------
Total from Investment Activities ............. 0.95 1.02 2.35 0.83 2.17
--------- ---------- --------- -------- --------
Distributions
Net investment income ............................ -- -- -- -- (0.05)
In excess of net investment income ............... -- (0.01) -- -- --
Net realized gains ............................... (0.82) (1.05) (0.91) (1.78) (0.21)
In excess of net realized gains .................. -- -- -- (0.23) --
--------- ---------- --------- -------- --------
Total Distributions .......................... (0.82) (1.06) (0.91) (2.01) (0.26)
--------- ---------- --------- -------- --------
Net Asset Value, End of Period ...................... $ 13.49 $ 13.36 $ 13.40 $ 11.96 $ 13.14
========= ========== ========= ======== ========
Total Return ........................................ 7.54%(b) 8.39% 21.43% 7.11% 19.75%
Ratios/Supplementary Data:
Net Assets at end of period (000) ................ $ 33,046 $ 30,081 $ 17,620 $ 5,633 $ 4,559
Ratio of expenses to average net assets .......... 1.25%(c) 1.26% 1.26% 1.25% 0.61%
Ratio of net investment income (loss) to average
net assets ..................................... (0.31)%(c) (0.13)% (0.11)% (0.41)% 0.19%
Ratio of expenses to average net assets* ......... 1.35%(c) 1.36% 1.36% 1.37% 1.23%
Ratio of net investment loss to average net
assets* ........................................ (0.41)%(c) (0.23)% (0.21)% (0.53)% (0.43)%
Portfolio turnover**.............................. 40.00% 65.85% 83.13% 85.00% 65.00%
Average commission rate paid (d).................. $ 0.0599 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On May 6, 1992 the Emerging Growth Portfolio issued a series of shares
designated as "Investor" Shares. In addition, on January 3, 1994, the
Portfolio issued a new series of shares designated as "Institutional"
Shares. The financial highlights presented for periods prior to January 3,
1994 represent financial highlights applicable to the Investor Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-120-
<PAGE> 122
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30, April 4, 1994 to
Ended ---------------------------- November 30,
May 31, 1997 1996 1995 1994 (a)(b)(c)
--------------- ------------ ------------ ------------------
Investor A Investor A Investor A Investor A
Shares Shares Shares Shares
--------------- ------------ ------------ ------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......................... $ 12.05 $ 10.76 $ 9.90 $ 10.00
--------- --------- -------- --------
Investment Activities
Net investment income ..................................... 0.01 0.02 0.02 (0.01)
Net realized and unrealized gains from investments and
foreign currency ........................................ 0.73 1.27 0.86 (0.09)
--------- --------- -------- --------
Total from Investment Activities ...................... 0.74 1.29 0.88 (0.10)
--------- --------- -------- --------
Distributions
Net investment income ..................................... (0.01) -- -- --
In excess of net investment income ........................ (0.01) -- -- --
Net realized gains ........................................ (0.31) -- (0.01) --
Tax return of capital ..................................... -- -- (0.01) --
--------- --------- -------- --------
Total Distributions ................................... (0.33) -- (0.02) --
--------- --------- -------- --------
Net Asset Value, End of Period ............................... $ 12.46 $ 12.05 $ 10.76 $ 9.90
========= ========= ======== ========
Total Return (excludes sales charges) ........................ 6.36%(d) 11.99% 8.89% (1.00)%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) ......................... $ 2,991 $ 2,573 $ 1,568 $ 791
Ratio of expenses to average net assets ................... 1.50%(e) 1.44% 1.45% 1.55%(e)
Ratio of net investment income to average net asset........ 0.14%(e) 0.19% 0.07% (0.39)%(e)
Ratio of expenses to average net assets* .................. 1.77%(e) 1.75% 1.76% 1.89%(e)
Ratio of net investment income (loss) to average net
assets *................................................. (0.13)%(e) (0.12)% (0.24)% (0.73)%(e)
Portfolio turnover**....................................... 39.39% 77.63% 62.78% 21.00%
Average commission rate paid (f)........................... $ 0.0187 -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) On April 4, 1994, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on May 2, 1994, the Portfolio
issued a new series of shares which were designated as "Investor" Shares.
The financial highlights presented for April 4, 1994 to May 2, 1994
represent financial highlights applicable to the Trust Shares.
(c) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(d) Not annualized.
(e) Annualized.
(f) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-121-
<PAGE> 123
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995(a)
----------------- ------------------ ----------------
Investor B Investor B Investor B
Shares Shares Shares
----------------- ------------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ...................................... $ 11.90 $ 10.71 $ 9.26
---------- ---------- --------
Investment Activities
Net investment loss .................................................... (0.02) (0.04) (0.03)
Net realized and unrealized gains from investments
and foreign currency.................................................. 0.70 1.23 1.48
---------- ---------- ---------
Total from Investment Activities .................................. 0.68 1.19 1.45
---------- ---------- ---------
Distributions
Net investment income .................................................. -- -- --
In excess of net investment income ..................................... (0.02) -- --
Net realized gains ..................................................... (0.31) -- --
In excess of net realized gains ........................................ -- -- --
---------- ---------- ---------
Total Distributions ............................................... (0.33) -- --
---------- ---------- ---------
Net Asset Value, End of Period ............................................ $ 12.25 $ 11.90 $ 10.71
========== ========== ========
Total Return (excludes sales charge) ...................................... 5.88%(d) 11.11% 8.38%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................................... $ 521 $ 437 $ 102
Ratio of expenses to average net assets ................................ 2.20%(c) 2.14% 2.02%(c)
Ratio of net investment loss to average net assets ..................... (0.54)%(c) (0.50)% (0.96)%(c)
Ratio of expenses to average net assets* ............................... 2.47%(c) 2.46% 2.44%(c)
Ratio of net investment loss to average net assets* .................... (0.81)%(c) (0.82)% (1.38)%(c)
Portfolio turnover**.................................................... 39.39% 77.63% 62.78%
Average commission rate paid (e)........................................ $ 0.0187 -- --
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from March
1, 1995 to November 30, 1995.
(c) Annualized.
(d) Not annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-122-
<PAGE> 124
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30, April 4, 1994 to
Ended ---------------------------- November 30,
May 31, 1997 1996 1995 1994(a)
---------------- ----------- ----------- ---------------
Trust Trust Trust Trust
Shares Shares Shares Shares
---------------- ----------- ----------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 12.12 $ 10.79 $ 9.92 $ 10.00
----------- ----------- ----------- -----------
Investment Activities
Net investment income ......................................... 0.02 0.06 0.03 0.01
Net realized and unrealized gains from investments
and foreign currency ........................................ 0.75 1.27 0.86 (0.09)
----------- ----------- ----------- -----------
Total from Investment Activities ......................... 0.77 1.33 0.89 (0.08)
----------- ----------- ----------- -----------
Distributions
Net investment income ......................................... (0.02) -- -- --
Net realized gains ............................................ (0.31) -- (0.01) --
Tax return of capital ......................................... -- -- (0.01) --
----------- ----------- ----------- -----------
Total Distributions ...................................... (0.33) -- (0.02) --
----------- ----------- ----------- -----------
Net Asset Value, End of Period ................................... $ 12.56 $ 12.12 $ 10.79 $ 9.92
=========== =========== =========== ===========
Total Return ..................................................... 6.59%(b) 12.33% 8.97% (0.80)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................. $ 54,908 $ 52,181 $ 36,096 $ 23,746
Ratio of expenses to average net assets ....................... 1.20%(c) 1.14% 1.16% 1.23%(c)
Ratio of net investment income to average net assets........... 0.41%(c) 0.51% 0.39% 0.23%(c)
Ratio of expenses to average net assets* ...................... 1.46%(c) 1.45% 1.46% 1.95%(c)
Ratio of net investment income to average net assets *......... 0.15%(c) 0.20% 0.09% (0.49)%(c)
Portfolio turnover**........................................... 39.39% 77.63% 62.78% 21.00%
Average commission rate paid (d)............................... $ 0.0187 -- -- --
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-123-
<PAGE> 125
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30, April 4, 1994 to
Ended ----------------------------------- November 30,
May 31, 1997 1996 1995 1994(a)
------------- ------------- ------------- -------------
Institutional Institutional Institutional Institutional
Shares Shares Shares Shares
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 12.03 $ 10.75 $ 9.90 $ 10.00
----------- ----------- --------- ----------
Investment Activities
Net investment income ................................ 0.01 0.01 0.01 (0.01)
Net realized and unrealized gains from investments
and foreign currency ............................... 0.73 1.27 0.86 (0.09)
----------- ----------- --------- ----------
Total from Investment Activities ................ 0.74 1.28 0.87 (0.10)
----------- ----------- --------- ----------
Distributions
Net investment income ................................ (0.01) -- -- --
In excess of net investment income ................... (0.01) -- -- --
Realized net gains ................................... (0.31) -- (0.01) --
Total return of capital .............................. -- -- (0.01) --
----------- ----------- --------- ----------
In excess of net realized gains ...................... -- -- -- --
----------- ----------- --------- ----------
Total Distributions ............................. (0.33) -- (0.02) --
----------- ----------- --------- ----------
Net Asset Value, End of Period .......................... $ 12.44 $ 12.03 $ 10.75 $ 9.90
=========== =========== ========= ==========
Total Return ............................................ 6.37%(b) 11.91% 8.78% (1.00)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .................... $ 6,619 $ 6,059 $ 2,159 $ 197
Ratio of expenses to average net assets .............. 1.50%(c) 1.44% 1.44% 1.70%(c)
Ratio of net investment income to average
net assets ......................................... 0.12%(c) 0.16% 0.13% (0.48)%(c)
Ratio of expenses to average net assets* ............. 1.76%(c) 1.76% 1.75% 2.17%(c)
Ratio of net investment loss to average net
assets*............................................ (0.14)%(c) (0.16)% (0.18)% (0.94)%(c)
Portfolio turnover**.................................. 39.39% 77.63% 62.78% 21.00%
Average commission rate paid (d)...................... $ 0.0187 -- -- --
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) On April 4, 1994, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on April 24, 1994, the Portfolio
issued a new series of shares which were designated as "Institutional"
Shares. The financial highlights presented for April 4, 1994 to April 24,
1994 represent financial highlights applicable to the Trust Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-124-
<PAGE> 126
THE ARCH FUND, INC.
EQUITY INCOME
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
March 7, 1997
to
May 31, 1997 (a)
----------------
Investor A
Shares
----------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period .............................................. $ 10.00
-------
Investment Activities
Net investment income .......................................................... 0.04
Net realized and unrealized gains from investments ............................. 0.12
-------
Total from Investment Activities .......................................... 0.16
-------
Distributions
Net investment income .......................................................... (0.04)
In excess of net investment income ............................................. (0.01)
-------
Total Distributions ....................................................... (0.05)
-------
Net Asset Value, End of Period .................................................... $ 10.11
=======
Total Return (excludes sales charge) .............................................. 1.58%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) .............................................. $ 41
Ratio of expenses to average net assets ........................................ 0.44%(c)
Ratio of net investment income to average net assets ........................... 2.32%(c)
Ratio of expenses to average net assets* ....................................... 1.26%(c)
Ratio of net investment income to average net assets* .......................... 1.50%(c)
Portfolio turnover**............................................................ 26.29%
Average commission rate paid (d)................................................ $0.0600
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-125-
<PAGE> 127
THE ARCH FUND, INC.
EQUITY INCOME
Investor B Shares
<TABLE>
<CAPTION>
Financial Highlights
March 7, 1997
to
May 31, 1997 (a)
----------------
Investor B
Shares
----------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ...................... $ 10.00
---------
Investment Activities
Net investment income .................................. 0.03
Net realized and unrealized gains from investments ..... 0.11
---------
Total from Investment Activities .................. 0.14
---------
Distributions
Net investment income .................................. (0.02)
---------
Total Distributions ............................... (0.02)
---------
Net Asset Value, End of Period ............................ $ 10.12
=========
Total Return (excludes sales charge) ...................... 1.43%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................... $ 7
Ratio of expenses to average net assets ................ 1.04%(c)
Ratio of net investment income to average net assets ... 1.21%(c)
Ratio of expenses to average net assets* ............... 1.92%(c)
Ratio of net investment income to average net assets* .. 0.34%(c)
Portfolio turnover**.................................... 26.29%
Average commission rate paid (d)........................ $ 0.0600
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-126-
<PAGE> 128
THE ARCH FUND, INC.
EQUITY INCOME
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
March 7, 1997
to
May 31, 1997 (a)
----------------
Trust
Shares
----------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ................................................ $ 10.00
--------
Investment Activities
Net investment income ............................................................ 0.05
Net realized and unrealized gains from investments ............................... 0.11
--------
Total from Investment Activities ............................................ 0.16
--------
Distributions
Net investment income ............................................................ (0.05)
--------
Total Distributions ......................................................... (0.05)
--------
Net Asset Value, End of Period ...................................................... $ 10.11
========
Total Return ........................................................................ 1.61%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................................ $119,885
Ratio of expenses to average net assets .......................................... 0.14%(c)
Ratio of net investment income to average net assets ............................. 2.20%(c)
Ratio of expenses to average net assets* ......................................... 0.67%(c)
Ratio of net investment income to average net assets* ............................ 1.67%(c)
Portfolio turnover**.............................................................. 26.29%
Average commission rate paid (d).................................................. $ 0.0600
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-127-
<PAGE> 129
THE ARCH FUND, INC.
EQUITY INCOME
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
March 7, 1997
to
May 31, 1997 (a)
----------------------
Institutional
Shares
----------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ........................................... $ 10.00
-----------
Investment Activities
Net investment income ....................................................... 0.04
Net realized and unrealized gains from investments .......................... 0.12
-----------
Total from Investment Activities ....................................... 0.16
-----------
Distributions
Net investment income ....................................................... (0.04)
In excess of net investment income .......................................... (0.01)
-----------
Total Distributions .................................................... (0.05)
-----------
Net Asset Value, End of Period ................................................. $ 10.11
===========
Total Return (excludes sales charge) ........................................... 1.61%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................................... $ 1
Ratio of expenses to average net assets ..................................... 1.05%(c)
Ratio of net investment income to average net assets ........................ 1.76%(c)
Ratio of expenses to average net assets* .................................... 1.50%(c)
Ratio of net investment income to average net assets* ....................... 1.31%(c)
Portfolio turnover**......................................................... 26.29%
Average commission rate paid (d)............................................. $ 0.0600
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-128-
<PAGE> 130
THE ARCH FUND, INC.
EQUITY INDEX
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
May 1, 1997
to
May 31, 1997 (a)
----------------
Investor A
Shares
----------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ............................................ $ 10.00
-----------
Investment Activities
Net investment income ........................................................ 0.02
Net realized and unrealized gains from investments ........................... 0.59
-----------
Total from Investment Activities ........................................ 0.61
-----------
Distributions
Net investment income ........................................................ (0.02)
-----------
Total Distributions ..................................................... (0.02)
-----------
Net Asset Value, End of Period .................................................. $ 10.59
===========
Total Return (excludes sales charge) ............................................ 6.08%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................ $ 2
Ratio of expenses to average net assets ...................................... 0.69%(c)
Ratio of net investment income to average net assets ......................... 2.39%(c)
Ratio of expenses to average net assets* ..................................... 1.22%(c)
Ratio of net investment income to average net assets* ........................ 1.86%(c)
Portfolio turnover**.......................................................... 0.20%
Average commission rate paid (d).............................................. $0.0200
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-129-
<PAGE> 131
THE ARCH FUND, INC.
EQUITY INDEX
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
May 1, 1997
to
May 31, 1997 (a)
----------------
Trust
Shares
----------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ............................................ $ 10.00
-----------
Investment Activities
Net investment income ........................................................ 0.02
Net realized and unrealized gains from investments ........................... 0.59
-----------
Total from Investment Activities ........................................ 0.61
-----------
Distributions
Net investment income ........................................................ (0.02)
-----------
Total Distributions ..................................................... (0.02)
-----------
Net Asset Value, End of Period .................................................. $ 10.59
===========
Total Return .................................................................... 6.10%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................ $ 26,637
Ratio of expenses to average net assets ...................................... 0.33%(c)
Ratio of net investment income to average net assets ......................... 2.77%(c)
Ratio of expenses to average net assets* ..................................... 0.43%(c)
Ratio of net investment income to average net assets* ........................ 2.67%(c)
Portfolio turnover**.......................................................... 0.20%
Average commission rate paid (d).............................................. $ 0.0200
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-130-
<PAGE> 132
THE ARCH FUND, INC.
EQUITY INDEX
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
May 1, 1997
to
May 31, 1997 (a)
------------------
Institutional
Shares
------------------
<S> <C>
Net Asset Value, Beginning of Period ................................. $ 10.00
----------
Investment Activities
Net investment income ............................................. 0.02
Net realized and unrealized gains from investments ................ 0.59
----------
Total from Investment Activities .............................. 0.61
----------
Distributions
Net investment income ............................................. (0.02)
----------
Total Distributions ........................................... (0.02)
----------
Net Asset Value, End of Period ....................................... $ 10.59
==========
Total Return ......................................................... 6.10%(b)***
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................. $ 1
Ratio of expenses to average net assets ........................... 0.35%(c)
Ratio of net investment income to average net assets .............. 2.75%(c)
Ratio of expenses to average net assets* .......................... 1.05%(c)
Ratio of net investment income to average net assets* ............. 2.05%(c)
Portfolio turnover**............................................... 0.20%
Average commission rate paid (d)................................... $ 0.0200
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-131-
<PAGE> 133
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Six Months Years Ended November 30, to
Ended ----------------------------------------- November 30,
May 31, 1997 1996 1995 1994 (a) 1993 (b)
---------------- ------------ ------------ ---------- ---------------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
---------------- ------------ ------------ ---------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 12.58 $ 11.65 $ 9.61 $ 10.22 $ 10.00
--------- ---------- -------- -------- --------
Investment Activities
Net investment income ............................ 0.16 0.32 0.32 0.28 0.23
Net realized and unrealized gains (losses) from
investments .................................... 0.49 1.34 2.02 (0.47) 0.15
--------- ---------- -------- -------- --------
Total from Investment Activities ............. 0.65 1.66 2.34 (0.19) 0.38
--------- ---------- -------- -------- --------
Distributions
Net investment income ............................ (0.16) (0.31) (0.30) (0.29) (0.16)
In excess of net investment income ............... (0.08) -- -- -- --
Net realized gains ............................... (0.49) (0.42) -- -- --
In excess of net realized gains .................. (0.22) -- -- (0.13) --
--------- ---------- -------- -------- --------
Total Distributions .......................... (0.95) (0.73) (0.30) (0.42) (0.16)
--------- ---------- -------- -------- --------
Net Asset Value, End of Period ...................... $ 12.28 $ 12.58 $ 11.65 $ 9.61 $ 10.22
========= ========== ======== ======== ========
Total Return (excludes sales charge) ................ 5.59%(c) 15.10% 24.85% (1.91)% 3.86%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................ $ 9,707 $ 9,328 $ 8,348 $ 7,321 $ 1,978
Ratio of expenses to average net assets .......... 1.27%(d) 1.27% 1.27% 1.27% 0.56%(d)
Ratio of net investment income to average net
assets ......................................... 2.72%(d) 2.79% 2.98% 2.77% 3.42%(d)
Ratio of expenses to average net assets* ......... 1.37%(d) 1.37% 1.37% 1.39% 1.21%(d)
Ratio of net investment income to average net
assets* ........................................ 2.62%(d) 2.69% 2.88% 2.65% 2.77%(d)
Portfolio turnover **............................. 28.56% 85.16% 58.16% 49.00% 26.00%
Average commission rate paid (e).................. $ 0.0600 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Period from commencement of operations.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased
and sold for which commissions were charged.
See notes to financial statements
-132-
<PAGE> 134
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1,
Six Months Ended 1995 to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
---------------- ----------------- ----------------
Investor B Investor B Investor B
Shares Shares Shares
---------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .............................. $ 12.49 $ 11.59 $ 10.13
-------- -------- -------
Investment Activities
Net investment income .......................................... 0.13 0.25 0.22
Net realized and unrealized gains from investments ............. 0.47 1.33 1.44
-------- -------- -------
Total from Investment Activities ........................... 0.60 1.58 1.66
-------- -------- -------
Distributions
Net investment income .......................................... (0.13) (0.26) (0.20)
In excess of net investment income ............................. (0.07) -- --
Net realized gains ............................................. (0.47) (0.42) --
In excess of net realized gains ................................ (0.24) -- --
-------- -------- -------
Total Distributions ........................................ (0.91) (0.68) (0.20)
-------- -------- -------
Net Asset Value, End of Period .................................... $ 12.18 $ 12.49 $ 11.59
======== ======== =======
Total Return (excludes sales charge) .............................. 5.21%(e) 14.35% 23.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .............................. $ 450 $ 321 $ 36
Ratio of expenses to average net assets ........................ 1.97%(c) 1.96% 1.93%(c)
Ratio of net investment income to average net assets ........... 2.02%(c) 2.09% 2.28%(c)
Ratio of expenses to average net assets* ....................... 2.07%(c) 2.06% 2.03%(c)
Ratio of net investment income to average net assets* .......... 1.92%(c) 1.99% 2.18%(c)
Portfolio turnover**............................................ 28.56% 85.16% 58.16%
Average commission rate paid (d)................................ $ 0.0600 -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio authorized the issuance of a series of shares designated as
"Investor B" Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30,
1995.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
(e) Not annualized.
See notes to financial statements
-133-
<PAGE> 135
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Six Months Years Ended November 30, to
Ended -------------------------------------------- November 30,
May 31, 1997 1996 1995 1994 1993 (a)
---------------- --------------- -------------- ---------- -----------------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
---------------- --------------- -------------- ---------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 12.58 $ 11.64 $ 9.62 $ 10.22 $ 10.00
-------- -------- --------- -------- ---------
Investment Activities
Net investment income ................... 0.21 0.37 0.34 0.29 0.23
Net realized and unrealized gains
(losses) from investments ............. 0.46 1.34 2.02 (0.47) 0.15
-------- -------- --------- -------- ---------
Total from Investment Activities .... 0.67 1.71 2.36 (0.18) 0.38
-------- -------- --------- -------- ---------
Distributions
Net investment income ................... (0.21) (0.35) (0.34) (0.29) (0.16)
In excess of net investment income ...... (0.05) -- -- -- --
Net realized gains ...................... (0.46) (0.42) -- -- --
In excess of net realized gains ......... (0.25) -- -- (0.13) --
-------- -------- --------- -------- ---------
Total Distributions ................. (0.97) (0.77) (0.34) (0.42) (0.16)
-------- -------- --------- -------- ---------
Net Asset Value, End of Period ............. $ 12.28 $ 12.58 $ 11.64 $ 9.62 $ 10.22
======== ======== ========= ======== =========
Total Return ............................... 5.74%(b) 15.56% 24.97% (1.81)% (3.86)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ....... $ 46,138 $ 61,821 $ 72,669 $ 65,288 $ 69,720
Ratio of expenses to average net assets 0.97%(c) 0.97% 0.98% 0.97% 0.56%(c)
Ratio of net investment income to
average net assets .................... 3.03%(c) 3.08% 3.29% 3.04% 3.42%(c)
Ratio of expenses to average net assets*
1.07%(c) 1.07% 1.08% 1.39% 1.21%(c)
Ratio of net investment income to
average net assets income to average
net assets *........................... 2.93%(c) 2.98% 3.19% 2.63% 2.77%(c)
Portfolio turnover**..................... 28.56% 85.16% 58.16% 49.00% 26.00%
Average commission rate paid (d)......... $ 0.0600 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-134-
<PAGE> 136
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Six Months Years Ended November 30, to
Ended ------------------------------------------- November 30,
May 31, 1997 1996 1995 1994 (a) 1993 (b)
---------------- --------------- -------------- ---------- -----------------
Investor Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
---------------- --------------- -------------- ---------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............. $ 12.54 $ 11.62 $ 9.60 $ 10.22 $ 10.00
--------- --------- ---------- --------- --------
Investment Activities
Net investment income ......................... 0.16 0.32 0.31 0.28 0.23
Net realized and unrealized gains (losses)
from investments ............................ 0.50 1.34 2.02 (0.48) 0.15
--------- --------- ---------- --------- --------
Total from Investment Activities .......... 0.66 1.66 2.33 (0.20) 0.38
--------- --------- ---------- --------- --------
Distributions
Net investment income ......................... (0.16) (0.32) (0.31) (0.29) (0.16)
In excess of net investment income ............ (0.08) -- -- -- --
Net realized gains ............................ (0.50) (0.42) -- -- --
In excess of net realized gains ............... (0.21) -- -- (0.13) --
--------- --------- ---------- --------- --------
Total Distributions ....................... (0.95) (0.74) (0.31) (0.42) (0.16)
--------- --------- ---------- --------- --------
Net Asset Value, End of Period ................... $ 12.25 $ 12.54 $ 11.62 $ 9.60 $ 10.22
========= ========= ========== ========= ========
Total Return ..................................... 5.70%(c) 15.08% 24.67% (2.00)% 3.86%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............. $ 60,643 $ 54,731 $ 36,827 $ 22,723 $ 1,978
Ratio of expenses to average net assets ....... 1.27%(d) 1.27% 1.27% 1.27% 0.56%(d)
Ratio of net investment income to average net
assets ...................................... 2.71%(d) 2.78% 2.97% 2.77% 3.42%(d)
Ratio of expenses to average net assets* ...... 1.37%(d) 1.37% 1.37% 1.40% 1.21%(d)
Ratio of net investment income income to
average net assets* ......................... 2.61%(d) 2.68% 2.87% 2.64% 2.77%(d)
Portfolio turnover**........................... 28.56% 85.16% 58.16% 49.00% 26.00%
Average commission rate paid (e)............... $ 0.0600 $ 0.0599 -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) The Balanced Portfolio issued a series of shares designated as "Investor"
Shares on April 1, 1993. In addition, on January 3, 1994, the Portfolio
issued a new series of shares designated as "Institutional" Shares. The
financial highlights presented for periods prior to January 3, 1994
represent financial highlights applicable to the Investor Shares.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were charged.
See notes to financial statements
-135-
<PAGE> 137
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended --------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
------------ ---------- ---------- -------- --------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
------------ ---------- ---------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
------- --------- ------- ------- -------
Investment Activities
Net investment income .................................. 0.28 0.64 0.61 0.60 0.64
Net realized and unrealized gains (losses) from
investments .......................................... (0.30) (0.19) 0.89 (0.94) 0.39
------- --------- ------- ------- -------
Total from Investment Activities ................... (0.02) 0.45 1.50 (0.34) 1.03
------- --------- ------- ------- -------
Distributions
Net investment income .................................. (0.28) (0.64) (0.61) (0.60) (0.64)
In excess of net investment income ..................... -- -- -- (0.07) --
------- --------- ------- ------- -------
Total Distributions ................................ (0.28) (0.64) (0.61) (0.67) (0.64)
------- --------- ------- ------- -------
Net Asset Value, End of Period ............................ $ 10.04 $ 10.34 $ 10.53 $ 9.64 $ 10.65
======= ========= ======= ======= =======
Total Return (excludes sales charge) ...................... (0.14)%(b) 4.51% 15.98% (3.32)% 10.23%
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................... $ 4,607 $ 4,915 $ 5,496 $ 5,167 $ 3,737
Ratio of expenses to average net assets ................ 0.95%(c) 0.95% 0.95% 0.95% 0.95%
Ratio of net investment income to average net assets.... 5.64%(c) 6.06% 6.03% 6.00% 6.00%
Ratio of expenses to average net assets* ............... 1.05%(c) 1.05% 1.05% 1.05% 1.05%
Ratio of net investment income to average net assets* .. 5.54%(c) 5.96% 5.93% 5.90% 5.90%
Portfolio turnover**.................................... 76.99% 149.20% 59.32% 50.00% 31.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-136-
<PAGE> 138
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
---------------- ----------------- ----------------
Investor B Investor B Investor B
Shares Shares Shares
---------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................................... $ 10.34 $ 10.53 $ 9.92
------- -------- -------
Investment Activities
Net investment income ............................................... 0.25 0.57 0.38
Net realized and unrealized losses from investments ................. (0.29) (0.19) 0.61
------- -------- -------
Total from Investment Activities ................................ (0.04) 0.38 0.99
------- -------- -------
Distributions
Net investment income ............................................... (0.25) (0.57) (0.38)
------- -------- -------
Total Distributions ............................................. (0.25) (0.57) (0.38)
------- -------- -------
Net Asset Value, End of Period ......................................... $ 10.05 $ 10.34 $ 10.53
======= ======== =======
Total Return (excludes sales charge) ................................... (0.38)%(d) 3.79% 15.27%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................... $ 576 $ 511 $ 106
Ratio of expenses to average net assets ............................. 1.65%(c) 1.65% 1.65%(c)
Ratio of net investment income to average net assets ................ 4.92%(c) 5.37% 5.19%(c)
Ratio of expenses to average net assets* ............................ 1.75%(c) 1.75% 1.75%(c)
Ratio of net investment income to average net assets * .............. 4.82%(c) 5.27% 5.09%(c)
Portfolio turnover**................................................. 76.99% 149.20% 59.32%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio redesignated the Investor Shares as "Investor A" Shares
and authorized the issuance of a series of shares designated as
"Investor B" Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994
to February 28, 1995 plus the total return for the Investor B Shares
from March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Not annualized.
See notes to financial statements
-137-
<PAGE> 139
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ----------------------------------------------------------
May 31, 1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- -----------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
-------------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
--------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income ....................... 0.30 0.67 0.64 0.63 0.68
Net realized and unrealized gains (losses)
from investments .......................... (0.30) (0.19) 0.89 (0.94) 0.39
--------- ---------- ---------- ---------- -----------
Total from Investment Activities ........ -- 0.48 1.53 (0.31) 1.07
--------- ---------- ---------- ---------- -----------
Distributions
Net investment income ....................... (0.30) (0.67) (0.64) (0.63) (0.68)
In excess of net realized gains ............. -- -- -- (0.07) --
--------- ---------- ---------- ---------- -----------
Total Distributions ..................... (0.30) (0.67) (0.64) (0.70) (0.68)
--------- ---------- ---------- ---------- -----------
Net Asset Value, End of Period ................. $ 10.04 $ 10.34 $ 10.53 $ 9.64 $ 10.65
========= ========== ========== ========== ==========
Total Return ................................... 0.01%(a) 4.82% 16.31% (3.03)% 10.55%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $ 141,221 $ 141,440 $ 127,741 $ 132,577 $ 149,674
Ratio of expenses to average net assets ..... 0.65%(b) 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to average
net assets ................................ 5.93%(b) 6.36% 6.32% 6.25% 6.32%
Ratio of expenses to average net assets* .... 0.75%(b) 0.75% 0.75% 1.05% 0.88%
Ratio of net investment income to average
net assets* ............................... 5.83%(b) 6.26% 6.22% 5.85% 6.09%
Portfolio turnover**......................... 76.99% 149.20% 59.32% 50.00% 31.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
See notes to financial statements
-138-
<PAGE> 140
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ------------------------------------------------------
May 31,1997 1996 1995 1994(a) 1993
-------------- -------------- -------------- -------------- ----------
Institutional Institutional Institutional Institutional Investor
Shares Shares Shares Shares Shares
-------------- -------------- -------------- -------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
-------- --------- ------- ------- -------
Investment Activities
Net investment income .............................. 0.28 0.64 0.61 0.60 0.64
Net realized and unrealized gains (losses) from
investments ...................................... (0.30) (0.19) 0.89 (0.94) 0.39
-------- --------- ------- ------- --------
Total from Investment Activities ............... (0.02) 0.45 1.50 (0.34) 1.03
-------- --------- ------- ------- --------
Distributions
Net investment income .............................. (0.28) (0.64) (0.61) (0.60) (0.64)
In excess of net realized gains .................... -- -- -- (0.07) --
-------- --------- ------- ------- --------
Total Distributions ............................ (0.28) (0.64) (0.61) (0.67) (0.64)
-------- --------- ------- ------- --------
Net Asset Value, End of Period ........................ $ 10.04 $ 10.34 $ 10.53 $ 9.64 $ 10.65
======== ========= ======= ======= =======
Total Return .......................................... (0.14)%(b) 4.51% 15.98% (3.32)% 10.23%
Ratios/Supplementary Data:
Net Assets at end of period (000) .................. $ 15,608 $ 14,875 $ 9,413 $ 5,965 $ 3,737
Ratio of expenses to average net assets ............ 0.95%(c) 0.95% 0.95% 0.96% 0.95%
Ratio of net investment income to average net
assets ........................................... 5.63%(c) 6.06% 6.01% 6.03% 6.00%
Ratio of expenses to average net assets* ........... 1.05%(c) 1.05% 1.05% 1.07% 1.05%
Ratio of net investment income to average net
assets * ......................................... 5.53%(c) 5.96% 5.91% 5.92% 5.90%
Portfolio turnover**................................ 76.99% 149.20% 59.32% 50.00% 31.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented
for the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-139-
<PAGE> 141
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ---------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
---------------- ------------ ------------ ------------ ----------
Investor A Investor A Investor A Investor A Investor
Shares Shares Shares Shares Shares
---------------- ------------ ------------ ------------ ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................ $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80
-------- -------- -------- -------- --------
Investment Activities
Net investment income .................................... 0.30 0.62 0.64 0.61 0.59
Net realized and unrealized gains (losses) from
investments ............................................ (0.19) (0.15) 0.80 (1.00) 0.47
-------- -------- -------- -------- --------
Total from Investment Activities ..................... 0.11 0.47 1.44 (0.39) 1.06
-------- -------- -------- -------- --------
Distributions
Net investment income .................................... (0.29) (0.62) (0.64) (0.61) (0.59)
In excess of net investment income ....................... -- (0.03) -- -- --
Net realized gains ....................................... -- -- -- -- (0.07)
In excess of net realized gains .......................... -- -- -- (0.18) --
-------- -------- -------- -------- --------
Total Distributions .................................. (0.29) (0.65) (0.64) (0.79) (0.66)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .............................. $ 10.49 $ 10.67 $ 10.85 $ 10.05 $ 11.20
======== ======== ======== ======== ========
Total Return (excludes sales charges) ....................... 1.11%(b) 4.57% 14.66% (3.14)% 10.03%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................ $ 5,349 $ 7,153 $ 8,179 $ 9,631 $ 9,567
Ratio of expenses to average net assets .................. 0.96%(c) 0.97% 0.97% 0.96% 0.97%
Ratio of net investment income to average net assets ..... 5.63%(c) 5.82% 6.05% 5.98% 5.25%
Ratio of expenses to average net assets* ................. 1.06%(c) 1.07% 1.07% 1.06% 1.08%
Ratio of net investment income to average net assets* .... 5.53%(c) 5.72% 5.95% 5.88% 5.14%
Portfolio turnover**...................................... 78.33% 53.76% 93.76% 50.00% 24.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-140-
<PAGE> 142
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
------------ ------------ --------------
Investor B Investor B Investor B
Shares Shares Shares
------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .................................... $ 10.66 $ 10.84 $ 10.34
------- ------- -------
Investment Activities
Net investment income ................................................. 0.26 0.55 0.31
Net realized and unrealized losses from investments ................... (0.18) (0.15) 0.50
------- ------- -------
Total from Investment Activities .................................. 0.08 0.40 0.81
------- ------- -------
Distributions
Net investment income ................................................. (0.26) (0.55) (0.31)
Net realized gains .................................................... -- (0.03) --
------- ------- -------
Total Distributions ............................................... (0.26) (0.58) (0.31)
------- ------- -------
Net Asset Value, End of Period .......................................... $ 10.48 $ 10.66 $ 10.84
======= ======= =======
Total Return (excludes sales charge) .................................... 0.75%(c) 3.85% 12.85%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ..................................... $ 413 $ 359 $ 41
Ratio of expenses to average net assets ............................... 1.66%(d) 1.66% 1.68%(d)
Ratio of net investment income to average net assets .................. 4.92%(d) 5.06% 5.37%(d)
Ratio of expenses to average net assets* .............................. 1.76%(d) 1.76% 1.78%(d)
Ratio of net investment income to average net assets* ................. 4.82%(d) 4.96% 5.27%(d)
Portfolio turnover** .................................................. 78.33% 53.76% 93.76%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio redesignated the Investor Shares as "Investor A" Shares and
authorized the issuance of a series of shares designated as "Investor B"
Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Not annualized.
(d) Annualized.
See notes to financial statements
-141-
<PAGE> 143
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ----------------------------------------------------
May 31, 1997 1996 1995 1994 1993
------------ -------- -------- -------- --------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------------ -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80
-------- -------- -------- -------- --------
Investment Activities
Net investment income .............................. 0.31 0.66 0.67 0.66 0.62
Net realized and unrealized gains (losses) from
investments ...................................... (0.18) (0.15) 0.80 (0.97) 0.47
-------- -------- -------- -------- --------
Total from Investment Activities ............... 0.13 0.51 1.47 (0.31) 1.09
-------- -------- -------- -------- --------
Distributions
Net investment income .............................. (0.31) (0.66) (0.67) (0.66) (0.62)
Net realized gains ................................. -- -- -- -- (0.07)
In excess of net realized gains .................... -- (0.03) -- (0.18) --
-------- -------- -------- -------- --------
Total Distributions ............................ (0.31) (0.69) (0.67) (0.84) (0.69)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ....................... $ 10.49 $ 10.67 $ 10.85 $ 10.05 $ 11.20
======== ======== ======== ======== ========
Total Return ......................................... 1.26%(a) 4.88% 15.00% (2.85)% 10.36%
Ratios/Supplementary Data:
Net Assets at end of period (000) .................. $ 69,406 $ 60,079 $ 45,513 $ 33,166 $ 35,121
Ratio of expenses to average net assets ............ 0.66%(b) 0.67% 0.67% 0.66% 0.67%
Ratio of net investment income to average net
assets ........................................... 5.91%(b) 6.10% 6.36% 6.25% 5.57%
Ratio of expenses to average net assets* ........... 0.76%(b) 0.77% 0.77% 1.06% 0.91%
Ratio of net investment income to average net
assets * ......................................... 5.81%(b) 6.00% 6.26% 5.85% 5.33%
Portfolio turnover** ............................... 78.33% 53.67% 93.76% 50.00% 24.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
See notes to financial statements
-142-
<PAGE> 144
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Years Ended November 30,
Ended ------------------------------------------------------
May 31,1997 1996 1995 1994(a) 1993
-------------- -------------- -------------- ---------- ----------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
-------------- -------------- -------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..................... $ 10.64 $ 10.82 $ 10.02 $ 11.20 $ 10.80
------- ------- ------- ------- -------
Investment Activities
Net investment income ................................. 0.27 0.62 0.63 0.61 0.59
Net realized and unrealized gains (losses) from
investments ......................................... (0.17) (0.15) 0.80 (1.00) 0.47
------- ------- ------- ------- -------
Total from Investment Activities .................. 0.10 0.47 1.43 (0.39) 1.06
------- ------- ------- ------- -------
Distributions
Net investment income ................................. (0.27) (0.62) (0.63) (0.61) (0.59)
In excess of net investment income .................... (0.02) -- -- (0.18) --
Net realized gains .................................... -- -- -- -- (0.07)
In excess of net realized gains ....................... -- (0.03) -- -- --
------- ------- ------- ------- -------
Total Distributions ............................... (0.29) (0.65) (0.63) (0.79) (0.66)
------- ------- ------- ------- -------
Net Asset Value, End of Period ........................... $ 10.45 $ 10.64 $ 10.82 $ 10.02 $ 11.20
======= ======= ======= ======= =======
Total Return ............................................. 1.01%(b) 4.55% 14.69% (3.46)% 10.03%
Ratios/Supplementary Data:
Net Assets at end of period (000) ..................... $ 6,766 $ 2,232 $ 667 $ 51 $ 9,567
Ratio of expenses to average net assets ............... 0.96%(c) 0.96% 0.97% 0.95% 0.97%
Ratio of net investment income to average net assets .. 5.59%(c) 5.75% 5.91% 6.54% 5.25%
Ratio of expenses to average net assets* .............. 1.06%(c) 1.06% 1.07% 1.16% 1.08%
Ratio of net investment income to average net assets* . 5.49%(c) 5.65% 5.81% 6.33% 5.14%
Portfolio turnover**................................... 78.33% 53.76% 93.76% 50.00% 24.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
shares as "Investor" Shares. In addition, on June 7, 1994, the Portfolio
issued a new series of shares designated as "Institutional" Shares. The
financial highlights presented for periods prior to June 7, 1994 represent
financial highlights applicable to the Investor Shares.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-143-
<PAGE> 145
THE ARCH FUND, INC.
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Year July 10, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
---------------- ---------------- ----------------
Investor A Investor A Investor A
Shares Shares Shares
---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................................. $ 10.08 $ 10.08 $ 10.00
--------- --------- --------
Investment Activities
Net investment income ............................................. 0.19 0.40 --
Net realized and unrealized losses from investments ............... (0.07) -- 0.08
--------- --------- --------
Total from Investment Activities .............................. 0.12 0.40 0.08
--------- --------- --------
Distributions
Net investment income ............................................. (0.19) (0.40) --
--------- --------- --------
Total Distributions ........................................... (0.19) (0.40) --
--------- --------- --------
Net Asset Value, End of Period ....................................... $ 10.01 $ 10.08 $ 10.08
========= ========= ========
Total Return (excludes sales charges) ................................ 1.20%(b) 4.02% 0.80%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................. $ 31 $ 51(c) --(c)
Ratio of expenses to average net assets ........................... 0.61%(d) 0.56% 0.00%(d)
Ratio of net investment income to average net assets .............. 3.80%(d) 3.83% 0.00%(d)
Ratio of expenses to average net assets* .......................... 1.21%(d) 1.26% 0.00%(d)
Ratio of net investment income to average net assets* ............. 3.20%(d) 3.13% 0.00%(d)
Portfolio turnover** .............................................. 0.00% 0.00% 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.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Only one Investor A Share, worth $10.08, was outstanding as of November 30,
1995.
(d) Annualized.
See notes to financial statements
-144-
<PAGE> 146
THE ARCH FUND, INC.
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Year July 10, 1995
Six Months Ended to
Ended November 30, November 30,
May 31, 1997 1996 1995 (a)
--------------- ---------------- ----------------
Trust Trust Trust
Shares Shares Shares
--------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 10.07 $ 10.07 $ 10.00
--------- ---------- ----------
Investment Activities
Net investment income ......................................... 0.20 0.41 0.14
Net realized and unrealized losses from investments ........... (0.07) -- 0.07
--------- ---------- ----------
Total from Investment Activities .......................... 0.13 0.41 0.21
--------- ---------- ----------
Distributions
Net investment income ......................................... (0.20) (0.41) (0.14)
--------- ---------- ----------
Total Distributions ....................................... (0.20) (0.41) (0.14)
--------- ---------- ----------
Net Asset Value, End of Period ................................... $ 10.00 $ 10.07 $ 10.07
========= ========== ==========
Total Return ..................................................... 1.32%(b) 4.15% 2.15%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................. $ 28,067 $ 29,472 $ 23,754
Ratio of expenses to average net assets ....................... 0.36%(c) 0.31% 0.47%(c)
Ratio of net investment income to average net assets........... 4.04%(c) 4.07% 3.81%(c)
Ratio of expenses to average net assets* ...................... 1.01%(c) 0.96% 1.12%(c)
Ratio of net investment income to average net assets * ........ 3.39%(c) 3.42% 3.16%(c)
Portfolio turnover** .......................................... 0.00% 0.00% 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.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-145-
<PAGE> 147
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Year Six Months
Ended Ended Ended Year Ended May 31,
May 31, November 30, November 30, -----------------------------------------
1997 1996 1995 (d) 1995(a) 1994 1993
-------------- -------------- -------------- ------------- ---------- ----------
Investor A Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares Shares
-------------- -------------- -------------- ------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...
$ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97
---------- --------- ---------- --------- --------- ----------
Investment Activities
Net investment income ............... 0.27 0.55 0.27 0.55 0.55 0.58
Net realized and unrealized gains
(losses) from investments ......... (0.10) (0.05) 0.22 0.40 (0.37) 0.64
---------- --------- ---------- --------- --------- ----------
Total from Investment Activities 0.17 0.50 0.49 0.95 0.18 1.22
---------- --------- ---------- --------- --------- ----------
Distributions
Net investment income ............... (0.27) (0.55) (0.27) (0.55) (0.55) (0.58)
Net realized gains .................. -- -- -- (0.01) (0.04) (0.07)
---------- --------- ---------- --------- --------- ----------
Total Distributions ............. (0.27) (0.55) (0.27) (0.56) (0.59) (0.65)
---------- --------- ---------- --------- --------- ----------
Net Asset Value, End of Period ......... $ 11.59 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
========== ========= ========== ========= ========= ==========
Total Return (excludes sales charges) .. 1.45%(b) 4.41% 4.32%(b) 8.91% 1.53% 11.47%
Ratios/Supplementary Data:
Net Assets at end of period (000) ... $ 23,565 $ 25,144 $ 24,726 $ 24,318 $ 27,919 $ 23,223
Ratio of expenses to average net
assets ............................ 0.86%(c) 0.85% 0.95%(c) 0.84% 0.65% 0.63%
Ratio of net investment income to
average net assets................. 4.61%(c) 4.75% 4.64%(c) 5.02% 4.75% 5.11%
Ratio of expenses to average net
assets* ........................... 0.96%(c) 1.05% 1.18%(c) 1.18% 1.12% 1.18%
Ratio of net investment income to
average net assets* ............... 4.51%(c) 4.55% 4.44%(c) 4.68% 4.28% 4.56%
Portfolio turnover**................. 3.77% 3.66% 1.55% -- 20.00% 15.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon merging into the ARCH Fund, Inc., the Missouri Tax-Exempt Bond
Portfolio changed its fiscal year end from May 31 to November 30.
See notes to financial statements
-146-
<PAGE> 148
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Year Six Months
Ended Ended Ended March 1, 1995
May 31, November 30, November 30, to May 31,
1997 1996 1995 (e) 1995 (a)
---------------- ---------------- ---------------- --------------
Investor A Investor A Investor A Investor A
Shares Shares Shares Shares
---------------- ---------------- ---------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 11.68 $ 11.74 $ 11.52 $ 11.19
-------- -------- -------- --------
Investment Activities
Net investment income .................................. 0.22 0.45 0.22 0.11
Net realized and unrealized gains (losses) from
investments .......................................... (0.10) (0.06) 0.22 0.33
-------- -------- -------- --------
Total from Investment Activities ................... 0.12 0.39 0.44 0.44
-------- -------- -------- --------
Distributions
Net investment income .................................. (0.22) (0.45) (0.22) (0.11)
-------- -------- -------- --------
Total Distributions ................................ (0.22) (0.45) (0.22) (0.11)
-------- -------- -------- --------
Net Asset Value, End of Period ............................ $ 11.58 $ 11.68 $ 11.74 $ 11.52
======== ======== ======== ========
Total Return (excludes sales charges) ..................... 1.04%(b) 3.48% 3.88%(b) 8.61%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................... $ 924 $ 675 $ 433 $ 94
Ratio of expenses to average net assets ................ 1.65%(d) 1.65% 1.77%(d) 1.76%(d)
Ratio of net investment income to average net assets ... 3.82%(d) 3.96% 3.82%(d) 4.00%(d)
Ratio of expenses to average net assets* ............... 1.75%(d) 1.75% 1.87%(d) 1.88%(d)
Ratio of net investment income to average net assets *.. 3.72%(d) 3.86% 3.72%(d) 3.89%(d)
Portfolio turnover**.................................... 3.77% 3.66% 1.55% --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On September 27, 1994, the Portfolio redesignated Investor shares as
"Investor A" shares and authorized the issuance of a third series of shares
designated as "Investor B" shares. These financial highlights of Investor B
shares cover the period from March 1, 1995 (commencement of operations)
through May 31, 1995.
(b) Not annualized.
(c) Represents total return for the Investor A Shares from June 1, 1994 to
February 28, 1995, plus the total return for the Investor B Shares for the
period from March 1, 1995 to May 31, 1995.
(d) Annualized.
(e) Upon merging into the ARCH Fund, Inc., the Missouri Tax-Exempt Bond
Portfolio changed its fiscal year end from May 31 to November 30.
See notes to financial statements
-147-
<PAGE> 149
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months Year Six Months
Ended Ended Ended Year Ended May 31,
May 31, November 30, November 30, ---------------------------------------
1997 1996 1995 (c) 1995 1994 1993
---------------- --------------- ------------- ---------- --------- ----------
Trust Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares Shares
---------------- --------------- ------------- ---------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...
$ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97
---------- --------- ---------- --------- --------- ----------
Investment Activities
Net investment income ............... 0.28 0.57 0.28 0.57 0.58 0.60
Net realized and unrealized gains
(losses) from investments ......... (0.10) (0.05) 0.22 0.40 (0.37) 0.64
---------- --------- ---------- --------- --------- ----------
Total from Investment Activities 0.18 0.52 0.50 0.97 0.21 1.24
---------- --------- ---------- --------- --------- ----------
Distributions
Net investment income ............... (0.28) (0.57) (0.28) (0.57) (0.58) (0.60)
Net realized gains .................. -- -- -- (0.01) (0.04) (0.07)
---------- --------- ---------- --------- --------- ----------
Total Distributions ............. (0.28) (0.57) (0.28) (0.58) (0.62) (0.67)
---------- --------- ---------- --------- --------- ----------
Net Asset Value, End of Period ......... $ 11.59 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
========== ========= ========== ========= ========= ==========
Total Return ........................... 1.55%(a) 4.62% 4.41%(a) 9.12% 1.73% 11.70%
Ratios/Supplementary Data:
Net Assets at end of period (000) ... $ 66,763 $ 55,905 $ 47,773 $ 44,336 $ 47,743 $ 32,777
Ratio of expenses to average net
assets ............................ 0.66%(b) 0.65% 0.78%(b) 0.64% 0.45% 0.43%
Ratio of net investment income to
average net assets ................ 4.82%(b) 4.95% 4.83%(b) 5.22% 4.96% 5.30%
Ratio of expenses to average net
assets* ........................... 0.76%(b) 0.75% 0.88%(b) 1.16% 1.13% 0.98%
Ratio of net investment income to
average net assets* ............... 4.72%(b) 4.85% 4.73%(b) 4.70% 4.28% 4.75%
Portfolio turnover**................. 3.77% 3.66% 1.55% -- 20.00% 15.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized.
(b) Annualized.
(c) Upon merging into the ARCH Fund, Inc., the Missouri Tax-Exempt Bond
Portfolio changed its fiscal year end from May 31 to November 30.
See notes to financial statements
-148-
<PAGE> 150
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months November 18, 1996
Ended to
May 31, 1997 November 30, 1996 (a)
---------------------- ----------------------
Investor A Investor A
Shares Shares
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning of Period .................................... $ 10.05 $ 10.00
-------- ---------
Investment Activities
Net investment income ................................................ 0.27 0.02
Net realized and unrealized losses from investments .................. (0.10) 0.05
-------- ---------
Total from Investment Activities ................................. 0.17 0.07
-------- ---------
Distributions
Net investment income ................................................ (0.27) (0.02)
-------- ---------
Total Distributions .............................................. (0.27) (0.02)
-------- ---------
Net Asset Value, End of Period .......................................... $ 9.95 $ 10.05
======== =========
Total Return (excludes sales charge) .................................... 1.69%(b) 0.73%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .................................... $ 543 $ 1
Ratio of expenses to average net assets .............................. 0.33%(c) 0.37%(c)
Ratio of net investment income to average net assets ................. 5.34%(c) 9.08%(c)
Ratio of expenses to average net assets* ............................. 0.82%(c) 1.07%(c)
Ratio of net investment income to average net assets* ................ 4.85%(c) 8.38%(c)
Portfolio turnover** ................................................. 50.81% --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-149-
<PAGE> 151
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months November 18, 1996
Ended to
May 31, 1997 November 30, 1996(a)
------------------ ---------------------
Investor B Investor B
Shares Shares
------------------ ---------------------
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning of Period ................................ $10.05 $10.00
------- --------
Investment Activities
Net investment income ............................................. 0.23 0.02
Net realized and unrealized losses from investments ............... (0.09) 0.05
------- --------
Total from Investment Activities .............................. 0.14 0.07
------- --------
Distributions
Net investment income ............................................. (0.23) (0.02)
------- --------
Total Distributions ........................................... (0.23) (0.02)
------- --------
Net Asset Value, End of Period ...................................... $ 9.96 $10.05
======= ========
Total Return (excludes sales charge) ................................ 1.41%(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 .............. 4.62%(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* ............. 4.62%(c) 7.65%(c)
Portfolio turnover** .............................................. 50.81% --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-150-
<PAGE> 152
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Six Months November 18, 1996
Ended to
May 31, 1997 November 30, 1996(a)
------------------ --------------------
Trust Trust
Shares Shares
------------------ --------------------
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning of Period ........................... $ 10.05 $ 10.00
--------- ----------
Investment Activities
Net investment income ........................................ 0.28 0.02
Net realized and unrealized losses from investments .......... (0.09) 0.05
--------- ----------
Total from Investment Activities ......................... 0.19 0.07
--------- ----------
Distributions
Net investment income ........................................ (0.28) (0.02)
--------- ----------
Total Distributions ...................................... (0.28) (0.02)
--------- ----------
Net Asset Value, End of Period ................................. $ 9.96 $ 10.05
========= ==========
Total Return.................................................... 1.91%(b) 0.74%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................ $325,884 $ 310,413
Ratio of expenses to average net assets ...................... 0.13%(c) 0.12%(c)
Ratio of net investment income to average net assets ......... 5.61%(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* ........ 5.01%(c) 5.07%(c)
Portfolio turnover**.......................................... 50.81% --
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-151-
<PAGE> 153
THE ARCH FUND, INC.
INTERMEDIATE CORPORATE BOND
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
-------------------
Investor A
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period .................................. $10.00
------
Investment Activities
Net investment income ............................................... 0.19
Net realized and unrealized losses from investments ................. (0.17)
------
Total from Investment Activities ................................ 0.02
------
Distributions
Net investment income ............................................... (0.19)
------
Total Distributions ............................................. (0.19)
------
Net Asset Value, End of Period ........................................ $ 9.83
======
Total Return (excludes sales charge) .................................. 0.25%(b)***
Ratios/Supplementary Data:
Net Assets at the end of period (000)................................ $ 66
Ratio of expenses to average net assets ............................. 0.60%(c)
Ratio of net investment income to average net assets ................ 9.77%(c)
Ratio of expenses to average net assets* ............................ 0.99%(c)
Ratio of net investment income to average net assets* ............... 9.38%(c)
Portfolio turnover** ................................................ 66.10%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-152-
<PAGE> 154
THE ARCH FUND, INC.
INTERMEDIATE CORPORATE BOND
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
-------------------
Trust
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period .................................... $ 10.00
--------
Investment Activities
Net investment income ................................................. 0.19
Net realized and unrealized losses from investments ................... (0.18)
--------
Total from Investment Activities .................................. 0.01
--------
Distributions
Net investment income ................................................. (0.19)
--------
Total Distributions ............................................... (0.19)
--------
Net Asset Value, End of Period .......................................... $ 9.82
========
Total Return............................................................. 0.17%(b)***
Ratios/Supplementary Data:
Net assets at the end of period (000).................................. $ 38,954
Ratio of expenses to average net assets ............................... 0.30%(c)
Ratio of net investment income to average net assets .................. 13.95%(c)
Ratio of expenses to average net assets* .............................. 0.68%(c)
Ratio of net investment income to average net assets* ................. 13.57%(c)
Portfolio turnover** .................................................. 66.10%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-153-
<PAGE> 155
THE ARCH FUND, INC.
INTERMEDIATE CORPORATE BOND
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
--------------------
Institutional
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ...................................... $10.00
--------
Investment Activities
Net investment income ................................................... 0.19
Net realized and unrealized losses from investments ..................... (0.17)
--------
Total from Investment Activities .................................... 0.02
--------
Distributions
Net investment income ................................................... (0.19)
--------
Total Distributions ................................................. (0.19)
--------
Net Asset Value, End of Period ............................................ $ 9.83
========
Total Return............................................................... 0.24%(b)***
Ratios/Supplementary Data:
Net Assets at the end of period (000) ................................... $ 1
Ratio of expenses to average net assets ................................. 0.69%(c)
Ratio of net investment income to average net assets .................... 14.04%(c)
Ratio of expenses to average net assets* ................................ 1.78%(c)
Ratio of net investment income to average net assets* ................... 12.95%(c)
Portfolio turnover**..................................................... 66.10%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-154-
<PAGE> 156
THE ARCH FUND, INC.
BOND INDEX
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
-------------------
Investor A
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ..................................... $10.00
--------
Investment Activities
Net investment income .................................................. 0.18
Net realized and unrealized losses from investments .................... (0.13)
--------
Total from Investment Activities ................................... 0.05
--------
Distributions
Net investment income .................................................. (0.18)
--------
Total Distributions ................................................ (0.18)
--------
Net Asset Value, End of Period ........................................... $ 9.87
========
Total Return (excludes sales charge) ..................................... 0.49%(b)***
Ratios/Supplementary Data:
Net Assets at the end of period (000) .................................. $ 46
Ratio of expenses to average net assets ................................ 0.52%(c)
Ratio of net investment income to average net assets ................... 6.72%(c)
Ratio of expenses to average net assets* ............................... 0.93%(c)
Ratio of net investment income to average net assets* .................. 6.31%(c)
Portfolio turnover** ................................................... 40.66%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-155-
<PAGE> 157
THE ARCH FUND, INC.
BOND INDEX
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
-------------------
Trust
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ........................................ $ 10.00
----------
Investment Activities
Net investment income ..................................................... 0.19
Net realized and unrealized losses from investments ....................... (0.14)
----------
Total from Investment Activities ...................................... 0.05
----------
Distributions
Net investment income ..................................................... (0.19)
----------
Total Distributions ................................................... (0.19)
----------
Net Asset Value, End of Period .............................................. $ 9.86
==========
Total Return................................................................. 0.54%(b)***
Ratios/Supplementary Data:
Net Assets at the end of period (000) ..................................... $ 129,939
Ratio of expenses to average net assets ................................... 0.22%(c)
Ratio of net investment income to average net assets ...................... 15.79%(c)
Ratio of expenses to average net assets* .................................. 0.31%(c)
Ratio of net investment income to average net assets* ..................... 15.70%(c)
Portfolio turnover** ...................................................... 40.66%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-156-
<PAGE> 158
THE ARCH FUND, INC.
BOND INDEX
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
February 10, 1997
to
May 31, 1997 (a)
-------------------
Investor A
Shares
-------------------
(Unaudited)
<S> <C>
Net Asset Value, Beginning of Period ....................................... $10.00
--------
Investment Activities
Net investment income .................................................... 0.19
Net realized and unrealized losses from investments ...................... (0.13)
--------
Total from Investment Activities ..................................... 0.06
--------
Distributions
Net investment income .................................................... (0.19)
--------
Total Distributions .................................................. (0.19)
--------
Net Asset Value, End of Period ............................................. $ 9.87
========
Total Return................................................................ 0.58%(b)***
Ratios/Supplementary Data:
Net Assets at the end of period (000) .................................... $ 1
Ratio of expenses to average net assets .................................. 0.75%(c)
Ratio of net investment income to average net assets ..................... 15.59%(c)
Ratio of expenses to average net assets* ................................. 1.14%(c)
Ratio of net investment income to average net assets* .................... 15.21%(c)
Portfolio turnover**...................................................... 40.66%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-157-
<PAGE> 159
INVESTMENT ADVISER
Mississippi Valley Advisors, Inc.
One Mercantile Center
Seventh & Washington Streets
St. Louis, Missouri 63101
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
LEGAL COUNSEL
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
This report is submitted for the general information of the shareholders of The
ARCH Funds, Inc. It is not authorized for distribution to prospective investors
unless accompanied or preceded by effective prospectuses for the Funds, which
contain information concerning the Fund's investment policies and expenses as
well as other pertinent information.
<PAGE> 1
Exhibit 17(j)
Annual Report
November 30, 1996
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
U.S. Government Securities Portfolio
Short-Intermediate Municipal Portfolio
Government & Corporate Bond Portfolio
National Municipal Bond Portfolio
Missouri Tax-Exempt Bond Portfolio
Balanced Portfolio
Growth & Income Equity Portfolio
International Equity Portfolio
Small Cap Equity Portfolio
[LOGO OF THE ARCH FUNDS APPEARS HERE]
The ARCH Funds
<PAGE> 2
THE ARCH FUND, INC.
MESSAGE FROM YOUR CHAIRMAN
Dear Shareholders:
We are pleased to present this report for The ARCH Fund, Inc. for the 12
months ended November 30, 1996. During the period, the ARCH family of mutual
funds saw its assets increase to $2.6 billion.
The ARCH Asset Adviser program has been very successful and continues to offer
investors an opportunity to invest in a diversified portfolio of ARCH funds with
professional guidance. Effective December 1, 1996, The ARCH Emerging Growth
Portfolio changed its name to The ARCH Small Cap Equity Portfolio. This name
more closely reflects the Portfolio's investment strategy. The ARCH National
Municipal Bond Portfolio commenced operations on November 18, 1996, and ended
the year with over $311 million in net assets.
The 12 months ended November 30, 1996, delivered further gains for stock
market investors, with the S&P 500 rising approximately 28%. Bonds also posted
strong results, with a total return of 6.07% for the Lehman Brothers Aggregate
Bond Index.
Such gains have encouraged complacency among some investors. After all, the
Dow Jones Industrial Average has climbed more or less steadily from around 1,000
in 1982 to break through the 6,000 mark during the recent period. But it's
important to remember that stock prices can fall as well as rise. Thus, you
should be sure that you understand and have confidence in your investment
manager's style and your individual fund portfolio. Otherwise, you will not be
able to ride out potential market dips--and you will risk selling at the bottom
of a market decline.
You will find discussions of each portfolio of The ARCH Fund, Inc. in the
pages that follow. Those reports will help you to understand your investments,
their recent performance and their current prospects. If you'd like more
information about any of the portfolios, please call the ARCH Shareholder
Servicing Center at 1-800-452-ARCH.
MESSAGE FROM YOUR INVESTMENT ADVISER, MISSISSIPPI VALLEY ADVISERS INC.
Our forecast calls for the economy to slow gradually during the coming year,
with its annual rate of growth declining from 2.7% in 1996 to an estimated 2.0%
in 1997. But it is worth noting that some forecasters expect growth to continue
at a stronger pace--which could force the Federal Reserve to raise interest
rates. If that occurs, the financial markets will likely suffer.
Given that risk, it's important to review the reasons why we think slower
economic growth is likely. Those reasons include the following:
- Consumer-loan delinquency rates at commercial banks continue to rise.
- Americans' personal savings rate generally has been 4.5% to 5%, making it
difficult for consumer expenditures to increase faster than real disposable
income.
- A sustained period of strong consumer spending has left little pent-up
consumer demand to fuel purchases of autos, houses and other consumer goods.
- Exports aren't likely to recover sharply, since the economies of our
major trading partners are not robust.
THE ARCH FUNDS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY,
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY, ANY BANK, THE
DISTRIBUTOR OR ANY OF THEIR AFFILIATES, AND INVOLVE INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
-1-
<PAGE> 3
ELEMENTS FUELING MODEST GROWTH
While economic growth will be limited by the foregoing factors, we do not
expect a recession to occur in 1997 or 1998.
Consumer confidence remains high, supported by healthy employment and income
growth. Civilian employment rose 2.1% during the first half of 1996, and real
personal disposable income climbed at a 1.8% annual rate.
The stock market's strong performance also has added to household net worth.
Inflation remains low, and the unemployment rate has held steady since 1994.
And, after two decades of decline, real hourly earnings have been climbing over
the last year or so.
The bottom line: We are forecasting modest economic growth at around a 2.0%
annual rate in 1997 and 2.2% in 1998. Inflation is likely to climb 2.5% to 3.5%
annually during the period, with corporate earnings growing 5% to 8% through
1997.
FINANCIAL MARKETS
Such a slow-growth, low-inflation environment generally is good news for
financial assets. But investors should bear in mind that stock market values are
scarce; thus, it is more important than ever to be selective in your
investments. We continue to find some opportunities in selected industries, and
we will manage the funds to take advantage of them.
Meanwhile, it is important for investors to look to both long-term goals and
short-term needs when planning fund investments. Money earmarked for the distant
future may be most appropriate for stock and bond funds. But most investors
should keep some cash in a money market fund or other stable instrument to cover
emergencies or other needs in the near future.
THE ARCH MONEY MARKET PORTFOLIO+
Q. What is the Portfolio's objective?
A. The ARCH Money Market Portfolio seeks current income with liquidity and
stability of principal. The Portfolio's net assets on November 30, 1996, were
approximately $824 million.
Q. What were the conditions in the money markets during the twelve months
ended November 30, 1996?
A. Short-term interest rates were at their highest early in the 12-month
period. They trended lower with a .25% cut in the Federal Funds rate on December
19, 1995, and a second .25% cut on January 31, 1996. For the rest of the period,
rates remained in a relatively narrow range. The 30-day rate for the Fund varied
by only .11% during this period.
Q. How did you manage the Portfolio to capitalize on those conditions?
A. Since rates were relatively stagnant during most of the period, the
Portfolio took advantage of market aberrations as they arose to extend its
maturity. The periods that provided the best opportunities to invest in
longer-maturity securities with higher yields typically came near the end of
each quarter. Often, issuers are eager to balance their books at the end of a
quarter or a year, so they sell new securities with high yields to attract
investors.
- ------
+ An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. Yields will fluctuate, and there can be no assurance that the
Portfolio will be able to maintain a stable Net Asset Value of $1.00 per
share.
-2-
<PAGE> 4
Q. What types of securities constituted the largest holding of the Portfolio
during the period?
A. First-tier commercial paper, which has the highest credit quality in the
commercial sector, constituted the Portfolio's largest holding, at 70.90%* of
assets. Such high-quality issues were readily available at good yields, one
reason being that firms issued a relatively large amount of commercial paper
during the period and were forced to offer attractive yields to compete for
buyers. Floating-rate notes comprised the second largest holding, at 10.05%* of
the Portfolio's assets. Such notes offer some additional yield without adding
much risk.
Q. What is the Portfolio's strategy going forward?
A. The Portfolio will continue to make most of its investments in the
commercial-paper market, which currently offers the best combination of
availability and high yields. We also will look to add some floating-rate
issues, which could enhance the Portfolio's yield. It seems unlikely that the
Federal Reserve will raise or lower rates soon, so the Portfolio will maintain a
neutral maturity for now.
THE ARCH TREASURY MONEY MARKET PORTFOLIO+
Q. What is the Portfolio's objective?
A. The ARCH Treasury Money Market Portfolio seeks a high level of current
income exempt from state income tax, consistent with liquidity and security of
principal. The Portfolio's total assets stood at $139 million on November 30,
1996.
Q. How did you manage the Portfolio during the recent period?
A. The Portfolio's holdings mainly consisted of Treasury bills, which
generally provided a yield advantage over short-coupon Treasury notes.
Q. How did you manage the maturity of the Portfolio?
A. The Portfolio must maintain an average maturity of less than 60 days to
keep its AAA m-g credit rating by Standard & Poor's. It targeted an average
maturity of 45 to 55 days for most of the period. The exception was the July to
September period, when we shortened the average maturity to meet a large
redemption. We will likely maintain an average maturity of 50 to 55 days going
forward, because we see the best values there.
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO+++
Q. What were the conditions in the tax-exempt money markets during the
twelve months ended November 30, 1996?
A. Yields on tax-exempt money market notes hit new lows compared to yields on
taxable Treasury bills. One reason was strong demand for tax-exempt issues from
fund managers, trusts and corporations, which drove the issues' prices up and
the yields down. In addition, relatively few issues came to market because
short-term rates were a bit high. Typically, municipalities issue more
securities when short-term rates are low because they don't have to pay as much
interest to investors. Finally, commercial paper offerings became increasingly
unattractive as their prices rose and their yields declined.
- ------
* Portfolio composition is subject to change.
+ An investment in the Portfolio is neither insured nor guaranteed by the U.S.
Government. Yields will fluctuate, and there can be no assurance that the
Portfolio will be able to maintain a stable Net Asset Value of $1.00 per share.
++ The Portfolio may be subject to certain state and local taxes and, depending
on an investor's tax status, the federal alternative minimum tax.
-3-
<PAGE> 5
Q. How did you manage the Portfolio in that environment?
A. The ARCH Tax-Exempt Money Market Portfolio seeks as high a level of current
interest income exempt from federal income tax as is consistent with liquidity
and stability of principal. The Portfolio attempts to achieve this objective
while maintaining strict credit quality standards.
During the recent period, we held a sizable percentage of the Portfolio in
daily and weekly variable rate securities. They provided the best yields on a
risk-adjusted basis. They also offered liquidity--the ability to buy and sell
quickly. That is useful during periods when the stock market rallies, because
some investors want to sell their shares in the Portfolio to buy stocks.
Q. How did the average maturity of the Portfolio vary during the period?
A. The Portfolio's average maturity at the start of the period was around 49
days. It fell to 27 days at the end of the period. We increased our investment
in shorter-term securities that offered better yields with lower maturity risk
than long-term issues.
The Portfolio's maturity at any given time also reflects seasonable shifts in
the marketplace. For example, around tax time we see lots of redemptions because
people are drawing money to pay their bills. We need to maintain a relatively
liquid position to meet their needs during that time.
Q. What is the Portfolio's strategy likely to be going forward?
A. We will continue to maintain a relatively short average maturity until
interest rates climb to more attractive levels. In our view, tax-exempt money
market securities will not compete well with taxable money market issues until
the markets shift. In particular, short-term taxable rates must decline enough
to lose their advantage over taxable-equivalent yields on tax-exempt securities.
When that happens, we'll be prepared to make changes in the Portfolio to capture
opportunities that may arise.
-4-
<PAGE> 6
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
Value of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Municipal Bond
Investor A (No Load) Investor A (Load)* Index-3 year
<S> <C> <C> <C>
7/95 10,000 9,747 10,000
11/95 10,080 9,825 10,220
11/96 10,485 10,220 10,713
</TABLE>
* Reflects 2.50% sales charge.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -----------------------------------------------------------
Since
Inception
1 Year (7/10/95)
- -----------------------------------------------------------
<S> <C> <C>
Investor A (No Load) 4.02% 3.46%
- -----------------------------------------------------------
Investor A * 1.41% 1.57%
- -----------------------------------------------------------
</TABLE>
Value of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Municipal Bond
Trust (No Load) Index-3 year
<S> <C> <C>
7/95 10,000 10,000
11/95 10,213 10,220
11/96 10,636 10,713
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -----------------------------------------------------------
Since
Inception
1 Year (7/10/95)
- -----------------------------------------------------------
<S> <C> <C>
Trust 4.15% 4.52%
- -----------------------------------------------------------
</TABLE>
The ARCH Short-Intermediate Municipal Portfolio is measured against the Lehman
Brothers Municipal Bond Index-3 year, an unmanaged Index representative of the
total return of municipal bonds with remaining maturities of 3 years or less.
Investors are unable to purchase the Index directly, although they can invest in
the underlying securities. The performance of the Index does not reflect the
deduction of expenses associated with a mutual fund, such as sales
<PAGE> 7
charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 2.50% sales charge on
Investor A shares. The Portfolio may be subject to certain state and local taxes
and, depending on an investor's tax status, the federal alternative minimum tax.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
Q. What were the conditions in the municipal bond market during the 12 months
ended November 30, 1996?
A. Municipal bonds outperformed taxable issues during the year. Rates for
municipal bonds with maturities of three-to-five years didn't change much
during the period, however.
Q. How did you manage the Portfolio in that environment?
A. The Portfolio seeks as high a level of current income exempt from federal
income tax, as is consistent with capital preservation. Its average maturity
generally remains between two and five years.
During the recent twelve-month period, we structured the Portfolio defensively
to guard against the risk that interest rates could increase. Many observers
were concerned that the Federal Reserve might raise interest rates, causing
longer-term issues to suffer price declines. The Portfolio's maturity fell from
5.1 to 4.0 years during the period.
Q. What was the average credit rating of the Portfolio's holdings?
A. The average credit rating of the Portfolio's holdings for the 12 months
was AA2. Yields on lower-quality issues were not generous enough to justify
their additional credit risk.
Q. How will you manage the Portfolio in the months ahead?
A. The relatively stable supply of municipal bonds should help support prices
in that market, and longer-term issues could benefit the most. Thus, we will
maintain an average maturity of around 4.5 years. We'll also continue to hold
issues of especially high credit quality because that is the nature of the
Portfolio.
-5-
<PAGE> 8
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
Q. How will you manage this new Portfolio?
A. The Fund was launched on November 18, 1996, and invests in high-quality
municipal securities in various municipalities across the country. It will
maintain an average credit quality of around AA1 under present conditions. One
reason for this is that the municipal market generally has not paid much in
additional yield to investors who take on the added risk in lower-quality
issues. The Portfolio's average maturity initially will be approximately ten
years. However, that will change as market conditions warrant. The Portfolio's
income may be subject to certain state and local taxes and, depending on an
investor's tax status, the federal alternative minimum tax.
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Value of a $10,000 Investment
- ------------------------------------------------------------------------------------------------------
Investor A Investor A CDSC CDSC Lehman Brother
(No Load) (Load) (No Load) (Load) Municipal Bond Index
<S> <C> <C> <C> <C> <C>
7/88 10,000 9,551 10,000 9,500 10,000
11/88 10,523 10,050 10,523 10,023 10,341
11/89 11,622 11,100 11,622 11,222 11,480
11/90 12,320 11,767 12,320 12,020 12,363
11/91 13,493 12,887 13,493 13,193 13,632
11/92 14,833 14,166 14,760 14,560 14,999
11/93 16,393 15,657 16,313 16,213 16,662
11/94 15,387 14,696 15,312 15,312 15,787
11/95 18,221 17,403 18,007 18,007 18,770
11/96 19,024 18,170 18,634 18,634 19,874
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects 4.50% sales charges.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (7/15/88)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.41% 7.11% 7.97%
- --------------------------------------------------------------------------------
Investor A* -0.26% 6.13% 7.38%
- --------------------------------------------------------------------------------
Investor B (No CDSC) 3.48% 6.67% 7.70%
- --------------------------------------------------------------------------------
Investor B (CDSC)** -1.50% 6.51% 7.70%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Value of a $10,000 Investment
- ----------------------------------------------------------------------
Lehman Brother
Trust Municipal Bond Index
<S> <C> <C>
7/88 10,000 10,000
11/88 10,523 10,341
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C>
11/89 11,622 11,480
11/90 12,353 12,363
11/91 13,546 13,632
11/92 14,915 14,999
11/93 16,517 16,662
11/94 15,535 15,787
11/95 18,430 18,770
11/96 19,281 19,874
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------
Since
Inception
1 Year 5 Year (7/15/88)
- --------------------------------------------------
<S> <C> <C> <C>
Trust 4.62% 7.32% 8.14%
- --------------------------------------------------
</TABLE>
The ARCH Missouri Tax-Exempt Bond Portfolio is measured against the Lehman
Brothers Municipal Bond Index, an unmanaged Index representative of the total
return of municipal bonds. Investors are unable to purchase the Index directly,
although they can invest in the underlying securities. The performance of the
Index does not reflect the deduction of expenses associated with a mutual fund,
such as sales charges, investment-management and fund-accounting fees. By
contrast, the performance of the Portfolio shown on the graph reflects the
deduction of these value-added services, as well as the deduction of a 4.50%
sales charge on Investor A shares and the applicable contingent deferred sales
charge (CDSC) on Investor B shares. The Portfolio may be subject to certain
state and local taxes and, depending on an investor's tax status, the federal
alternative minimum tax.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who 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 these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the Missouri municipal bond market during the
12 months ended November 30, 1996?
A. The supply of municipal issues in the Missouri market was limited. Issues
that did come to market were rather small and relatively illiquid. Rates on
intermediate- and long-term issues were stable, however.
-6-
<PAGE> 10
Q. How did you manage the Portfolio in that environment?
A. The Portfolio's average maturity at the end of the period was around 11
years, roughly unchanged from 12 months earlier. We found the best values among
issues that mature in 13 to 15 years. We also maintained a high-quality
portfolio with an average credit rating of AA2. Lower-quality issues didn't
offer enough extra yield to justify their additional credit risk.
Q. What's the outlook for the Missouri municipal bond market?
A. We've seen the number of new issues decline over the last few years, so we
expect more of the same. The reason is that rates are considered high, and
municipalities don't want to pay high interest rates on their bonds. That lack
of supply should help support prices for existing bonds.
Q. What will your strategy be in this environment?
A. We'll slightly increase the Portfolio's maturity to lock in yields. We also
will maintain the Portfolio's high credit quality, aiming to offer shareholders
the best returns we can without taking undue risk.
The ARCH International Equity Portfolio
[LINE GRAPH APPEARS HERE]
Value of a $10,000 Investment
<TABLE>
<CAPTION>
Investor B Investor B
Investor A No Load Investor A Load CDSC NO CDSC Morgan Stanley
Europe, Australia
and Far East Index
<S> <C> <C> <C> <C> <C>
4/94 10000 9551 10000 10000 10000
11/94 9900 9456 9405 9900 10370
11/95 10780 10296 10330 10730 11189
11/96 12072 11530 11622 11922 12543
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
<TABLE>
<CAPTION>
- -------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- -------------------------------------------------------
Since
Inception
1 Year (4/4/94)
- -------------------------------------------------------
<S> <C> <C>
Investor A (No Load) 11.99% 7.33%
- -------------------------------------------------------
Investor A* 6.92% 5.49%
- -------------------------------------------------------
Investor B (No CDSC) 11.11% 6.82%
- -------------------------------------------------------
Investor B (CDSC)** 6.11% 5.81%
- -------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
Value of a $10,000 Investment
<TABLE>
<CAPTION>
Trust Institutional Morgan Stanley
Europe, Australia
and Far East Index
<S> <C> <C> <C>
4/94 10000 10000 10000
11/94 9920 9900 10370
11/95 10810 10770 11189
11/96 12142 12052 12543
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Average Annual Total Return
as of 11/30/96
- -------------------------------------------------------
Since
Inception
1 Year (4/4/94)
- -------------------------------------------------------
<S> <C> <C>
Trust 12.33% 7.56%
- -------------------------------------------------------
Institutional 11.91% 7.26%
- -------------------------------------------------------
</TABLE>
The ARCH International Equity Portfolio is measured against the unmanaged
Morgan Stanley EAFE (Europe, Australia and Far East) Index, which generally is
representative of the performance of international stocks. Investors are unable
to purchase the Index directly, although they can invest in the underlying
securities. The performance of the Index does not reflect the deduction of
expenses associated with a mutual fund, such as sales charges, investment-
management and fund-accounting fees. By contrast, the performance of the
Portfolio shown on the graph reflects the deduction of these value-added
services, as well as the deduction of a 4.50% sales charge on Investor A shares
and the applicable contingent deferred sales charge on Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
-7-
<PAGE> 12
International investing is subject to certain factors such as currency
exchange-rate volatility, possible political, social or economic instability,
foreign taxation and differences in auditing and other financial standards.
Q. What were conditions like for global equity investors during the twelve-
month period ended November 30, 1996?
A. The past 12-month period was favorable for international investors, with
most major markets showing strong results. Japan has been a notable exception,
losing 4.4% on a U.S. dollar basis. The weaker yen and the sporadic and unstable
nature of Japan's economic recovery caused that poor performance. Results in
many of the emerging markets, most typically in Asia, also were disappointing.
Q. How did the Portfolio's holdings in various markets affect returns?
A. The Portfolio maintained a relatively low investment in Japan compared to
our benchmark, the Morgan Stanley EAFE Index. We made a relatively high
investment in other Pacific markets such as Hong Kong and Singapore. Both
decisions boosted the Portfolio's performance. The Portfolio benefited further
from overweighting in Italy and Spain.
We held a relatively low percentage of the Portfolio's investments in the
United Kingdom, which staged a strong market rally. But our individual stock
picks in the U.K. outperformed that market by 23% to 30%. Overall, the Portfolio
was up 11.99% (Investor A net asset value) over the last 12 months.
Q. What other moves did the Portfolio make to enhance returns?
A. We broadened sector exposure within Japan, keeping the Portfolio broadly
diversified during this unstable period. Our disciplined approach to finding
quality growth companies selling at attractive valuations led to a portfolio
with several common themes, particularly in Europe. For example, industries
requiring a highly educated workforce, such as pharmaceuticals and electronics,
enjoy a relative cost advantage in Europe, where highly educated workers are
more readily available than elsewhere.
Q. What is the Portfolio's strategy and outlook going forward?
A. We continue to carefully monitor developments in Japan, where we are
unlikely to increase the Portfolio's stake until a stronger economic recovery
takes shape. In Europe, a combination of low interest rates and the start of a
genuine economic recovery has boosted stock prices. We also anticipate
maintaining the Portfolio's exposure to emerging markets.
-8-
<PAGE> 13
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Value of a $10,000 Investment
- ----------------------------------------------------------------
Investor A Investor A Investor B Investor B S&P 500
(No Load) (Load)* (CDSC)** (No CDSC) Index
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,346 9,882 9,846 10,346 10,620
11/89 13,151 12,561 12,751 13,151 13,912
11/90 12,973 12,390 12,673 12,973 13,439
11/91 15,228 14,545 14,928 15,228 16,167
11/92 18,364 17,539 18,164 18,364 19,142
11/93 20,135 19,267 20,035 20,135 21,075
11/94 20,176 19,305 20,176 20,176 21,307
11/95 26,622 25,473 26,472 26,472 29,188
11/96 32,743 31,274 32,371 32,371 37,366
- ----------------------------------------------------------------
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- ----------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/2/88)
- ----------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 22.99% 16.55% 14.97%
- ----------------------------------------------------------------
Investor A* 17.44% 15.48% 14.35%
- ----------------------------------------------------------------
Investor B (No CDSC) 22.29% 16.28% 14.81%
- ----------------------------------------------------------------
Investor B (CDSC)** 17.29% 16.17% 14.81%
- ----------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------
Value of a $10,000 Investment
- ----------------------------------------------
S&P 500
Trust Institutional Index
- ----------------------------------------------
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,345 10,346 10,620
11/89 13,150 13,151 13,912
11/90 12,971 12,973 13,439
11/91 15,227 15,228 16,167
11/92 18,362 18,364 19,142
11/93 20,134 20,135 21,075
11/94 20,206 20,173 21,307
11/95 26,727 26,604 29,188
11/96 32,994 32,745 37,366
- ----------------------------------------------
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
- ------------------------------------------------
Average Annual Total Return
as of 11/30/96
- ------------------------------------------------
Since
Inception
1 Year 5 Year (6/2/88)
- ------------------------------------------------
<S> <C> <C> <C>
Trust 23.45% 16.73% 15.07%
- ------------------------------------------------
Institutional 23.08% 16.55% 14.97%
- ------------------------------------------------
</TABLE>
The performance of the ARCH Growth & Income Equity Portfolio is measured
against the Standard & Poor's 500 Index, an unmanaged Index generally
representative of the U.S. stock market. Investors are unable to purchase the
Index directly, although they can invest in the underlying securities. The
performance of the Index does not reflect the deduction of expenses associated
with a mutual fund, such as sales charges, investment management and fund-
accounting fees. By contrast, the performance of the Portfolio shown on the
graph reflects the deduction of these value-added services, as well as the
deduction of a 4.50% sales charge on Investor A shares and the applicable
contingent deferred sales charge (CDSC) on Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What market conditions influenced the Portfolio's performance and strategy
during the twelve months ended November 30, 1996?
A. The market's strongest performers were the larger capitalization stocks
that make up the major stock market indices, which continued to post record
highs. The Dow Jones Industrial Average, dominated by large, mature companies,
outperformed the S&P 500 by 3.5 percentage points and beat the broader Russell
2000 Index by 12 percentage points.
Q. What was your general strategy in that environment?
A. The Portfolio remained well diversified, leaning toward stocks of companies
with predictable earnings growth. As of November 30, 1996, the Portfolio was
most heavily weighted in the consumer growth sector (23.6%) and the interest
rate sensitive sector (19.1%).*
Q. How did the Portfolio change during the period?
A. Major changes in the Portfolio during this period were these: The consumer
growth sector rose from 19.5% to 23.6% of the Portfolio; consumer cyclical
stocks fell from 5.9% to 1.4%; and technologies rose from 7.4% to 9.6% of the
Portfolio's investments.
- ------
* Portfolio composition is subject to change.
-9-
<PAGE> 15
Q. What is the Portfolio's strategy going forward?
A. We feel that economic growth will slow through 1997, since growth in
consumer spending is not likely to be sustained at its current rate. We also
expect capital spending and exports to slow down. Such a scenario should make it
more difficult for companies to post strong earnings gains but also should help
keep inflation in check and nudge interest rates lower. Specific areas of the
stock market that look attractive are health care, technology, energy and
financial services. Thus, we will maintain significant investments in those
sectors.
THE ARCH BALANCED PORTFOLIO
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Value of a $10,000 Investment
- -----------------------------------------------------------------------------------------------------------
Investor A Investor A Investor B Investor B S&P 500 Lehman Bros. Aggre.
(No Load) (Load)* (Cdsc)** (No Cdsc) Index Bond Index
<S> <C> <C> <C> <C> <C> <C>
4/93 $10,000 $9,551 $10,000 $10,000 $10,000 $10,000
11/93 $10,386 $9,920 $10,174 $10,674 $10,421 $10,529
11/94 $10,188 $9,730 $9,950 $10,335 $10,536 $10,207
11/95 $12,719 $12,148 $12,506 $12,806 $14,433 $12,007
11/96 $14,640 $13,983 $14,134 $14,434 $18,477 $12,736
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------------------------------------
Since
Inception
1 Year (4/1/93)
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor A (No Load) 15.10% 10.94%
- --------------------------------------------------------------------------------
Investor A* 9.92% 9.56%
- --------------------------------------------------------------------------------
Investor B (No CDSC) 14.35% 10.51%
- --------------------------------------------------------------------------------
Investor B (CDSC)** 9.35% 9.88%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Value of a $10,000 Investment
- ----------------------------------------------------------------------------------
Trust S&P 500 Lehman Bros. Aggre.
(No Load) Institutional Index Bond Index
<S> <C> <C> <C> <C>
4/93 $10,000 $10,000 $10,000 $10,000
11/93 $10,387 $10,386 $10,421 $10,529
11/94 $10,199 $10,179 $10,536 $10,207
11/95 $12,744 $12,690 $14,433 $12,007
11/96 $14,727 $14,601 $18,477 $12,736
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------------------------------------
Since
Inception
1 Year (4/1/93)
- --------------------------------------------------------------------------------
<S> <C> <C>
Trust 15.56% 11.12%
- --------------------------------------------------------------------------------
Institutional 15.08% 10.86%
- --------------------------------------------------------------------------------
</TABLE>
The performance of the ARCH Balanced Portfolio is measured against the
Standard & Poor's 500 Index, an unmanaged index generally representative of the
U.S. stock market, and the Lehman Brothers Aggregate Bond Index, an unmanaged
Index comprised of the Lehman Brothers Government/Corporate Bond Index and two
Lehman Brothers asset-backed securities indices. Investors are unable to
purchase the Indices directly, although they can invest in the underlying
securities. The performance of the Indices does not reflect the deduction of
expenses associated with a mutual fund, such as sales charges,
investment-management and fund-accounting fees. By contrast, the performance of
the Portfolio shown on the graph reflects the deduction of these value-added
services, as well as the deduction of a 4.50% sales charge on Investor A shares
and the applicable contingent deferred sales charge (CDSC) on Investor B Shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What market conditions influenced the Portfolio's performance and strategy
during the twelve months ended November 30, 1996?
A. The Portfolio is designed for investors who want to participate in a
combination of the stock and fixed-income markets, and its performance is
influenced by trends in both. During the recent period, the major stock market
indices rose sharply, with the biggest gains recorded by large-company stocks.
-10-
<PAGE> 17
In the fixed-income market, shorter-maturity fixed-income securities
outperformed longer-term issues. Inflation fears pushed yields higher at various
times throughout the period, causing long-term bonds to lose ground. In
addition, foreign investors made large purchases of short-term fixed-income
issues, driving their prices higher.
Q. What was your strategy in that environment?
A. The Portfolio typically holds roughly 50% to 60% of its assets in stocks
with the rest in bonds. During the recent period, the Portfolio invested about
55% of its portfolio in stocks, with around 40% in bonds and 5% in cash
reserves.
Q. What types of stocks did you favor?
A. The Portfolio's stock investments are similar to those in the ARCH Growth &
Income Equity Portfolio. They include shares of firms with solid earnings
prospects, especially those whose business cycle is not strictly related to the
economy's growth rate. Consumer growth stocks of firms in businesses such as
health care and the specialty retail industry were well represented. Financial
service companies and manufacturers of consumer staples such as food and
beverages also were significant holdings for the Portfolio.
Q. What about the fixed-income sector?
A. Those investments are similar to the portfolio of the ARCH Government &
Corporate Bond Portfolio, high-quality Treasury and U.S. Government agency
securities with intermediate maturities.
Q. What is the Portfolio's strategy going forward?
A. The Investment Adviser's investment management committee will monitor the
financial markets and make any necessary adjustments in the Portfolio's
allocations among stocks, bonds and cash. But such changes aren't likely to vary
greatly from the Portfolio's neutral position of 55% stocks and 45% bonds, over
the short term.*
THE ARCH SMALL CAP EQUITY PORTFOLIO+
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Value of a $10,000 Investment
- ----------------------------------------------------------------------------------------------------------
Investor A Investor A Investor B Investor B Russell 2000
(No Load) (Load)* (CDSC)** (No CDSC) Index
<S> <C> <C> <C> <C> <C>
5/92 10,000 9,551 10,000 10,000 10,000
11/92 11,255 10,750 10,750 11,255 11,032
11/93 13,478 12,873 13,078 13,478 13,128
11/94 14,473 13,823 14,172 14,472 12,981
11/95 17,579 16,790 17,187 17,487 16,680
11/96 19,049 18,193 18,622 18,822 19,434
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
<TABLE>
<CAPTION>
- ----------------------------------------------------
Average Annual Total Return
as of 11/30/96
- ----------------------------------------------------
Since
Inception
1 Year (5/6/92)
- ----------------------------------------------------
<S> <C> <C>
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
Investor A (No Load) 8.36% 15.12%
- ----------------------------------------------------
Investor A* 3.51% 13.97%
- ----------------------------------------------------
Investor B (No CDSC) 7.63% 14.82%
- ----------------------------------------------------
Investor B (CDSC)** 2.68% 14.56%
- ----------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Value of a $10,000 Investment
- -----------------------------------------------------------------------
Trust Institutional Russell 2000
Index
<S> <C> <C> <C>
5/92 10,000 10,000 10,000
11/92 11,255 11,255 11,032
11/93 13,478 13,478 13,128
11/94 14,497 14,436 12,981
11/95 17,642 17,531 16,680
11/96 19,181 19,002 19,434
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------
Average Annual Total Return
as of 11/30/96
- ----------------------------------------------------
Since
Inception
1 Year (5/6/92)
- ----------------------------------------------------
<S> <C> <C>
Trust 8.72% 15.30%
- ----------------------------------------------------
Institutional 8.39% 15.09%
- ----------------------------------------------------
</TABLE>
- ------
* Portfolio composition is subject to change.
+ Formerly The ARCH Emerging Growth Portfolio.
-11-
<PAGE> 19
The ARCH Small Cap Equity Portfolio is measured against the Russell 2000
Index, an unmanaged index generally representative of the total return of small
to mid-sized companies. Investors cannot purchase the Index directly, although
they can invest in the underlying securities. The performance of the Index does
not reflect the deduction of expenses associated with a mutual fund, such as
sales charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Small capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure, and, historically, their
stocks have experienced a greater degree of market volatility than stocks on
average.
Q. What market conditions influenced the Portfolio's performance and
strategy during the twelve months ended November 30, 1996?
A. The stock market performed well, but the gains mostly came from the largest
capitalization stocks. The S&P 500 climbed 28%, but the full Russell 2000 Index
of small company stocks was up only 16.5%. Moreover, high-flying "momentum"
stocks were the strongest performers during the first half of the year.
Our approach is to buy a broadly diversified portfolio of emerging company
stocks that are trading at attractive valuations--not the ideal strategy for
such an environment. But value stocks did better late in the year, and our
relative performance improved.
Q. Can you discuss your general strategy in more detail?
A. The Investment Adviser's strategy is to emphasize individual stock
selection as we seek out the best relative values within a broadly diversified
portfolio. We believe stocks with the best future earnings and cash flow
relative to their current prices will provide the best total returns.
A key component of our relative value style of investing is to look beyond
near-term earnings problems. Thus, our results tend to lag during periods when
investors are bidding up prices of stocks that have high earnings momentum. We
generally use such periods to buy neglected stocks. During 1996, we found such
opportunities among stocks of companies like Lunar Corporation, a medical device
company, Cytec Industries, a diversified specialty chemical manufacturer, and
J&L Steel, a stainless-steel manufacturing company.*
Q. How did the Portfolio's holdings change during the period?
A. We made some modest shifts in industry weightings to buy shares that looked
especially attractive at their current prices. But we generally don't make
dramatic shifts in the Portfolio. Instead, we prefer to buy stocks at good
prices and be patient.
- ------
* Portfolio composition is subject to change.
-12-
<PAGE> 20
Q. What is the Portfolio's strategy going forward?
A. The same as always, really. We will continue to seek the best relative
values within the small-company universe. We will look for opportunities within
emerging-growth industries as well as specialized segments of more mature
industries. We also will consider for purchase small companies with unique
features including high-asset values and cash flows, or other factors that
increase the potential for above-average capital appreciation.
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
- --------------------------------------------------------------------------------
Value of a $10,000 Investment
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Investor A Investor A Investor B Investor B Lehman Brothers Aggregate
(No Load) (Load)* (CDSC)** (No CDSC) Bond Index
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,266 9,805 9,770 10,266 10,265
11/89 11,476 10,960 11,076 11,476 11,738
11/90 12,045 11,504 11,754 12,045 12,627
11/91 13,586 12,976 13,286 13,586 14,447
11/92 14,647 13,989 14,447 14,647 15,727
11/93 16,145 15,367 16,045 16,145 17,441
11/94 15,609 14,857 15,609 15,609 16,907
11/95 18,104 17,232 17,994 17,994 19,889
11/96 18,920 18,070 18,675 18,675 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
Investor A * -0.23% 5.86% 7.24%
- -------------------------------------------------------------------------
Investor B (No CDSD) 3.79% 6.57% 7.65%
- -------------------------------------------------------------------------
Investor B (CDSC) ** -1.12% 6.41% 7.65%
- -------------------------------------------------------------------------
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
- --------------------------------------------------------------------------------
Value of a $10,000 Investment
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<PAGE> 21
<TABLE>
<CAPTION>
Lehman Brothers Aggregate
Trust Institutional Bond Index
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,266 10,266 10,265
11/89 11,476 11,476 11,738
11/90 12,045 12,045 12,627
11/91 13,616 13,586 14,447
11/92 14,724 14,647 15,727
11/93 16,278 16,145 17,441
11/94 15,785 15,609 16,907
11/95 18,359 18,104 19,889
11/96 19,244 18,920 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Trust 4.82% 7.16% 8.04%
- -------------------------------------------------------------------------
Institutional 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
</TABLE>
The ARCH Government & Corporate Bond Portfolio is measured against the Lehman
Brothers Aggregate Bond Index, an unmanaged Index comprised of the Lehman
Brothers Government-Corporate Bond Index and two Lehman Brothers asset-backed
securities Indices. Investors cannot purchase the Index directly, although they
can invest in the underlying securities. The performance of the Index does not
reflect the deduction of expenses associated with a mutual fund, such as sales
charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the taxable bond market during the 12 months
ended November 30, 1996?
A. The bond market has been volatile. The ten-year Treasury bond started the
period yielding 5.70%. That yield rose to 7.10% around mid-year, then fell to
6.10%. Investors worried that the Federal Reserve would raise short-term
interest rates around the middle of the summer, because the economy had grown so
quickly in the first quarter. Then the Fed didn't do anything, and the fear
receded--so bond prices started to rise again. We started to see another rally
toward the end of the 12-month period.
-13-
<PAGE> 22
Q. How did you structure the Portfolio to address those conditions?
A. We invested about 75% of the Portfolio in Treasuries, with the rest in
mortgage-backed securities. Corporate bonds seemed very expensive to us, with
yields only about 12 one-hundredths of a percentage point higher than Treasury
yields--and they have much more credit risk than Treasury or agency debt. Thus,
we used mortgage-backed issues instead of corporates to enhance the Portfolio's
yield.
The Portfolio's average maturity rose from 8.6 years to 10.8 years during the
period. We increased the maturity to take advantage of higher interest rates. We
implemented the change by selling some of our shorter Treasuries and buying
five- to ten-year mortgages. Such securities recently provided 0.75 to 1.25
percentage points of extra yield over Treasuries of comparable maturities. In
fact, we increased our Portfolio's mortgage-backed exposure from 26% to 35%,
currently*.
Q. How did you manage credit risk in the Portfolio?
A. We currently have an average quality rating of AAA, the same rating that we
had at the beginning of the year. The Portfolio's holdings currently are
comprised almost entirely of United States Treasury and agency- guaranteed
mortgage debt. The Portfolio holds almost no corporate issues because we believe
that the small current yield advantage of corporates over Treasuries does not
justify corporate debt's additional credit risk.
Q. Where are you finding the best values in the bond market?
A. Mortgage-backed securities clearly offer the most value in our securities
universe. Our intent is to continue to increase the Portfolio's mortgage
exposure from the current 35% to the 40% to 45% level. Corporates will remain on
our watch list, and we will increase the Portfolio's corporate exposure when
their yields improve relative to yields on Treasury issues.*
Q. What is your outlook for the bond market and the Portfolio?
A. We're neutral on the market right now. We don't see anything fundamental
about the economy that would cause rates to rise or fall in the immediate
future. But we will pay close attention to the psychology of the market, which
can be a very different matter. People's expectations have a large effect on the
bond market, and we'll pay close attention to changes in those expectations.
That way, we'll be prepared to make changes in the Portfolio to reflect such
psychological factors.
The ARCH U.S. Government Securities Portfolio
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Value of a $10,000 Investment
- -----------------------------------------------------------------------------------------------------------------------
Investor A Investor A Investor B Investor B Lehman Intermediate
(No Load) (Load) (CDSC) (NO CDSC) Government Bond Index
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,305 9,842 9,808 10,305 10,374
11/89 11,339 10,830 10,939 11,339 11,666
11/90 12,435 11,877 12,135 12,435 12,644
11/91 13,972 13,345 13,672 13,972 14,281
11/92 14,978 14,306 14,778 14,978 15,442
11/93 16,480 15,699 16,380 16,480 16,849
11/94 15,962 15,205 15,962 15,962 16,512
11/95 18,302 17,434 18,012 18,012 18,833
11/96 19,138 18,279 18,705 18,705 19,899
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/2/88)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.57% 6.49% 7.93%
- --------------------------------------------------------------------------------
Investor A* -0.13% 5.52% 7.35%
- --------------------------------------------------------------------------------
Investor B (No CDSC) 3.85% 6.01% 7.64%
- --------------------------------------------------------------------------------
Investor B (CDSC)** -1.07% 5.85% 7.64%
- --------------------------------------------------------------------------------
</TABLE>
*Reflects 4.50% sales charge.
**Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Label A B C
Trust Institutional Lehman Intermediate
Government Bond Index
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,305 10,305 10,374
11/89 11,339 11,339 11,666
11/90 12,435 12,435 12,644
11/91 14,004 13,972 14,281
11/92 15,056 14,978 15,442
11/93 16,616 16,480 16,849
11/94 16,142 15,910 16,512
11/95 18,564 18,247 18,833
11/96 19,469 19,077 19,899
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
as of 11/30/96
- --------------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/2/88)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust 4.88% 6.81% 8.15%
- --------------------------------------------------------------------------------
Institutional 4.55% 6.43% 7.89%
- --------------------------------------------------------------------------------
</TABLE>
* Portfolio composition is subject to change.
-14-
<PAGE> 24
The ARCH U.S. Government Securities Portfolio is measured against the
unmanaged Lehman Brothers Intermediate Government Bond Index, which is generally
representative of the total return of intermediate-term U.S. Government
securities. Investors are unable to purchase the Index directly, although they
can invest in the underlying securities. The performance of the Index does not
reflect the deduction of expenses associated with a mutual fund, such as sales
charges, investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B Shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
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 who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the Treasury market during the 12 months
ended November 30, 1996?
A. The Treasury market, along with the bond market in general, has been
extremely volatile for the past year. Yields on the five-year Treasury rose
from 5.5% at the end of November 1995 to a high of 6.85% on June 12, 1996. The
yield then fell to 5.82% at the end of the period.
Q. How did you structure the Portfolio to address those conditions?
A. The Portfolio started the period with a 4-year average maturity and ended
the period with a 5.4-year average maturity--about the same as the Lehman
Brothers Intermediate Government Bond Index.
Q. What changes did you make in the Portfolio's holdings?
A. We increased our holdings of mortgage-backed securities from 34% to around
40%, currently, because they offered attractive yields. Falling interest rates
caused investors to worry that mortgage prepayments would rise and make
mortgage-backed securities less attractive. Thus, prices of the securities fell,
creating an opportunity for us to buy them cheaply.*
Q. How do you manage credit risk in the Portfolio?
A. The Portfolio is comprised entirely of Treasury and U.S. government
agency-guaranteed mortgage and other debt, so the credit quality is extremely
high--and it will remain high due to the nature of the Portfolio.
Q. What is your outlook and strategy going forward?
A. As market conditions permit, we intend to continue to add to our
mortgage-backed exposure, which might climb to 45% of the Portfolio. These
agency securities still represent the best value available today.
- ------
* Portfolio composition is subject to change.
-15-
<PAGE> 25
TABLE OF CONTENTS
Independent Auditors Report
Page 17
Statements of Assets and Liabilities
Page 18
Statements of Operations
Page 26
Statements of Changes in Net Assets
Page 30
Schedules of Portfolio Investments
Page 36
Notes to Financial Statements
Page 71
Financial Highlights
Page 89
-16-
<PAGE> 26
Independent Auditors' Report
The Shareholders and Board of Directors of
The ARCH Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of
The ARCH Fund, Inc.--Money Market Portfolio, Treasury Money Market Portfolio,
Tax-Exempt Money Market Portfolio, Growth & Income Equity Portfolio, Small Cap
Equity Portfolio (formerly Emerging Growth Portfolio), International Equity
Portfolio, Balanced Portfolio, Government & Corporate Bond Portfolio, U.S.
Government Securities Portfolio, Short-Intermediate Municipal Portfolio,
Missouri Tax-Exempt Bond Portfolio, and National Municipal Bond Portfolio,
including the schedules of portfolio investments, as of November 30, 1996, and
the related statements of operations, statements of changes in net assets and
the financial highlights for each of the periods indicated herein. These
financial statements and the financial highlights are the responsibility of The
ARCH Fund, Inc.'s management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of
November 30, 1996, by examination and other appropriate audit procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the aforementioned portfolios comprising The ARCH Fund, Inc. at November
30, 1996, the results of their operations, the changes in their net assets and
the financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 22, 1997
-17-
<PAGE> 27
THE ARCH FUND, INC.
Statements of Assets and Liabilities
November 30, 1996
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $845,516,579; $139,866,134 and $113,556,641,
respectively) ......................................................... $ 845,516,579 $ 139,866,134 $ 113,556,641
Cash ..................................................................... 21 908 --
Interest and dividends receivable ........................................ 2,790,092 1,349 533,391
Prepaid expenses and other assets ........................................ 2,352 2,064 121
--------------- --------------- ---------------
Total Assets ................................................... 848,309,044 139,870,455 114,090,153
--------------- --------------- ---------------
LIABILITIES:
Cash overdraft ........................................................... -- -- 21,762
Dividends payable ........................................................ 3,413,503 487,181 288,947
Payable to brokers for investments purchased ............................. 20,000,000 -- --
Accrued expenses and other payables:
Investment advisory fees ............................................ 213,889 32,958 33,574
Administration fees ................................................. 34,307 5,331 3,162
Distribution and services fees ...................................... 94,056 11,106 7,127
Accounting and custodian fees ....................................... 10,502 1,870 2,107
Other ............................................................... 150,228 44,049 23,495
--------------- --------------- ---------------
Total Liabilities .............................................. 23,916,485 582,495 380,174
--------------- --------------- ---------------
NET ASSETS:
Capital .................................................................. 824,391,646 139,273,374 113,697,819
Undistributed net investment income....................................... 7,451 5,719 12,160
Accumulated undistributed net realized gains (losses) from investment
transactions .......................................................... (6,538) 8,867 --
=============== =============== ===============
Net Assets ..................................................... $ 824,392,559 $ 139,287,960 $ 113,709,979
=============== =============== ===============
</TABLE>
-18-
<PAGE> 28
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
November 30, 1996
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ................................................... $ 91,165,514 $ 7,667,179 $ 17,984,105
Investor B Shares ................................................... 40,930 -- --
Trust Shares ........................................................ 717,265,464 131,321,975 95,725,874
Institutional Shares ................................................ 15,920,651 298,806 --
--------------- --------------- ---------------
Total .......................................................... $ 824,392,559 $ 139,287,960 $ 113,709,979
=============== =============== ===============
Outstanding shares of common stock
Investor A Shares ................................................... 91,165,477 7,666,856 17,984,067
Investor B Shares ................................................... 40,931 -- --
Trust Shares ........................................................ 717,264,622 131,310,132 95,725,841
Institutional Shares ................................................ 15,920,616 298,802 --
--------------- --------------- ---------------
Total .......................................................... 824,391,646 139,275,790 113,709,908
=============== =============== ===============
Net asset value
Investor A Shares(a)................................................. $ 1.00 $ 1.00 $ 1.00
Investor B Shares(a)................................................. 1.00 -- --
Trust Shares(a)...................................................... 1.00 1.00 1.00
Institutional Shares(a).............................................. 1.00 1.00 --
=============== =============== ===============
</TABLE>
- ------------
(a) Offering price and redemption price are the same.
See notes to financial statements
-19-
<PAGE> 29
THE ARCH FUND, INC.
Statements of Assets and Liabilities
November 30, 1996
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio(a) Portfolio
-------------- -------------- -------------
ASSETS:
<S> <C> <C> <C>
Investments, at value (Cost $361,437,050; $204,903,389; and $53,902,910,
respectively) ............................................................. $466,947,587 $216,552,529 $60,972,938
Cash ......................................................................... 578 950 10
Foreign currency (Cost $205,464).............................................. -- -- 204,372
Interest and dividends receivable ............................................ 784,273 136,461 59,350
Receivable from brokers for investments sold ................................. -- -- 605,984
Receivable for portfolio shares issued ....................................... 36,365 24,633 8,574
Reclaim receivable ........................................................... -- -- 48,426
Unamortized organization costs ............................................... -- 2,781 12,879
Prepaid expenses and other assets ............................................ -- 7,478 3,962
------------ ------------ -----------
Total Assets ....................................................... 467,768,803 216,724,832 61,916,495
------------ ------------ -----------
LIABILITIES:
Payable to brokers for investments purchased ................................. 4,518,189 -- 594,605
Payable for portfolio shares redeemed ........................................ 10,885 570 1,481
Accrued expenses and other payables:
Investment advisory fees ................................................ 203,484 132,737 35,011
Administration fees ..................................................... 12,559 5,851 2,518
Distribution and services fees .......................................... 29,088 11,572 3,857
Accounting and custodian fees ........................................... 11,727 5,715 24,891
Other ................................................................... 83,792 30,851 4,072
------------ ------------ -----------
Total Liabilities .................................................. 4,869,724 187,296 666,435
------------ ------------ -----------
NET ASSETS:
Capital ...................................................................... 321,702,631 191,482,861 52,505,446
Undistributed net investment income .......................................... 857,888 161,024 119,518
Net unrealized appreciation from investments ................................. 105,510,537 11,649,140 8,230,324
Net unrealized depreciation from translation of assets and liabilities in
foreign currencies ........................................................ -- -- (1,160,982)
Accumulated undistributed net realized gains (losses) from investment
transactions .............................................................. 34,828,023 13,244,511 (216,958)
Accumulated undistributed net realized gains from foreign currency
transactions .............................................................. -- -- 1,772,712
------------ ------------ -----------
Net Assets ......................................................... $462,899,079 $216,537,536 $61,250,060
============= ============= ===========
</TABLE>
Continued
-20-
<PAGE> 30
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
November 30, 1996
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio(a) Portfolio
----------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets
Investor A Shares ....................................................... $ 38,229,131 $ 13,888,657 $ 2,573,264
Investor B Shares ....................................................... 3,536,720 1,272,317 436,500
Trust Shares ............................................................ 348,183,263 171,295,263 52,180,813
Institutional Shares .................................................... 72,949,965 30,081,299 6,059,483
--------------- --------------- --------------
Total .............................................................. $ 462,899,079 $ 216,537,536 $ 61,250,060
============== ============== =============
Outstanding shares of common stock
Investor A Shares ....................................................... 2,047,651 1,036,243 213,589
Investor B Shares ....................................................... 190,397 96,074 36,691
Trust Shares ............................................................ 18,610,126 12,702,144 4,305,174
Institutional Shares .................................................... 3,907,610 2,252,184 503,707
--------------- --------------- --------------
Total .............................................................. 24,755,784 16,086,645 5,059,161
============== ============== =============
Net asset value
Investor A Shares--redemption price per share ............................ $ 18.67 $ 13.40 $ 12.05
Investor B Shares--offering price per share *............................. 18.58 13.24 11.90
Trust Shares--offering and redemption price per share .................... 18.71 13.49 12.12
Institutional Shares--offering and redemption price per share ............ 18.67 13.36 12.03
============== ============== =============
Maximum Sales Charge: Investor A Shares ....................................... 4.50% 4.50% 4.50%
--------------- --------------- --------------
Maximum Offering Price (100%/ (100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share: Investor A Shares $ 19.55 $ 14.03 $ 12.62
============== ============== =============
</TABLE>
- ------------
(a) Formerly Emerging Growth Portfolio.
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-21-
<PAGE> 31
THE ARCH FUND, INC.
Statements of Assets and Liabilities
November 30, 1996
<TABLE>
<CAPTION>
Government & U.S. Government
Balanced Corporate Bond Securities
Portfolio Portfolio Portfolio
------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $107,233,813; $156,326,416; and
$68,860,209, respectively) ....................................... $125,526,146 $160,448,070 $69,511,112
Cash ................................................................ 18,033 349,656 --
Interest and dividends receivable ................................... 761,175 1,858,877 691,871
Unamortized organization costs ...................................... 7,009 -- --
Prepaid expenses and other assets ................................... 14,046 978 2,460
------------ ------------ -----------
Total Assets .............................................. 126,326,409 162,657,581 70,205,443
LIABILITIES:
Cash overdraft ...................................................... -- -- 98
Dividends payable ................................................... -- 815,178 339,617
Payable for portfolio shares redeemed ............................... 259 1,435 --
Accrued expenses and other payables:
Investment advisory fees ....................................... 76,359 59,282 25,606
Administration fees ............................................ 3,427 4,412 1,904
Distribution and services fees ................................. 15,660 5,249 2,597
Accounting and custodian fees .................................. 3,894 5,141 2,266
Other .......................................................... 25,641 25,983 9,695
------------ ------------ -----------
Total Liabilities ......................................... 125,240 916,680 381,783
NET ASSETS:
Capital ............................................................. 100,403,539 158,972,815 69,317,216
Undistributed net investment income ................................. 808,152 2,351 218,765
Net unrealized appreciation from investments ........................ 18,292,333 4,121,654 650,903
Accumulated undistributed net realized gains (losses) from
investment transactions .......................................... 6,697,145 (1,355,919) (363,224)
------------ ------------ -----------
Net Assets ................................................ $126,201,169 $161,740,901 $69,823,660
============ ============ ===========
</TABLE>
Continued
-22-
<PAGE> 32
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
November 30, 1996
<TABLE>
<CAPTION>
Government & U.S. Government
Balanced Corporate Bond Securities
Portfolio Portfolio Portfolio
--------------- ------------------- --------------------
<S> <C> <C> <C>
Net Assets
Investor A Shares .............................................. $ 9,328,488 $ 4,914,677 $ 7,153,141
Investor B Shares .............................................. 321,203 510,871 359,274
Trust Shares ................................................... 61,820,867 141,440,065 60,079,499
Institutional Shares ........................................... 54,730,611 14,875,288 2,231,746
-------------- -------------- -------------
Total ..................................................... $ 126,201,169 $ 161,740,901 $ 69,823,660
============== ============== =============
Outstanding shares of common stock
Investor A Shares .............................................. 741,573 475,410 670,520
Investor B Shares .............................................. 25,723 49,403 33,698
Trust Shares ................................................... 4,915,712 13,681,482 5,631,203
Institutional Shares ........................................... 4,363,483 1,438,805 209,842
-------------- -------------- -------------
Total ..................................................... 10,046,491 15,645,100 6,545,263
============== ============== =============
Net asset value
Investor A Shares redemption price per share ................... $ 12.58 $ 10.34 $ 10.67
Investor B Shares offering price per share *.................... 12.49 10.34 10.66
Trust Shares offering and redemption price per share ........... 12.58 10.34 10.67
Institutional Shares offering and redemption price per share ... 12.54 10.34 10.64
============== ============== =============
Maximum Sales Charge: Investor A Shares ............................. 4.50% 4.50% 4.50%
-------------- -------------- -------------
Maximum Offering Price (100%/ (100%-Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share: Investor A
Shares $ 13.17 $ 10.83 $ 11.17
============== ============== =============
</TABLE>
- ------------
* Redemption price of Investor B Shares varies based on length of time held.
See notes to financial statements
-23-
<PAGE> 33
THE ARCH FUND, INC.
Statements of Assets and Liabilities
November 30, 1996
<TABLE>
<CAPTION>
Short- Missouri National
Intermediate Tax-Exempt Municipal
Municipal Bond Bond
Portfolio Portfolio Portfolio
--------------- -------------- ------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $29,002,171; $78,138,683; $289,710,990,
respectively) ............................................................ $29,209,650 $80,835,189 $305,292,225
Cash ........................................................................ 652 -- 22
Interest and dividends receivable ........................................... 386,034 1,237,491 6,337,858
Unamortized organization costs .............................................. 8,382 -- --
Prepaid expenses and other assets ........................................... 16,107 1,704 --
----------- ----------- ------------
Total Assets ...................................................... 29,620,825 82,074,384 311,630,105
----------- ----------- ------------
LIABILITIES:
Dividends payable ........................................................... 93,298 303,019 1,199,780
Accrued expenses and other payables:
Investment advisory fees ............................................... -- 28,891 --
Administration fees .................................................... 795 2,207 7,011
Distribution and services fees ......................................... 11 4,662 --
Accounting and custodian fees .......................................... 572 2,737 525
Other .................................................................. 3,064 9,143 8,146
----------- ----------- ------------
Total Liabilities ................................................. 97,740 350,659 1,215,462
----------- ----------- ------------
NET ASSETS:
Capital ..................................................................... 29,315,606 79,145,761 294,718,075
Undistributed net investment income.......................................... -- -- 8
Net unrealized appreciation from investments ................................ 207,479 2,696,506 15,581,235
Accumulated undistributed net realized gains (losses) from investment
transactions ............................................................. -- (118,542) 115,325
=========== =========== ============
Net Assets ........................................................ $29,523,085 $81,723,725 $310,414,643
=========== =========== ============
</TABLE>
Continued
-24-
<PAGE> 34
THE ARCH FUND, INC.
Statements of Assets and Liabilities, Continued
November 30, 1996
<TABLE>
<CAPTION>
Short- Missouri National
Intermediate Tax-Exempt Municipal
Municipal Bond Bond
Portfolio Portfolio Portfolio
-------------- -------------- ------------
Net Assets
<S> <C> <C> <C>
Investor A Shares....................................................... $ 51,425 $ 25,143,671 $ 1,005
Investor B Shares....................................................... -- 674,863 1,005
Trust Shares............................................................ 29,471,660 55,905,191 310,412,633
------------- ------------- --------------
Total ............................................................. $ 29,523,085 $ 81,723,725 $ 310,414,643
============= ============= ==============
Outstanding shares of common stock
Investor A Shares ...................................................... 5,103 2,151,158 100
Investor B Shares ...................................................... -- 57,799 100
Trust Shares ........................................................... 2,926,403 4,782,605 30,901,906
------------- ------------- --------------
Total ............................................................. 2,931,506 6,991,562 30,902,106
============= ============= ==============
Net asset value
Investor A Shares--redemption price per share............................ $ 10.08 $ 11.69 $ 10.05
Investor B Shares--offering price per share *............................ -- 11.68 10.05
Trust Shares--offering and redemption price per share.................... 10.07 11.69 10.05
============= ============= ==============
Maximum Sales Charge: Investor A Shares ...................................... 2.50% 4.50% 4.50%
------------- ------------- --------------
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net asset value
adjusted to nearest cent) per share: Investor A Shares $ 10.34 $ 12.24 $ 10.52
============= ============= ==============
</TABLE>
- ------------
* Redemption price of Investor B Shares varies based on length of time held.
See note to financial statements
-25-
<PAGE> 35
THE ARCH FUND, INC.
Statements of Operations
For the year ended November 30, 1996
<TABLE>
<CAPTION>
Treasury Tax-Exempt
Money Market Money Market Money Market
Portfolio Portfolio Portfolio
----------------- ---------------- ----------------
<S> <C> <C> <C>
Investment Income:
Interest income ........................................ $46,863,199 $12,925,790 $3,382,932
----------- ----------- ----------
Total Income 46,863,199 12,925,790 3,382,932
----------- ----------- ----------
Expenses:
Investment advisory fees ............................... 3,415,218 1,001,477 382,160
Administration fees .................................... 1,707,609 500,739 95,540
Distribution and services fees--Investor A Shares ....... 179,676 12,304 23,950
Distribution and services fees--Investor B Shares ....... 295 -- --
Administrative services fees--Trust Shares .............. 614,938 170,407 21,891
Administrative services fees--Institutional Shares ...... 49,568 1,103 --
Custodian and accounting fees .......................... 114,683 31,973 16,631
Legal and audit fees ................................... 131,316 41,974 1,304
Organization costs ..................................... -- 7,102 --
Directors' fees and expenses ........................... 29,174 9,122 3,826
Transfer agent fees .................................... 233,092 74,879 24,320
Registration and filing fees ........................... 66,570 9,264 2,206
Printing costs ......................................... 106,694 51,550 2,529
Other .................................................. 16,837 5,178 2,594
Expenses voluntarily reduced ........................... (1,280,058) (375,444) (47,714)
----------- ----------- ----------
Total Expenses ............................... 5,385,612 1,541,628 529,237
----------- ----------- ----------
Net Investment Income .................................. 41,477,587 11,384,162 2,853,695
----------- ----------- ----------
Realized Gains (Losses) from Investment Transactions:
Net realized gains from investment transactions ........ 234 11,653 --
----------- ----------- ----------
Net realized gains from investment transactions ........ 234 11,653 --
----------- ----------- ----------
Change in net assets resulting from operations ......... $41,477,821 $11,395,815 $2,853,695
=========== =========== ==========
</TABLE>
- ----------
See notes to financial statements
-26-
<PAGE> 36
THE ARCH FUND, INC.
Statements of Operations
For the year ended November 30, 1996
<TABLE>
<CAPTION>
Growth & Small Cap International
Income Equity Equity Equity
Portfolio Portfolio (a) Portfolio
----------------- -------------- ---------------
<S> <C> <C> <C>
Investment Income:
Interest income ..................................................... $ 1,162,795 $ 725,369 $ 152,459
Dividend income ..................................................... 7,947,551 1,503,495 779,575
Income from securities lending ...................................... 33,677 113,625 --
Foreign tax withholding ............................................. (3,528) -- (51,706)
------------ ------------- ------------
Total Income .............................................. 9,140,495 2,342,489 880,328
------------ ------------- ------------
Expenses:
Investment advisory fees ............................................ 2,231,228 1,556,817 534,508
Administration fees ................................................. 811,356 415,168 106,902
Distribution and services fees--Investor A Shares ................... 93,863 41,415 6,210
Distribution and services fees--Investor B Shares ................... 22,511 10,185 2,752
Administrative services fees--Institutional Shares .................. 159,761 69,178 11,788
Custodian and accounting fees ....................................... 125,368 65,868 92,235
Legal and audit fees ................................................ 62,682 33,598 8,738
Organization costs .................................................. -- 6,880 5,490
Directors' fees and expenses ........................................ 13,957 6,932 1,792
Transfer agent fees ................................................. 115,631 58,430 12,616
Registration and filing fees ........................................ 37,959 26,850 10,467
Printing costs ...................................................... 47,063 23,004 4,852
Other ............................................................... 6,241 3,526 795
Expenses voluntarily reduced ........................................ (405,859) (207,666) (167,644)
------------ ------------- ------------
Total Expenses ............................................ 3,321,761 2,110,185 631,501
------------ ------------- ------------
Net Investment Income ............................................... 5,818,734 232,304 248,827
------------ ------------- ------------
Realized/Unrealized Gains (Losses) from Investments and
Foreign Currency:
Net realized gains (losses) from investment transactions ............ 36,039,992 13,981,122 (931,659)
Net realized gains from foreign currency transactions ............... -- -- 3,133,420
Change in unrealized appreciation from investments .................. 45,449,749 3,579,525 4,679,792
Change in unrealized appreciation (depreciation) from translation of
assets and liabilities in foreign currencies ..................... -- -- (1,058,982)
------------ ------------- ------------
Net realized/unrealized gains from investments and foreign
currency ......................................................... 81,489,741 17,560,647 5,822,571
------------ ------------- ------------
Change in net assets resulting from operations ...................... $ 87,308,475 $ 17,792,951 $ 6,071,398
============ ============= ============
</TABLE>
- ------------
(a) Formerly Emerging Growth Portfolio
See notes to financial statements
-27-
<PAGE> 37
THE ARCH FUND, INC.
Statements of Operations
For the year ended November 30, 1996
<TABLE>
<CAPTION>
Government & U.S. Government
Balanced Corporate Bond Securities
Portfolio Portfolio Portfolio
------------- --------------- ---------------
<S> <C> <C> <C>
Investment Income:
Interest income ................................................... $ 3,560,594 $10,425,354 $4,152,872
Dividend income ................................................... 1,542,941 32,006 38,485
Income from securities lending .................................... 29,797 60,038 27,498
Foreign tax withholding ........................................... (659) -- --
----------- ----------- ----------
Total Income ............................................ 5,132,673 10,517,398 4,218,855
----------- ----------- ----------
Expenses:
Investment advisory fees .......................................... 950,916 674,595 280,649
Administration fees ............................................... 253,573 299,782 124,733
Distribution and services fees--Investor A Shares ................. 26,566 16,108 22,956
Distribution and services fees--Investor B Shares ................. 2,149 3,500 2,489
Administrative services fees--Institutional Shares ................ 134,453 35,473 4,412
Custodian and accounting fees ..................................... 48,883 55,782 25,457
Legal and audit fees .............................................. 19,604 21,864 9,914
Organization costs ................................................ 5,124 -- --
Directors' fees and expenses ...................................... 4,402 5,450 2,202
Transfer agent fees ............................................... 31,850 44,144 17,245
Registration and filing fees ...................................... 21,994 8,400 9,013
Printing costs .................................................... 12,746 17,638 6,990
Other ............................................................. 3,932 2,849 1,063
Expenses voluntarily reduced ...................................... (126,784) (149,916) (62,398)
----------- ----------- ----------
Total Expenses .......................................... 1,389,408 1,035,669 444,725
----------- ----------- ----------
Net Investment Income ............................................. 3,743,265 9,481,729 3,774,130
----------- ----------- ----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions .......... 7,057,146 1,012,372 (408,957)
Change in unrealized appreciation (depreciation) from investments . 7,234,948 (2,852,662) (197,452)
----------- ----------- ----------
Net realized/unrealized gains (losses) from investments ........... 14,292,094 (1,840,290) (606,409)
----------- ----------- ----------
Change in net assets resulting from operations .................... $18,035,359 $ 7,641,439 $3,167,721
=========== =========== ==========
</TABLE>
- ------------
See notes to financial statements
-28-
<PAGE> 38
THE ARCH FUND, INC.
Statements of Operations
For the year ended November 30, 1996
<TABLE>
<CAPTION>
Short- Missouri National
Intermediate Tax-Exempt Municipal
Municipal Bond Bond
Portfolio Portfolio Portfolio (a)
------------- ------------- ------------
<S> <C> <C> <C>
Investment Income:
Interest income ............................................................. $1,145,219 $3,995,518 $ 748,864
Dividend income ............................................................. 32,365 83,249 2,806
---------- ---------- ----------
Total Income ..................................................... 1,177,584 4,078,767 751,670
---------- ---------- ----------
Expenses:
Investment advisory fees .................................................... 147,763 327,773 70,255
Administration fees ......................................................... 53,732 145,677 25,546
Distribution and services fees-Investor A Shares ............................ 114 73,842 3
Distribution and services fees-Investor B Shares ............................ - 6,318 -
Custodian and accounting fees ............................................... 14,335 32,839 525
Legal and audit fees ........................................................ 6,944 4,714 750
Organization costs .......................................................... 10,536 - 450
Directors' fees and expenses ................................................ 1,086 2,728 -
Transfer agent fees ......................................................... 6,560 22,044 4,200
Registration and filing fees ................................................ 7,844 1,210 -
Printing costs .............................................................. 8,786 8,355 2,700
Other ....................................................................... 438 621 45
Expenses voluntarily reduced ................................................ (174,660) (97,451) (88,792)
---------- ---------- ----------
Total Expenses .................................................... 83,478 528,670 15,682
---------- ---------- ----------
Net Investment Income ....................................................... 1,094,106 3,550,097 735,988
---------- ---------- ----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains from investment transactions ............................. - 70,177 115,325
Change in unrealized appreciation (depreciation) from investments ........... (16,660) (87,057) 1,278,075
---------- ---------- ----------
Net realized/unrealized gains (losses) from investments ..................... (16,660) (16,880) 1,393,400
---------- ---------- ----------
Change in net assets resulting from operations .............................. $1,077,446 $3,533,217 $2,129,388
========== ========== ==========
</TABLE>
- ------------
(a) For the period from November 18, 1996 (commencement of operations) through
November 30, 1996.
See notes to financial statements
-29-
<PAGE> 39
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Money Market Treasury Money
Portfolio Market Portfolio
----------------------------------- ----------------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ............................ $ 41,477,587 $ 33,761,482 $ 11,384,162 $ 11,520,298
Net realized gains (losses) from investment
transactions ................................... 234 (6,772) 11,653 10,481
---------------- ----------------- ----------------- ---------------
Change in net assets resulting from operations ...... 41,477,821 33,754,710 11,395,815 11,530,779
---------------- ----------------- ----------------- ---------------
Distributions to Investor A shareholders:
From net investment income ....................... (3,378,057) (2,861,060) (214,227) (132,984)
From net realized gains .......................... (21) - (132) -
In excess of net realized gains................... (368) - - -
Distributions to Investor B shareholders:
From net investment income ....................... (1,099) - - -
Distributions to Trust shareholders:
From net investment income ....................... (37,166,284) (30,299,854) (11,150,554) (11,386,621)
From net realized gains .......................... (205) - (11,519) -
In excess of net realized gains................... (4,060) - (527) -
Distributions to Institutional shareholders:
From net investment income ....................... (932,147) (600,568) (19,381) (693)
From net realized gains .......................... (8) - (2) -
In excess of net realized gains................... (71) - - -
---------------- ----------------- ----------------- ---------------
Change in net assets from shareholder distributions.. (41,482,320) (33,761,482) (11,396,342) (11,520,298)
---------------- ----------------- ----------------- ---------------
Capital Transactions:
Proceeds from shares issued ...................... 2,299,943,459 1,902,144,644 919,067,677 839,832,064
Dividends reinvested ............................. 14,874,622 11,376,917 3,510,783 3,013,118
Cost of shares redeemed .......................... (2,266,756,713) (1,740,810,431) (1,038,874,963) (831,082,824)
---------------- ----------------- ----------------- ---------------
Change in net assets from share transactions ........ 48,061,368 172,711,130 (116,296,503) 11,762,358
---------------- ----------------- ----------------- ---------------
Change in net assets ................................ 48,056,869 172,704,358 (116,297,030) 11,772,839
Net Assets:
Beginning of period .............................. 776,335,690 603,631,332 255,584,990 243,812,151
---------------- ----------------- ----------------- ---------------
End of period .................................... $ 824,392,559 $ 776,335,690 $ 139,287,960 $ 255,584,990
================ ================= ================= ===============
Share Transactions:
Issued ........................................... 2,299,943,459 1,902,144,644 919,067,677 839,832,064
Reinvested ....................................... 14,874,622 11,376,917 3,510,783 3,013,118
Redeemed ......................................... (2,266,756,713) (1,740,810,431) (1,038,874,963) (831,082,824)
---------------- ----------------- ----------------- ---------------
Change in shares .................................... 48,061,368 172,711,130 (116,296,503) 11,762,358
================ ================= ================= ===============
</TABLE>
- ------------
See notes to financial statements
-30-
<PAGE> 40
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Tax-Exempt Growth & Income
Money Market Portfolio Equity Portfolio
-------------------------------------------------- ---------------------------------
Year Six months Year Year Year
ended ended ended ended ended
November 30, November 30, May 31, November 30, November 30,
1996 1995 1995 1996 1995
----------------- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ................ $ 2,853,695 $ 1,425,002 $ 3,002,806 $ 5,818,734 $ 5,821,152
Net realized gains (losses) from
investment transactions ............ - 4,193 (102) 36,039,992 19,924,501
Net change in unrealized appreciation
from investments ................... - - - 45,449,749 61,722,240
--------------- ---------------- ---------------- --------------- ----------------
Change in net assets resulting from
operations ........................... 2,853,695 1,429,195 3,002,704 87,308,475 87,467,893
--------------- ---------------- ---------------- --------------- ----------------
Distributions to Investor A shareholders:
From net investment income ........... (265,973) (81,409) (174,372) (375,855) (333,955)
In excess of net investment income ... - - - (1,697) (4,006)
From net realized gains .............. - - - (1,443,632) (202,448)
In excess of net capital gains ....... (250) - -
Distributions to Investor B shareholders:
From net investment income ........... (11,083) (2,563)
In excess of net investment income ... (2,688) (31)
From net realized gains .............. (49,605) -
Distributions to Trust shareholders:
From net investment income ........... (2,587,722) (1,343,593) (2,828,434) (4,795,604) (5,053,238)
In excess of net investment income ... - - - (49,002) (60,612)
From net realized gains .............. - - - (16,436,950) (2,589,698)
In excess of net capital gains ....... (3,631) - -
Distributions to Institutional
shareholders:
From net investment income ........... (636,192) (431,396)
In excess of net investment income ... (1,490) (5,175)
From net realized gains .............. (2,330,241) (241,715)
--------------- ---------------- ---------------- --------------- ---------------
Change in net assets from shareholder
distributions ........................ (2,857,576) (1,425,002) (3,002,806) (26,134,039) (8,924,837)
--------------- ---------------- ---------------- --------------- ---------------
Capital Transactions:
Proceeds from shares issued .......... 213,251,311 108,021,357 258,130,980 92,320,506 52,046,659
Dividends reinvested ................. 562,557 216,746 412,936 22,057,938 7,546,386
Cost of shares redeemed .............. (183,534,633) (115,269,717) (289,306,657) (65,290,328) (61,695,190)
--------------- ---------------- ---------------- --------------- ---------------
Change in net assets from share
transactions ......................... 30,279,235 (7,031,614) (30,762,741) 49,088,116 (2,102,145)
--------------- ---------------- ---------------- --------------- ---------------
Change in net assets .................... 30,275,354 (7,027,421) (30,762,843) 110,262,552 76,440,911
Net Assets:
Beginning of period .................. 83,434,625 90,462,046 121,224,889 352,636,527 276,195,616
--------------- ---------------- ---------------- --------------- ---------------
End of period ........................ $ 113,709,979 $ 83,434,625 $ 90,462,046 $ 462,899,079 $ 352,636,527
=============== ================ ================ =============== ===============
Share Transactions:
Issued ............................... 213,251,311 108,021,357 258,130,980 5,578,024 3,553,184
Reinvested ........................... 562,557 216,746 412,936 1,403,626 558,779
Redeemed ............................. (183,534,633) (115,269,717) (289,306,657) (3,843,934) (4,212,791)
--------------- ---------------- ---------------- --------------- ---------------
Change in shares ........................ 30,279,235 (7,031,614) (30,762,741) 3,137,716 (100,828)
</TABLE>
- ---------------
See notes to financial statements
-31-
<PAGE> 41
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Small Cap Equity Portfolio(a) International Equity Portfolio
------------------------------- ------------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ..................................... $ 232,304 $ 163,419 $ 248,827 $ 114,721
Net realized gains (losses) from investment transactions .. 13,981,122 13,478,311 (931,659) 905,432
Net realized gains (losses) from foreign currency
transactions ............................................ 3,133,420 (1,899,048)
Net change in unrealized appreciation from investments .... 3,579,525 8,231,506 4,679,792 4,500,515
Change in unrealized depreciation from translation of
assets and liabilities in foreign currencies ............ (1,058,982) (595,181)
-------------- -------------- ------------- -------------
Change in net assets resulting from operations ............... 17,792,951 21,873,236 6,071,398 3,026,439
-------------- -------------- ------------- -------------
Distributions to Investor A shareholders:
In excess of net investment income ........................ (6,160) - - -
From net realized gains ................................... (1,177,710) (831,483) - (261)
Tax return of capital ..................................... - - - (1,179)
Distributions to Investor B shareholders:
From net realized gains ................................... (51,148) - - -
Distributions to Trust shareholders:
From net investment income ................................ (214,557) - - -
From net realized gains ................................... (11,321,459) (5,902,352) - (7,793)
Tax return of capital ..................................... - - - (35,169)
Distributions to Institutional shareholders:
In excess of net investment income ........................ (13,982) - - -
From net realized gains ................................... (1,397,709) (432,261) - (71)
Tax return of capital ..................................... - - - (318)
-------------- -------------- ------------- -------------
Change in net assets from shareholder distributions .......... (14,182,725) (7,166,096) - (44,791)
-------------- -------------- ------------- -------------
Capital Transactions:
Proceeds from shares issued ............................... 79,498,432 70,516,196 23,675,008 16,109,115
Dividends reinvested ...................................... 12,406,113 5,971,760 - 28,077
Cost of shares redeemed ................................... (51,937,381) (12,457,399) (8,420,843) (3,928,946)
-------------- -------------- ------------- -------------
Change in net assets from share transactions ................. 39,967,164 64,030,557 15,254,165 12,208,246
-------------- -------------- ------------- -------------
Change in net assets ......................................... 43,577,390 78,737,697 21,325,563 15,189,894
Net Assets:
Beginning of period ....................................... 172,960,146 94,222,449 39,924,497 24,734,603
-------------- -------------- ------------- -------------
End of period ............................................. $ 216,537,536 $ 172,960,146 $ 61,250,060 $ 39,924,497
============== ============== ============= =============
Share Transactions:
Issued .................................................... 6,245,178 5,411,069 2,083,892 1,588,686
Reinvested ................................................ 1,012,913 549,194 - 2,857
Redeemed .................................................. (4,004,332) (975,925) (724,654) (386,418)
-------------- -------------- ------------- -------------
Change in shares ............................................. 3,253,759 4,984,338 1,359,238 1,205,125
============== ============== ============= =============
</TABLE>
- ------------
(a) Formerly Emerging Growth Portfolio.
See notes to financial statements
-32-
<PAGE> 42
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Government & Corporate Bond
Balanced Portfolio Portfolio
--------------------------------- ---------------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income .................................... $ 3,743,265 $ 3,284,357 $ 9,481,729 $ 9,249,020
Net realized gains (losses) from investment transactions . 7,057,146 4,625,170 1,012,372 (1,171,676)
Net change in unrealized appreciation (depreciation) from
investments ............................................ 7,234,948 14,959,325 (2,852,662) 14,042,027
--------------- --------------- --------------- ----------------
Change in net assets resulting from operations .............. 18,035,359 22,868,852 7,641,439 22,119,371
--------------- --------------- --------------- ----------------
Distributions to Investor A shareholders:
From net investment income ............................... (235,477) (224,231) (325,323) (309,012)
From net realized gains .................................. (306,345) - (10,112) -
Distributions to Investor B shareholders:
From net investment income ............................... (4,068) (225) (18,810) (1,688)
From net realized gains .................................. (1,338) - (207) -
Distributions to Trust shareholders:
From net investment income ............................... (2,248,807) (2,182,251) (8,420,741) (8,521,373)
From net realized gains .................................. (2,656,748) - (232,344) -
Distributions to Institutional shareholders:
From net investment income ............................... (1,181,916) (790,342) (716,855) (416,947)
From net realized gains .................................. (1,351,994) - (17,276) -
--------------- --------------- --------------- ----------------
Change in net assets from shareholder distributions ......... (7,986,693) (3,197,049) (9,741,668) (9,249,020)
--------------- --------------- --------------- ----------------
Capital Transactions:
Proceeds from shares issued .............................. 25,923,740 26,225,962 42,646,634 22,004,332
Dividends reinvested ..................................... 7,792,122 3,130,438 5,921,069 6,496,071
Cost of shares redeemed .................................. (35,443,035) (26,478,191) (27,482,599) (42,323,482)
--------------- --------------- --------------- ----------------
Change in net assets from share transactions ................ (1,727,173) 2,878,209 21,085,104 (13,823,079)
--------------- --------------- --------------- ----------------
Change in net assets ........................................ 8,321,493 22,550,012 18,984,875 (952,728)
Net Assets:
Beginning of period ...................................... 117,879,676 95,329,664 142,756,026 143,708,754
--------------- --------------- --------------- ----------------
End of period ............................................ $ 126,201,169 $ 117,879,676 $ 161,740,901 $ 142,756,026
=============== =============== =============== ================
Share Transactions:
Issued ................................................... 2,238,696 2,500,588 4,197,687 2,156,859
Reinvested ............................................... 684,060 299,781 580,294 646,557
Redeemed ................................................. (3,006,390) (2,584,883) (2,689,747) (4,153,696)
--------------- --------------- --------------- ----------------
Change in shares ............................................ (83,634) 215,486 2,088,234 (1,350,280)
=============== =============== =============== ================
</TABLE>
See notes to financial statements
-33-
<PAGE> 43
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Portfolio Municipal Portfolio
------------------------------ ----------------------------
Year Year Year July 10,
ended ended ended 1995 to
November 30, November 30, November 30, November 30,
1996 1995 1996 1995 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ......................................... $ 3,774,130 $ 2,914,916 $ 1,094,106 $ 264,700
Net realized gains (losses) from investment transactions ...... (408,957) 588,948 - -
Net change in unrealized appreciation (depreciation) from
investments ................................................. (197,452) 2,891,528 (16,660) 224,139
-------------- -------------- -------------- --------------
Change in net assets resulting from operations ................... 3,167,721 6,395,392 1,077,446 488,839
-------------- -------------- -------------- --------------
Distributions to Investor A shareholders:
From net investment income .................................... (445,187) (543,517) (1,458) -
In excess of net realized gains ............................... (27,732) - - -
Distributions to Investor B shareholders:
From net investment income .................................... (12,608) (603) - -
In excess of net realized gains ............................... (165) - - -
Distributions to Trust shareholders:
From net investment income .................................... (3,231,786) (2,346,666) (1,092,648) (264,700)
In excess of net realized gains ............................... (154,647) - - -
Distributions to Institutional shareholders:
From net investment income .................................... (84,549) (24,130) - -
In excess of net realized gains ............................... (2,281) - - -
-------------- -------------- -------------- --------------
Change in net assets from shareholder distributions .............. (3,958,955) (2,914,916) (1,094,106) (264,700)
-------------- -------------- -------------- --------------
Capital Transactions:
Proceeds from shares issued ................................... 20,374,470 12,388,111 9,484,969 23,945,082
Dividends reinvested .......................................... 2,512,482 2,029,261 64,963 9,378
Cost of shares redeemed ....................................... (6,672,311) (6,345,525) (3,763,873) (424,913)
-------------- -------------- -------------- --------------
Change in net assets from share transactions ..................... 16,214,641 8,071,847 5,786,059 23,529,547
-------------- -------------- -------------- --------------
Change in net assets ............................................. 15,423,407 11,552,323 5,769,399 23,753,686
Net Assets:
Beginning of period ........................................... 54,400,253 42,847,930 23,753,686 -
-------------- -------------- -------------- --------------
End of period ................................................. $ 69,823,660 $ 54,400,253 $ 29,523,085 $ 23,753,686
============== ============== ============== ==============
Share Transactions:
Issued ........................................................ 1,922,232 1,156,552 944,068 2,399,958
Reinvested .................................................... 236,847 193,708 6,499 938
Redeemed ...................................................... (627,360) (599,690) (377,354) (42,604)
-------------- -------------- -------------- --------------
Change in shares ................................................. 1,531,719 750,570 573,213 2,358,292
============== ============== ============== ==============
</TABLE>
- ------------
(a) Period from commencement of operations.
See notes to financial statements
-34-
<PAGE> 44
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
National
Missouri Tax-Exempt Municipal Bond
Bond Portfolio Portfolio
------------------------------------------------- -------------------
Year Six months Year November 18,
ended ended ended 1996 to
November 30, November 30, May 31, November 30,
1996 1995 1995 1996(a)
---------------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income ............................... $ 3,550,097 $ 1,654,275 $ 3,690,016 $ 735,988
Net realized gains (losses) from investment
transactions ...................................... 70,177 1,611 (190,330) 115,325
Net change in unrealized appreciation (depreciation)
from investments .................................. (87,057) 1,343,976 2,083,405 1,278,075
------------ ------------ ------------ -------------
Change in net assets resulting from operations ......... 3,533,217 2,999,862 5,583,091 2,129,388
------------ ------------ ------------ -------------
Distributions to Investor A shareholders:
From net investment income .......................... (1,169,732) (565,623) (1,301,629) (4)
From net realized gains ............................. - - (19,180) -
Distributions to Investor B shareholders:
From net investment income .......................... (25,005) (5,588) (593) (3)
Distributions to Trust shareholders:
From net investment income .......................... (2,355,360) (1,083,064) (2,387,794) (735,973)
From net realized gains ............................. - - (31,970) -
------------ ------------ ------------ -------------
Change in net assets from shareholder distributions .... (3,550,097) (1,654,275) (3,741,166) (735,980)
------------ ------------ ------------ -------------
Capital Transactions:
Proceeds from shares issued ......................... 18,205,943 8,449,317 13,215,405 314,008,996
Dividends reinvested ................................ 1,325,915 610,700 1,366,231 -
Cost of shares redeemed ............................. (10,722,765) (6,221,755) (23,338,004) (4,987,761)
------------ ------------ ------------ -------------
Change in net assets from share transactions ........... 8,809,093 2,838,262 (8,756,368) 309,021,235
------------ ------------ ------------ -------------
Change in net assets ................................... 8,792,213 4,183,849 (6,914,443) 310,414,643
Net Assets:
Beginning of period ................................. 72,931,512 68,747,663 75,662,106 -
------------ ------------ ------------ -------------
End of period ....................................... $81,723,725 $72,931,512 $68,747,663 $310,414,643
============ ============ ============ =============
Share Transactions:
Issued .............................................. 1,584,195 735,228 1,199,549 31,400,289
Reinvested .......................................... 114,877 53,264 124,846 -
Redeemed ............................................ (921,381) (540,692) (2,158,695) (498,183)
------------ ------------ ------------ -------------
Change in shares ....................................... 777,691 247,800 (834,300) 30,902,106
============ ============ ============ =============
</TABLE>
- ------------
(a) Period from commencement of operations.
See notes to financial statements
-35-
<PAGE> 45
THE ARCH FUND, INC.
Money Market Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- ---------------
<S> <C>
Certificates of Deposit (6.1%):
25,000,000 Bayerische Landesbank Co.,
5.43%, 6/9/97.............. $ 25,001,862
25,000,000 Fifth Third Bank, 5.36%,
1/30/97.................... 25,000,000
---------------
Total Certificates of Deposit 50,001,862
---------------
Commercial Paper (70.9%):
Automotive (2.4%):
20,000,000 Daimler-Benz, 5.27%, 12/2/96.. 19,997,072
---------------
Beverages (1.8%):
14,823,000 PepsiCo, 5.25%, 12/6/96....... 14,812,192
---------------
Chemicals (1.8%):
15,000,000 Air Products & Chemicals,
Inc., 5.28%, 3/19/97....... 14,762,400
---------------
Computers (2.2%):
18,500,000 Texas Instruments, 5.32%,
12/2/96.................... 18,497,266
---------------
Conglomerates (4.8%):
40,000,000 J.P. Morgan, 5.26%,
12/2/96.................... 39,994,155
---------------
Consumer Goods & Services (1.2%):
10,000,000 May Department Stores, 5.26%,
12/2/96.................... 9,998,539
---------------
Electrical & Electronic (9.8%):
20,000,000 CSC Enterprises, 5.30%,
12/2/96.................... 19,997,056
7,342,000 CSC Enterprises, 5.33%,
12/4/96.................... 7,338,739
25,800,000 Duracell International, Inc.,
5.25%, 12/2/96............. 25,796,238
10,000,000 Intel Corp., 5.24%, 12/9/96... 9,988,356
17,750,000 Texas Instruments, 5.36%,
1/15/97.................... 17,631,075
---------------
80,751,464
---------------
Entertainment (1.8%):
15,000,000 Walt Disney, 5.25%, 12/9/96...
14,982,500
---------------
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- ---------------
<S> <C>
Commercial Paper, continued:
Finance (15.4%):
40,000,000 Dillards Investment, 5.27%,
12/20/96................... $ 39,888,744
8,000,000 General Electric Capital
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
Services, 5.55%, 12/16/96.. 7,981,500
6,000,000 General Electric Capital
Services, 5.30%*, 4/28/97.. 5,869,267
16,000,000 Hershey's, 5.80%, 12/2/96.... 15,997,422
20,000,000 Morgan Stanley, 5.31%,
2/14/97.................... 19,778,750
13,515,000 Motorola Credit, 5.24%,
12/19/96................... 13,479,591
23,796,000 Transamerica Corp., 5.27%,
12/5/96.................... 23,782,066
--------------
126,777,340
--------------
Grain Mill Products (1.5%):
12,189,000 General Mills, 5.35%, 12/2/96. 12,186,985
--------------
Greeting Cards (2.3%):
19,000,000 American Greetings Corp.,
5.27%, 12/20/96............. 18,947,154
--------------
Insurance (3.8%):
6,000,000 Aetna Services, Inc., 5.35%,
12/4/96..................... 5,997,325
20,000,000 Aetna Services, Inc., 5.28%,
12/18/96.................... 19,950,133
5,000,000 Aetna Services, Inc., 5.30%,
12/18/96.................... 4,987,486
--------------
30,934,944
--------------
Leasing (3.6%):
16,900,000 International Lease Finance,
5.55%, 1/15/97.............. 16,782,756
13,000,000 Puerto Hampshire Corp.,
5.50%, 12/2/96.............. 12,998,014
--------------
29,780,770
--------------
Oil & Gas Exploration Production & Services (4.6%):
15,000,000 Petrofina, 5.30%, 12/5/96..... 14,991,167
23,000,000 Texaco, 5.23%, 12/31/96....... 22,899,758
--------------
37,890,925
--------------
</TABLE>
Continued
-36-
<PAGE> 47
THE ARCH FUND, INC.
Money Market Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- ---------------
<S> <C>
Commercial Paper, continued:
Photography (2.2%):
18,000,000 Xerox Corp., 5.32%,
12/13/96..................... $ 17,968,080
---------------
Printing & Publishing (4.4%):
14,180,000 Mcgraw-Hill, 5.33%, 12/31/96.... 14,117,017
22,000,000 Mcgraw-Hill, 5.30%, 2/3/97...... 21,792,711
---------------
35,909,728
---------------
Telecommunications (4.7%):
23,000,000 Ameritech Corp., 5.24%,
12/31/96..................... 22,899,567
15,705,000 Southwestern Bell, 5.35%,
12/31/96..................... 15,634,982
---------------
38,534,549
---------------
Transportation & Shipping (2.7%):
22,225,000 Matson Navigation, 5.31%,
1/15/97...................... 22,077,482
---------------
Total Commercial Paper 584,803,545
---------------
Corporate Bonds (7.6%):
Banking (1.8%):
15,000,000 Huntington Bank, 5.36%*,
12/2/96...................... 14,999,978
---------------
Financial Services (4.8%):
20,000,000 CIT Group Holdings, 5.30%*,
12/23/96..................... 19,998,803
20,000,000 Merrill Lynch, 5.56%*, 10/1/97
20,000,000
---------------
39,998,803
---------------
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- ---------------
<S> <C>
Corporate Bonds, continued:
Industrial Goods & Services (1.0%):
8,000,000 EI DuPont Nemour, 5.80%,
12/12/96..................... $ 7,999,963
---------------
Total Corporate Bonds 62,998,744
---------------
Medium Term Note (2.4%):
Finance (2.4%):
20,000,000 Bear Stearns Co., 5.41%*,
10/14/97..................... 20,000,000
---------------
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
Total Medium Term Note 20,000,000
---------------
U.S. Government Agencies (11.9%):
Federal Farm Credit Bank:
20,000,000 5.22%, 3/3/97 .................. 20,000,000
20,000,000 5.85%, 8/1/97 .................. 20,012,614
Federal Home Loan Mortgage Corp.:
15,000,000 7.88%, 12/20/96 ................ 15,017,584
Federal National Mortgage Association:
33,500,000 5.40%, 12/6/96 ................. 33,474,875
Student Loan Marketing Assoc.:
10,000,000 5.35%*, 12/20/96 ............... 10,000,000
---------------
Total U.S. Government Agencies 98,505,073
---------------
U.S. Treasury Notes (3.5%):
29,156,000 7.50%, 12/31/96................. 29,207,355
---------------
Total U.S. Treasury Notes 29,207,355
---------------
Total (Cost-$845,516,579)(a) $ 845,516,579
===============
</TABLE>
- ------------
Percentages indicated are based on net assets of $824,392,559.
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at November 30, 1996.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-37-
<PAGE> 49
THE ARCH FUND, INC.
Treasury Money Market Fund
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- --------------
<S> <C>
U.S. Treasury Bills (100.4%):
16,408,000 12/12/96...................... $ 16,383,108
51,801,000 12/19/96...................... 51,668,324
18,834,000 1/9/97........................ 18,732,299
2,014,000 1/23/97....................... 1,999,204
14,101,000 2/6/97........................ 13,969,782
4,147,000 2/27/97....................... 4,096,416
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ------------- ------------------------------- ----------------
<S> <C>
U.S. Treasury Bills, continued:
7,859,000 3/6/97........................ $ 7,754,273
25,655,000 3/20/97....................... 25,262,728
---------------
Total U.S. Treasury Bills 139,866,134
---------------
Total (Cost--$139,866,134)(a) $ 139,866,134
===============
</TABLE>
- -----------
Percentages indicated are based on net assets of $139,287,960.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-38-
<PAGE> 50
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Amortized
Amount Description Cost
- ---------- --------------------------------- ---------------
<S> <C>
Municipal Bond (99.9%):
Alabama (4.4%):
4,000,000 Parrish Alabama Industrial
Development Board, 4.10%*,
6/1/15 ...................... $ 4,000,000
1,000,000 Phenix County Alabama, 4.00%*,
12/1/15 ..................... 1,000,000
---------------
5,000,000
---------------
Arizona (2.2%):
975,000 Chandler, 3.55%*, 12/1/02 ...... 975,000
1,500,000 Maricopa County Arizona,
4.00%*, 12/1/08 ............. 1,500,000
---------------
2,475,000
---------------
Delaware (2.6%):
3,000,000 Delaware St. Ciba-Geigy,
4.15%*, 3/1/26 .............. 3,000,000
---------------
Florida (1.4%):
1,500,000 Florida State Board of
Education, 7.63%, 6/1/09,
Prerefunded @ 102, 6/1/97.... 1,558,511
---------------
Georgia (11.6%):
5,000,000 Burke County, Development
Authority Pollution Control,
4.10%*, 9/1/26 .............. 5,000,000
3,200,000 Georgia Gas Authority, 3.70%,
2/12/97** ................... 3,200,000
5,000,000 Monroe County, 4.10%*,
7/1/25 ...................... 5,000,000
---------------
13,200,000
---------------
Illinois (4.4%):
1,000,000 Chicago, O'Hare International
Airport, 4.10%*, 12/1/17 .... 1,000,000
4,000,000 Chicago, O'Hare International
Airport, 4.10%*, 12/1/17 .... 4,000,000
---------------
5,000,000
---------------
Iowa (4.2%):
2,100,000 Iowa Finance Authority Cedar
River, 4.15%*, 6/1/24 ....... 2,100,000
2,700,000 Iowa Finance Authority Cedar
River, 4.15%*, 5/1/25 ....... 2,700,000
---------------
4,800,000
---------------
Kentucky (3.5%):
4,000,000 Daviess County Kentucky Solid
Waste Scott Paper Co.,
4.20%*, 12/1/23 ............. 4,000,000
---------------
</TABLE>
<PAGE> 51
<TABLE>
<S> <C>
Louisiana (9.4%):
3,300,000 Calcasieu Parish, 4.10%*,
2/1/16 ...................... 3,300,000
1,000,000 East Baton Rouge Parish
Pollution Control, 4.00%*,
3/1/22 ...................... 1,000,000
1,900,000 Louisiana Public Facilities,
3.60%*, 9/1/15 .............. 1,900,000
500,000 West Feliciana Parish Louisiana
Pollution Control Rev.,
4.05%*, 4/1/16 .............. 500,000
4,000,000 West Felincia Parish, Gulf
States Utilities, 4.05%*,
12/1/15 ..................... 4,000,000
---------------
10,700,000
---------------
Minnesota (4.8%):
3,000,000 Becker Northern States Power,
3.55%, 2/11/97** ............ 3,000,000
2,450,000 Minneapolis PCR, 3.70%*,
3/1/11....................... 2,450,000
---------------
5,450,000
---------------
Mississippi (2.1%):
2,400,000 Perry County PCR, 4.00%*,
3/1/02 ...................... 2,400,000
---------------
Missouri (11.7%):
3,000,000 Missouri Health & Educational
Facilities Authority,
3.55%*, 12/1/19 ............. 3,000,000
2,800,000 Missouri Health & Educational
Facilities Authority,
3.55%*, 12/1/15 ............. 2,800,000
</TABLE>
Continued
-39-
<PAGE> 52
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Amortized
Amount Description Cost
- --------- --------------------------------- ------------
<S> <C>
Municipal Bond, continued:
Missouri (11.7%):
2,000,000 Missouri Health & Educational
Facilities Authority, 3.60%*,
6/1/06.......................... $ 2,000,000
3,500,000 Missouri State Environmental
Improvement, 3.65%,
6/1/97**........................ 3,500,000
1,000,000 Missouri State Health &
Educational Facs Revenue,
3.60%*, 9/1/10.................. 1,000,000
1,000,000 Monsanto County, 3.65%*,
6/1/23.......................... 1,000,000
------------
13,300,000
------------
Montana (3.4%):
2,200,000 Forsyth Montana PCR Series B,
3.60%*, 6/1/13.................. 2,200,000
1,600,000 Forsyth PCR, 3.70%*, 6/1/13...... 1,600,000
------------
3,800,000
------------
New Mexico (3.0%):
3,400,000 Farmington PCR, 4.00%*,
9/1/24.......................... 3,400,000
------------
North Carolina (4.3%):
4,900,000 North Carolina Medical Care
Commission Hospital Revenue
Series A, 4.05%*, 10/1/20....... 4,900,000
------------
Tennessee (2.3%):
2,650,000 Bradley County, 4.10%*,
11/1/17......................... 2,650,000
------------
Texas (17.0%):
1,700,000 Angelina & Neches River
Authority, 4.10%*, 5/1/14....... 1,700,000
2,000,000 Angelina & Neches River
Authority, 4.10%*, 5/1/14....... 2,000,000
4,500,000 Harris County Health Care Fac.,
4.10%*, 12/1/25................. 4,500,000
3,000,000 Houston Texas, 4.50%,
6/30/97......................... 3,009,992
3,900,000 North Central Health, 4.20%*,
10/1/15......................... 3,900,000
2,200,000 Port Corpus Christi, Nueces
County Marine Trem, 3.35%*,
9/1/14.......................... 2,200,000
2,000,000 Texas State - Tax and Revenue
Anticipation Notes, 4.75%,
8/29/97......................... 2,011,138
------------
19,321,130
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
------------
Utah (1.8%):
2,000,000 Salt Lake City Utah Pollution
Control, 4.10%, 8/1/07**........ 2,000,000
------------
Washington (5.8%):
4,000,000 King County Washington, 3.60%*,
2/13/97......................... 4,000,000
2,600,000 Washington St. Hlth, 4.00%*,
10/1/05......................... 2,600,000
------------
6,600,000
------------
Total Municipal Bond 113,554,641
------------
Investment Companies (0.0%):
1,000 Federated Tax-Free Trust Fund.... 1,000
1,000 Nuveen Tax-Exempt Money Market
Fund............................ 1,000
------------
Total Investment Companies 2,000
------------
Total (Cost--$113,556,641)(a) $113,556,641
============
</TABLE>
- --------------
Percentages indicated are based on net assets of $113,709,979.
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at November 30, 1996.
** Put and demand features exist allowing the fund to require the repurchase
of the investment within variable time periods ranging from daily, weekly,
monthly or semi-annually. Maturity date reflects the next put date.
(a) Cost for federal income tax and financial reporting purposes are the same.
PCR--Pollution Control Revenue
See notes to financial statements
-40-
<PAGE> 54
THE ARCH FUND, INC.
Growth and Income Equity Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- ------------------------------- --------------
<S> <C>
Commercial Paper (2.9%):
Telecommunications (2.9%):
13,365,000 Ameritech Corp., 5.88%,
12/2/96.................... $ 13,362,816
--------------
Total Commercial Paper 13,362,816
--------------
Common Stocks (96.9%):
Airlines (1.4%):
257,000 Southwest Airlines............ 6,360,750
--------------
Banking (2.3%):
114,600 Chase Manhattan Corp. ........ 10,829,700
--------------
Banking & Financial Services (2.3%):
155,000 Crestar Financial Corp. ...... 10,791,875
--------------
Beverages (1.9%):
288,000 PepsiCo, Inc. ................ 8,604,000
--------------
Business Services (1.7%):
200,000 First Data Corp.(c)........... 7,975,000
--------------
Chemicals (5.7%):
235,000 Millipore Corp. .............. 9,605,625
170,000 Morton International, Inc. ... 6,863,750
200,000 Praxair, Inc. ................ 9,725,000
--------------
26,194,375
--------------
Containers & Packaging (2.1%):
138,552 Avery Dennison................ 9,785,235
--------------
Electrical Equipment (4.5%):
111,000 General Electric Co. ......... 11,544,000
116,914 Grainger W.W., Inc. .......... 9,294,663
--------------
20,838,663
--------------
Financial Services (6.7%):
200,000 First USA, Inc.(c)............ 6,575,000
250,000 Green Tree Financial Corp. ... 10,468,750
176,935 PMI Group.(c)................. 10,262,230
132,000 United Companies Financial
Corp.(c)................... 3,943,500
-------------
31,249,480
--------------
Food Processing (5.9%):
255,000 H. J. Heinz Co.(c)............ 9,658,125
320,000 IBP, Inc. .................... 7,920,000
250,000 Sara Lee Corp. ............... 9,812,500
--------------
27,390,625
--------------
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
Health Care--General (2.2%):
88,058 Bristol Myers Squibb Co.(c)... 10,016,598
--------------
Informational Services (1.1%):
155,000 Analog Devices, Inc.(b)(c).... 4,979,375
--------------
Machinery & Equipment (1.6%):
415,000 McDermott International, Inc.. 7,366,250
--------------
Manufacturing-Consumer Goods (4.9%):
185,000 Crown Cork & Seal Co., Inc.... 9,805,000
280,000 Newell Co. ................... 8,680,000
185,157 Whitman Corp. ................ 4,258,611
--------------
22,743,611
--------------
Medical Equipment & Supplies (2.1%):
156,000 Allergan...................... 5,011,500
177,000 CR Bard....................... 4,956,000
--------------
9,967,500
--------------
Medical-Hospital Services (1.8%):
213,000 Columbia/HCA Healthcare Corp.
8,520,000
--------------
Oil & Gas Equipment/Services (3.8%):
321,300 Dresser Industries, Inc.(c)... 10,522,575
160,000 Tidewater, Inc. .............. 7,000,000
--------------
17,522,575
--------------
Oil & Gas Exploration Production & Services (5.9%):
175,000 Murphy Oil Corp. ............. 8,925,000
254,000 Ultramar Corp. ............... 8,064,500
459,100 Union Texas Petroleum
Holdings, Inc. ............ 10,214,975
-------------
27,204,475
--------------
Pharmaceuticals (13.1%):
160,000 Abbott Laboratories........... 8,920,000
140,000 American Home Products Corp. .
8,995,000
160,000 Eli Lilly & Co. .............. 12,239,999
100,000 Pfizer, Inc. ................. 8,962,500
166,678 Schering Plough Corp. ........ 11,875,807
140,000 Smithkline Beecham PLC,
ADR. ...................... 9,642,500
--------------
60,635,806
--------------
</TABLE>
Continued
-41-
<PAGE> 56
THE ARCH FUND, INC.
Growth and Income Equity Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- ------------------------------- --------------
<S> <C>
Common Stocks, continued:
Railroads (1.9%):
100,000 Burlington Northern Santa Fe $ 8,987,500
---------------
Retail Stores (3.6%):
162,000 Home Depot, Inc............... 8,444,250
321,363 Wal-Mart Stores, Inc.......... 8,194,757
---------------
16,639,007
---------------
Retail Stores - Grocery (1.0%):
128,500 Albertson's Inc............... 4,481,438
---------------
Technology (6.5%):
208,000 Automatic Data Processing,
Inc........................ 8,918,000
70,000 Microsoft(b).................. 10,981,250
186,500 Motorola, Inc................. 10,327,438
---------------
30,226,688
---------------
Tobacco (1.8%):
80,000 Philip Morris Cos., Inc....... 8,250,000
---------------
Utilities - Electric (3.8%):
227,800 Central & South West Corp..... 6,093,650
202,000 Cinergy Corp.(c).............. 6,767,000
140,500 Western Resources, Inc.(c).... 4,443,313
---------------
17,303,963
---------------
Utilities - Oil & Gas (2.2%):
250,000 Vastar Resources.............. 10,031,250
---------------
Utilities - Telecommunications (3.3%):
178,000 AT&T Corp..................... 6,986,500
186,000 GTE Corp...................... 8,346,750
---------------
15,333,250
---------------
Wholesale Distribution (1.8%):
239,935 Sysco Corp.................... 8,187,782
---------------
Total Common Stocks 448,416,771
---------------
Investment Companies (1.1%):
5,168,000 Cash Assets Trust Money
Market Fund................ 5,168,000
---------------
Total Investment Companies 5,168,000
---------------
Total (Cost--$361,437,050)(a) $ 466,947,587
===============
</TABLE>
<PAGE> 57
- ------------
Percentages indicated are based on net assets of $462,899,079.
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $1,286,000. Cost for federal income tax purposes differs
from value by net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation ........................ $108,084,975
Unrealized depreciation ........................ (3,860,240)
------------
Net unrealized appreciation .................... $104,224,735
============
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1996.
ADR--American Depository Receipt
See notes to financial statements
-42-
<PAGE> 58
THE ARCH FUND, INC.
Small Cap Equity Portfolio*
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------- ---------------
<S> <C>
Commercial Paper (1.7%):
Telecommunications (1.7%):
3,593,000 Ameritech Corp., 5.88%,
12/2/96......................... $ 3,592,413
--------------
Total Commercial Paper 3,592,413
--------------
Common Stocks (97.9%):
Airlines (0.8%):
114,800 Skywest, Inc.(c)................. 1,650,250
--------------
Banking (6.3%):
50,000 First Commerce Corp.(c).......... 1,968,750
40,000 First Financial Corp............. 1,195,000
120,000 Signet Banking Corp.............. 3,630,000
50,000 Standard Federated Bank.......... 2,818,750
100,000 Union Planters Corp.(c).......... 4,137,500
--------------
13,750,000
--------------
Beverages - Foreign (3.0%):
137,823 Canadaigua Wine, Inc.,
Class A(b).................... 3,721,221
75,000 Mondavi Robert Corp.
Class A(b)(c)................. 2,737,500
--------------
6,458,721
--------------
Broadcasting (1.0%):
70,000 Evergreen Media Corp.(b)(c)...... 1,732,500
75,000 Paxson Communications Corp.(b)... 515,625
--------------
2,248,125
--------------
Chemicals (3.2%):
75,000 Cytec Industries, Inc.(b)........ 2,775,000
198,000 Hanna (M.A.) Co.................. 4,182,750
--------------
6,957,750
--------------
Coal (0.5%):
56,250 Zeigler Coal Holding Co.......... 1,033,594
--------------
Commercial Services (2.3%):
100,000 NFO Research, Inc.(b)............ 2,200,000
100,000 Unitog Co........................ 2,712,500
--------------
4,912,500
--------------
Computer Software (0.8%):
100,000 Active Voice Corp.(b)............ 1,150,000
125,000 Bitstream, Inc.(b)(c)............ 578,125
--------------
1,728,125
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
<S> <C>
Computers (6.7%):
93,474 Komag, Inc.(b)(c)................ 3,014,537
139,800 Norand Corp.(b)(c)............... 2,341,650
155,000 Quantum Corp.(b)(c).............. 4,146,250
191,088 Zebra Technologies 4,920,515
Corp.(b)(c)...................
--------------
14,422,952
--------------
Consumer Goods & Services (2.0%):
115,000 Department 56, Inc.(b)........... 2,673,750
55,024 Talbots, Inc.(c)................. 1,588,818
--------------
4,262,568
--------------
Containers (1.2%):
105,000 Ball Corp........................ 2,572,500
--------------
Cosmetics (1.2%):
125,000 Research Medical, Inc.(b)(c)..... 2,578,125
--------------
Electrical Equipment (2.3%):
120,000 Hubbell, Inc., Class B(c)........ 5,039,999
--------------
Financial Services (12.3%):
100,000 Advanta Corp., Class B(c)........ 4,200,000
48,600 Charter One Financial, Inc....... 2,114,100
145,000 Cityscape Financial 3,770,000
Corp.(b)(c)...................
60,000 Finova Group, Inc.(c)............ 3,960,000
34,000 GMAC Investment Corp............. 2,592,500
107,000 Resource Bancshares Mortgage
Group, Inc.(c)................ 1,618,375
91,000 Southern Pacific Funding
Corp.(b)(c)................... 2,889,250
118,600 Union Acceptance Corp.(b)........ 2,312,700
108,400 United Companies Financial
Corp.(c)...................... 3,238,450
--------------
26,695,375
--------------
Food Processing (1.8%):
150,000 Hormel Foods Corp. 3,900,000
--------------
Food Products (1.0%):
172,500 Performance Food Group(b)........ 2,080,781
--------------
Hospital Supply & Management (0.6%):
222,000 OrthoLogic Corp.(b)(c)........... 1,359,750
--------------
</TABLE>
Continued
-43-
<PAGE> 60
THE ARCH FUND, INC.
Small Cap Equity Portfolio*
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------- ---------------
<S> <C>
Common Stocks, continued:
Industrial Goods & Services (0.6%):
99,300 Polymer Group, Inc.(b).......... $ 1,278,488
--------------
Informational Services (2.0%):
102,000 SunGard Data Systems,
Inc.(b)(c)................... 4,284,000
--------------
Insurance (2.4%):
82,100 American States Financial
Corp......................... 2,247,488
80,000 NAC Re
Corp.(c)..................... 2,920,000
--------------
5,167,488
--------------
Machinery & Equipment (0.6%):
24,000 Tecumseh Products Co.
Class A(c)................... 1,404,000
--------------
Manufacturing-Capital Goods (1.0%):
40,000 Aptaragroup, Inc................ 1,380,000
40,000 Holophane Corp.(b).............. 760,000
--------------
2,140,000
--------------
Manufacturing-Consumer Goods (0.6%):
50,000 Libbey, Inc.(c)................. 1,343,750
--------------
Manufacturing-Miscellaneous (0.8%):
75,000 Lydall, Inc.(b)................. 1,706,250
--------------
Medical Equipment & Supplies (9.2%):
135,000 Allergan, Inc................... 4,336,875
85,000 Dentsply International, Inc..... 3,952,500
93,000 Fisher Scientific Intl.(c)....... 4,254,750
77,000 Lunar Corp.(b).................. 2,387,000
125,000 Nellcor Puritan Bennett, 2,593,750
Inc.(b)(c)...................
150,000 Penederm, Inc.(b)............... 1,350,000
60,100 ResMed, Inc.(b)................. 1,126,875
--------------
20,001,750
--------------
Medical Services (6.2%):
100,000 Apria Healthcare Group, Inc.(b). 1,800,000
280,000 Beverly Enterprises, Inc.(b)(c). 3,710,000
66,000 Emeritus Corp.(b)............... 907,500
60,000 Horizon/CMS Healthcare Corp.(b). 645,000
95,000 Living Centers of America(b).... 2,410,625
60,000 Sterling House Corp.(b)......... 510,000
285,032 Sun Health Care Group,
Inc.(b)(c)................... 3,562,900
--------------
13,546,025
--------------
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
<S> <C>
Common Stocks, continued:
Medical--Hospital Management & Services (0.7%):
150,000 American Oncology Resources,
Inc.(b)(c)................... $ 1,462,500
--------------
Miscellaneous (1.7%):
65,000 Interim Services, Inc.(b)....... 2,551,250
75,000 Western Staff Services, Inc.(b). 1,040,625
--------------
3,591,875
--------------
Office/Business Equipment & Supplies (0.6%):
118,000 Nu-Kote Holding, Inc.
Class A(b)................... 1,253,750
--------------
Oil & Gas Equipment/Services (0.6%):
41,000 Swift Energy Co.(b)(c).......... 1,296,625
--------------
Oil & Gas Exploration Production &
Services (4.6%):
125,000 J. Ray McDermott, S.A.(b)....... 3,093,750
170,000 Union Texas Petroleum Holdings,
Inc.......................... 3,782,500
99,623 Weatherford Enterra, Inc.(b).... 3,038,502
--------------
9,914,752
--------------
Pharmaceuticals (1.9%):
91,000 Scherer (R.P.) Corp.(b)......... 4,163,250
--------------
Printing & Publishing (0.8%):
170,000 K-111 Communications
Corp.(b)..................... 1,700,000
--------------
Restaurants (1.2%):
55,000 Ruby Tuesday, Inc............... 886,875
174,000 Ryan's Family Steak Houses,
Inc.(b)...................... 1,218,000
65,000 Shoney's, Inc.(b)............... 536,250
--------------
2,641,125
--------------
Retail--General Merchandise (1.0%):
155,000 Oakley, Inc.(b)(c).............. 2,150,625
--------------
Retail Stores (4.3%):
70,000 Discount Auto Parts, Inc.(b).... 1,793,750
78,000 Marks Bros. Jewelers, Inc.(b)... 1,423,500
150,000 Michaels Stores, Inc.(b)(c)..... 1,500,000
123,360 Micro Warehouse, Inc.(b)........ 3,053,160
75,000 Tractor Supply Co.(b)(c)........ 1,575,000
--------------
9,345,410
--------------
Steel (0.7%):
120,716 J&L Specialty Steel, Inc........ 1,463,682
--------------
</TABLE>
Continued
-44-
<PAGE> 62
THE ARCH FUND, INC.
Small Cap Equity Portfolio*
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- --------------------------------- --------------
<S> <C>
Common Stocks, continued:
Telecommunications (2.3%):
175,000 Arch Communications Group,
Inc.(b)(c)................... $ 1,925,000
270,000 Mobile Telecom Tech
Corp.(b)(c).................. 3,155,625
--------------
5,080,625
--------------
Telecommunications-Services &
Equipment (1.3%):
222,000 InteliData Technologies
Corp.(b)(c).................. 1,633,781
100,000 SmarTalk Teleservices, Inc.(b).. 1,250,000
--------------
2,883,781
--------------
Trucking & Leasing (2.9%):
155,000 American Freightways Corp.(b)... 1,588,750
180,000 U.S. Freightways Corp. ......... 4,668,750
--------------
6,257,500
--------------
Utilities--Electric (1.0%):
75,000 Central Louisiana Electric...... 2,118,750
--------------
Utilities--Gas (1.1%):
54,000 Tejas Gas Corp.(b).............. 2,369,250
--------------
Wholesale Distribution (0.8%):
155,000 Peak Technologies Group(b)...... 1,743,750
--------------
Total Common Stocks 211,960,116
--------------
Investment Companies (0.5%):
1,000,000 Cash Assets Trust Money Market
Fund......................... 1,000,000
--------------
Total Investment Companies 1,000,000
--------------
Total (Cost--$204,903,389)(a) $ 216,552,529
==============
</TABLE>
- ------------
Percentages indicated are based on net assets of $216,537,536.
(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 ........................................... $ 31,424,716
Unrealized depreciation ........................................... (19,775,576)
-------------
Net unrealized appreciation ....................................... $ 11,649,140
=============
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1996.
* Formerly Emerging Growth Portfolio
See notes to financial statements
-45-
<PAGE> 63
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- ----------- ---------------------------------- -------------
<S> <C>
Common Stocks (96.6%):
Australia (1.0%):
Insurance (1.0%):
115,000 QBE Insurance..................... $ 602,207
-------------
Total Australia 602,207
-------------
Finland (0.7%):
Electronics (0.7%):
8,300 Nokia Preferred Free.............. 461,841
-------------
Total Finland 461,841
-------------
France (9.6%):
Banking (1.2%):
18,700 Banque Nationale de Paris......... 744,758
-------------
Building Products (1.2%):
5,000 Compagnie de Saint-Gobain......... 718,985
-------------
Construction - Domestic (1.2%):
7,800 Technip SA........................ 731,814
-------------
Energy (1.2%):
9,000 Total SA-B........................ 719,809
-------------
Insurance (2.4%):
23,200 Assurances Generales de France.... 759,616
5,750 Union des Assurances Federales.... 710,130
-------------
1,469,746
-------------
Merchandising (0.6%):
620 Carrefour......................... 382,971
-------------
Multiple Industry (0.8%):
7,100 Strafor-Facom..................... 523,395
-------------
Recreation (1.0%):
7,000 Salomon SA........................ 616,547
-------------
Total France 5,908,025
-------------
Germany (8.4%):
Business Services (0.9%):
4,150 Sap Preference.................... 570,754
-------------
Conglomerates (1.3%):
18,100 Hoechst AG........................ 792,483
-------------
Healthcare (1.8%):
880 Altana............................ 737,958
</TABLE>
Healthcare, continued:
<PAGE> 64
<TABLE>
<CAPTION>
<S> <C>
6,200 Gehe AG(b)........................ $ 381,171
-------------
1,119,129
-------------
Manufacturing--Engineering (1.0%):
1,400 Mannesmann AG Ordinary............ 584,280
-------------
Miscellaneous Materials (1.1%):
5,400 SGL Carbon........................ 663,975
-------------
Retail (1.1%):
15,800 Douglas Holding AG................ 656,832
-------------
Utilities (1.2%):
12,600 Veba(b)........................... 737,340
-------------
Total Germany 5,124,793
-------------
Hong Kong (6.7%):
Banking (0.8%):
100,000 Dao Heng Bank Group Ltd........... 474,650
-------------
Electric Utility (0.7%):
105,000 Great Eagle Holdings Ltd.......... 435,915
-------------
Financial Services (0.9%):
285,000 Peregrine Investment Holdings..... 527,094
28,500 Peregrine Investment Holdings
Warrants....................... 9,399
-------------
536,493
-------------
Hotels & Lodging (0.8%):
1,540,000 Regal Hotels International........ 507,889
-------------
Merchandising (0.3%):
237,000 Goldlion Holdings................. 197,704
-------------
Multiple Industry (1.5%):
319,000 First Pacific Co. Limited......... 443,513
50,000 Swire Pacific A................... 473,680
-------------
917,193
-------------
Real Estate (1.7%):
245,000 Amoy Properties Ltd............... 342,214
82,000 Cheung Kong....................... 721,158
-------------
1,063,372
-------------
Total Hong Kong 4,133,216
-------------
</TABLE>
Continued
-46-
<PAGE> 65
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- ---------- ---------------------------------- -------------
<S> <C>
Common Stocks, continued:
Italy (4.7%):
Banking (1.2%):
300,000 Banca Fideuram................... $ 734,692
-------------
Energy (1.2%):
143,000 ENI.............................. 753,268
-------------
Recreation (1.1%):
37,300 Bulgari.......................... 690,640
-------------
Telecommunications (1.2%):
310,000 Telecom Italia Mobile............ 729,510
-------------
Total Italy 2,908,110
-------------
Japan (25.6%):
Appliances (1.8%):
35,000 Sharp Corp....................... 547,452
9,000 Sony Corp........................ 576,538
-------------
1,123,990
-------------
Automotive (1.4%):
28,000 Honda Motor...................... 826,713
-------------
Banking (2.5%):
47,000 Asahi Bank....................... 458,436
22,000 Bank of Tokyo, Mitsubishi........ 450,439
38,000 Mitsubishi Trust & Banking....... 611,072
-------------
1,519,947
-------------
Conglomerates (0.9%):
48,000 Sekisui Chemical Co.............. 531,459
-------------
Construction (1.5%):
13,000 Sho-bond Construction Corp....... 403,251
64,000 Toda Construction................ 489,279
-------------
892,530
-------------
Data Processing (1.3%):
38,000 Canon, Inc....................... 801,406
-------------
Defense (0.8%):
40,000 Shiseido Co., Ltd................ 481,546
-------------
Electrical & Electronic (0.5%):
5,000 TDK Corp......................... 322,496
-------------
Electronic Components (2.7%):
3,500 Keyence Corp..................... 424,429
9,000 Rohm Co.......................... 553,603
-------------
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
<S> <C>
Electronic Components
43,000 Yamatake-Honeywell............... $ 699,033
-------------
1,677,065
-------------
Entertainment (1.3%):
4,000 SMC.............................. 271,353
40,000 Taiyo Yuden Co., Ltd............. 541,300
-------------
812,653
-------------
Financial Services (0.8%):
44,000 Daiwa Securities................. 475,571
-------------
Healthcare (0.8%):
12,700 Amway Japan...................... 472,065
-------------
Industrial Components (1.0%):
33,000 Bridgestone...................... 608,963
-------------
Machinery - Industrial (0.9%):
114,000 Ishikawajima-Harima Heavy
Industries Co., Ltd........... 530,931
-------------
Media (0.6%):
1,200 Nippon Television Network........ 360,633
-------------
Merchandising (2.0%):
25,000 Mycal Corp....................... 373,462
9,000 Nichiei Co....................... 631,898
4,000 Seven-Eleven Japan............... 238,664
-------------
1,244,024
-------------
Real Estate (0.8%):
40,000 Mitsubishi Estate Co. Ltd........ 506,151
-------------
Recreation (1.6%):
13,600 Nintendo......................... 962,037
-------------
Retail (0.4%):
21,000 Nippon Comsys Corp............... 262,039
-------------
Software & Computer Services (0.5%):
15,400 Meitec (9744).................... 322,074
-------------
Telecommunications (1.5%):
55 DDI Corp......................... 393,893
75 Nippon Telephone & Telegraph..... 535,149
-------------
929,042
-------------
Total Japan 15,663,335
-------------
</TABLE>
Continued
-47-
<PAGE> 67
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
--------- ---------------------------------- ------------
<S> <C>
Common Stocks, continued:
Malaysia (3.4%):
Aluminum (0.4%):
175,000 IOI Corporation Berhad........... $ 270,027
------------
Electric Utility (0.8%):
107,000 Malaysian Resources Corp., Bhd... 469,907
------------
Financial Services (0.9%):
85,000 Hong Leong Credit................ 524,624
------------
Real Estate (0.7%):
142,000 Hicom Holdings Bhd............... 410,125
------------
Services (Non-Financial) (0.6%):
196,000 Multi-Purpose Holdings Bhd....... 379,977
------------
Total Malaysia 2,054,660
------------
Netherlands (3.3%):
Appliances (1.0%):
12,635 Ahrend Groep Nv.................. 652,055
------------
Financial Services (0.9%):
16,000 International Nederlanden........ 560,371
------------
Healthcare (0.8%):
15,600 Gist Brocades.................... 480,328
------------
Recreation (0.6%):
7,300 Polygram......................... 351,757
------------
Total Netherlands 2,044,511
------------
Norway (0.9%):
Telecommunications (0.9%):
13,100 Nera AS.......................... 537,044
------------
Total Norway 537,044
------------
Portugal (1.1%):
Telecommunications (1.1%):
25,000 Portugal Telecom SA.............. 663,702
------------
Total Portugal 663,702
------------
Singapore (0.7%):
Banking (0.7%):
34,000 OCBC Foreign..................... 412,142
------------
Total Singapore 412,142
------------
Spain (2.8%):
Energy (1.0%):
17,100 Repsol SA........................ 633,162
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C>
------------
Insurance (0.7%):
6,000 Mapfre Vida...................... 402,162
------------
Utilities (1.1%):
16,466 Aguas D' Barcelona............... 648,468
------------
Water Utility (0.0%):
16,466 Sociedade General de Aguas de
Barcelona, SA................. 8,138
------------
Total Spain 1,691,930
------------
Sweden (3.5%):
Electronics (1.4%):
27,200 Ericsson Free.................... 838,787
------------
Insurance (1.2%):
25,100 Skandia Forsakrings AB........... 716,069
------------
Pharmaceuticals (0.9%):
14,500 Pharmacia & Upjohn, Inc.......... 558,394
------------
Total Sweden 2,113,250
------------
Switzerland (7.1%):
Banking (0.6%):
3,600 CS Holding Registered............ 383,545
------------
Electronics (1.0%):
500 Brown Boveri Series A Bearer..... 626,187
------------
Healthcare (3.2%):
700 Ares Serono...................... 654,675
90 Roche Genussshein................ 692,453
550 Sandoz SA Registered Swit........ 640,239
------------
1,987,367
------------
Insurance (1.2%):
650 Swiss Reinsurance Registered..... 710,229
------------
Utilities (1.1%):
1,600 Elektrowatt B.................... 642,543
------------
Total Switzerland 4,349,871
------------
United Kingdom (11.5%):
Banking (2.5%):
46,000 Barclays Bank PLC................ 791,103
63,600 Standard Chartered Bank.......... 721,888
------------
1,512,991
------------
</TABLE>
Continued
-48-
<PAGE> 69
THE ARCH FUND, INC.
International Equity Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or Market Value
Principal Security in U.S.
Amount Description Dollars
- ------------ --------------------------------- -------------
<S> <C>
Common Stocks, continued:
United Kingdom, continued:
Business Services (0.8%):
39,000 Reuters Holdings(b).............. $ 473,467
-------------
Commercial Services (2.3%):
233,000 Corporate Services Group PLC..... 657,738
105,800 Rentokil......................... 771,548
-------------
1,429,286
-------------
Computer Services (1.5%):
49,800 Misys PLC........................ 830,096
5,500 SEMA Group PLC................... 88,027
-------------
918,123
-------------
Electronic Components (2.1%):
109,600 Electrocomponents................ 813,071
121,000 Pace Micro Technology PLC(b)..... 484,910
-------------
1,297,981
-------------
Energy (1.2%):
63,200 British Petroleum................ 729,029
-------------
Telecommunications (1.1%):
154,000 Vodafone......................... 666,324
-------------
Total United Kingdom 7,027,201
-------------
United States (5.6%):
Beverages & Tobacco (0.8%):
10,800 Panamerican Beverages A.......... 504,900
-------------
Closed End Investment Companies (1.4%):
5,600 Genesis Chile Fund............... 224,448
8,400 India Magnum Fund(b)............. 336,336
3,100 Korea International Investment
Fund(b)....................... 293,477
-------------
854,261
-------------
Financial Services (0.4%):
6,000 Brazilian Investment Co.(b)...... 233,940
-------------
Healthcare (1.2%):
25,200 Elan-ADR(b)...................... 749,700
-------------
Multiple Industry (0.4%):
13,000 Argentinian Investor Co.......... 268,710
-------------
Retail (0.2%):
1,270 Fila Holdings ADR................ 93,980
-------------
Telecommunications (0.5%):
3,800 Telebras ADR..................... 288,800
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
<S> <C>
-------------
Textile (0.7%):
6,275 Gucci Group ADR.................. 460,428
-------------
Total United States 3,454,719
-------------
Total Common Stocks 59,150,557
-------------
U.S. Government Agencies (2.0%):
Federal Home Loan Mortgage Association:
1,228,000 0.00%, 12/2/96 ................. 1,227,610
-------------
Total U.S. Government Agencies 1,227,610
-------------
Investment Companies (1.0%):
5,100 Siam Fund(b)..................... 240,771
40 Taipei Fund(b)................... 354,000
-------------
Total Investment Companies 594,771
-------------
Total (Cost--$53,902,910)(a) $ 60,972,938
=============
</TABLE>
- ------------
Percentages indicated are based on net assets of $61,250,060.
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $15,000 and other differences of approximately $96,000.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized appreciation ............................. $8,413,795
Unrealized depreciation ............................. (1,454,387)
============
Net unrealized appreciation 6,959,408
============
</TABLE>
(b) Represents non-income producing securities.
ADR--American Depository Receipt
See notes to financial statements
-49-
<PAGE> 71
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ --------------------------------- ---------------
<S> <C>
Commercial Paper (2.4%):
Telecommunications (2.4%):
2,985,000 Ameritech Corp., 5.88%, 12/2/96. $ 2,984,512
---------------
Total Commercial Paper 2,984,512
---------------
Common Stocks (56.3%):
Banking (1.5%):
20,000 Chase Manhattan Corp............ 1,890,000
---------------
Banking & Financial Services (1.4%):
25,000 Crestar Financial Corp.......... 1,740,625
---------------
Beverages (0.6%):
25,250 PepsiCo, Inc.................... 754,344
---------------
Business Services (1.2%):
37,200 First Data Corp.(c)............. 1,483,350
---------------
Chemicals (3.8%):
37,800 Millipore Corp.................. 1,545,075
39,300 Morton International, Inc....... 1,586,737
35,000 Praxair, Inc.................... 1,701,875
---------------
4,833,687
---------------
Containers & Packaging (1.2%):
21,126 Avery Dennison.................. 1,492,024
---------------
Electrical Equipment (2.5%):
14,940 General Electric Co............. 1,553,760
20,800 Grainger W.W., Inc.............. 1,653,600
---------------
3,207,360
---------------
Financial Services (4.2%):
54,200 First USA, Inc.(c).............. 1,781,825
35,200 Green Tree Financial Corp....... 1,474,000
25,377 PMI Group(c).................... 1,471,866
20,000 United Companies Financial
Corp.(c)..................... 597,500
---------------
5,325,191
---------------
Food & Related (2.6%):
45,800 H. J. Heinz Co.................. 1,734,675
38,700 Sara Lee Corp................... 1,518,975
---------------
3,253,650
---------------
Food Processing (1.2%):
60,000 IBP, Inc........................ 1,485,000
---------------
Health Care--General (1.3%):
13,870 Bristol Myers Squibb Co.(c)..... 1,577,712
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
<S> <C>
---------------
Informational Services (0.7%):
26,400 Analog Devices, Inc.(b)(c)...... 848,100
---------------
Machinery & Equipment (0.8%):
60,000 McDermott International, Inc.... 1,065,000
---------------
Manufacturing-Consumer Goods (2.4%):
30,000 Crown Cork & Seal Co., Inc...... 1,590,000
21,000 Newell Co....................... 651,000
34,291 Whitman Corp.................... 788,693
---------------
3,029,693
---------------
Medical Equipment & Supplies (1.0%):
20,000 Allergan........................ 642,500
23,400 CR Bard, Inc.................... 655,200
---------------
1,297,700
---------------
Medical-Hospital Services (1.1%):
35,000 Columbia/HCA Healthcare Corp.... 1,400,000
---------------
Oil & Gas Equipment/Services (2.5%):
45,000 Dresser Industries, Inc......... 1,473,750
37,700 Tidewater, Inc.................. 1,649,375
---------------
3,123,125
---------------
Oil & Gas Exploration Production & Services (3.3%):
27,800 Murphy Oil Corp................. 1,417,800
40,600 Ultramar Corp................... 1,289,050
63,400 Union Texas Petroleum
Holdings, Inc.................. 1,410,650
---------------
4,117,500
---------------
Pharmaceuticals (7.8%):
26,900 Abbott Laboratories............. 1,499,675
20,000 American Home Products Corp..... 1,285,000
23,600 Eli Lilly & Co.................. 1,805,400
19,824 Pfizer, Inc..................... 1,776,726
24,322 Schering Plough Corp............ 1,732,943
26,138 Smithkline Beecham PLC, ADR..... 1,800,255
---------------
9,899,999
---------------
</TABLE>
Continued
-50-
<PAGE> 73
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ --------------------------------- ---------------
<S> <C>
Railroads (1.2%):
17,300 Burlington Northern Santa Fe.... $ 1,554,837
---------------
Retail Stores (2.4%):
27,300 Home Depot, Inc................. 1,423,013
60,893 Walmart Stores, Inc............. 1,552,771
---------------
2,975,784
---------------
Technology (3.1%):
16,756 Automatic Data Processing,
Inc.(c)...................... 718,413
11,300 Microsoft(b).................... 1,772,687
26,000 Motorola, Inc................... 1,439,750
---------------
3,930,850
---------------
Telecommunications (0.9%):
28,300 A T & T Corp.................... 1,110,775
---------------
Tobacco (1.5%):
18,600 Philip Morris Cos., Inc......... 1,918,125
---------------
Utilities--Electric (2.4%):
40,500 Central & South West Corp....... 1,083,375
35,300 Cinergy Corp.................... 1,182,550
26,000 Western Resources, Inc.......... 822,250
---------------
3,088,175
---------------
Utilities - Oil & Gas (1.3%):
40,000 Vastar Resources................ 1,605,000
---------------
Utilities - Telecommunications (1.3%):
35,800 GTE Corp........................ 1,606,525
---------------
Wholesale Distribution (1.1%):
40,669 Sysco Corp...................... 1,387,830
---------------
Total Common Stocks 71,001,961
---------------
Corporate Bonds (0.8%):
Oil & Exploration Products & Services (0.8%):
1,000,000 BP America, Inc., 8.88%, 12/1/97
1,030,860
---------------
Total Corporate Bonds 1,030,860
---------------
Medium Term Note (1.6%):
Finance (1.6%):
2,000,000 Federal Home Loan Bank, 5.35%,
2/7/01....................... 1,957,400
---------------
Total Medium Term Note 1,957,400
---------------
U.S. Government Agencies (12.6%):
Federal Home Loan Mortgage Corp.:
251,518 9.50%, 2/1/98 .................. $ 259,219
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
<S> <C>
254,389 7.00%, 3/1/98 .................. 257,887
441,013 6.00%, 4/1/98 .................. 438,808
96,453 6.50%, 4/1/98 .................. 96,935
423,460 6.50%, 4/1/98 .................. 425,577
113,476 7.00%, 4/1/98 .................. 115,036
596,178 6.50%, 4/1/08 .................. 592,452
270,105 7.00%, 4/1/08 .................. 272,636
234,325 7.00%, 4/1/08 .................. 236,521
791,567 6.50%, 1/1/09 .................. 786,620
Government National Mortgage Assoc.:
374,829 7.00%, 7/15/09 ................. 379,863
464,626 6.50%, 10/20/10 ................ 458,818
2,129,781 6.50%, 7/15/11 ................. 2,124,456
14,514 8.50%, 6/15/17 ................. 15,168
409,223 8.00%, 7/15/22 ................. 422,138
266,839 7.00%, 11/15/22 ................ 265,505
429,604 7.00%, 11/15/22 ................ 427,456
733,892 7.50%, 3/15/23 ................. 744,901
9,957 8.50%, 3/15/23 ................. 10,405
368,679 7.50%, 4/15/23 ................. 374,210
629,944 8.50%, 8/15/24 ................. 658,292
583,971 8.50%, 9/15/24 ................. 610,250
148,334 8.50%, 9/15/24 ................. 155,009
143,513 8.50%, 1/15/25 ................. 149,970
157,103 8.50%, 2/15/25 ................. 164,173
415,792 8.50%, 3/15/25 ................. 434,503
188,924 8.50%, 4/15/25 ................. 197,425
418,327 8.00%, 8/15/25 ................. 431,529
24,743 7.50%, 9/15/25 ................. 25,114
24,281 7.50%, 10/15/25 ................ 24,646
38,007 7.50%, 10/15/25 ................ 38,577
920,424 7.50%, 10/15/25 ................ 934,231
26,478 7.50%, 10/15/25 ................ 26,875
904,115 7.50%, 10/15/25 ................ 917,676
145,357 6.50%, 1/15/26 ................. 141,404
676,759 6.50%, 1/15/26 ................. 658,358
24,797 6.50%, 3/15/26 ................. 24,123
503,527 6.50%, 4/15/26 ................. 489,836
501,599 6.50%, 4/15/26 ................. 487,961
</TABLE>
Continued
-51-
<PAGE> 75
THE ARCH FUND, INC.
Balanced Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ --------------------------------- ---------------
<S> <C>
U.S. Government Agencies, continued:
478,770 6.50%, 4/15/26 ................. $ 465,752
184,745 6.50%, 5/15/26 ................. 179,721
---------------
Total U.S. Government Agencies 15,920,036
---------------
U.S. Treasury Bonds (9.0%):
300,000 10.75%, 8/15/05................. 394,020
2,750,000 12.00%, 8/15/13(c)............ 4,039,339
1,500,000 7.50%, 11/15/16............... 1,677,090
1,000,000 8.13%, 5/15/21(c)............. 1,199,010
1,000,000 8.13%, 8/15/21(c)............. 1,199,760
1,200,000 8.00%, 11/15/21............... 1,422,408
1,500,000 6.25%, 8/15/23................ 1,454,415
---------------
Total U.S. Treasury Bonds 11,386,042
---------------
U.S. Treasury Notes (16.4%):
3,000,000 6.25%, 1/31/97................ $ 3,005,610
3,500,000 6.88%, 3/31/97................ 3,518,410
2,250,000 5.75%, 9/30/97(c)............. 2,257,155
2,000,000 5.00%, 2/15/99(c)............. 1,974,860
3,000,000 7.50%, 5/15/02(c)............. 3,231,000
3,000,000 6.38%, 8/15/02(c)............. 3,075,060
1,000,000 6.25%, 2/15/03................ 1,017,840
2,500,000 7.00%, 7/15/06(c)............. 2,665,400
---------------
Total U.S. Treasury Notes 20,745,335
---------------
Investment Companies (0.4%):
500,000 Cash Assets Trust Money Market
Fund......................... 500,000
---------------
Total Investment Companies 500,000
===============
Total (Cost--$107,233,813)(a) $ 125,526,146
===============
</TABLE>
- ----------
Percentages indicated are based on net assets of $126,201,169.
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $378,000. Cost for federal income tax purposes differs
from value by net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation ........................................... $ 18,696,122
Unrealized depreciation ........................................... (781,785)
==============
Net unrealized appreciation ....................................... $ 17,914,337
==============
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1996.
ADR--American Depository Receipt
See notes to financial statements
-52-
<PAGE> 76
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------- ------------------------------- --------------
<S> <C>
U.S. Government Agencies (29.9%):
Federal Home Loan Mortgage Corp.:
62,124 7.50%, 1/15/97 ............... $ 62,083
1,553,379 6.50%, 2/1/98 ................ 1,561,146
1,002,649 6.50%, 3/1/98 ................ 1,007,662
67,461 8.50%, 5/1/01 ................ 69,991
145,373 8.50%, 11/1/01 ............... 150,279
101,728 8.00%, 3/1/02 ................ 104,271
32,593 8.00%, 3/1/02 ................ 33,408
150,093 7.50%, 4/1/02 ................ 152,344
64,396 8.00%, 5/1/02 ................ 66,006
9,460 8.00%, 5/1/02 ................ 9,696
5,859 8.00%, 6/1/02 ................ 6,006
332,743 8.00%, 6/1/02 ................ 341,062
80,213 8.00%, 6/1/02 ................ 82,219
18,557 8.00%, 6/1/02 ................ 19,021
28,967 8.00%, 7/1/02 ................ 29,692
194,747 8.00%, 7/1/02 ................ 199,615
118,205 8.50%, 3/1/05 ................ 122,195
9,650 8.50%, 4/1/05 ................ 9,975
1,000,000 7.46%, 8/3/05 ................ 1,011,660
86,115 8.50%, 9/1/05 ................ 89,021
43,299 8.50%, 4/1/06 ................ 45,179
2,415,691 8.00%, 1/1/23 ................ 2,487,389
570,958 8.00%, 1/1/23 ................ 587,904
Federal National Mortgage Assoc.:
214,818 8.50%, 5/25/97 ............... 215,181
1,428,262 6.00%, 11/1/00, Pool #190070 . 1,405,938
5,000,001 7.00%, 7/1/11 ................ 5,042,151
3,283,473 8.00%, 7/1/24, Pool #190264 .. 3,377,873
Government National Mortgage Assoc.:
23,636 9.50%, 2/15/01 ............... 25,077
51,526 9.50%, 9/15/01 ............... 54,665
208,641 8.00%, 1/15/02 ............... 216,398
49,442 8.00%, 3/15/02 ............... 51,280
197,465 8.00%, 3/15/02 ............... 204,806
202,730 8.00%, 4/15/02 ............... 210,267
148,426 8.00%, 7/15/02 ............... 153,945
98,169 9.50%, 10/15/02 .............. 104,150
114,376 9.50%, 1/15/06 ............... 121,345
183,736 8.00%, 5/15/06 ............... 190,567
83,321 9.50%, 7/15/07 ............... 88,398
413,135 8.00%, 11/15/07 .............. 428,495
465,708 8.00%, 12/15/07 .............. 483,023
713,923 9.50%, 8/15/09, Pool # 400219. 757,422
202,454 9.50%, 9/15/09 ............... 214,790
892,670 9.50%, 2/15/10 ............... 947,060
47,228 8.00%, 5/15/10 ............... 48,984
180,164 6.50%, 8/15/10 ............... 179,714
208,063 8.00%, 9/15/10 ............... 215,799
275,032 8.00%, 11/15/10 .............. 285,257
1,056,917 8.00%, 11/15/10 .............. 1,096,214
333,987 8.00%, 11/15/10 .............. 346,404
435,620 6.50%, 3/15/11 ............... 434,531
124,241 6.50%, 3/15/11 ............... 123,930
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
<S> <C>
377,727 6.50%, 4/15/11 ............... 376,783
116,739 6.50%, 4/15/11 ............... 116,447
496,989 6.50%, 4/15/11 ............... 495,746
674,556 6.50%, 5/15/11 ............... 672,869
489,123 6.50%, 5/15/11 ............... 487,900
84,064 6.50%, 5/15/11 ............... 83,854
628,584 6.50%, 6/15/11 ............... 627,012
115,200 6.50%, 6/15/11 ............... 114,912
322,901 6.50%, 6/15/11 ............... 322,094
790,736 6.50%, 6/15/11 ............... 788,759
362,672 6.50%, 7/15/11 ............... 361,765
430,436 6.50%, 8/15/11 ............... 429,360
2,560,196 8.50%, 4/15/17, Pool #0212112. 2,675,405
1,606,517 8.00%, 4/15/22, Pool #0320818. 1,657,218
3,791,920 7.50%, 1/15/23, Pool #0331839. 3,848,799
2,236,146 8.00%, 1/15/23, Pool #0331841. 2,306,719
1,106,039 7.50%, 4/15/23 ............... 1,122,629
1,683,515 9.00%, 3/15/25 ............... 1,786,092
4,950,002 6.50%, 6/15/26 ............... 4,815,412
--------------
Total U.S. Government Agencies 48,361,263
--------------
</TABLE>
Continued
-53-
<PAGE> 78
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------- ------------------------------- ------------
<S> <C>
U.S. Treasury Bonds (33.8%):
5,300,000 12.75%, 11/15/10.............. $ 7,680,336
9,305,000 12.00%, 8/15/13(b)............ 13,667,649
1,375,000 9.25%, 2/15/16(b)............. 1,800,741
1,675,000 8.75%, 5/15/17(b)............. 2,109,127
2,865,000 8.88%, 8/15/17................ 3,652,245
4,150,000 8.88%, 2/15/19(b)............. 5,316,648
2,183,000 8.75%, 8/15/20................ 2,775,510
9,400,000 7.25%, 8/15/22(b)............. 10,286,138
7,600,000 6.25%, 8/15/23................ 7,369,036
------------
Total U.S. Treasury Bonds 54,657,430
------------
U.S. Treasury Notes (35.5%):
21,950,000 6.38%, 5/15/99(b)............. 22,313,712
10,800,000 6.00%, 10/15/99(b)............ 10,906,380
7,500,000 6.13%, 7/31/00(b)............. 7,590,975
11,400,000 5.63%, 2/28/01(b)............. 11,328,978
1,600,000 6.63%, 7/31/01(b)............. 1,651,104
2,400,000 6.38%, 8/15/02................ 2,460,048
1,000,000 7.88%, 11/15/04............... 1,116,480
------------
Total U.S. Treasury Notes 57,367,677
------------
Investment Companies (0.0%):
61,700 Federated Money Market Trust
Fund....................... 61,700
------------
Total Investment Companies 61,700
------------
Total (Cost--$156,326,416)(a) $160,448,070
============
</TABLE>
- ------------
Percentages indicated are based on net assets of $161,740,901.
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $119,000. Cost for federal income tax purposes differs
from value by net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized appreciation ......................... $4,327,285
Unrealized depreciation ......................... (324,850)
----------
Net unrealized appreciation ..................... $4,002,435
==========
</TABLE>
(b) A portion of this security was loaned as of November 30, 1996.
See notes to financial statements
-54-
<PAGE> 79
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------------- -------------
<S> <C>
U.S. Government Agencies (29.2%):
Federal Home Loan Mortgage Corp.:
62,124 7.50%, 1/15/97 .................. $ 62,083
271,660 7.50%, 8/1/97 ................... 277,601
505,299 6.50%, 2/1/98 ................... 507,826
395,553 9.50%, 2/1/98 ................... 407,665
569,119 6.00%, 5/1/98 ................... 566,273
21,938 9.50%, 9/1/04, Pool # 380053 .... 23,131
500,000 7.46%, 8/3/05 ................... 505,830
333,897 8.50%, 3/1/06 ................... 348,398
588,910 7.50%, 4/1/08, Pool #E4-5929 .... 602,526
495,000 7.00%, 11/1/11, Pool #E65619 .... 499,638
Federal National Mortgage Assoc.:
714,131 6.00%, 11/1/00, Pool #190070 .... 702,969
381,998 7.00%, 11/1/11, Pool #250738 .... 385,219
351,670 7.00%, 11/1/11, Pool #349630 .... 354,635
256,332 7.00%, 11/1/11, Pool #351122 .... 258,495
1,641,736 8.00%, 7/1/24, Pool #190264 ..... 1,688,936
Government National Mortgage Assoc.:
332,323 8.00%, 1/15/07 .................. 344,679
84,323 6.50%, 5/15/08 .................. 84,112
391,999 9.00%, 7/15/09 .................. 413,680
526,307 9.00%, 11/15/09 ................. 555,417
865,441 8.00%, 10/15/10 ................. 897,618
126,964 6.50%, 11/15/10 ................. 126,647
395,411 6.50%, 2/15/11 .................. 394,423
408,004 6.50%, 3/15/11 .................. 406,984
444,496 6.50%, 3/15/11 .................. 443,385
460,820 6.50%, 3/15/11 .................. 459,667
741,764 6.50%, 3/15/11 .................. 739,909
67,430 6.50%, 3/15/11 .................. 67,262
838,247 6.50%, 4/15/11 .................. 836,151
463,295 6.50%, 4/15/11 .................. 462,137
391,338 6.50%, 5/15/11 .................. 390,360
62,609 6.50%, 5/15/11 .................. 62,452
152,581 6.50%, 5/15/11 .................. 152,199
271,269 6.50%, 6/15/11 .................. 270,591
121,273 6.50%, 6/15/11 .................. 120,969
421,119 6.50%, 7/15/11 .................. 420,066
880,398 6.50%, 7/15/11 .................. 878,197
203,780 8.50%, 5/15/17, Pool #0219152.... 212,950
175,962 8.50%, 6/15/21, Pool #0307921.... 183,880
1,162,318 7.50%, 12/15/22, Pool 0347332.... 1,179,752
651,055 8.00%, 5/15/23, Pool #0352469.... 671,602
260,474 9.50%, 1/15/25 .................. 282,614
730,424 9.50%, 2/15/25, Pool #365292 .... 792,510
19,190 9.50%, 2/15/25 .................. 20,822
538,463 9.50%, 2/15/25, Pool#401796 ..... 584,232
376,090 9.50%, 3/15/25, Pool #407257 .... 408,058
278,196 9.50%, 4/15/25, Pool #386741 .... 301,843
-------------
Total U.S. Government Agencies 20,356,393
-------------
U.S. Treasury Bonds (8.6%):
1,000,000 12.75%, 11/15/10................. 1,449,120
3,100,000 12.00%, 8/15/13(b)............... 4,553,435
-------------
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
<S> <C>
Total U.S. Treasury Bonds 6,002,555
-------------
U.S. Treasury Notes (61.7%):
5,200,000 5.75%, 9/30/97(b)................ 5,216,537
2,500,000 5.63%, 10/31/97(b)............... 2,505,700
2,250,000 5.00%, 1/31/98(b)................ 2,238,548
5,000,000 5.13%, 2/28/98................... 4,978,550
5,300,000 7.13%, 10/15/98(b)............... 5,447,658
3,600,000 7.00%, 4/15/99(b)................ 3,707,604
6,500,000 6.38%, 5/15/99................... 6,607,705
1,650,000 7.75%, 11/30/99(b)............... 1,741,427
2,150,000 6.88%, 3/31/00................... 2,224,089
1,000,000 8.00%, 5/15/01................... 1,085,600
1,650,000 7.50%, 5/15/02(b)................ 1,777,050
700,000 7.25%, 8/15/04(b)................ 753,690
3,000,000 6.50%, 8/15/05(b)................ 3,091,950
1,700,000 5.88%, 11/15/05(b)............... 1,680,756
-------------
Total U.S. Treasury Notes 43,056,864
-------------
</TABLE>
Continued
-55-
<PAGE> 81
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------------- -------------
<S> <C>
Investment Companies (0.1%):
95,300 Federated U.S. Treasury
Obligation Fund............... $ 95,300
-------------
Total Investment Companies 95,300
-------------
Total (Cost $68,860,209)(a) $ 69,511,112
=============
</TABLE>
- -----------
Percentages indicated are based on net assets of $69,823,660.
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting purposes in excess of federal income tax reporting
of approximately $38,000. Cost for federal income tax purposes differs from
value by net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized appreciation .......................... $ 868,537
Unrealized depreciation .......................... (255,602)
----------
Net unrealized appreciation ...................... $ 612,935
==========
</TABLE>
(b) A portion of this security was loaned as of November 30, 1996.
See notes to financial statements
-56-
<PAGE> 82
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ ---------------------------------- --------------
<S> <C>
Municipal Bonds (96.4%):
Alabama (3.4%):
1,000,000 Alabama State GO, 4.40%,
12/1/00........................ $ 1,006,250
--------------
Alaska (1.0%):
300,000 Anchorage, 5.40%, 8/1/98 ........ 306,750
--------------
Colorado (3.9%):
390,000 Aurora-Colorado Springs, 5.40%,
6/1/98 ....................... 398,775
720,000 El Paso County Colorado School
District No. 020, 5.15%,
12/15/99 ..................... 739,800
--------------
1,138,575
--------------
Hawaii (5.4%):
1,000,000 Hawaii State, 4.10%, 11/1/01 .... 981,250
600,000 Hawaii State Highway Revenue 611,250
- OID, 4.80%, 7/1/03 ......... --------------
1,592,500
--------------
Illinois (11.3%):
700,000 Chicago, O'Hare International
Airport, 4.10%*, 12/1/17 ..... 700,000
500,000 Chicago, Water Revenue, 4.70%,
12/1/99 ...................... 507,500
500,000 Dupage County, 5.90%, 11/1/01 ... 536,250
400,000 Illinois State GO, 5.25%,
4/1/01....................... 413,500
400,000 Illinois State GO Refunding,
5.60%, 10/1/99 ............... 415,000
750,000 Toll Highway Authority, 4.75%,
1/1/02 ....................... 755,625
--------------
3,327,875
--------------
Indiana (1.7%):
500,000 Muncie, School Board, 4.95%,
1/15/02 ...................... 507,500
--------------
Iowa (1.5%):
425,000 Ottumwa County, 5.10%, 6/1/01 ... 440,937
--------------
Kentucky (1.3%):
380,000 Kenton County, Water Revenue,
5.60%, 2/1/99 ................ 391,400
--------------
Maine (2.8%):
800,000 Maine Municipal Bond Refunding,
4.90%, 11/1/02 ............... 820,000
--------------
Maryland (3.1%):
400,000 Department of Transportation,
4.10%, 12/15/00 .............. 400,000
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
<S> <C>
500,000 Washington, Suburban Sanitation
District, 5.00%, 6/1/00 ...... 513,750
--------------
913,750
--------------
Michigan (5.7%):
400,000 Chelsea, 5.25%, 5/1/01 .......... 415,500
800,000 Kent City, Building Authority
GO, 4.50%, 12/1/01 ........... 808,000
450,000 Oakland County, Building
Authority, 4.75%, 4/1/00 ..... 457,312
--------------
1,680,812
--------------
Minnesota (3.0%):
365,000 Duluth, 4.65%, 2/1/02 ........... 370,475
500,000 Minnesota State, 5.50%, 8/1/98 .. 513,750
--------------
884,225
--------------
Mississippi (3.4%):
500,000 Mississippi State Capital
Improvement, 5.00%, 8/1/99 ... 513,125
500,000 Perry County, PCR, 4.00%*,
3/1/02 ....................... 500,000
--------------
1,013,125
--------------
Missouri (1.1%):
320,000 Jefferson County, School
District, 4.70%, 3/1/01 ...... 326,000
--------------
Nevada (4.8%):
900,000 Sparks GO, 4.80%, 3/1/04 ........ 909,000
</TABLE>
Continued
-57-
<PAGE> 84
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ ---------------------------------- --------------
<S> <C>
Municipal Bonds, continued:
Nevada, continued:
500,000 Washoe County, 5.30%, 8/1/00 $ 518,750
--------------
1,427,750
--------------
New Mexico (3.6%):
345,000 Albuquerque, 4.40%, 7/1/00 ...... 347,156
700,000 New Mexico State Capital
Projects GO, 4.60%, 8/1/00 ... 710,500
--------------
1,057,656
--------------
New York (1.8%):
500,000 New York Power Authority, 5.85%,
1/1/00 ....................... 522,500
--------------
Pennsylvania (3.1%):
500,000 Bucks County, 5.60%, 3/1/98 ..... 510,000
400,000 Delaware County, 4.35%, 10/1/00 . 404,500
--------------
914,500
--------------
Rhode Island (3.1%):
900,000 Commonwealth Construction
Capital Development, 4.60%,
11/1/03 ...................... 901,125
--------------
South Carolina (2.9%):
400,000 Charleston S.C. GO, 4.50%,
2/1/00 ....................... 404,500
450,000 Charleston School District,
4.40%, 2/1/98 ................ 452,813
--------------
857,313
--------------
South Dakota (2.2%):
640,000 South Dakota Building Authority,
Finance Bonds, 5.00%, 9/1/02 . 652,000
--------------
Texas (7.3%):
450,000 Dallas, Water & Sewer Revenue,
4.60%, 4/1/01 ................ 454,500
800,000 Houston, Series C, 5.50%, 4/1/01 837,000
Texas, continued:
400,000 San Antonio GO, 4.88%, 8/1/99 409,000
450,000 Tarrant Water Control, 5.60%,
3/1/00 ....................... 468,563
--------------
2,169,063
--------------
Utah (5.6%):
675,000 Box Elder School District,
4.80%, 6/15/01 ............... 693,563
560,000 North Davis County Sewer
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
<S> <C>
District, 5.70%, 3/1/02 ...... 592,900
350,000 North Davis County Sewer
District, GO, 5.70%, 3/1/03 .. 372,312
--------------
1,658,775
--------------
Vermont (0.9%):
270,000 Vermont Municipal Bond, 4.50%,
12/1/01 ...................... 272,363
--------------
Virginia (2.8%):
400,000 Virginia Beach GO, 4.20%,
7/15/98 ...................... 401,000
400,000 Virginia Public Building
Refunding, 5.70%, 8/1/00 ..... 419,500
--------------
820,500
--------------
Washington (7.2%):
500,000 Clark County, 4.60%, 1/1/01 ..... 503,750
500,000 Grant County Public Utilities
District, 4.80%, 1/1/04 ...... 503,750
600,000 Seattle, 4.80%, 5/1/02 .......... 608,250
250,000 Seattle Water System Refunding
Bonds, 4.70%, 12/1/00 ........ 254,687
250,000 Washington State Refunding
Bonds, Series R-92C, 5.75%,
9/1/02 ....................... 267,188
--------------
2,137,625
--------------
Wisconsin (2.5%):
325,000 Brown County, 4.80%, 11/1/01 .... 331,906
</TABLE>
Continued
-58-
<PAGE> 86
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ ---------------------------------- -----------
<S> <C>
Municipal Bonds, continued:
Wisconsin (2.5%):
380,000 Milwaukee County, Refunding
Bonds, Series A, 5.25%,
9/1/00 ....................... $ 391,875
-----------
723,781
-----------
Total Municipal Bonds 28,464,650
-----------
Investment Companies (2.5%):
548,000 Federated Tax-Free Trust Mutual
Fund.......................... $ 548,000
197,000 Nuveen Tax Exempt Money Market
Fund.......................... 197,000
-----------
Total Investment Companies 745,000
-----------
Total (Cost--$29,002,171)(a) $29,209,650
===========
</TABLE>
- ------------
Percentages indicated are based on net assets of $29,523,085.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized appreciation ........................ $244,939
Unrealized depreciation ........................ (37,460)
========
Net unrealized appreciation .................... $207,479
========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at November 30, 1996.
GO--General Obligation.
OID--Original Issue Discount.
PCR--Pollution Control Revenue.
See notes to financial statements
-59-
<PAGE> 87
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ ---------------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds (92.3%):
Missouri (88.0%):
300,000 Christian County School District R-6, 7.05%, 3/1/11 ............................................... $ 327,375
1,255,000 Columbia GO, 5.50%, 10/1/03 ....................................................................... 1,339,712
1,000,000 Columbia Water & Electrical Revenue, 6.13%, 10/1/12 ............................................... 1,052,500
750,000 Franklin County Union Reorganized School District Series 1993, 5.75%, 3/1/13 ...................... 768,750
1,000,000 Hazelwood School District Series 1994, 5.85%, 3/1/09 .............................................. 1,041,250
1,000,000 Jefferson City, School District, 6.70%, 3/1/11 .................................................... 1,156,250
150,000 Kansas City Municipal Assistance Corp., 7.15%, 4/15/04 ............................................ 166,875
2,415,000 Kansas City School District Building, 5.15%, 2/1/08 ............................................... 2,439,150
1,000,000 Kansas City School District Building Series D, 5.00%, 2/1/14, Insured by FGIC ..................... 958,750
1,000,000 Kansas City School District Series 1993 C, 5.38%, 7/1/05, Insured by FGIC.......................... 1,041,250
1,000,000 Kansas City Sewer Revenue, 7.25%, 4/1/03, Prerefunded 4/1/99 @ 100................................. 1,071,250
700,000 Lincoln County IDR, 7.50%, 5/1/05 ................................................................. 752,500
1,500,000 Mehlville School District 09, 6.00%, 2/15/13 ...................................................... 1,586,250
1,500,000 Missouri Board Public Buildings, 6.40%, 12/1/09 ................................................... 1,606,875
2,000,000 Missouri Building, Series A, 5.40%, 8/1/09 ........................................................ 2,065,000
1,000,000 Missouri Environmental Resources Authority, 6.45%, 7/1/08 ......................................... 1,100,000
720,000 Missouri Environmental Resources Authority, 7.00%, 10/1/10 ........................................ 789,300
1,100,000 Missouri Environmental Resources Authority, 6.88%, 6/1/14 ......................................... 1,207,250
500,000 Missouri Environmental Resources Authority, 6.55%, 7/1/14 ......................................... 542,500
1,250,000 Missouri Environmental Resources Authority, 5.63%, 7/1/16 ......................................... 1,279,687
200,000 Missouri Environmental Resources Authority, 7.40%, 5/1/20 ......................................... 219,250
100,000 Missouri Environmental Resources Authority, 7.40%, 5/1/20 ......................................... 109,875
1,000,000 Missouri GO, 5.25%, 8/1/08 ........................................................................ 1,018,750
1,000,000 Missouri GO, 5.13%, 8/1/09 ........................................................................ 1,007,500
1,400,000 Missouri Health & Educational Facilities Authority, 4.20%*, 12/1/05 ............................... 1,400,000
800,000 Missouri Health & Educational Facilities Authority, 7.75%, 6/1/07 ................................. 829,864
600,000 Missouri Health & Educational Facilities Authority, 6.63%, 11/1/09 ................................ 672,000
500,000 Missouri Health & Educational Facilities Authority, 7.13%, 12/15/12, Prerefunded 12/15/00 @ 102.... 563,125
2,000,000 Missouri Health & Educational Facilities Authority, 5.10%, 11/15/13 ............................... 1,942,500
1,000,000 Missouri Health & Educational Facilities Authority, 5.38%, 2/15/14 ................................ 1,001,250
750,000 Missouri Health & Educational Facilities Authority, 6.25%, 6/1/15 ................................. 794,063
2,000,000 Missouri Health & Educational Facilities Authority, 6.25%, 6/1/16 ................................. 2,117,500
2,500,000 Missouri Health & Educational Facilities Authority, 5.25%, 5/15/21 ................................ 2,418,750
1,200,000 Missouri Health & Educational Facilities Authority Child Mercy, 5.63%, 5/15/12 .................... 1,215,000
2,300,000 Missouri Health & Educational Facilities Revenue, 3.60%*, 9/1/10 .................................. 2,300,000
1,000,000 Missouri Higher Education Loan Authority, 5.75%, 2/15/02 .......................................... 1,040,000
500,000 Missouri Housing Development, 7.00%, 9/1/10 ....................................................... 534,375
495,000 Missouri Housing Development, 6.90%, 7/1/18 ....................................................... 519,750
1,000,000 Missouri Housing Development, 6.60%, 7/1/24 ....................................................... 1,042,500
1,000,000 Missouri Sewer, 5.75%, 3/1/01 ..................................................................... 1,053,750
</TABLE>
Continued
-60-
<PAGE> 88
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ -------------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
Municipal Bonds, continued:
Missouri, continued:
750,000 Missouri Southern State College, 5.25%, 12/1/12 .................................................. $ 738,750
200,000 Missouri Water PCR, 7.13%, 12/1/10 ............................................................... 220,750
1,000,000 Missouri Water PCR, 5.75%, 8/1/12 ................................................................ 1,030,000
1,000,000 Missouri Western State College, 5.40%, 10/1/16 ................................................... 1,002,500
570,000 O'Fallon GO, 5.75%, 3/1/10 ....................................................................... 582,113
600,000 Phelps County Hospital Revenue, 8.20%, 3/1/05, Prerefunded 3/1/00 @ 102........................... 682,500
1,000,000 Sikeston Electric Revenue, 5.00%, 6/1/22 ......................................................... 941,250
1,000,000 Sikeston Electric Revenue, 6.25%, 6/1/22, Prerefunded 6/1/02 @ 102................................ 1,110,000
500,000 Southeast Missouri Correctional Facilities, 5.75%, 10/15/08 ...................................... 515,625
500,000 Southeast Missouri Correctional Facilities, 5.75%, 10/15/16 ...................................... 504,375
2,000,000 Springfield School District R-12, 5.25%, 3/1/11 .................................................. 1,980,000
400,000 Springfield School District R-12 Series A, 6.75%, 3/1/11 ......................................... 438,500
2,000,000 Springfield Water Works Revenue, 5.60%, 5/1/23 ................................................... 2,022,500
500,000 St. Charles County GO, 5.70%, 2/15/05 ............................................................ 526,875
1,000,000 St. Charles County GO, 6.00%, 2/15/09 ............................................................ 1,035,000
500,000 St. Charles County Public Facilities, 6.38%, 3/15/07 ............................................. 538,750
750,000 St. Louis County Paltonville R-3 School District, 6.25%, 2/1/10 .................................. 814,687
1,000,000 St. Louis County Rockwood School District R-6, 5.00%, 2/1/04 ..................................... 1,018,750
2,500,000 St. Louis County Series B, 5.50%, 2/1/13 ......................................................... 2,521,875
800,000 St. Louis County, IDR, 7.38%, 2/1/14 ............................................................. 810,000
400,000 St. Louis IDR, 6.65%, 5/1/16 ..................................................................... 455,000
500,000 St. Louis Water Revenue, 6.00%, 7/1/14 ........................................................... 529,375
1,740,000 St. Peters GO, 5.80%, 1/1/09 ..................................................................... 1,809,600
1,065,000 St. Peters GO, 5.85%, 1/1/13 ..................................................................... 1,090,294
1,400,000 University of Missouri Industrial Development, 5.95%, 12/20/25 ................................... 1,414,000
925,000 University of Missouri Revenue Bonds, 6.50%, 11/1/11 ............................................. 1,002,469
2,000,000 University of Missouri Revenue Bonds, 5.50%, 11/1/23 ............................................. 2,012,500
400,000 Webster Groves, 6.60%, 2/1/10 .................................................................... 456,500
--------------
71,896,814
--------------
Puerto Rico (4.3%):
500,000 Commonwealth, 6.45%, 7/1/17 ...................................................................... 539,375
1,000,000 Commonwealth GO Series A, 6.00%, 7/1/06 .......................................................... 1,060,000
2,000,000 Public Buildings Authority, 5.50%, 7/1/21 ........................................................ 1,950,000
--------------
3,549,375
--------------
Total Municipal Bonds 75,446,189
--------------
</TABLE>
Continued
-61-
<PAGE> 89
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Fund
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ------------ ------------------------------------------------------------------------------------------------ --------------
<S> <C>
Investment Companies (6.6%):
2,364,000 Federated Tax-Free Trust Fund...................................................................... $ 2,364,000
3,025,000 Nuveen Tax Exempt Money Market Fund................................................................ 3,025,000
-------------
Total Investment Companies 5,389,000
-------------
Total (Cost-$78,138,683)(a) $ 80,835,189
=============
</TABLE>
- ------------
Percentages indicated are based on net assets of $81,723,725.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation ................ $ 2,797,984
Unrealized depreciation ................ (101,478)
------------
Net unrealized appreciation ............ $ 2,696,506
============
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio
Investments is the rate in effect at November 30, 1996.
FGIC--Financial Guaranty Insurance Corp.
GO--General Obligation
IDR--Industrial Development Revenue
PCR--Pollution Control Revenue
See notes to financial statements
-62-
<PAGE> 90
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ---------------------------------------------------------------------------------------------------- --------------
<S> <C> <C>
Municipal Bonds (97.8%):
Alabama (2.7%):
2,000,000 Birmingham, Series A, 5.70%, 6/1/13 ................................................................. $ 2,052,500
3,000,000 Birmingham, Series A, 5.90%, 6/1/18 ................................................................. 3,060,000
1,000,000 Huntville, 6.75%, 4/1/06 ............................................................................ 1,092,500
1,000,000 Huntville, 6.75%, 2/1/10 ............................................................................ 1,088,750
1,000,000 Tuscaloosa, 6.88%, 7/1/11 ........................................................................... 1,082,500
--------------
8,376,250
--------------
Alaska (0.3%):
1,000,000 State Housing Finance Corp., Series A, 5.70%, 12/1/11 ............................................... 1,017,500
--------------
Arizona (4.6%):
1,000,000 Chandler Street & Highway User Revenue, 7.00%, 7/1/08 ............................................... 1,102,500
1,000,000 Mohave County Unified School District No. 1, Series A, 5.90%, 7/1/15 ................................ 1,047,500
1,000,000 Phoenix, 6.80%, 7/1/08 .............................................................................. 1,085,000
1,000,000 Pima County University School District, Series D, 6.10%, 7/1/10 ..................................... 1,060,000
6,400,000 Salt River Project Agricultural Impact, Series C, 6.20%, 1/1/12 ..................................... 6,728,000
1,000,000 Salt River Project Agriculture Impact, 6.00%, 1/1/13 ................................................ 1,037,500
1,000,000 State Transportation Board Excise Tax, Series B, 5.75%, 7/1/05 ...................................... 1,081,250
1,000,000 State Transportation Board Highway Revenue, Series A, 6.50%, 7/1/11 ................................. 1,105,000
--------------
14,246,750
--------------
California (2.9%):
1,000,000 California State, 6.00%, 9/1/09 ..................................................................... 1,100,000
1,000,000 Los Angeles Department of Water & Power, 5.70%, 9/1/10 .............................................. 1,026,250
1,000,000 Los Angeles Department of Water & Power, 6.88%, 1/15/11 ............................................. 1,098,750
1,000,000 Los Angeles Department of Water & Power, 6.10%, 7/1/11 .............................................. 1,060,000
1,500,000 San Francisco City And County, Series D, 6.20%, 6/15/08 ............................................. 1,584,375
2,000,000 Southern California Public Power Authority, Series A, 5.00%, 7/1/15 ................................. 1,890,000
1,000,000 State Public Works Board Lease Revenue, Series A, 7.00%, 9/1/09 ..................................... 1,116,250
--------------
8,875,625
--------------
Colorado (0.8%):
1,000,000 Fort Collins, Series C, 6.00%, 12/1/09 .............................................................. 1,051,250
1,000,000 Jefferson County School District No. R001, 5.90%, 12/15/05 .......................................... 1,071,250
500,000 Summit County School District No. RE1, 9.80%, 12/1/97 ............................................... 530,435
--------------
2,652,935
--------------
Connecticut (1.4%):
3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 ......................................................... 3,165,000
1,000,000 Connecticut State, Series A, 6.50%, 3/15/10 ......................................................... 1,111,250
--------------
4,276,250
--------------
Delaware (0.7%):
2,000,000 Wilmington, 6.75%, 5/15/10 .......................................................................... 2,187,500
--------------
</TABLE>
Continued
-63-
<PAGE> 91
-63-
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Florida (3.4%):
2,000,000 Brevard County, 6.00%, 9/1/11 ....................................................................... $ 2,100,000
1,000,000 Jacksonville Electrical Authority Revenue, 6.90%, 10/1/07 ........................................... 1,107,500
1,000,000 Jacksonville Transportation, 7.00%, 7/1/13 .......................................................... 1,036,040
1,000,000 Pollution Control, Series Y, 6.50%, 7/1/11 .......................................................... 1,076,250
1,000,000 State Board of Education Capital Outlay Pub. Ed., 6.13%, 6/1/10 ..................................... 1,057,500
1,000,000 State Board of Education Capital Outlay Pub. Ed., Series A, 5.88%, 6/1/16 ........................... 1,032,500
1,000,000 State Board of Education Capital Outlay Pub. Ed., Series A, 6.75%, 6/1/09 ........................... 1,107,500
1,300,000 State Board of Education Capital Outlay Refunded, Series A, 6.10%, 6/1/00 ........................... 1,379,625
700,000 State Board of Education Capital Outlay Unrefunded, Series A, 6.10%, 6/1/00 ......................... 720,944
---------------
10,617,859
---------------
Georgia (0.7%):
1,000,000 Atlanta, Series A, 6.10%, 12/1/19 ................................................................... 1,056,250
1,000,000 Georgia State, Series B, 6.30%, 3/1/09 .............................................................. 1,130,000
---------------
2,186,250
---------------
Guam (0.3%):
1,000,000 Government Water System Revenue, 7.00%, 7/1/09 ...................................................... 1,083,750
---------------
Hawaii (0.7%):
1,000,000 Hawaii State, Series BR, 7.00%, 6/1/09 .............................................................. 1,091,250
1,000,000 Hawaii State, Series BT, 6.13%, 2/1/10 .............................................................. 1,077,500
---------------
2,168,750
---------------
Illinois (9.8%):
1,000,000 Arlington Heights, Series B, 5.88%, 12/1/12 ......................................................... 1,028,750
3,000,000 Chicago, 6.00%, 1/1/11 .............................................................................. 3,187,500
1,000,000 Chicago Metropolitan Water Reclamation, 5.40%, 12/1/06 .............................................. 1,050,000
1,000,000 Chicago Metropolitan Water Reclamation, 5.50%, 12/1/08 .............................................. 1,047,500
1,000,000 Chicago Metropolitan Water Reclamation, 6.30%, 12/1/09 .............................................. 1,087,500
2,000,000 Cook County, 5.90%, 11/15/16 ........................................................................ 2,072,500
1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 .............................................................. 1,055,000
1,000,000 Evanston, 6.13%, 12/1/11 ............................................................................ 1,055,000
1,000,000 Illinois State, 6.00%, 10/1/01 ...................................................................... 1,070,000
1,000,000 Illinois State, 6.80%, 4/1/06 ....................................................................... 1,026,840
1,000,000 Illinois State, 5.88%, 6/1/09 ....................................................................... 1,042,500
1,000,000 Illinois State, 6.25%, 10/1/11 ...................................................................... 1,071,250
1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA....................................................... 1,025,000
3,000,000 Illinois State, 5.88%, 8/1/12 ....................................................................... 3,116,250
2,000,000 Illinois State, 5.63%, 7/1/13 ....................................................................... 2,035,000
2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA....................................................... 2,005,000
1,000,000 Illinois State, 5.75%, 7/1/16 ....................................................................... 1,018,750
1,000,000 Kane County Public Building, Series B, 6.40%, 12/1/03 ............................................... 1,045,000
</TABLE>
Continued
-64-
<PAGE> 92
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Illinois, continued:
1,000,000 Lake County Water & Sewer Systems, Series A, 6.70%, 12/1/06 ......................................... $ 1,105,000
1,000,000 Lake County Water & Sewer Systems, Series A, 5.50%, 12/1/09 ......................................... 1,015,000
1,000,000 Springfield, 6.30%, 12/1/13 ......................................................................... 1,058,750
1,000,000 Springfield, 7.00%, 12/1/11 ......................................................................... 1,095,000
--------------
30,313,090
--------------
Indiana (5.5%):
5,000,000 Goshen-Chandler School Building, 5.75%, 1/15/10 ..................................................... 5,125,000
3,000,000 Hammond Multi-School Building Corp., 5.80%, 1/15/15 ................................................. 3,060,000
5,000,000 Hammond Multi-School Building Corp., 5.85%, 1/15/20 ................................................. 5,100,000
1,000,000 Indianapolis Local Public Improvements, Series C, 6.50%, 2/1/08 ..................................... 1,072,500
1,000,000 Transportation Finance Authority, Series A, 5.75%, 6/1/12 ........................................... 1,048,750
1,500,000 Whitko Middle School Building Corp., 5.88%, 7/15/12 ................................................. 1,558,125
--------------
16,964,375
--------------
Kansas (0.7%):
1,000,000 Douglas County School District No. 497, Series A, 6.00%, 9/1/11 ..................................... 1,071,250
500,000 Johnson County School District No. 233, 6.10%, 3/1/99 ............................................... 502,350
500,000 Shawnee County, 9.60%, 9/1/00 ....................................................................... 590,625
--------------
2,164,225
--------------
Kentucky (0.2%):
70,000 State Turnpike Authority Economic Development, 7.25%, 5/15/10 ....................................... 77,613
430,000 State Turnpike Authority Economic Development, 7.25%, 5/15/10 ....................................... 476,762
--------------
554,375
--------------
Michigan (1.4%):
335,000 Gratiot County Economic Development, 9.25%, 10/1/00 ................................................. 335,020
1,000,000 Greenville Public Schools, 5.75%, 5/1/11 ............................................................ 1,038,750
1,000,000 Johannesburg-Lewistown Area Schools, 5.00%, 5/1/13 .................................................. 963,750
2,000,000 Redford School District, 5.95%, 5/1/15 .............................................................. 2,097,500
--------------
4,435,020
--------------
Minnesota (2.1%):
1,000,000 Metropolitan Council, 6.88%, 12/1/04 ................................................................ 1,070,000
1,000,000 Metropolitan Council, Series D, 6.75%, 9/1/09 ....................................................... 1,067,500
1,000,000 Minneapolis Special School District, Series A, 5.70%, 2/1/09 ........................................ 1,048,750
1,000,000 Northern Municipal Power Agency, Series A, 5.90%, 1/1/08 ............................................ 1,055,000
2,000,000 Northern Municipal Power Agency, Series A, 7.25%, 1/1/16 ............................................ 2,142,500
--------------
6,383,750
--------------
Mississippi (0.3%):
1,000,000 Mississippi State, 6.20%, 2/1/08 .................................................................... 1,086,250
--------------
</TABLE>
Continued
-65-
<PAGE> 93
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Missouri (10.4%):
250,000 Blue Springs Waterworks & Sewer Revenue, 6.10%, 9/1/98 .............................................. $ 254,460
300,000 Blue Springs Waterworks & Sewer Revenue, 6.20%, 9/1/99 .............................................. 305,460
1,000,000 Clay County, 7.60%, 7/1/98 .......................................................................... 1,020,380
1,000,000 Independence Electrical Utility Revenue, 7.10%, 6/1/04, Prerefunded 12/1/98 @ 100.................... 1,053,750
730,000 Jackson County Reorganized School District No. 4, 6.65%, 3/1/03, Prerefunded 3/1/99 @ 100............ 771,063
1,000,000 Kansas City, 6.50%, 3/1/06 .......................................................................... 1,066,250
650,000 Kansas City Water Revenue, Series A, 7.00%, 12/1/08 ................................................. 656,500
1,000,000 Kansas City Water Revenue, Series B, 6.70%, 12/1/06, Prerefunded 12/1/97 @ 101....................... 1,041,580
250,000 Metropolitan St. Louis Sewer District, 9.00%, 2/1/97 ................................................ 252,225
2,000,000 Springfield Missouri School District R12, Series A, 6.75%, 3/1/11 ................................... 2,192,500
1,000,000 Springfield School District No R12, 6.38%, 3/1/12 ................................................... 1,055,000
1,000,000 St. Charles County Francis Howell School, 6.70%, 3/1/07 ............................................. 1,093,750
1,000,000 St. Louis County, 6.30%, 2/1/00 ..................................................................... 1,046,250
1,000,000 St. Louis County, 7.20%, 2/1/05 ..................................................................... 1,108,750
500,000 St. Louis County Industrial Development, 8.00%, 10/1/12 ............................................. 505,330
1,000,000 State Enviromental Improvement & Energy, 5.88%, 1/1/15 .............................................. 1,017,500
1,000,000 State Environmental Resources Authority, 7.00%, 10/1/10 ............................................. 1,096,250
365,000 State Health & Education Facilities, 6.00%, 5/15/04, Prerefunded 5/15/03 @ 101....................... 399,219
635,000 State Health & Education Facilities, 6.00%, 5/15/04 ................................................. 692,943
900,000 State Health & Education Facilities, 7.25%, 7/1/15 .................................................. 920,610
2,200,000 State Health & Education Facilities, 7.75%, 6/1/05, Prerefunded 6/1/98 @ 102......................... 2,367,750
1,000,000 State Health & Education Facilities, Series A, 6.75%, 5/15/12 ....................................... 1,152,500
1,000,000 State Health & Education Facilities, Series AA, 6.25%, 6/1/07 ....................................... 1,080,000
1,500,000 State Health & Education Facilities, Series B, 7.00%, 6/1/05 ........................................ 1,668,750
3,000,000 State Health & Education Facilities, Series D, 7.00%, 12/1/09 ....................................... 3,292,500
1,000,000 State Health & Educational Facilities, 7.13%, 12/15/12, Prerefunded 12/15/00 @ 102................... 1,126,250
1,200,000 State Health & Educational Facilities, 7.75%, 6/1/07 ................................................ 1,244,796
2,500,000 State Water Pollution Control Service, 7.13%, 12/1/10 ............................................... 2,759,375
---------------
32,241,691
---------------
Nebraska (0.7%):
1,000,000 Omaha Public Power District Electric Revenue, Series B, 6.00%, 2/1/07 ............................... 1,097,500
1,000,000 Public Power District Revenue, Series A, 5.50%, 1/1/13 .............................................. 1,008,750
---------------
2,106,250
---------------
Nevada (1.8%):
3,000,000 Nevada State, 6.50%, 12/1/12 ........................................................................ 3,296,250
1,000,000 Nevada State Universal Systems Projects, 6.50%, 8/1/08 .............................................. 1,096,250
1,000,000 Nevada State, Series A, 6.50%, 5/1/08 ............................................................... 1,091,250
---------------
5,483,750
---------------
</TABLE>
Continued
-66-
<PAGE> 94
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
New Hampshire (1.7%):
1,000,000 Concord, 6.15%, 10/15/10 ............................................................................ $ 1,077,500
1,000,000 State Capital Improvements, Series B, 6.45%, 11/1/08 ................................................ 1,106,250
3,000,000 State Turnpike System Revenue, 6.00%, 4/1/13 ........................................................ 3,090,000
---------------
5,273,750
---------------
New Jersey (1.0%):
1,000,000 New Jersey State, 7.25%, 4/15/08 .................................................................... 1,085,000
2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 .......................................................... 2,137,500
---------------
3,222,500
---------------
New York (0.7%):
2,100,000 State Power Authority, Series V, 7.88%, 1/1/07 ...................................................... 2,210,985
---------------
North Carolina (1.0%):
2,000,000 Eastern Municipal Power Agency, Series B, 6.00%, 1/1/13 ............................................. 2,057,500
1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 ......................................................... 1,016,250
---------------
3,073,750
---------------
Ohio (1.4%):
1,000,000 Columbus Sewer Improvement No. 27-E-U, 6.30%, 2/15/12 ............................................... 1,070,000
2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%, 5/1/13 ............................................... 2,115,000
1,000,000 Hamilton City Electric, Series A, 6.00%, 10/15/12 ................................................... 1,057,500
---------------
4,242,500
---------------
Oklahoma (0.5%):
500,000 Oklahoma City New Public Housing, 5.75%, 5/1/98 ..................................................... 513,750
1,000,000 Tulsa, 6.25%, 6/1/11 ................................................................................ 1,065,000
---------------
1,578,750
---------------
Oregon (0.3%):
1,000,000 State Veteran Welfare, Series 74A, 7.60%, 3/1/01 .................................................... 1,027,860
---------------
Pennsylvania (2.2%):
1,000,000 Allegheny County Series C-40, 5.90%, 5/1/07 ......................................................... 1,068,750
1,500,000 Burrell School District, 5.65%, 11/15/16 ............................................................ 1,533,750
1,000,000 Easttown Township, 5.65%, 8/1/17 .................................................................... 1,016,250
1,000,000 State Higher Education Facilities, Series A, 5.88%, 1/1/15 .......................................... 1,035,000
2,000,000 State Higher Education Facilities, Series B, 5.88%, 1/1/15 .......................................... 2,070,000
---------------
6,723,750
---------------
Puerto Rico (0.1%):
200,000 Industrial Medical & Enviromental, 3.41%*, 3/1/23 ................................................... 200,690
---------------
Tennessee (2.0%):
1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 ...................................................... 1,055,000
</TABLE>
Continued
-67-
<PAGE> 95
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Tennessee, continued:
1,000,000 Metropolitan Government Nashville & Davidson County, 5.75%, 1/1/15 .................................. $ 1,017,500
1,000,000 Metropolitan Government Nashville & Davidson County, 6.13%, 5/15/19 ................................. 1,051,250
2,000,000 Shelby County, Series A, 6.25%, 12/1/09 ............................................................. 2,180,000
1,000,000 Shelby County, Series B, 5.88%, 3/1/12 .............................................................. 1,033,750
---------------
6,337,500
---------------
Texas (11.7%):
230,000 Austin, 6.25%, 9/1/06 ............................................................................... 244,088
400,000 Austin, 6.25%, 9/1/06 ............................................................................... 432,000
3,000,000 Austin Independent School District, 5.75%, 8/1/15 ................................................... 3,093,750
1,000,000 Austin Public Improvement, 6.13%, 9/1/10 ............................................................ 1,051,250
1,000,000 Austin Utility Systems Revenue, 6.25%, 11/15/07 ..................................................... 1,081,250
4,000,000 Austin Utility Systems Revenue, Series A, 6.00%, 11/15/05 ........................................... 4,310,000
1,000,000 Brazos River Authority Special Facilities, 7.00%, 8/15/11 ........................................... 1,100,000
1,000,000 Dallas Waterworks & Sewer, Series A, 6.00%, 10/1/10 ................................................. 1,026,250
1,000,000 Fort Worth Water & Sewer Revenue, Series B, 6.50%, 12/15/06 ......................................... 1,075,000
1,000,000 Friendship Independent School District, 6.90%, 2/15/10 .............................................. 1,078,750
1,000,000 Harris County, 7.00%, 10/1/07 ....................................................................... 1,126,250
1,000,000 Harris County, Series B, 5.80%, 10/1/04 ............................................................. 1,058,750
1,000,000 Houston Independent School District, 6.75%, 8/15/08 ................................................. 1,101,250
1,000,000 Houston Water & Sewer Systems Revenue, Series B, 6.75%, 12/1/08 ..................................... 1,110,000
715,000 Houston, Series C, 6.25%, 3/1/12 .................................................................... 750,750
1,000,000 Humble Independent School District, 6.25%, 2/1/07 ................................................... 1,085,000
1,000,000 Manor Independent School District, 5.70%, 8/1/10 .................................................... 1,038,750
1,000,000 Royse City Independent School District, 5.50%, 2/15/15 .............................................. 1,012,500
1,050,000 San Antonio, 6.00%, 8/1/09 .......................................................................... 1,069,687
1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 ........................................................... 1,022,500
2,000,000 San Antonio Electric & Gas Revenue, 6.50%, 2/1/12 ................................................... 2,085,000
480,000 Spring Branch Independent School District, 6.38%, 2/1/07 ............................................ 522,000
520,000 Spring Branch Independent School District, 6.38%, 2/1/07 ............................................ 555,100
480,000 Spring Branch Independent School District, 6.38%, 2/1/09 ............................................ 522,000
520,000 Spring Branch Independent School District, 6.38%, 2/1/09 ............................................ 551,200
3,000,000 State Public Finance Authority, Series A, 5.95%, 10/1/15 ........................................... 3,127,500
1,000,000 State Public Finance Authority, Series A, 5.70%, 10/1/07 ............................................ 1,046,250
1,000,000 University Texas Permenant University Fund, Series A, 6.25%, 7/1/13 ................................. 1,047,500
2,000,000 Water Development Board Revenue, Series A, 5.75%, 7/15/15 ........................................... 2,045,000
---------------
36,369,325
---------------
Utah (3.0%):
1,000,000 Davis County School District, 6.65%, 6/1/04 ......................................................... 1,102,500
1,000,000 Davis County School District, 7.00%, 6/1/04 ......................................................... 1,088,750
</TABLE>
Continued
-68-
<PAGE> 96
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Utah, continued:
1,000,000 Intermountain Power Agency, Utah Power Supply, 7.20%, 7/1/19 ........................................ $ 1,036,580
4,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/12 .............................. 4,160,000
1,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/15 .............................. 1,000,260
1,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 7.00%, 7/1/15 .............................. 1,033,420
---------------
9,421,510
---------------
Virginia (4.1%):
1,000,000 Newport News, Series A, 6.13%, 6/1/10 ............................................................... 1,065,000
2,000,000 Richmond Public Improvement, Series B, 6.25%, 1/15/18 ............................................... 2,100,000
2,000,000 State Housing Development Authority, 6.40%, 7/1/17 .................................................. 2,067,500
1,200,000 State Housing Development Authority, Series B, Sub-Series B2, 6.70%, 1/1/14 ......................... 1,284,000
2,000,000 State Housing, Series C, Sub-Series C2, 5.60%, 1/1/15 ............................................... 1,975,000
1,000,000 State Public School Authority, 5.90%, 7/15/11 ....................................................... 1,051,250
1,000,000 State Public School Authority, Series A, 7.13%, 1/1/10 .............................................. 1,054,410
2,000,000 State Public School Authority, Series A, 6.25%, 1/1/11 .............................................. 2,082,500
---------------
12,679,660
---------------
Washington (12.5%):
1,000,000 Grant County Public Utility, Series F, 5.70%, 1/1/15 ................................................ 1,016,250
1,000,000 King County Library System, 6.05%, 12/1/07 .......................................................... 1,088,750
1,500,000 King County School District No. 415, 5.75%, 6/1/11 .................................................. 1,558,125
2,000,000 King County School District No. 415, 5.88%, 6/1/16 .................................................. 2,060,000
1,000,000 King County, Series A, 6.00%, 12/1/09 ............................................................... 1,056,250
1,000,000 Seattle Municipal Light & Power Revenue, 6.20%, 7/1/06 .............................................. 1,096,250
1,000,000 Seattle Municipal Light & Power Revenue, 6.25%, 7/1/07 .............................................. 1,092,500
1,000,000 Snohomish County Public Utility District 001, 6.45%, 1/1/06 ......................................... 1,116,250
2,000,000 Snohomish County Public Utility District 001, 6.50%, 1/1/12 ......................................... 2,152,500
3,000,000 Snohomish County Public Utility District 001, 6.00%, 1/1/13 ......................................... 3,123,750
1,000,000 Snohomish County Public Utility District 001, Series A, 6.90%, 1/1/06 ............................... 1,096,250
1,000,000 Snohomish County School District No. 2, 6.20%, 12/1/12 .............................................. 1,072,500
1,000,000 Snohomish County School District No. 2, Series A, 6.80%, 12/1/03 .................................... 1,100,000
1,000,000 Spokane, 6.13%, 1/1/09 .............................................................................. 1,048,750
3,000,000 Spokane Regular Solid Waste Management, 5.50%, 12/1/10 .............................................. 3,041,250
4,000,000 State Public Power Supply Systems, 5.50%, 7/1/15 .................................................... 3,935,000
1,000,000 State Public Power Supply Systems, Series A, Project II, 7.38%, 7/1/12,
Prerefunded 7/1/00 @ 102.......................................................................... 1,120,000
1,000,000 State Public Power Supply Systems, Series B, Project III, 7.25%, 7/1/15 ............................. 1,103,750
500,000 State Public Power Supply Systems, Series C, Project I, 7.75%, 7/1/08 ............................... 566,250
3,000,000 State Public Power Supply Systems, Series C, Project I, 5.60%, 7/1/14 ............................... 2,992,500
1,000,000 Tacoma Electrical System, 6.13%, 1/1/11 ............................................................. 1,066,250
1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 ............................................................. 1,057,500
</TABLE>
Continued
-69-
<PAGE> 97
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Schedule of Portfolio Investments, Continued
November 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
Municipal Bonds, continued:
Washington, continued:
2,000,000 Washington State, Series B, 6.38%, 8/1/10 ........................................................... $ 2,135,000
1,000,000 Washington State, Series DD-14 & Series B, 5.75%, 9/1/07 ............................................ 1,051,250
1,000,000 Washington State, Series R 92A, 6.25%, 9/1/09 ....................................................... 1,051,250
-------------
38,798,125
-------------
Wisconsin (4.2%):
1,000,000 Dane County, Series A, 5.65%, 3/1/12 ................................................................ 1,023,750
1,000,000 Green Bay Area Public School District, Series A, 5.50%, 4/1/12 ...................................... 1,011,250
3,000,000 Kenosha, Series B, 5.85%, 12/1/11 ................................................................... 3,108,750
3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 ........................................................... 3,120,000
280,000 Wisconsin State, 7.10%, 5/1/00 ...................................................................... 292,250
1,220,000 Wisconsin State, 7.10%, 5/1/00 ...................................................................... 1,273,375
1,000,000 Wisconsin State, Series A, 6.30%, 5/1/10 ............................................................ 1,087,500
1,000,000 Wisconsin State, Series G, 6.75%, 5/1/09 ............................................................ 1,068,750
1,000,000 Wisconsin State, Series G, 6.75%, 5/1/11 ............................................................ 1,068,750
-------------
13,054,375
-------------
Total Municipal Bonds 303,637,225
-------------
Investment Companies (0.5%):
1,540,000 Federated Tax-Free Trust Mutual Fund................................................................. 1,540,000
115,000 Nuveen Tax-Exempt Money Market Fund.................................................................. 115,000
-------------
Total Investment Companies 1,655,000
-------------
Total (Cost--$289,710,990)(a) $305,292,225
=============
</TABLE>
- ------------
Percentages indicated are based on net assets of $310,414,643.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized appreciation ........................ $15,584,013
Unrealized depreciation ........................ (2,778)
============
Net unrealized appreciation .................... $15,581,235
============
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
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 rate reflected in the Schedule of Portfolio Investments is the
rate in effect at November 30, 1996.
MBIA--Municipal Bond Insurance Agency
See notes to financial statements
-70-
<PAGE> 98
THE ARCH FUND, INC.
Notes to Financial Statements
November 30, 1996
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 November 30, 1996, 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 (formerly Emerging Growth), International Equity,
Balanced, Government & Corporate Bond, U.S. Government Securities,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal
Bond, Kansas Tax-Exempt Bond, Equity Income and Short-Intermediate
Corporate Bond Portfolios (referred to individually as a "Portfolio" and
collectively, the "Portfolios"). The Fund was organized as a Maryland
corporation on September 9, 1982. The Kansas Tax-Exempt Bond, Equity
Income and Short-Intermediate Corporate Bond Portfolios have not yet
commenced operations.
The Portfolios' investment objectives are as follows. Money Market seeks
current income with liquidity and stability of principal. Treasury Money
Market seeks a high level of current income exempt from state income tax
consistent with liquidity and security of principal. Tax-Exempt Money
Market seeks a high level of current interest income exempt from federal
income tax as is consistent with liquidity and stability of principal.
Growth & Income Equity seeks long-term capital growth, with income a
secondary consideration. Small Cap Equity seeks capital appreciation.
International Equity seeks capital growth consistent with reasonable
investment risk. Balanced seeks to maximize total return through a
combination of growth of capital and current income consistent with the
preservation of capital. Government & Corporate Bond seeks the highest
level of current income that is consistent with conservation of capital.
U.S. Government Securities seeks a high rate of current income that is
consistent with relative stability of principal. Short-Intermediate
Municipal seeks as high a level of current income, exempt from regular
federal income tax, as is consistent with preservation of capital.
Missouri Tax-Exempt Bond seeks as high a level of interest income exempt
from federal income tax as is consistent with conservation of capital.
National Municipal Bond 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 Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios (collectively, "the money market portfolios") are
valued at amortized cost. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the market value of the
instrument. In addition, the money market portfolios may not (a) purchase
any instrument with a remaining maturity greater than 397 days unless such
instrument is subject to a demand feature, or (b) maintain a
dollar-weighted-average portfolio maturity which exceeds 90 days. The
securities of the Growth & Income Equity, Small Cap Equity, International
Equity, Balanced, Government & Corporate Bond, U.S. Government Securities,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, and National
Municipal Bond Portfolios (collectively, "the variable net
Continued
-71-
<PAGE> 99
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
asset value portfolios") that are traded on a recognized exchange are
valued at the last sale price on the national 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 (or the sub-investment adviser) in accordance with
guidelines approved by the Fund's Board of Directors. Quotations of
foreign securities in foreign currency are converted to the U.S. dollar
equivalent at the prevailing exchange rate on the date of conversion.
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.
Repurchase agreements:
The Portfolios may engage in repurchase agreement transactions. Under the
terms of a typical repurchase agreement, a Portfolio takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Portfolio's
holding period. This arrangement results in a fixed rate of return that is
not subject to market fluctuations during the Portfolio's holding period.
The value of the collateral exceeds at all times the total amount of the
repurchase obligations, including interest. In the event of counterparty
default, the Portfolio has the right to use the collateral to offset
losses incurred. There is potential for loss to the Portfolio in the event
the Portfolio is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while
the Portfolio seeks to assert its rights. The Portfolios' investment
adviser, acting under the supervision of the Board of Directors, reviews
the value of the collateral and the creditworthiness of those banks and
dealers with which the Portfolios enter into repurchase agreements to
evaluate potential risks.
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 the relative net assets of each class of shares.
Foreign currency translation:
The market value of investment securities, other assets and liabilities of
the International Equity Portfolio denominated in a foreign currency are
translated into U.S. dollars at the current exchange rate. Purchases and
sales of securities, income receipts and expense payments are translated
into U.S. dollars at the exchange rate on the dates of the transactions.
The International Equity Portfolio isolates that portion of the results of
operations resulting from changes in foreign exchange rates on investments
from the fluctuation arising from changes in market prices of securities
held.
Reported net realized foreign exchange gains or losses arise from sales
and maturities of foreign securities, sales of foreign currencies,
currency exchange fluctuations between the trade and settlement dates on
Continued
-72-
<PAGE> 100
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
securities transactions, and the difference between the amount of assets
and liabilities recorded and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities,
including investments in securities, resulting from changes in exchange
rates.
Risks associated with foreign securities and currencies:
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers.
Such risks include future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental
laws and restrictions. In addition, with respect to certain countries,
there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which
could adversely affect investments in those countries.
Certain countries may also impose substantial restrictions on investments
in their capital markets by foreign entities, including restrictions on
investments in issuers of industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available
in the International Equity Portfolio and result in a lack of liquidity
and a high price volatility with respect to securities of issuers from
developing countries.
Forward currency exchange contracts:
The International Equity Portfolio may enter into forward foreign currency
exchange contracts ("forwards"). A forward is an agreement between two
parties to buy and sell a currency at a set price on a future date. The
market value of the forward fluctuates with changes in currency exchange
rates. The forward is marked-to-market daily and the change in market
value is recorded by the Portfolio as unrealized appreciation or
depreciation. When the forward is closed, the Portfolio records a realized
gain or loss equal to the fluctuation in value during the period the
forward was opened. The Portfolio could be exposed to risk if a counter
party is unable to meet the terms of a forward or if the value of the
currency changes unfavorably.
Securities lending:
To increase return, the Growth & Income Equity, Small Cap Equity,
International, Balanced, Government & Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal and National Municipal Bond
Portfolios 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 lending
Portfolio. By lending its securities, a 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 Portfolios, of securities lending are that the borrower may not
provide additional collateral when required or return the securities when
due. In addition, if cash
Continued
-73-
<PAGE> 101
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
collateral invested by a 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 November 30, 1996, the Portfolios had securities
with the following market values on loan:
<TABLE>
<CAPTION>
Market Value of Loaned
Portfolio Securities
---------- ----------------------
<S> <C>
Growth & Income Portfolio......................... $52,714
Small Cap Equity Portfolio........................ 40,666
Balanced Portfolio................................ 20,811
Government & Corporate Bond Portfolio............. 38,595
U.S. Government Securities Portfolio.............. 14,491
</TABLE>
The loaned securities were fully collateralized by cash and U.S.
Government securities.
Dividends and distributions to shareholders:
Dividends on each share of the Portfolios 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 Money Market, Treasury Money Market, Tax-Exempt Money
Market, Government & Corporate Bond, U.S. Government Securities,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios 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. The Growth & Income Equity, Small Cap Equity,
Balanced and International Equity Portfolios declare and pay dividends
from net investment income quarterly. However, commencing January 1, 1997,
the Growth & Income and Balanced Portfolios will declare and pay dividends
from net investment income monthly. 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.
Federal income taxes:
It is the policy of each 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 Portfolios bear all costs in connection with their 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 dates each Portfolio
Continued
-74-
<PAGE> 102
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
commenced operations: December 2, 1991, for the Treasury Money Market
Portfolio; May 1, 1992, for the Small Cap Equity Portfolio; April 1, 1993,
for the Balanced Portfolio; April 4, 1994, for the International Equity
Portfolio; July 10, 1995, for the Short-Intermediate Municipal Portfolio;
and November 18, 1996 for the National Municipal Bond Portfolio. As of
November 30, 1996, all costs were fully amortized for the Money Market,
Tax-Exempt Money Market, Growth & Income Equity, Government & Corporate
Bond, U.S. Government Securities and Missouri Tax-Exempt Bond Portfolios.
Other:
Operating expenses of the Fund not directly attributable to a 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 four classes of Portfolio shares in each
Portfolio (except as noted): Investor A Shares, Investor B Shares (except
the Treasury Money Market, Tax-Exempt Money Market and Short-Intermediate
Municipal Portfolios), Trust Shares, and Institutional Shares (except the
Tax-Exempt Money Market, Missouri Tax-Exempt Bond, National Municipal
Bond, Kansas Tax-Exempt Bond and Short-Intermediate Municipal Portfolios).
Investor A Shares of the variable net asset value portfolios are sold with
front-end sales charges. Investor B Shares of the Money Market Portfolio
and the variable net asset value portfolios 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>
One or less......................................... 5.0%
More than one, but less than two.................... 4.0%
Two, but less than three............................ 3.0%
Three, but less than four........................... 3.0%
Four, but less than five............................ 2.0%
Five, and up to and including six................... 1.0%
More than six....................................... None
</TABLE>
Investor B Shares of the Money Market Portfolio are available for purchase
only by those investors participating in the ARCH Asset Adviser Program or
through exchanges of Investor B Shares of the variable net asset value
portfolios. Each class of shares in a 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
Continued
-75-
<PAGE> 103
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
exchange privilege of each class of shares, and the automatic conversion
of Investor B Shares of a Portfolio into Investor A Shares of that
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 to such authority, as of November 30,
1996, the Fund's shares were classified as follows:
<TABLE>
<CAPTION>
Represent Interests In:
--------------------------------------------------------
Class Shares (000) Portfolio Class
-------------------------------------------- --------------- -------------------------------------- ----------------
<S> <C> <C> <C>
Class A Shares............................. 550,000 Money Market Investor A
Class A--Special Series 1 Shares............ 1,800,000 Money Market Trust
Class A--Special Series 2 Shares............ 300,000 Money Market Investor B
Class A--Special Series 3 Shares............ 50,000 Money Market Institutional
Class B Shares............................. 100,000 Treasury Money Market Investor A
Class B--Special Series 1 Shares............ 1,000,000 Treasury Money Market Trust
Class B--Special Series 2 Shares............ 300,000 Treasury Money Market Institutional
Class C Shares............................. 5,000 Growth & Income Equity Investor A
Class C--Special Series 1 Shares............ 50,000 Growth & Income Equity Trust
Class C--Special Series 2 Shares............ 20,000 Growth & Income Equity Investor B
Class C--Special Series 3 Shares............ 50,000 Growth & Income Equity Institutional
Class D Shares............................. 5,000 Government & Corporate Bond Investor A
Class D--Special Series 1 Shares............ 50,000 Government & Corporate Bond Trust
Class D--Special Series 2 Shares............ 20,000 Government & Corporate Bond Investor B
Class D--Special Series 3 Shares............ 50,000 Government & Corporate Bond Institutional
Class E Shares............................. 5,000 U.S. Government Securities Investor A
Class E--Special Series 1 Shares............ 15,000 U.S. Government Securities Trust
Class E--Special Series 2 Shares............ 20,000 U.S. Government Securities Investor B
Class E--Special Series 3 Shares............ 50,000 U.S. Government Securities Institutional
Class F Shares............................. 5,000 Small Cap Equity Investor A
Class F--Special Series 1 Shares............ 15,000 Small Cap Equity Trust
Class F--Special Series 2 Shares............ 20,000 Small Cap Equity Investor B
Class F--Special Series 3 Shares............ 50,000 Small Cap Equity Institutional
Class G Shares............................. 5,000 Balanced Investor A
Class G--Special Series 1 Shares............ 15,000 Balanced Trust
Class G--Special Series 2 Shares............ 20,000 Balanced Investor B
Class G--Special Series 3 Shares............ 50,000 Balanced Institutional
</TABLE>
Continued
-76-
<PAGE> 104
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
<TABLE>
<CAPTION>
Represent Interests In:
------------------------------------------------------------
Class Shares (000) Portfolio Class
------------------------------------------- ---------------- ------------------------------------------ -----------------
<S> <C> <C> <C>
Class H Shares............................ 10,000 International Equity Investor A
Class H--Special Series 1 Shares........... 10,000 International Equity Trust
Class H--Special Series 2 Shares........... 10,000 International Equity Investor B
Class H--Special Series 3 Shares........... 50,000 International Equity Institutional
Class I Shares............................ 25,000 Short-Intermediate Municipal Investor A
Class I--Special Series 1 Shares........... 25,000 Short-Intermediate Municipal Trust
Class J Shares............................ 50,000 Tax-Exempt Money Market Investor A
Class J--Special Series 1 Shares........... 300,000 Tax-Exempt Money Market Trust
Class K Shares............................ 25,000 Missouri Tax-Exempt Bond Investor A
Class K--Special Series 1 Shares........... 25,000 Missouri Tax-Exempt Bond Trust
Class K--Special Series 2 Shares........... 10,000 Missouri Tax-Exempt Bond Investor B
Class L Shares............................ 25,000 Kansas Tax-Exempt Bond Investor A
Class L--Special Series 1 Shares........... 25,000 Kansas Tax-Exempt Bond Trust
Class L--Special Series 2 Shares........... 10,000 Kansas Tax-Exempt Bond Investor B
Class M Shares............................ 25,000 Equity Income Investor A
Class M--Special Series 1 Shares........... 50,000 Equity Income Trust
Class M--Special Series 2 Shares........... 25,000 Equity Income Investor B
Class M--Special Series 3 Shares........... 25,000 Equity Income Institutional
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
Class O Shares............................ 25,000 Short-Intermediate Corporate Bond Investor A
Class O--Special Series 1 Shares........... 50,000 Short-Intermediate Corporate Bond Trust
Class O--Special Series 2 Shares........... 25,000 Short-Intermediate Corporate Bond Investor B
Unclassified............................... 1,455,000
</TABLE>
Each Portfolio share represents an equal, proportionate interest in the
Portfolio with respect to other shares outstanding, irrespective of
series.
Continued
-77-
<PAGE> 105
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
4. Capital Share Transactions
Transactions in portfolio shares of the Fund were as follows:
<TABLE>
<CAPTION>
Money Market Treasury Money
Portfolio Market Portfolio
------------------------------------- -----------------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
------------------ -------------- --------------- ------------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ....................... $ 104,686,425 $ 112,310,285 $ 14,064,613 $ 6,460,977
Dividends reinvested .............................. 3,310,910 2,767,393 198,801 128,151
Cost of shares redeemed ........................... (81,696,699) (98,595,971) (9,372,706) (5,526,091)
---------------- ---------------- ---------------- ----------------
Change in net assets from Investor A share
transactions .................................... $ 26,300,636 $ 16,481,707 $ 4,890,708 $ 1,063,037
================ ================ ================ ================
Investor B Shares (a):
Proceeds from shares issued ....................... $ 64,563 --
Dividends reinvested .............................. 954 --
Cost of shares redeemed ........................... (24,585) --
---------------- ----------------
Change in net assets from Investor B share
transactions .................................... $ 40,932 --
================ ================
Trust Shares:
Proceeds from shares issued ....................... $ 2,117,336,443 $ 1,743,384,071 $ 899,191,996 $ 833,331,145
Dividends reinvested .............................. 11,554,554 8,609,524 3,311,570 2,884,381
Cost of shares redeemed ........................... (2,109,752,319) (1,598,808,463) (1,023,961,242) (825,544,533)
---------------- ---------------- ---------------- ----------------
Change in net assets from Trust share
transactions .................................... $ 19,138,678 $ 153,185,132 $ (121,457,676) $ 10,670,993
================ ================ ================ ================
Institutional Shares:
Proceeds from shares issued ....................... $ 77,856,028 $ 46,450,288 $ 5,811,068 $ 39,942
Dividends reinvested .............................. 8,204 412 586
Cost of shares redeemed ........................... (75,283,110) (43,405,997) (5,541,015) (12,200)
---------------- ---------------- ---------------- ----------------
Change in net assets from Institutional share
transactions .................................... $ 2,581,122 $ 3,044,291 $ 270,465 $ 28,328
================ ================ ================ ================
SHARE TRANSACTIONS:
Investor A Shares:
Issued ............................................ 104,686,425 112,310,285 14,064,613 6,460,977
Reinvested ........................................ 3,310,910 2,767,393 198,801 128,151
Redeemed .......................................... (81,696,699) (98,595,971) (9,372,706) (5,526,091)
---------------- ---------------- ---------------- ----------------
Change in Investor A Shares ....................... 26,300,636 16,481,707 4,890,708 1,063,037
================ ================ ================ ================
Investor B Shares (a):
Issued ............................................ 64,563 --
Reinvested ........................................ 954 --
Redeemed .......................................... (24,585) --
---------------- ----------------
Change in Investor B Shares ....................... 40,932 --
================ ================
Trust Shares:
Issued ............................................ 2,117,336,443 1,743,384,071 899,191,996 833,331,145
Reinvested ........................................ 11,554,554 8,609,524 3,311,570 2,884,381
Redeemed .......................................... (2,109,752,319) (1,598,808,463) (1,023,961,242) (825,544,533)
---------------- ---------------- ---------------- ----------------
Change in Trust Shares ............................ 19,138,678 153,185,132 (121,457,676) 10,670,993
================ ================ ================ ================
Institutional Shares:
Issued .......................................... 77,856,028 46,450,288 5,811,068 39,942
Reinvested ...................................... 8,204 -- 412 586
Redeemed ........................................ (75,283,110) (43,405,997) (5,541,015) (12,200)
---------------- ---------------- ---------------- ----------------
Change in Institutional Shares .................. 2,581,122 3,044,291 270,465 28,328
================== ================ ================== =================
</TABLE>
(a) Investor B Shares commenced operations January 26, 1996.
Continued
-78-
<PAGE> 106
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
<TABLE>
<CAPTION>
Tax-Exempt Money Growth & Income
Market Portfolio Equity Portfolio
---------------------------------------------------- ---------------------------------
Year Six months Year Year Year
ended ended ended ended ended
November 30, November 30, May 31, November 30, November 30,
1996 1995 1995 1996 1995
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued............ $ 27,071,489 $ 2,077,331 $ 7,203,987 $ 9,870,808 $ 4,047,263
Dividends reinvested................... 235,312 83,299 173,129 1,806,750 533,478
Cost of shares redeemed................ (14,725,931) (1,895,782) (10,869,665) (3,418,441) (3,003,314)
---------------- ---------------- ---------------- ---------------- ---------------
Change in net assets from Investor A
share transactions................... $ 12,580,870 $ 264,848 $ (3,492,549) $ 8,259,117 $ 1,577,427
================ ================ ================ ================ ===============
Investor B Shares (a):
Proceeds from shares issued............ $ 2,406,329 $ 739,310
Dividends reinvested................... 62,055 2,484
Cost of shares redeemed................ (141,771) (27,250)
---------------- ---------------
Change in net assets from Investor B
share transactions................... $ 2,326,613 $ 714,544
================ ===============
Trust Shares:
Proceeds from shares issued............ $ 186,179,822 $ 105,944,026 $ 250,926,993 $ 55,386,626 $ 33,387,661
Dividends reinvested................... 327,245 133,447 239,807 17,221,218 6,332,138
Cost of shares redeemed................ (168,808,702) (113,373,935) (278,436,992) (57,945,665) (55,583,498)
---------------- ---------------- ---------------- ---------------- ---------------
Change in net assets from Trust share
transactions......................... $ 17,698,365 $ (7,296,462) $ (27,270,192) $ 14,662,179 $ (15,863,699)
================ ================ ================ ================ ===============
Institutional Shares:
Proceeds from shares issued............ $ 24,656,743 $ 13,872,425
Dividends reinvested................... 2,967,915 678,286
Cost of shares redeemed................ (3,784,451) (3,081,128)
---------------- ---------------
Change in net assets from Institutional
share transactions................... $ 23,840,207 $ 11,469,583
================ ===============
SHARE TRANSACTIONS:
Investor A Shares:
Issued................................. 27,071,489 2,077,331 7,203,987 598,426 274,340
Reinvested............................. 235,312 83,299 173,129 115,115 39,596
Redeemed............................... (14,725,931) (1,895,782) (10,869,665) (204,520) (219,461)
---------------- ---------------- ---------------- ---------------- ---------------
Change in Investor A Shares............ 12,580,870 264,848 (3,492,549) 509,021 94,475
================ ================ ================ ================ ===============
Investor B Shares (a):
Issued................................. 146,675 49,645
Reinvested............................. 3,961 162
Redeemed............................... (8,326) (1,719)
---------------- ---------------
Change in Investor B Shares............ 142,310 48,088
================ ===============
Trust Shares:
Issued................................. 186,179,822 105,944,026 250,926,993 3,359,483 2,315,536
Reinvested............................. 327,245 133,447 239,807 1,095,493 468,940
Redeemed............................... (168,808,702) (113,373,935) (278,436,992) (3,405,972) (3,773,562)
---------------- ---------------- ---------------- ---------------- ---------------
Change in Trust Shares................. 17,698,365 (7,296,462) (27,270,192) 1,049,004 (989,086)
================ ================ ================ ================ ===============
Institutional Shares:
Issued................................. 1,473,440 913,663
Reinvested............................. 189,057 50,081
Redeemed............................... (225,116) (218,049)
---------------- ---------------
Change in Institutional Shares......... 1,437,381 745,695
================ ===============
</TABLE>
(a)Investor B Shares commenced operations March 1, 1995.
Continued
-79-
<PAGE> 107
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
<TABLE>
<CAPTION>
Small Cap Equity International Equity
Portfolio (a) Portfolio
----------------------------- -----------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued .............. $ 8,330,915 $ 2,716,088 $ 1,165,994 $ 821,313
Dividends reinvested ..................... 1,175,137 828,227 -- 1,748
Cost of shares redeemed .................. (10,568,422) (1,041,887) (393,881) (153,976)
------------ ------------ ------------ ------------
Change in net assets from Investor A share
transactions ........................... $ (1,062,370) $ 2,502,428 $ 772,113 $ 669,085
============ ============ ============ ============
Investor B Shares (b):
Proceeds from shares issued .............. $ 668,648 $ 605,912 $ 314,369 $ 99,602
Dividends reinvested ..................... 51,148 -- -- --
Cost of shares redeemed .................. (82,619) (5,173) (7,784) (5)
------------ ------------ ------------ ------------
Change in net assets from Investor B share
transactions ........................... $ 637,177 $ 600,739 $ 306,585 $ 99,597
============ ============ ============ ============
Trust Shares:
Proceeds from shares issued .............. $ 57,112,437 $ 56,170,238 $ 18,402,546 $ 13,203,803
Dividends reinvested ..................... 9,768,137 4,711,272 -- 25,940
Cost of shares redeemed .................. (38,246,394) (10,894,683) (7,672,403) (3,599,335)
------------ ------------ ------------ ------------
Change in net assets from Trust share
transactions ........................... $ 28,634,180 $ 49,986,827 $ 10,730,143 $ 9,630,408
============ ============ ============ ============
Institutional Shares:
Proceeds from shares issued .............. $ 13,386,432 $ 11,023,958 $ 3,792,099 $ 1,984,397
Dividends reinvested ..................... 1,411,691 432,261 -- 389
Cost of shares redeemed .................. (3,039,946) (515,656) (346,775) (175,630)
------------ ------------ ------------ ------------
Change in net assets from Institutional
share transactions ..................... $ 11,758,177 $ 10,940,563 $ 3,445,324 $ 1,809,156
============ ============ ============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ................................... 652,412 218,241 103,191 81,235
Reinvested ............................... 96,278 76,260 -- 148
Redeemed ................................. (832,375) (83,578) (35,253) (15,655)
------------ ------------ ------------ ------------
Change in Investor A Shares .............. (83,685) 210,923 67,938 65,728
============ ============ ============ ============
Investor B Shares (b):
Issued ................................... 53,222 45,495 27,867 9,497
Reinvested ............................... 4,217 -- -- --
Redeemed ................................. (6,486) (374) (672) (1)
------------ ------------ ------------ ------------
Change in Investor B Shares .............. 50,953 45,121 27,195 9,496
============ ============ ============ ============
Trust Shares:
Issued ................................... 4,475,488 4,303,611 1,619,798 1,300,301
Reinvested ............................... 796,399 433,021 -- 2,669
Redeemed ................................. (2,922,899) (852,124) (658,505) (354,075)
------------ ------------ ------------ ------------
Change in Trust Shares ................... 2,348,988 3,884,508 961,293 948,895
============ ============ ============ ============
Institutional Shares:
Issued ................................... 1,064,056 843,722 333,036 197,653
Reinvested ............................... 116,019 39,913 -- 40
Redeemed ................................. (242,572) (39,849) (30,224) (16,687)
------------ ------------ ------------ ------------
Change in Institutional Shares ........... 937,503 843,786 302,812 181,006
============ ============ ============ ============
</TABLE>
(a) Formerly Emerging Growth Portfolio
(b) Investor B Shares commenced operations March 1, 1995.
Continued
-80-
<PAGE> 108
THE ARCH FUND, INC.
Note to Financial Statements, Continued
November 30, 1996
<TABLE>
<CAPTION>
Balanced Government & Corporate
Portfolio Bond Portfolio
----------------------------- -----------------------------
Year Year Year Year
ended ended ended ended
November 30, November 30, November 30, November 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ...................... $ 1,279,888 $ 725,604 $ 1,081,992 $ 532,904
Dividends reinvested ............................. 540,237 220,854 288,701 259,920
Cost of shares redeemed .......................... (1,566,057) (1,372,493) (1,822,047) (911,926)
------------ ------------ ------------ ------------
Change in net assets from Investor A share
transactions ................................... $ 254,068 $ (426,035) $ (451,354) $ (119,102)
============ ============ ============ ============
Investor B Shares (a):
Proceeds from shares issued ...................... $ 255,917 $ 33,778 $ 431,722 $ 136,699
Dividends reinvested ............................. 5,128 225 12,973 1,155
Cost of shares redeemed .......................... (2,897) -- (42,309) (33,852)
------------ ------------ ------------ ------------
Change in net assets from Investor B share
transactions ................................... $ 258,148 $ 34,003 $ 402,386 $ 104,002
============ ============ ============ ============
Trust Shares:
Proceeds from shares issued ...................... $ 8,437,415 $12,537,321 $ 33,574,691 $ 17,932,992
Dividends reinvested ............................. 4,712,847 2,119,017 4,910,841 5,831,411
Cost of shares redeemed .......................... (29,178,365) (20,150,860) (22,962,197) (40,412,534)
------------ ------------ ------------ ------------
Change in net assets from Trust share transactions $(16,028,103) $ (5,494,522) $ 15,523,335 $(16,648,131)
============ ============ ============ ============
Institutional Shares:
Proceeds from shares issued ...................... $ 15,950,520 $ 12,929,259 $ 7,558,229 $ 3,401,735
Dividends reinvested ............................. 2,533,910 790,342 708,554 403,585
Cost of shares redeemed .......................... (4,695,716) (4,954,838) (2,656,046) (965,170)
------------ ------------ ------------ ------------
Change in net assets from Institutional share
transactions .................................... $ 13,788,714 $ 8,764,763 $ 5,610,737 $ 2,840,150
============ ============ ============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ........................................... 111,445 68,078 105,753 51,880
Reinvested ....................................... 47,412 21,139 28,274 25,848
Redeemed ......................................... (134,124) (134,533) (180,569) (91,838)
------------ ------------ ------------ ------------
Change in Investor A Shares ...................... 24,733 (45,316) (46,542) (14,110)
============ ============ ============ ============
Investor B Shares (a):
Issued ........................................... 22,386 3,119 42,182 13,279
Reinvested ....................................... 447 20 1,284 112
Redeemed ......................................... (249) -- (4,176) (3,279)
------------ ------------ ------------ ------------
Change in Investor B Shares ...................... 22,584 3,139 39,290 10,112
============ ============ ============ ============
Trust Shares:
Issued ........................................... 732,718 1,216,163 3,312,003 1,760,564
Reinvested ....................................... 413,590 203,146 481,194 580,575
Redeemed ......................................... (2,470,952) (1,964,748) (2,242,645) (3,962,515)
------------ ------------ ------------ ------------
Change in Trust Shares ........................... (1,324,644) (545,439) 1,550,552 (1,621,376)
============ ============ ============ ============
Institutional Shares:
Issued ........................................... 1,372,147 1,213,228 737,749 331,136
Reinvested ....................................... 222,611 75,476 69,542 40,022
Redeemed ......................................... (401,065) (485,602) (262,357) (96,064)
------------ ------------ ------------ ------------
Change in Institutional Shares ................... 1,193,693 803,102 544,934 275,094
============ ============ ============ ============
</TABLE>
(a) Investor B Shares commenced operations March 1, 1995.
Continued
-81-
<PAGE> 109
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1995
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Portfolio Municipal Portfolio
----------------------------- -----------------------------
Year Year Year July 10, 1995
ended ended ended to
November 30, November 30, November 30, November 30,
1996 1995 1996 1995 (a)
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued ............................... $ 322,833 $ 262,858 $ 50,234 $ 10
Dividends reinvested ...................................... 467,398 485,224 1,301 --
Cost of shares redeemed ................................... (1,672,421) (2,896,079) -- --
------------ ------------ ------------ ------------
Change in net assets from Investor A share transactions ... $ (882,190) $ (2,147,997) $ 51,535 $ 10
============ ============ ============ ============
Investor B Shares (b):
Proceeds from shares issued ............................... $ 316,733 $ 43,386
Dividends reinvested ...................................... 11,390 436
Cost of shares redeemed ................................... (8,781) (2,869)
------------ ------------
Change in net assets from Investor B share transactions ... $ 319,342 $ 40,953
============ ============
Trust Shares:
Proceeds from shares issued ............................... $ 17,936,354 $ 11,497,995 $ 9,434,735 $ 23,945,072
Dividends reinvested ...................................... 1,953,246 1,522,604 63,662 9,378
Cost of shares redeemed ................................... (4,671,823) (3,434,036) (3,763,873) (424,913)
------------ ------------ ------------ ------------
Change in net assets from Trust share transactions ........ $ 15,217,777 $ 9,586,563 $ 5,734,524 $ 23,529,537
============ ============ ============ ============
Institutional Shares:
Proceeds from shares issued ............................... $ 1,798,550 $ 583,872
Dividends reinvested ...................................... 80,448 20,997
Cost of shares redeemed ................................... (319,286) (12,541)
------------ ------------
Change in net assets from Institutional share transactions $ 1,559,712 $ 592,328
============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued .................................................... 30,791 24,838 4,971 1
Reinvested ................................................ 43,886 46,390 131 --
Redeemed .................................................. (157,854) (275,695) -- --
------------ ------------ ------------ ------------
Change in Investor A Shares ............................... (83,177) (204,467) 5,102 1
============ ============ ============ ============
Investor B Shares (b):
Issued .................................................... 29,636 4,044
Reinvested ................................................ 1,081 41
Redeemed .................................................. (835) (268)
------------ ------------
Change in Investor B Shares ............................... 29,882 3,817
============ ============
Trust Shares:
Issued .................................................... 1,690,682 1,071,870 939,097 2,399,957
Reinvested ................................................ 184,241 145,303 6,368 938
Redeemed .................................................. (438,058) (322,555) (377,354) (42,604)
------------ ------------ ------------ ------------
Change in Trust Shares .................................... 1,436,865 894,618 568,111 2,358,291
============ ============ ============ ============
Institutional Shares:
Issued .................................................... 171,123 55,800
Reinvested ................................................ 7,639 1,974
Redeemed .................................................. (30,613) (1,172)
------------ ------------
Change in Institutional Shares ............................ 148,149 56,602
============ ============
</TABLE>
(a) Period from commencement of operations.
(b) Investor B Shares commenced operations March 1, 1995.
Continued
-82-
<PAGE> 110
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
<TABLE>
<CAPTION>
Missouri Tax-Exempt National Municipal
Bond Portfolio Bond Portfolio
------------------------------- -------------------------------
Year Six months Year November 18,
ended ended ended 1996 to
November 30, November 30, May 31, November 30,
1996 1995 1995 1996(a)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued .............. $ 2,404,280 $ 1,156,729 $ 2,418,111 $ 1,000
Dividends reinvested ..................... 884,429 425,016 1,012,362 --
Cost of shares redeemed .................. (2,791,258) (1,628,286) (7,808,196) --
------------- ------------- ------------- -------------
Change in net assets from Investor A share
transactions ........................... $ 497,451 $ (46,541) $ (4,377,723) $ 1,000
============= ============= ============= =============
Investor B Shares (b):
Proceeds from shares ..................... $ 284,623 $ 329,022 $ 92,022 $ 1,000
Dividends reinvested ..................... 9,017 1,975 170 --
Cost of shares redeemed .................. (52,123) (1,803) -- --
------------- ------------- ------------- -------------
Change in net assets from Investor B share
transactions ........................... $ 241,517 $ 329,194 $ 92,192 $ 1,000
============= ============= ============= =============
Trust Shares:
Proceeds from shares issued .............. $ 15,517,040 $ 6,963,566 $ 10,705,272 $ 314,006,996
Dividends reinvested ..................... 432,469 183,709 353,699 --
Cost of shares redeemed .................. (7,879,384) (4,591,666) (15,529,808) (4,987,761)
------------- ------------- ------------- -------------
Change in net assets from Trust share
transactions ........................... $ 8,070,125 $ 2,555,609 $ (4,470,837) $ 309,019,235
============= ============= ============= =============
SHARE TRANSACTIONS:
Investor A Shares:
Issued ................................... 210,587 101,135 220,783 100
Reinvested ............................... 76,641 37,072 92,504 --
Redeemed ................................. (242,599) (141,933) (712,361) --
------------- ------------- ------------- -------------
Change in Investor A Shares .............. 44,629 (3,726) (399,074) 100
============= ============= ============= =============
Investor B Shares (b):
Issued ................................... 24,662 28,689 8,170 100
Reinvested ............................... 784 172 15 --
Redeemed ................................. (4,537) (156) -- --
------------- ------------- ------------- -------------
Change in Investor B Shares .............. 20,909 28,705 8,185 100
============= ============= ============= =============
Trust Shares:
Issued ................................... 1,348,946 605,404 970,596 31,400,089
Reinvested ............................... 37,452 16,020 32,327 --
Redeemed ................................. (674,245) (398,603) (1,446,334) (498,183)
------------- ------------- ------------- -------------
Change in Trust Shares ................... 712,153 222,821 (443,411) 30,901,906
============= ============= ============= =============
</TABLE>
(a) Period from commencement of operations.
(b) Investor B Shares commenced operations March 1, 1995 for the Missouri
Tax-Exempt Bond Portfolio.
Continued
-83-
<PAGE> 111
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
5. Purchases and Sales of Investment Securities
Purchases and sales of securities (excluding short-term securities) during
the period ended November 30, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales
----------- ---------
<S> <C> <C>
Growth & Income Equity.................. $279,992 $243,447
Small Cap Equity........................ 161,781 127,632
International Equity.................... 50,715 38,136
Balanced................................ 94,490 97,708
Government & Corporate Bond............. 221,456 211,542
U.S. Government Securities.............. 54,984 30,252
Short-Intermediate Municipal............ 4,595 --
Missouri Tax-Exempt Bond................ 3,983 2,526
National Municipal Bond*................ -- 4,162
</TABLE>
* For the period from November 18, 1996 (commencement of operations) through
November 30, 1996.
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
of St. Louis 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 each Portfolio.
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
Portfolios for serving as officers of the Fund. Under the terms of the
administration agreement, the Company receives fees computed as 0.20%
(0.10% for the Tax-Exempt Money Market Portfolio) of the average daily net
assets of each Portfolio. The Company serves the Fund as Transfer Agent.
BISYS serves as the Fund's distributor and is entitled to receive
commissions on sales of Investor A Shares and Investor B Shares of the
variable net asset value portfolios. For the year ended November 30, 1996,
BISYS received approximately $532,040 from commissions earned on sales of
Investor A Shares and redemptions of Investor B Shares of which BISYS
re-allowed $114,124 to affiliated dealers of the Fund's shares.
With respect to Investor A Shares of the Portfolios, the Fund has adopted
a Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, each Portfolio may pay (i) up to 0.10% of
the average daily net assets of each 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% (0.15% for the money market portfolios) of the
average daily net assets of each Portfolio's outstanding Investor A Shares
to broker-dealers and other organizations for shareholder administrative
services provided pursuant to servicing agreements under the Plan.
Continued
-84-
<PAGE> 112
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
Similarly, with respect to Investor B Shares, the Fund has adopted a
Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, a 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 Fund'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 and Institutional Shares of the Portfolios, the Fund
has adopted separate Administrative Services Plans pursuant to which Trust
Shares are sold to banks and other financial institutions on behalf of
their qualified accounts and Institutional Shares are sold to banks and
other financial institutions acting on behalf of their accounts for which
they do not exercise investment discretion. A 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% (0.25% for money market portfolios) of the average
daily net assets of the Portfolio's Trust or Institutional Shares,
respectively.
Fees may be voluntarily reduced to assist the Portfolios in maintaining
competitive expense ratios.
Information regarding these transaction is as follows for the year ended
November 30, 1996:
<TABLE>
<CAPTION>
Investment Advisory Administration
Fees Fees
------------------------ --------------
Annual fee
before
voluntary Voluntary Fund
fee fee Voluntary fee Custodian Accounting Transfer
reductions reductions reductions Fees Fees Agent Fees
---------- ---------- -------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio ....... 0.40% $628,005 $652,053 $112,571 $ 2,112 $233,092
Treasury Money Market
Portfolio ................. 0.40% 179,300 196,144 31,459 514 74,879
Tax-Exempt Money Market
Portfolio ................. 0.40% 47,714 -- 15,401 1,230 24,320
Growth & Income Equity
Portfolio .................... 0.55% -- 405,859 123,116 2,252 115,631
Small Cap Equity Portfolio ... 0.75% -- 207,666 62,896 2,972 58,430
International Equity Portfolio 1.00% 140,840 26,804 92,169 66 12,616
Balanced Portfolio ........... 0.75% -- 126,784 40,193 8,690 31,850
Government & Corporate
Bond Portfolio ........... 0.45% -- 149,916 45,242 10,540 44,144
U.S. Government Securities
Portfolio ................. 0.45% -- 62,398 20,641 4,816 17,245
Short-Intermediate Municipal
Portfolio ................. 0.55% 147,782 26,878 8,495 5,840 6,560
Missouri Tax-Exempt Bond
Portfolio ................. 0.45% -- 72,846 22,427 10,412 22,044
National Municipal Bond
Portfolio ................. 0.55% 70,262 18,530 165 360 4,200
</TABLE>
Additionally, the distributor voluntarily reduced distribution and
services fees in the amount of $24,605 for the Investor A Shares of the
Missouri Tax-Exempt Bond Portfolio.
Continued
-85-
<PAGE> 113
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
7. Concentration of Credit Risk
The Missouri Tax-Exempt Bond Portfolio invests a substantial proportion of
its assets in debt obligations issued by the State of Missouri and its
political subdivisions, agencies and public authorities. The Portfolio is
more susceptible to factors adversely affecting issuers of Missouri
municipal securities than a fund that is not concentrated in these issuers
to the same extent.
8. Acquisition of Mercantile Common Fund
On November 18, 1996, the National Municipal Bond Portfolio issued Trust
Shares to acquire all of the assets and liabilities, including
distributions payable of $463,800, of the Mercantile Common Trust Fund M
of Mercantile Bank of St. Louis National Association. The following is a
summary of shares issued, net assets acquired, net asset value per share
and unrealized appreciation as of the date acquired:
<TABLE>
<S> <C>
Shares (000)................................. 313,331
Net assets (000)............................. $313,315
Net asset value.............................. $ 10.00
Unrealized appreciation (000)................ $ 14,302
</TABLE>
9. Federal Income Tax Information (Unaudited)
The following table presents capital gain dividend distributions from
long-term capital gains for the following portfolios for the year ended
November 30, 1996:
<TABLE>
<CAPTION>
Portfolio Amount
--------- -----------
<S> <C>
Growth & Income Equity Portfolio.................... $16,288,042
Small Cap Equity Portfolio.......................... 6,759,451
Balanced Portfolio.................................. 3,625,218
U.S. Government Securities Portfolio................ 146,826
</TABLE>
As of November 30, 1996, for Federal income tax purposes, the following
portfolios have capital loss carryforwards available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
Portfolio Amount Expires
--------- ---------- -------
<S> <C> <C>
Government & Corporate Bond Portfolio................ $ 65,133 2002
Government & Corporate Bond Portfolio................ 1,171,567 2003
U.S. Government Securities Portfolio................. 325,257 2004
Missouri Tax-Exempt Bond Portfolio................... 188,537 2003
</TABLE>
For the taxable year ended November 30, 1996, the following percentages of
the income dividends paid by the following Portfolios qualify for the
dividends received deduction available to corporations:
<TABLE>
<S> <C>
Growth & Income Equity Portfolio.................... 69.34%
Small Cap Equity Portfolio.......................... 10.67%
Balanced Portfolio.................................. 35.47%
</TABLE>
Continued
-86-
<PAGE> 114
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
The Fund designates the following exempt-interest dividends for the period
ended November 30, 1996:
<TABLE>
<CAPTION>
Tax-Exempt Money Short-Intermediate Missouri Tax-Exempt National Municipal
Market Portfolio Municipal Portfolio Bond Portfolio Bond Portfolio*
---------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Exempt-interest dividends:
Investor A Shares ......... $ 265,973 $ 1,458 $ 1,169,732 $ 4
Investor B Shares ......... -- -- $ 25,005 --
Trust Shares .............. $ 2,587,723 $ 1,092,648 $ 2,355,360 $ 1,199,672
Exempt-interest dividends per share:
Investor A Shares ......... $ 0.028 $ 0.395 $ 0.548 $ 0.022
Investor B Shares ......... -- -- $ 0.454 $ 0.019
Trust Shares .............. $ 0.030 $ 0.407 $ 0.571 $ 0.024
</TABLE>
* For the period from November 18, 1996 (commencement of operations) through
November 30, 1996.
Continued
-87-
<PAGE> 115
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1996
The percentage break-down of exempt-interest income by state for the
period ended November 30, 1996 is as follows:
<TABLE>
<CAPTION>
Short-
Tax-Exempt Intermediate Missouri Tax- National
Money Market Municipal Exempt Bond Municipal
Portfolio Portfolio Portfolio Bond Portfolio
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Alabama ...... 1.73% 2.76% -- 1.81%
Alaska ....... -- 1.12% -- 0.36%
Arizona ...... 1.92% -- -- 5.22%
California ... 0.68% -- -- 4.09%
Colorado ..... 0.77% 1.61% -- 1.08%
Connecticut .. -- -- -- 1.51%
Delaware ..... 0.66% -- -- 0.83%
Florida ...... 4.12% -- -- 4.00%
Georgia ...... 7.55% -- -- 0.78%
Guam ......... -- -- -- 0.45%
Hawaii ....... -- 3.08% -- 0.81%
Idaho ........ -- -- -- --
Illinois ..... 7.95% 10.96% -- 8.12%
Indiana ...... 0.13% 2.16% -- 2.78%
Iowa ......... 1.38% 1.77% -- --
Kansas ....... -- -- -- 0.90%
Kentucky ..... 1.49% 1.51% -- 0.23%
Louisiana .... 8.21% -- -- --
Maine ........ -- 3.37% -- --
Maryland ..... -- 3.39% -- --
Michigan ..... 3.23% 6.64% -- 1.19%
Minnesota .... 5.75% 3.35% -- 2.37%
Mississippi .. 1.43% 1.95% -- 0.39%
Missouri ..... 16.59% 1.31% 94.79% 13.14%
Montana ...... 3.92% -- -- --
Nebraska ..... -- -- -- 0.55%
Nevada ....... -- 5.80% -- 2.07%
New Hampshire -- -- -- 1.95%
New Jersey ... -- -- -- 1.02%
New Mexico ... 0.28% 4.11% -- --
New York ..... -- 2.04% -- 1.05%
North Carolina 4.43% -- -- 1.26%
Ohio ......... -- -- -- 1.52%
Oklahoma ..... -- -- -- 0.60%
Oregon ....... -- -- -- 0.49%
Pennsylvania . 3.39% 3.37% -- 1.68%
Puerto Rico .. -- -- 5.21% 0.04%
Rhode Island . -- 3.61% -- --
South Carolina 0.02% 3.14% -- --
South Dakota . -- 2.81% -- --
Tennessee .... 2.70% -- -- 2.27%
Texas ........ 18.37% 8.62% -- 11.17%
Utah ......... 0.38% 5.93% -- 3.86%
Vermont ...... -- 1.08% -- --
Virginia ..... 1.98% 2.96% -- 4.33%
Washington ... 0.94% 8.72% -- 11.48%
Wisconsin .... -- 2.83% -- 4.60%
====== ====== ====== ======
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
</TABLE>
Continued
-88-
<PAGE> 116
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
---------------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
----------- ----------- ----------- ----------- -----------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------
Investment Activities
Net investment income ....................... 0.047 0.052 0.033 0.025 0.032
----------- ----------- ----------- ----------- -----------
Total from Investment Activities ........ 0.047 0.052 0.033 0.025 0.032
----------- ----------- ----------- ----------- -----------
Distributions
Net investment income ....................... (0.047) (0.052) (0.033) (0.025) (0.032)
----------- ----------- ----------- ----------- -----------
Total Distributions ..................... (0.047) (0.052) (0.033) (0.025) (0.032)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ===========
Total Return ................................... 4.81% 5.33% 3.37% 2.52% 3.21%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $ 91,166 $ 64,865 $ 48,384 $ 46,920 $ 52,224
Ratio of expenses to average net assets ..... 0.78% 0.77% 0.78% 0.79% 0.80%
Ratio of net investment income to average net
assets .................................... 4.70% 5.20% 3.35% 2.50% 3.21%
Ratio of expenses to average net assets* .... 0.93% 0.92% 0.93% 0.93% 0.94%
Ratio of net investment income to average net
assets* ................................... 4.55% 5.05% 3.20% 2.36% 3.07%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
See notes to financial statements
-89-
<PAGE> 117
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
January 26, 1996
to
November 30, 1996 (a)
---------------------
Investor B
Shares
---------------------
<S> <C>
Net Asset Value, Beginning of Period ................... $ 1.00
-------
Investment Activities
Net investment income ............................... 0.033
-------
Total from Investment Activities ................ 0.033
-------
Distributions
Net investment income ............................... (0.033)
-------
Total Distributions ............................. (0.033)
-------
Net Asset Value, End of Period ......................... $ 1.00
=======
Total Return (excludes sales charge) ................... 3.35%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................... $ 41
Ratio of expenses to average net assets ............. 1.47%(c)
Ratio of net investment income to average net assets 3.73%(c)
Ratio of expenses to average net assets* ............ 1.68%(c)
Ratio of net investment income to average net assets* 3.52%(c)
</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.
See notes to financial statements
-90-
<PAGE> 118
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------
Investment Activities
Net investment income .................... 0.049 0.054 0.035 0.026 0.034
------------ ------------ ------------ ------------ ------------
Total from Investment Activities ..... 0.049 0.054 0.035 0.026 0.034
------------ ------------ ------------ ------------ ------------
Distributions
Net investment income .................... (0.049) (0.054) (0.035) (0.026) (0.034)
------------ ------------ ------------ ------------ ------------
Total Distributions .................. (0.049) (0.054) (0.035) (0.026) (0.034)
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============
Total Return ................................ 4.99% 5.52% 3.55% 2.72% 3.44%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........ $ 717,265 $ 698,131 $ 544,952 $ 621,717 $ 574,941
Ratio of expenses to average net assets .. 0.61% 0.59% 0.61% 0.59% 0.57%
Ratio of net investment income to average
net assets ............................. 4.88% 5.38% 3.45% 2.70% 3.44%
Ratio of expenses to average net assets* . 0.76% 0.74% 0.93% 0.80% 0.71%
Ratio of net investment income to average
net assets* ............................ 4.73% 5.23% 3.13% 2.49% 3.30%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements
-91-
<PAGE> 119
THE ARCH FUND, INC.
MONEY MARKET PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
------------- ------------- ------------- ----------- -----------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------
Investment Activities
Net investment income ....................... 0.047 0.052 0.033 0.025 0.032
----------- ----------- ----------- ----------- -----------
Total from Investment Activities ........ 0.047 0.052 0.033 0.025 0.032
----------- ----------- ----------- ----------- -----------
Distributions
Net investment income ....................... (0.047) (0.052) (0.033) (0.025) (0.032)
----------- ----------- ----------- ----------- -----------
Total Distributions ..................... (0.047) (0.052) (0.033) (0.025) (0.032)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== =========== =========== ===========
Total Return ................................... 4.81% 5.33% 3.34% 2.52% 3.21%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $ 15,921 $ 13,340 $ 10,295 $ 46,920 $ 52,224
Ratio of expenses to average net assets ..... 0.78% 0.77% 0.78% 0.79% 0.80%
Ratio of net investment income to average net
assets .................................... 4.70% 5.20% 3.48% 2.50% 3.21%
Ratio of expenses to average net assets* .... 0.93% 0.92% 0.95% 0.93% 0.94%
Ratio of net investment income to average net
assets* ................................... 4.55% 5.05% 3.31% 2.36% 3.07%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented
for the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
See notes to financial statements
-92-
<PAGE> 120
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
December 2, 1991
Years Ended November 30, to
------------------------------------------------------- November 30,
1996 1995 1994(a) 1993 1992(b)(c)
---------- ---------- ---------- ---------- ----------------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
---------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income ....................... 0.044 0.048 0.031 0.024 0.017
---------- ---------- ---------- ---------- ----------
Total from Investment Activities ........ 0.044 0.048 0.031 0.024 0.017
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income ....................... (0.044) (0.048) (0.031) (0.024) (0.017)
---------- ---------- ---------- ---------- ----------
Total Distributions ..................... (0.044) (0.048) (0.031) (0.024) (0.017)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
Total Return ................................... 4.46% 4.93% 3.16% 2.43% 1.79%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $ 7,667 $ 2,776 $ 1,713 $ 1,411 $ 3,257
Ratio of expenses to average net assets ..... 0.81% 0.78% 0.71% 0.64% 0.58%(e)
Ratio of net investment income to average net
assets .................................... 4.35% 4.84% 3.14% 2.41% 2.88%(e)
Ratio of expenses to average net assets* .... 0.96% 0.93% 0.94% 0.97% 1.02%(e)
Ratio of net investment income to average net
assets* ................................... 4.20% 4.69% 2.90% 2.08% 2.44%(e)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Period from commencement of operations.
(c) On December 2, 1991, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on April 20, 1992 the Portfolio
issued a second series of shares which were designated as "Investor"
Shares. The financial highlights presented for the period prior to April
20, 1992 represent financial highlights applicable to the Trust Shares.
(d) Not annualized.
(e) Annualized.
See notes to financial statements
-93-
<PAGE> 121
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
December 2, 1991
Years Ended November 30, to
---------------------------------------------------------- November 30,
1996 1995 1994 1993 1992 (a)(b)
---------- ----------- ---------- ----------- ----------------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
---------- ----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ----------- ---------- ---------- -----------
Investment Activities
Net investment income ........................ 0.045 0.050 0.033 0.026 0.034
---------- ----------- ---------- ---------- -----------
Total from Investment Activities ......... 0.045 0.050 0.033 0.026 0.034
---------- ----------- ---------- ---------- -----------
Distributions
Net investment income ........................ (0.045) (0.050) (0.033) (0.026) (0.034)
---------- ----------- ---------- ---------- -----------
Total Distributions ...................... (0.045) (0.050) (0.033) (0.026) (0.034)
---------- ----------- ---------- ---------- -----------
Net Asset Value, End of Period .................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== =========== ========== ========== ===========
Total Return .................................... 4.64% 5.12% 3.38% 2.67% 3.16%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............ $ 131,322 $ 252,780 $ 242,099 $ 256,503 $ 229,288
Ratio of expenses to average net assets ...... 0.61% 0.60% 0.49% 0.41% 0.28%(d)
Ratio of net investment income to average net
assets ..................................... 4.55% 5.01% 3.26% 2.64% 3.35%(d)
Ratio of expenses to average net assets* ..... 0.76% 0.75% 0.94% 0.85% 0.72%(d)
Ratio of net investment income to average net
assets* .................................... 4.40% 4.86% 2.82% 2.21% 2.91%(d)
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On December 2, 1991, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on April 20, 1992, the Portfolio
issued a second series of shares which were designated as "Investor"
Shares.
(c) Not annualized.
(d) Annualized.
See notes to financial statements
-94-
<PAGE> 122
THE ARCH FUND, INC.
TREASURY MONEY MARKET PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Year January 26, 1995
Ended to
November 30, 1996 November 30, 1995
(a)
----------------- -----------------
Institutional Institutional
Shares Shares
-------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period ................... $ 1.00 $ 1.00
-------- --------
Investment Activities
Net investment income ............................... 0.044 0.042
-------- --------
Total from Investment Activities ................ 0.044 0.042
-------- --------
Distributions
Net investment income ............................... (0.044) (0.042)
-------- --------
Total Distributions ............................. (0.044) (0.042)
-------- --------
Net Asset Value, End of Period ......................... $ 1.00 $ 1.00
======== ========
Total Return ........................................... 4.46% 4.94%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................... $ 299 $ 28
Ratio of expenses to average net assets ............. 0.79% 0.92%(c)
Ratio of net investment income to average net assets 4.39% 5.76%(c)
Ratio of expenses to average net assets* ............ 0.94% 1.07%(c)
Ratio of net investment income to average net assets* 4.24% 5.61%(c)
</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) Represents total return for the Investor A Shares from December 1, 1994 to
January 25, 1995 plus the total return for the Institutional Shares from
January 26, 1995 to November 30, 1995.
(c) Annualized.
See notes to financial statements
-95-
<PAGE> 123
THE ARCH FUND, INC.
TAX-EXEMPT MONEY MARKET PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Ended Ended
November 30, November 30, Years Ended May 31,
1996 1995 (d) -----------------------------------------------------
-------------------------------- 1995 (a) 1994 1993 1992
Investor Investor ------------ ---------- ---------- ----------
A A Investor A Investor Investor Investor
Shares Shares Shares Shares Shares Shares
-------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- --------- --------- --------- --------- ----------
Investment Activities
Net investment income .............. 0.028 0.014 0.027 0.017 0.019 0.031
---------- --------- --------- --------- --------- ----------
Total from Investment
Activities ................... 0.028 0.014 0.027 0.017 0.019 0.031
---------- --------- --------- --------- --------- ----------
Distributions
Net investment income .............. (0.028) (0.014) (0.027) (0.017) (0.019) (0.031)
---------- --------- --------- --------- --------- ----------
Total Distributions ............ (0.028) (0.014) (0.027) (0.017) (0.019) (0.031)
---------- --------- --------- --------- --------- ----------
Net Asset Value, End of Period ........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========= ========= ========= ========= ==========
Total Return .......................... 2.83% 1.45%(b) 2.70% 1.73% 1.90% 3.16%
Ratios/Supplementary Data:
Net Assets at end of period (000) .. $ 17,984 $ 5,403 $ 5,138 $ 8,631 $ 6,837 $ 10,956
Ratio of expenses to average net
assets ........................... 0.75% 0.94%(c) 0.84% 0.76% 0.80% 0.87%
Ratio of net investment income to
average net assets................ 2.78% 2.87%(c) 2.63% 1.72% 1.88% 3.10%
Ratio of expenses to average net
assets* .......................... 0.80% 0.99%(c) 0.93% 0.86% 0.90% 0.97%
Ratio of net investment income to
average net assets*............... 2.73% 2.82%(c) 2.54% 1.62% 1.78% 3.00%
</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) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Tax-Exempt
Money Market Portfolio changed its fiscal year end from May 31 to November
30.
See notes to financial statements
-96-
<PAGE> 124
THE ARCH FUND, INC.
TAX-EXEMPT MONEY MARKET PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Years Ended May 31,
November 30, November 30, -------------------------------------------------------
1996 1995 (c) 1995 1994 1993 1992
--------------- ----------------- --------- --------- --------- ---------
Trust Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares Shares
--------------- ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period ......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- ---------- --------- ----------- ----------- -----------
Investment Activities
Net investment income .......... 0.030 0.016 0.029 0.020 0.021 0.034
--------- ---------- --------- ----------- ----------- -----------
Total from Investment
Activities ............... 0.030 0.016 0.029 0.020 0.021 0.034
--------- ---------- --------- ----------- ----------- -----------
Distributions
Net investment income .......... (0.030) (0.016) (0.029) (0.020) (0.021) (0.034)
--------- ---------- --------- ----------- ----------- -----------
Total Distributions ........ (0.030) (0.016) (0.029) (0.020) (0.021) (0.034)
--------- ---------- --------- ----------- ----------- -----------
Net Asset Value, End of Period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========== ========= =========== =========== ===========
Total Return ...................... 3.06% 1.57%(a) 2.93% 1.97% 2.16% 3.44%
Ratios/Supplementary Data:
Net Assets at end of period
(000) ........................ $ 95,726 $ 78,031 $ 85,324 $ 112,594 $ 137,602 $ 126,079
Ratio of expenses to average
net assets ................... 0.53% 0.70%(b) 0.61% 0.52% 0.52% 0.59%
Ratio of net investment income
to average net assets ........ 3.01% 3.10%(b) 2.87% 1.95% 2.13% 3.38%
Ratio of expenses to average
net assets* .................. 0.58% 0.75%(b) 0.70% 0.86% 0.62% 0.69%
Ratio of net investment income
to average net assets* ....... 2.96% 3.05%(b) 2.78% 1.61% 2.03% 3.28%
</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) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Tax-Exempt
Money Market Portfolio changed its fiscal year end from May 31 to November
30.
See notes to financial statements
-97-
<PAGE> 125
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
---------- ---------- ---------- -------- --------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................... $ 16.30 $ 12.70 $ 14.74 $ 14.49 $ 12.33
------- ------- ------- ------- -------
Investment Activities
Net investment income ............................... 0.20 0.23 0.20 0.25 0.25
Net realized and unrealized gains from
investments ....................................... 3.32 3.74 (0.17) 1.06 2.24
------- ------- ------- ------- -------
Total from Investment Activities ................ 3.52 3.97 0.03 1.31 2.49
------- ------- ------- ------- -------
Distributions
Net investment income ............................... (0.20) (0.23) (0.21) (0.25) (0.26)
In excess of net investment income.................. (0.01) -- -- -- --
Net realized gains .................................. (0.94) (0.14) (0.18) (0.81) (0.07)
In excess of net realized gains ..................... -- -- (1.68) -- --
------- ------- ------- ------- -------
Total Distributions ............................. (1.15) (0.37) (2.07) (1.06) (0.33)
------- ------- ------- ------- -------
Net Asset Value, End of Period ......................... $ 18.67 $ 16.30 $ 12.70 $ 14.74 $ 14.49
========= ======== ========= ======== =======
Total Return (excludes sales charge) ................... 22.99% 31.95% 0.20% 9.65% 20.59%
Ratios/Supplementary Data:
Net Assets at end of period (000) ................... $ 38,229 $ 25,082 $ 18,343 $ 11,157 $ 6,044
Ratio of expenses to average net assets ............. 1.05% 1.05% 1.05% 0.74% 0.71%
Ratio of net investment income to average net
assets............................................. 1.20% 1.59% 1.45% 1.74% 1.94%
Ratio of expenses to average net assets* ............ 1.15% 1.15% 1.15% 0.96% 0.85%
Ratio of net investment income to average net
assets* ........................................... 1.10% 1.49% 1.35% 1.52% 1.80%
Portfolio turnover................................... 63.90% 58.50% 65.00% 41.00% 79.00%
Average commission rate paid (b)..................... $ 0.0598 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-98-
<PAGE> 126
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Ended to
November 30, November 30,
1996 1995 (a)
---------------- ---------------
Investor Investor
B B
Shares Shares
---------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period ........................................................... $ 16.23 $ 13.43
---------- --------
Investment Activities
Net investment income ....................................................................... 0.11 0.14
Net realized and unrealized gains from investments and foreign currency ..................... 3.30 2.81
---------- --------
Total from Investment Activities ........................................................ 3.41 2.95
---------- --------
Distributions
Net investment income ....................................................................... (0.11) (0.15)
In excess of net investment income........................................................... (0.01) --
Net realized gains .......................................................................... (0.94) --
---------- --------
Total Distributions ..................................................................... (1.06) (0.15)
---------- --------
Net Asset Value, End of Period ................................................................. $ 18.58 $ 16.23
========== ========
Total Return (excludes sales charge) ........................................................... 22.29% 31.20%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................................................... $ 3,537 $ 781
Ratio of expenses to average net assets ..................................................... 1.75% 1.75%(c)
Ratio of net investment income to average net assets ........................................ 0.49% 0.87%(c)
Ratio of expenses to average net assets* .................................................... 1.85% 1.85%(c)
Ratio of net investment income to average net assets* ....................................... 0.39% 0.77%(c)
Portfolio turnover........................................................................... 63.90% 58.50%
Average commission rate paid (d)............................................................. $ 0.0598 --
</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. On September 27, 1994, the
Portfolio authorized the issuance of a series designated as "Investor B"
Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-99-
<PAGE> 127
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 16.32 $ 12.72 $ 14.74 $ 14.49 $ 12.33
-------- -------- -------- -------- --------
Investment Activities
Net investment income ....................... 0.24 0.27 0.22 0.25 0.24
Net realized and unrealized gains from
investments ............................... 3.34 3.74 (0.17) 1.06 2.25
-------- -------- -------- -------- --------
Total from Investment Activities ........ 3.58 4.01 0.05 1.31 2.49
-------- -------- -------- -------- --------
Distributions
Net investment income ....................... (0.24) (0.27) (0.21) (0.25) (0.26)
In excess of net investment income .......... (0.01) -- -- -- --
Net realized gains .......................... (0.94) (0.14) (0.18) (0.81) (0.07)
In excess of net realized gains ............. -- -- (1.68) -- --
-------- -------- -------- -------- --------
Total Distributions ..................... (1.19) (0.41) (2.07) (1.06) (0.33)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ................. $ 18.71 $ 16.32 $ 12.72 $ 14.74 $ 14.49
======== ======== ======== ======== ========
Total Return ................................... 23.45% 32.27% 0.36% 9.65% 20.59%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $348,183 $286,546 $235,955 $238,771 $232,967
Ratio of expenses to average net assets ..... 0.75% 0.75% 0.75% 0.74% 0.71%
Ratio of net investment income to average
net assets ................................ 1.50% 1.89% 1.72% 1.74% 1.94%
Ratio of expenses to average net assets* .... 0.85% 0.85% 1.15% 0.96% 0.85%
Ratio of net investment income to average
net assets* ............................... 1.40% 1.79% 1.32% 1.52% 1.80%
Portfolio turnover........................... 63.90% 58.50% 65.00% 41.00% 79.00%
Average commission rate paid (a)............. $ 0.0598 -- -- -- --
</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) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-100-
<PAGE> 128
THE ARCH FUND, INC.
GROWTH & INCOME EQUITY PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
--------------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
------------- ------------- ------------- -------- --------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
------------- ------------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................ $ 16.29 $ 12.70 $ 14.74 $ 14.49 $ 12.33
--------- --------- ---------- --------- --------
Investment Activities
Net investment income ............................ 0.20 0.23 0.20 0.25 0.25
Net realized and unrealized gains from
investments .................................... 3.33 3.74 (0.17) 1.06 2.24
--------- --------- ---------- --------- --------
Total from Investment Activities ............. 3.53 3.97 0.03 1.31 2.49
--------- --------- ---------- --------- --------
Distributions
Net investment income ............................ (0.20) (0.24) (0.21) (0.25) (0.26)
In excess of net investment income ............... (0.01) -- -- -- --
Net realized gains ............................... (0.94) (0.14) (0.18) (0.81) (0.07)
In excess of net realized gains .................. -- -- (1.68) -- --
--------- --------- ---------- --------- --------
Total Distributions .......................... (1.15) (0.38) (2.07) (1.06) (0.33)
--------- --------- ---------- --------- --------
Net Asset Value, End of Period ...................... $ 18.67 $ 16.29 $ 12.70 $ 14.74 $ 14.49
========= ========= ========== ========= ========
Total Return ........................................ 23.08% 31.88% 0.19% 9.65% 20.59%
Ratios/Supplementary Data:
Net Assets at end of period (000) ................ $ 72,950 $ 40,228 $ 21,897 $ 11,157 $ 6,044
Ratio of expenses to average net assets .......... 1.05% 1.05% 1.05% 0.74% 0.71%
Ratio of net investment income to average net
assets ......................................... 1.19% 1.58% 1.41% 1.74% 1.94%
Ratio of expenses to average net assets* ......... 1.15% 1.15% 1.16% 0.96% 0.85%
Ratio of net investment income to average net
assets* ........................................ 1.09% 1.48% 1.30% 1.52% 1.80%
Portfolio turnover................................ 63.90% 58.50% 65.00% 41.00% 79.00%
Average commission rate paid (b).................. $ 0.0598 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented
for the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
(b) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-101-
<PAGE> 129
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO**
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
May 6, 1992
Years Ended November 30, to
------------------------------------------------------- November 30,
1996 1995 1994 (a) 1993 1992 (b)(c)
------------ ------------ ------------ ---------- ----------------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
------------ ------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 13.44 $ 11.99 $ 13.14 $ 11.23 $ 10.10
--------- -------- -------- ------- -------
Investment Activities
Net investment income (loss) ...................... (0.01) -- (0.03) 0.03 0.02
Net realized and unrealized gains from
investments ..................................... 1.03 2.36 0.89 2.14 1.13
--------- -------- -------- ------- -------
Total from Investment Activities .............. 1.02 2.36 0.86 2.17 1.15
--------- -------- -------- ------- -------
Distributions
Net investment income ............................. -- -- -- (0.05) (0.02)
In excess of net investment income ................ (0.01) -- -- -- --
Net realized gains ................................ (1.05) (0.91) (1.78) (0.21) --
In excess of net realized gains ................... -- -- (0.23) -- --
--------- -------- -------- ------- -------
Total Distributions ........................... (1.06) (0.91) (2.01) (0.26) (0.02)
--------- -------- -------- ------- -------
Net Asset Value, End of Period ....................... $ 13.40 $ 13.44 $ 11.99 $ 13.14 $ 11.23
========= ======== ======== ======= =======
Total Return (excludes sales charge) ................. 8.36% 21.47% 7.38% 19.75% 12.55%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................. $ 13,889 $ 15,056 $ 10,899 $ 4,559 $ 753
Ratio of expenses to average net assets ........... 1.26% 1.26% 1.25% 0.61% 0.30%(e)
Ratio of net investment income (loss) to average
net assets ...................................... (0.13)% (0.12)% (0.44)% 0.19% 0.78%(e)
Ratio of expenses to average net assets* .......... 1.36% 1.36% 1.36% 1.23% 1.12%(e)
Ratio of net investment loss to average net
assets* ......................................... (0.23)% (0.22)% (0.55)% (0.43)% (0.04)%(e)
Portfolio turnover................................. 65.85% 83.13% 85.00% 65.00% 56.00%
Average commission rate paid (f)................... $ 0.0582 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Formerly Emerging Growth Portfolio.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Period from commencement of operations.
(c) On May 6, 1992, the Portfolio issued a series of shares which were
designated as "Investor" Shares.
(d) Not annualized.
(e) Annualized.
(f) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-102-
<PAGE> 130
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO**
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Ended to
November 30, November 30,
1996 1995 (a)
---------------- ----------------
Investor B Investor B
Shares Shares
---------------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period ...................................... $ 13.37 $ 11.83
---------- --------
Investment Activities
Net investment loss .................................................... (0.07) (0.03)
Net realized and unrealized gains from investments ..................... 0.99 1.57
---------- --------
Total from Investment Activities ................................... 0.92 1.54
---------- --------
Distributions
Net realized gains ..................................................... (1.05) --
---------- --------
Total Distributions ................................................ (1.05) --
---------- --------
Net Asset Value, End of Period ............................................ $ 13.24 $ 13.37
========== ========
Total Return (excludes sales charge) ...................................... 7.63% 20.83%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................................... $ 1,272 $ 603
Ratio of expenses to average net assets ................................ 1.96% 1.96%(c)
Ratio of net investment loss to average net assets ..................... (0.83)% (0.78)%(c)
Ratio of expenses to average net assets* ............................... 2.06% 2.06%(c)
Ratio of net investment loss to average net assets* .................... (0.93)% (0.88)%(c)
Portfolio turnover...................................................... 65.85% 83.13%
Average commission rate paid (d)........................................ $ 0.0582 --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Formerly Emerging Growth Portfolio.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio authorized the issuance of a series designated as "Investor B"
Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-103-
<PAGE> 131
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO**
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30, May 1, 1992 to
-------------------------------------------------------- November 30,
1996 1995 1994 1993 1992 (a)
---------- ---------- ---------- ---------- -----------------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $ 13.49 $ 12.01 $ 13.14 $ 11.23 $ 10.00
----------- ----------- --------- --------- ----------
Investment Activities
Net investment income (loss)..................... 0.02 0.03 (0.01) 0.03 0.04
Net realized and unrealized gains from
investments ................................... 1.05 2.36 0.89 2.14 1.21
----------- ----------- --------- --------- ----------
Total from Investment Activities ............ 1.07 2.39 0.88 2.17 1.25
----------- ----------- --------- --------- ----------
Distributions
Net investment income ........................... (0.02) -- -- (0.05) (0.02)
Net realized gains .............................. (1.05) (0.91) (1.78) (0.21) --
In excess of net realized gains ................. -- -- (0.23) -- --
----------- ----------- --------- --------- ----------
Total Distributions ......................... (1.07) (0.91) (2.01) (0.26) (0.02)
----------- ----------- --------- --------- ----------
Net Asset Value, End of Period ..................... $ 13.49 $ 13.49 $ 12.01 $ 13.14 $ 11.23
=========== =========== ========= ========= ==========
Total Return ....................................... 8.72% 21.70% 7.56% 19.75% 12.55%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............... $ 171,295 $ 139,681 $ 77,690 $ 47,473 $ 26,829
Ratio of expenses to average net assets ......... 0.96% 0.96% 0.95% 0.61% 0.30%(c)
Ratio of net investment income (loss) to average
net assets..................................... 0.17% 0.18% (0.16)% 0.19% 0.78%(c)
Ratio of expenses to average net assets* ........ 1.06% 1.06% 1.36% 1.23% 1.12%(c)
Ratio of net investment income (loss) to average
net assets* ................................... 0.07% 0.08% (0.56)% (0.43)% (0.04)%(c)
Portfolio turnover............................... 65.85% 83.13% 85.00% 65.00% 56.00%
Average commission rate paid (d)................. $ 0.0582 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Formerly Emerging Growth Portfolio.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-104-
<PAGE> 132
THE ARCH FUND, INC.
SMALL CAP EQUITY PORTFOLIO**
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
May 6, 1992
Years Ended November 30, to
--------------------------------------------------------- November 30,
1996 1995 1994 (a) 1993 1992 (b)
-------------- -------------- -------------- ---------- -------------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
-------------- -------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 13.40 $ 11.96 $13.14 $11.23 $10.10
------- ------- ------ ------ ------
Investment Activities
Net investment income (loss) ...................... (0.01) (0.01) (0.03) 0.03 0.02
Net realized and unrealized gains from
investments....................................... 1.03 2.36 0.86 2.14 1.13
------- ------- ------ ------ ------
Total from Investment Activities .............. 1.02 2.35 0.83 2.17 1.15
------- ------- ------ ------ ------
Distributions
Net investment income ............................. -- -- -- (0.05) (0.02)
In excess of net investment income ................ (0.01) -- -- -- --
Net realized gains ................................ (1.05) (0.91) (1.78) (0.21) --
In excess of net realized gains ................... -- -- (0.23) -- --
------- ------- ------ ------ ------
Total Distributions ........................... (1.06) (0.91) (2.01) (0.26) (0.02)
------- ------- ------ ------ ------
Net Asset Value, End of Period ....................... $ 13.36 $ 13.40 $11.96 $13.14 $11.23
======= ======= ====== ====== ======
Total Return ......................................... 8.39% 21.43% 7.11% 19.75% 12.55%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................. $30,081 $17,620 $5,633 $4,559 $ 753
Ratio of expenses to average net assets ........... 1.26% 1.26% 1.25% 0.61% 0.30%(d)
Ratio of net investment income (loss) to average
net assets ...................................... (0.13)% (0.11)% (0.41)% 0.19% 0.78%(d)
Ratio of expenses to average net assets* .......... 1.36% 1.36% 1.37% 1.23% 1.12%(d)
Ratio of net investment loss to average net
assets* ......................................... (0.23)% (0.21)% (0.53)% (0.43)% (0.04)%(d)
Portfolio turnover................................. 65.85% 83.13% 85.00% 65.00% 56.00%
Average commission rate paid (e)................... $0.0582 -- -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Formerly Emerging Growth Portfolio.
(a) On May 6, 1992 the Portfolio issued a series of shares designated as
"Investor" Shares. In addition, on January 3, 1994, the Portfolio issued a
new series of shares designated as "Institutional" Shares. The financial
highlights presented for periods prior to January 3, 1994 represent
financial highlights applicable to the Investor Shares.
(b) Period from commencement of operations.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-105-
<PAGE> 133
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30, April 4, 1994 to
------------------------------- November 30,
1996 1995 1994 (a)(b)(c)
---------------- -------------- ---------------
Investor A Investor A Investor A
Shares Shares Shares
---------------- -------------- ---------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .......................................... $ 10.76 $ 9.90 $ 10.00
-------- ------- -------
Investment Activities
Net investment income (loss)................................................ 0.02 0.02 (0.01)
Net realized and unrealized gains (losses) from investments and
foreign currency ......................................................... 1.27 0.86 (0.09)
-------- ------- -------
Total from Investment Activities ....................................... 1.29 0.88 (0.10)
-------- ------- -------
Distributions
Net realized gains ......................................................... -- (0.01) --
Tax return of capital ...................................................... -- (0.01) --
-------- ------- -------
Total Distributions .................................................... -- (0.02) --
-------- ------- -------
Net Asset Value, End of Period ................................................ $ 12.05 $ 10.76 $ 9.90
======== ======= =======
Total Return (excludes sales charges) ......................................... 11.99% 8.89% (1.00)%(d)
Ratios/Supplementary Data:
Net Assets at end of period (000) .......................................... $ 2,573 $ 1,568 $ 791
Ratio of expenses to average net assets .................................... 1.44% 1.45% 1.55%(e)
Ratio of net investment income to average net asset......................... 0.19% 0.07% (0.39)%(e)
Ratio of expenses to average net assets* ................................... 1.75% 1.76% 1.89%(e)
Ratio of net investment loss to average net assets*......................... (0.12)% (0.24)% (0.73)%(e)
Portfolio turnover.......................................................... 77.63% 62.78% 21.00%
Average commission rate paid (f)............................................ $ 0.0251 -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On April 4, 1994, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on May 2, 1994, the Portfolio
issued a new series of shares which were designated as "Investor" Shares.
The financial highlights presented for April 4, 1994 to May 2, 1994
represent financial highlights applicable to the Trust Shares.
(c) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
(d) Not annualized.
(e) Annualized.
(f) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-106-
<PAGE> 134
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Ended to
November 30, November 30,
1996 1995(a)
-------------- --------------
Investor B Investor B
Shares Shares
-------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period......................................................... $ 10.71 $ 9.26
------- ------
Investment Activities
Net investment loss........................................................................ (0.04) (0.03)
Net realized and unrealized gains from investments and foreign currency.................... 1.23 1.48
------- ------
Total from Investment Activities....................................................... 1.19 1.45
------- ------
Distributions
------- ------
Total Distributions.................................................................... -- --
------- ------
Net Asset Value, End of Period............................................................... $ 11.90 $10.71
======= ======
Total Return (excludes sales charge)......................................................... 11.11% 8.38%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)........................................................... $ 437 $ 102
Ratio of expenses to average net assets..................................................... 2.14% 2.02%(c)
Ratio of net investment loss to average net assets.......................................... (0.50)% (0.96)%(c)
Ratio of expenses to average net assets*.................................................... 2.46% 2.44%(c)
Ratio of net investment loss to average net assets*......................................... (0.82)% (1.38)%(c)
Portfolio turnover.......................................................................... 77.63% 62.78%
Average commission rate paid(d)............................................................. $0.0251 --
</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) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-107-
<PAGE> 135
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30, April 4, 1994 to
--------------------------------- November 30,
1996 1995 1994 (a)
--------------- ---------------- -----------------
Trust Trust Trust
Shares Shares Shares
--------------- ---------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ........................................ $ 10.79 $ 9.92 $ 10.00
------- ------- -------
Investment Activities
Net investment income .................................................... 0.06 0.03 0.01
Net realized and unrealized gains (losses) from investments and foreign
currency ............................................................... 1.27 0.86 (0.09)
------- ------- -------
Total from Investment Activities ..................................... 1.33 0.89 (0.08)
------- ------- -------
Distributions
Net realized gains ....................................................... -- (0.01) --
Tax return of capital .................................................... -- (0.01) --
------- ------- -------
Total Distributions .................................................. -- (0.02) --
------- ------- -------
Net Asset Value, End of Period .............................................. $ 12.12 $ 10.79 $ 9.92
======= ======= =======
Total Return ................................................................ 12.33% 8.97% (0.80)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................................ $52,181 $36,096 $23,746
Ratio of expenses to average net assets .................................. 1.14% 1.16% 1.23%(c)
Ratio of net investment income to average net assets...................... 0.51% 0.39% 0.23%(c)
Ratio of expenses to average net assets* ................................. 1.45% 1.46% 1.95%(c)
Ratio of net investment income (loss) to average net assets*.............. 0.20% 0.09% (0.49)%(c)
Portfolio turnover........................................................ 77.63% 62.78% 21.00%
Average commission rate paid (d).......................................... $0.0251 -- --
</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.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-108-
<PAGE> 136
THE ARCH FUND, INC.
INTERNATIONAL EQUITY PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30, April 4, 1994 to
----------------------------------- November 30,
1996 1995 1994(a)
---------------- ---------------- --------------------
Institutional Institutional Institutional
Shares Shares Shares
---------------- ---------------- --------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ................................ $ 10.75 $ 9.90 $ 10.00
------- ------- -------
Investment Activities
Net investment income (loss) ..................................... 0.01 0.01 (0.01)
Net realized and unrealized gains (losses) from investments and
foreign currency ............................................... 1.27 0.86 (0.09)
------- ------- -------
Total from Investment Activities ............................. 1.28 0.87 (0.10)
------- ------- -------
Distributions
Realized net gains ............................................... -- (0.01) --
Tax return of capital ............................................ -- (0.01) --
------- ------- -------
Total Distributions .......................................... -- (0.02) --
------- ------- -------
Net Asset Value, End of Period ...................................... $ 12.03 $ 10.75 $ 9.90
======= ======= =======
Total Return ........................................................ 11.91% 8.78% (1.00)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................ $ 6,059 $2,159 $ 197
Ratio of expenses to average net assets .......................... 1.44% 1.44% 1.70%(c)
Ratio of net investment income (loss) to average net assets ...... 0.16% 0.13% (0.48)%(c)
Ratio of expenses to average net assets* ......................... 1.76% 1.75% 2.17%(c)
Ratio of net investment loss to average net assets*............... (0.16)% (0.18)% (0.94)%(c)
Portfolio turnover................................................ 77.63% 62.78% 21.00%
Average commission rate paid (d).................................. $0.0251 -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On April 4, 1994, the Portfolio issued a series of shares which were
designated as "Trust" Shares. In addition, on April 24, 1994, the Portfolio
issued a new series of shares which were designated as "Institutional"
Shares. The financial highlights presented for April 4, 1994 to April 24,
1994 represent financial highlights applicable to the Trust Shares.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-109-
<PAGE> 137
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Years Ended November 30, to
---------------------------------------- November 30,
1996 1995 1994 (a) 1993 (b)
------------ ------------ ------------ ----------------
Investor A Investor A Investor A Investor
Shares Shares Shares Shares
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................................. $ 11.65 $ 9.61 $ 10.22 $ 10.00
--------- ------- ------- -------
Investment Activities
Net investment income ............................................. 0.32 0.32 0.28 0.23
Net realized and unrealized gains from investments ................ 1.34 2.02 (0.47) 0.15
--------- ------- ------- -------
Total from Investment Activities .............................. 1.66 2.34 (0.19) 0.38
--------- ------- ------- -------
Distributions
Net investment income ............................................. (0.31) (0.30) (0.29) (0.16)
Net realized gains ................................................ (0.42) -- -- --
In excess of net realized gains ................................... -- -- (0.13) --
--------- ------- ------- -------
Total Distributions ........................................... (0.73) (0.30) (0.42) (0.16)
--------- ------- ------- -------
Net Asset Value, End of Period ....................................... $ 12.58 $ 11.65 $ 9.61 $ 10.22
========= ======= ======= =======
Total Return (excludes sales charge) ................................. 15.10% 24.85% (1.91)% 3.86%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) ................................. $ 9,328 $ 8,348 $ 7,321 $ 1,978
Ratio of expenses to average net assets ........................... 1.27% 1.27% 1.27% 0.56%(d)
Ratio of net investment income to average net assets .............. 2.79% 2.98% 2.77% 3.42%(d)
Ratio of expenses to average net assets* .......................... 1.37% 1.37% 1.39% 1.21%(d)
Ratio of net investment income to average net assets* ............ 2.69% 2.88% 2.65% 2.77%(d)
Portfolio turnover ................................................ 85.16% 58.16% 49.00% 26.00%
Average commission rate paid (e)................................... $ 0.0599 -- -- --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Period from commencement of operations.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-110-
<PAGE> 138
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1,
Ended 1995 to
November 30, November 30,
1996 1995(a)
-------------- --------------
Investor Investor
B B
Shares Shares
-------------- --------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................................ $ 11.59 $10.13
------- ------
Investment Activities
Net investment income......................................................................... 0.25 0.22
Net realized and unrealized gains from investments............................................ 1.33 1.44
------- ------
Total from Investment Activities.......................................................... 1.58 1.66
------- ------
Distributions
Net investment income......................................................................... (0.26) (0.20)
Net realized gains............................................................................ (0.42) --
------- ------
Total Distributions....................................................................... (0.68) (0.20)
------- ------
Net Asset Value, End of Period.................................................................. $ 12.49 $11.59
======= ======
Total Return (excludes sales charge)............................................................ 14.35% 23.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................................................. $ 321 $ 36
Ratio of expenses to average net assets....................................................... 1.96% 1.93%(c)
Ratio of net investment income to average net assets.......................................... 2.09% 2.28%(c)
Ratio of expenses to average net assets*...................................................... 2.06% 2.03%(c)
Ratio of net investment income to average net assets*......................................... 1.99% 2.18%(c)
Portfolio turnover............................................................................ 85.16% 58.16%
Average commission rate paid(d)............................................................... $0.0599 --
</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. On September 27, 1994, the
Portfolio authorized the issuance of a series of shares designated as
"Investor B" Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-111-
<PAGE> 139
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Years Ended November 30, to
------------------------------------------- November 30,
1996 1995 1994 1993 (a)
------------ ------------ ----------- ----------------
Trust Trust Trust Trust
Shares Shares Shares Shares
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 11.64 $ 9.62 $ 10.22 $ 10.00
-------- --------- -------- ---------
Investment Activities
Net investment income ......................................... 0.37 0.34 0.29 0.23
Net realized and unrealized gains from investments ............ 1.34 2.02 (0.47) 0.15
-------- --------- -------- ---------
Total from Investment Activities .......................... 1.71 2.36 (0.18) 0.38
-------- --------- -------- ---------
Distributions
Net investment income ......................................... (0.35) (0.34) (0.29) (0.16)
Net realized gains ............................................ (0.42) -- -- --
In excess of net realized gains ............................... -- -- (0.13) --
-------- --------- -------- ---------
Total Distributions ....................................... (0.77) (0.34) (0.42) (0.16)
-------- --------- -------- ---------
Net Asset Value, End of Period ................................... $ 12.58 $ 11.64 $ 9.62 $ 10.22
======== ========= ======== =========
Total Return ..................................................... 15.56% 24.97% (1.81)% 3.86%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................. $ 61,821 $ 72,669 $ 65,288 $ 69,720
Ratio of expenses to average net assets ....................... 0.97% 0.98% 0.97% 0.56%(c)
Ratio of net investment income to average net assets .......... 3.08% 3.29% 3.04% 3.42%(c)
Ratio of expenses to average net assets* ...................... 1.07% 1.08% 1.39% 1.21%(c)
Ratio of net investment income to average net assets income to
average net assets*.......................................... 2.98% 3.19% 2.63% 2.77%(c)
Portfolio turnover............................................. 85.16% 58.16% 49.00% 26.00%
Average commission rate paid (d)............................... $ 0.0599 -- -- --
</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.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-112-
<PAGE> 140
THE ARCH FUND, INC.
BALANCED PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
April 1, 1993
Years Ended November 30, to
--------------------------------------------- November 30,
1996 1995 1994(a) 1993(b)
------------- ------------- ------------- ------------
Institutional Institutional Institutional Investor
Shares Shares Shares Shares
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............................. $ 11.62 $ 9.60 $ 10.22 $10.00
------- ------- ------- ------
Investment Activities
Net investment income.......................................... 0.32 0.31 0.28 0.23
Net realized and unrealized gains from investments............. 1.34 2.02 (0.48) 0.15
------- ------- ------- ------
Total from Investment Activities........................... 1.66 2.33 (0.20) 0.38
------- ------- ------- ------
Distributions
Net investment income.......................................... (0.32) (0.31) (0.29) (0.16)
Net realized gains............................................. (0.42) -- -- --
In excess of net realized gains................................ -- -- (0.13) --
------- ------- ------- ------
Total Distributions........................................ (0.74) (0.31) (0.42) (0.16)
------- ------- ------- ------
Net Asset Value, End of Period................................... $ 12.54 $ 11.62 $ 9.60 $10.22
======= ======= ======= ======
Total Return..................................................... 15.08% 24.67% (2.00)% 3.86%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000).............................. $54,731 $36,827 $22,723 $1,978
Ratio of expenses to average net assets........................ 1.27% 1.27% 1.27% 0.56%(d)
Ratio of net investment income to average net assets........... 2.78% 2.97% 2.77% 3.42%(d)
Ratio of expenses to average net assets*....................... 1.37% 1.37% 1.40% 1.21%(d)
Ratio of net investment income income to average net assets*... 2.68% 2.87% 2.64% 2.77%(d)
Portfolio turnover............................................. 85.16% 58.16% 49.00% 26.00%
Average commission rate paid(e)................................ $0.0599 -- -- --
</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) The Balanced Portfolio issued a series of shares designated as "Investor"
Shares on April 1, 1993. In addition, on January 3, 1994, the Portfolio
issued a new series of shares designated as "Institutional" Shares. The
financial highlights presented for periods prior to January 3, 1994
represent financial highlights applicable to the Investor Shares.
(c) Not annualized.
(d) Annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
See notes to financial statements
-113-
<PAGE> 141
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
------------- ------------ ------------ ---------- ----------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ...................... $ 10.53 $ 9.64 $10.65 $10.26 $10.15
------- ------ ------ ------ ------
Investment Activities
Net investment income .................................. 0.64 0.61 0.60 0.64 0.66
Net realized and unrealized gains (losses) from
investments .......................................... (0.19) 0.89 (0.94) 0.39 0.11
------- ------ ------ ------ ------
Total from Investment Activities ................... 0.45 1.50 (0.34) 1.03 0.77
------- ------ ------ ------ ------
Distributions
Net investment income .................................. (0.64) (0.61) (0.60) (0.64) (0.66)
In excess of net investment income ..................... -- -- (0.07) -- --
------- ------ ------ ------ ------
Total Distributions ................................ (0.64) (0.61) (0.67) (0.64) (0.66)
------- ------ ------ ------ ------
Net Asset Value, End of Period ............................ $ 10.34 $10.53 $ 9.64 $10.65 $10.26
======= ====== ====== ====== ======
Total Return (excludes sales charge) ...................... 4.51% 15.98% (3.32)% 10.23% 7.81%
Ratios/Supplementary Data:
Net Assets at end of period (000) ...................... $ 4,915 $5,496 $5,167 $3,737 $2,490
Ratio of expenses to average net assets ................ 0.95% 0.95% 0.95% 0.95% 0.93%
Ratio of net investment income to average net assets.... 6.06% 6.03% 6.00% 6.00% 6.45%
Ratio of expenses to average net assets* ............... 1.05% 1.05% 1.05% 1.05% 1.06%
Ratio of net investment income to average net assets* .. 5.96% 5.93% 5.90% 5.90% 6.32%
Portfolio turnover...................................... 149.20% 59.32% 50.00% 31.00% 52.00%
</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) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
See notes to financial statements
-114-
<PAGE> 142
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Ended to
November 30, November 30,
1996 1995 (a)
------------ -------------
Investor B Investor B
Shares Shares
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................ $ 10.53 $ 9.92
------- ------
Investment Activities
Net investment income ........................................................ 0.57 0.38
Net realized and unrealized gains (losses) from investments .................. (0.19) 0.61
------- ------
Total from Investment Activities ......................................... 0.38 0.99
------- ------
Distributions
Net investment income ........................................................ (0.57) (0.38)
------- ------
Total Distributions ...................................................... (0.57) (0.38)
------- ------
Net Asset Value, End of Period .................................................. $ 10.34 $10.53
======= ======
Total Return (excludes sales charge) ............................................ 3.79% 15.27%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................ $ 511 $ 106
Ratio of expenses to average net assets ...................................... 1.65% 1.65%(c)
Ratio of net investment income to average net assets ......................... 5.37% 5.19%(c)
Ratio of expenses to average net assets* ..................................... 1.75% 1.75%(c)
Ratio of net investment income to average net assets* ........................ 5.27% 5.09%(c)
Portfolio turnover............................................................ 149.20% 59.32%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio redesignated the Investor Shares as "Investor A" Shares and
authorized the issuance of a series of shares designated as "Investor B"
Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
See notes to financial statements
-115-
<PAGE> 143
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ----------- ----------- ----------- -----------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........... $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15
-------- -------- -------- -------- --------
Investment Activities
Net investment income ....................... 0.67 0.64 0.63 0.68 0.70
Net realized and unrealized gains (losses)
from investments .......................... (0.19) 0.89 (0.94) 0.39 0.11
-------- -------- -------- -------- --------
Total from Investment Activities ........ 0.48 1.53 (0.31) 1.07 0.81
-------- -------- -------- -------- --------
Distributions
Net investment income ....................... (0.67) (0.64) (0.63) (0.68) (0.70)
In excess of net realized gains ............. -- -- (0.07) -- --
-------- -------- -------- -------- --------
Total Distributions ..................... (0.67) (0.64) (0.70) (0.68) (0.70)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ................. $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
======== ======== ======== ======== ========
Total Return ................................... 4.82% 16.31% (3.03)% 10.55% 8.14%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........... $141,440 $127,741 $132,577 $149,674 $135,404
Ratio of expenses to average net assets ..... 0.65% 0.65% 0.65% 0.65% 0.63%
Ratio of net investment income to average
net assets ................................ 6.36% 6.32% 6.25% 6.32% 6.73%
Ratio of expenses to average net assets* .... 0.75% 0.75% 1.05% 0.88% 0.76%
Ratio of net investment income to average
net assets* ............................... 6.26% 6.22% 5.85% 6.09% 6.60%
Portfolio turnover........................... 149.20% 59.32% 50.00% 31.00% 52.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements
-116-
<PAGE> 144
THE ARCH FUND, INC.
GOVERNMENT & CORPORATE BOND PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
-------------- -------------- -------------- ---------- ----------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
-------------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................... $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15
--------- --------- -------- -------- --------
Investment Activities
Net investment income ............................... 0.64 0.61 0.60 0.64 0.66
Net realized and unrealized gains (losses) from
investments ....................................... (0.19) 0.89 (0.94) 0.39 0.11
--------- --------- -------- -------- --------
Total from Investment Activities ................ 0.45 1.50 (0.34) 1.03 0.77
--------- --------- -------- -------- --------
Distributions
Net investment income ............................... (0.64) (0.61) (0.60) (0.64) (0.66)
In excess of net realized gains ..................... -- -- (0.07) -- --
--------- --------- -------- -------- --------
Total Distributions ............................. (0.64) (0.61) (0.67) (0.64) (0.66)
--------- --------- -------- -------- --------
Net Asset Value, End of Period ......................... $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
========= ========= ======== ======== ========
Total Return ........................................... 4.51% 15.98% (3.32)% 10.23% 7.81%
Ratios/Supplementary Data:
Net Assets at end of period (000) ................... $ 14,875 $ 9,413 $ 5,965 $ 3,737 $ 2,490
Ratio of expenses to average net assets ............. 0.95% 0.95% 0.96% 0.95% 0.93%
Ratio of net investment income to average net
assets ............................................ 6.06% 6.01% 6.03% 6.00% 6.45%
Ratio of expenses to average net assets* ............ 1.05% 1.05% 1.07% 1.05% 1.06%
Ratio of net investment income to average net
assets* ........................................... 5.96% 5.91% 5.92% 5.90% 6.32%
Portfolio turnover................................... 149.20% 59.32% 50.00% 31.00% 52.00%
</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) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented
for the periods prior to January 3, 1994 represent financial highlights
applicable to the Investor Shares.
See notes to financial statements
-117-
<PAGE> 145
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
------------ ------------ ------------ ---------- ----------
Investor A Investor A Investor A Investor Investor
Shares Shares Shares Shares Shares
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................ $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68
------- ------- ------- ------- -------
Investment Activities
Net investment income .................................... 0.62 0.64 0.61 0.59 0.62
Net realized and unrealized gains (losses) from
investments ............................................ (0.15) 0.80 (1.00) 0.47 0.13
------- ------- ------- ------- -------
Total from Investment Activities ..................... 0.47 1.44 (0.39) 1.06 0.75
------- ------- ------- ------- -------
Distributions
Net investment income .................................... (0.62) (0.64) (0.61) (0.59) (0.62)
Net realized gains ....................................... -- -- -- (0.07) (0.01)
In excess of net realized gains .......................... (0.03) -- (0.18) -- --
------- ------- ------- ------- -------
Total Distributions .................................. (0.65) (0.64) (0.79) (0.66) (0.63)
------- ------- ------- ------- -------
Net Asset Value, End of Period .............................. $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80
======= ======= ======= ======= =======
Total Return (excludes sales charges) ....................... 4.57% 14.66% (3.14)% 10.03% 7.20%
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................ $ 7,153 $ 8,179 $ 9,631 $ 9,567 $ 7,499
Ratio of expenses to average net assets .................. 0.97% 0.97% 0.96% 0.97% 0.95%
Ratio of net investment income to average net assets ..... 5.82% 6.05% 5.98% 5.25% 5.72%
Ratio of expenses to average net assets* ................. 1.07% 1.07% 1.06% 1.08% 1.09%
Ratio of net investment income to average net assets* .... 5.72% 5.95% 5.88% 5.14% 5.58%
Portfolio turnover........................................ 53.76% 93.76% 50.00% 24.00% 74.00%
</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) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
See notes to financial statements
-118-
<PAGE> 146
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year March 1, 1995
Ended to
November 30, November 30,
1996 1995 (a)
----------------- ---------------
Investor B Investor B
Shares Shares
----------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................................ $ 10.84 $ 10.34
--------- --------
Investment Activities
Net investment income ........................................................................ 0.55 0.31
Net realized and unrealized losses from investments .......................................... (0.15) 0.50
--------- --------
Total from Investment Activities ......................................................... 0.40 0.81
--------- --------
Distributions
Net investment income ........................................................................ (0.55) (0.31)
In excess of net realized gains .............................................................. (0.03) --
--------- --------
Total Distributions ...................................................................... (0.58) (0.31)
--------- --------
Net Asset Value, End of Period .................................................................. $ 10.66 $ 10.84
========= ========
Total Return (excludes sales charge) ............................................................ 3.85% 12.85%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................................ $ 359 $ 41
Ratio of expenses to average net assets ...................................................... 1.66% 1.68%(c)
Ratio of net investment income to average net assets ......................................... 5.06% 5.37%(c)
Ratio of expenses to average net assets* ..................................................... 1.76% 1.78%(c)
Ratio of net investment income to average net assets* ........................................ 4.96% 5.27%(c)
Portfolio turnover............................................................................ 53.76% 93.76%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations. On September 27, 1994, the
Portfolio redesignated the Investor Shares as "Investor A" Shares and
authorized the issuance of a series of shares designated as "Investor B"
Shares.
(b) Represents total return for the Investor A Shares from December 1, 1994 to
February 28, 1995 plus the total return for the Investor B Shares from
March 1, 1995 to November 30, 1995.
(c) Annualized.
See notes to financial statements
-119-
<PAGE> 147
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68
------- ------- ------- ------- --------
Investment Activities
Net investment income ............................. 0.66 0.67 0.66 0.62 0.66
Net realized and unrealized gains (losses) from
investments ..................................... (0.15) 0.80 (0.97) 0.47 0.13
------- ------- ------- ------- -------
Total from Investment Activities .............. 0.51 1.47 (0.31) 1.09 0.79
------- ------- ------- ------- -------
Distributions
Net investment income ............................. (0.66) (0.67) (0.66) (0.62) (0.66)
Net realized gains ................................ -- -- -- (0.07) (0.01)
In excess of net realized gains ................... (0.03) -- (0.18) -- --
------- ------- ------- ------- -------
Total Distributions ........................... (0.69) (0.67) (0.84) (0.69) (0.67)
------- ------- ------- ------- -------
Net Asset Value, End of Period ....................... $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80
======= ======= ======= ======= =======
Total Return ......................................... 4.88% 15.00% (2.85)% 10.36% 7.52%
Ratios/Supplementary Data:
Net Assets at end of period (000) ................. $60,079 $45,513 $33,166 $35,121 $31,106
Ratio of expenses to average net assets ........... 0.67% 0.67% 0.66% 0.67% 0.65%
Ratio of net investment income to average net
assets .......................................... 6.10% 6.36% 6.25% 5.57% 6.02%
Ratio of expenses to average net assets* .......... 0.77% 0.77% 1.06% 0.91% 0.79%
Ratio of net investment income to average net
assets* ......................................... 6.00% 6.26% 5.85% 5.33% 5.88%
Portfolio turnover................................. 53.76% 93.76% 50.00% 24.00% 74.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
See notes to financial statements
-120-
<PAGE> 148
THE ARCH FUND, INC.
U.S. GOVERNMENT SECURITIES PORTFOLIO
Institutional Shares
Financial Highlights
<TABLE>
<CAPTION>
Years Ended November 30,
----------------------------------------------------------------------
1996 1995 1994 (a) 1993 1992
-------------- -------------- -------------- ---------- ----------
Institutional Institutional Institutional Investor Investor
Shares Shares Shares Shares Shares
-------------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..................... $ 10.82 $ 10.02 $ 11.20 $ 10.80 $ 10.68
-------- --------- -------- -------- --------
Investment Activities
Net investment income ................................. 0.62 0.63 0.61 0.59 0.62
Net realized and unrealized gains (losses) from
investments ......................................... (0.15) 0.80 (1.00) 0.47 0.13
-------- --------- -------- -------- --------
Total from Investment Activities .................. 0.47 1.43 (0.39) 1.06 0.75
-------- --------- -------- -------- --------
Distributions
Net investment income ................................. (0.62) (0.63) (0.61) (0.59) (0.62)
Net realized gains .................................... -- -- -- (0.07) (0.01)
In excess of net realized gains ....................... (0.03) -- (0.18) -- --
-------- --------- -------- -------- --------
Total Distributions ............................... (0.65) (0.63) (0.79) (0.66) (0.63)
-------- --------- -------- -------- --------
Net Asset Value, End of Period ........................... $ 10.64 $ 10.82 $ 10.02 $ 11.20 $ 10.80
======== ========= ======== ======== ========
Total Return ............................................. 4.55% 14.69% (3.46)% 10.03% 7.20%
Ratios/Supplementary Data:
Net Assets at end of period (000) ..................... $ 2,232 $ 667 $ 51 $ 9,567 $ 7,499
Ratio of expenses to average net assets ............... 0.96% 0.97% 0.95% 0.97% 0.95%
Ratio of net investment income to average net assets .. 5.75% 5.91% 6.54% 5.25% 5.72%
Ratio of expenses to average net assets* .............. 1.06% 1.07% 1.16% 1.08% 1.09%
Ratio of net investment income to average net assets* 5.65% 5.81% 6.33% 5.14% 5.58%
Portfolio turnover..................................... 53.76% 93.76% 50.00% 24.00% 74.00%
</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) As of December 1, 1990, the Portfolio designated the existing series of
shares as "Investor" Shares. In addition, on June 7, 1994, the Portfolio
issued a new series of shares designated as "Institutional" Shares. The
financial highlights presented for periods prior to June 7, 1994 represent
financial highlights applicable to the Investor Shares.
See notes to financial statements
-121-
<PAGE> 149
THE ARCH FUND, INC.
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Year July 10, 1995
Ended to
November 30, November 30,
1996 1995 (a)
---------------- ---------------
Investor A Investor A
Shares Shares
---------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period ............................................................ $ 10.08 $ 10.00
------- -------
Investment Activities
Net investment income ........................................................................ 0.40 --
Net realized and unrealized gains from investments ........................................... -- 0.08
------- -------
Total from Investment Activities ......................................................... 0.40 0.08
------- -------
Distributions
Net investment income ........................................................................ (0.40) --
------- -------
Total Distributions ...................................................................... (0.40) --
------- -------
Net Asset Value, End of Period .................................................................. $ 10.08 $ 10.08
======= =======
Total Return (excludes sales charges) ........................................................... 4.02% 0.80%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................................ $ 51 --(c)
Ratio of expenses to average net assets ...................................................... 0.56% 0.00%(d)
Ratio of net investment income to average net assets ......................................... 3.83% 0.00%(d)
Ratio of expenses to average net assets* ..................................................... 1.26% 0.00%(d)
Ratio of net investment income to average net assets* ........................................ 3.13% 0.00%(d)
Portfolio turnover ........................................................................... 0.00% 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) Only one Investor A Share, worth $10.08, was outstanding as of November 30,
1995.
(d) Annualized.
See notes to financial statements
-122-
<PAGE> 150
THE ARCH FUND, INC.
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Year July 10, 1995
Ended to
November 30, November 30,
1996 1995 (a)
---------------- ----------------
Trust Trust
Shares Shares
---------------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period ........................................................... $ 10.07 $ 10.00
--------- ---------
Investment Activities
Net investment income ....................................................................... 0.41 0.14
Net realized and unrealized gains from investments .......................................... -- 0.07
--------- ---------
Total from Investment Activities ........................................................ 0.41 0.21
--------- ---------
Distributions
Net investment income ....................................................................... (0.41) (0.14)
--------- ---------
Total Distributions ..................................................................... (0.41) (0.14)
--------- ---------
Net Asset Value, End of Period ................................................................. $ 10.07 $ 10.07
========= =========
Total Return ................................................................................... 4.15% 2.15%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ........................................................... $ 29,472 $ 23,754
Ratio of expenses to average net assets ..................................................... 0.31% 0.47%(c)
Ratio of net investment income to average net assets......................................... 4.07% 3.81%(c)
Ratio of expenses to average net assets* .................................................... 0.96% 1.12%(c)
Ratio of net investment income to average net assets* ....................................... 3.42% 3.16%(c)
Portfolio turnover .......................................................................... 0.00% 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.
See notes to financial statements
-123-
<PAGE> 151
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Year Ended May 31,
November 30, November 30, -------------------------------------------------------
1996 1995 (d) 1995(a) 1994 1993 1992
-------------- ------------- ------------- ---------- ---------- ----------
Investor A Investor A Investor A Investor Investor Investor
Shares Shares Shares Shares Shares Shares
-------------- ------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97 $ 10.62
--------- -------- --------- -------- -------- ---------
Investment Activities
Net investment income ............... 0.55 0.27 0.55 0.55 0.58 0.63
Net realized and unrealized gains
(losses) from investments ......... (0.05) 0.22 0.40 (0.37) 0.64 0.43
--------- -------- --------- -------- -------- ---------
Total from Investment Activities 0.50 0.49 0.95 0.18 1.22 1.06
--------- -------- --------- -------- -------- ---------
Distributions
Net investment income ............... (0.55) (0.27) (0.55) (0.55) (0.58) (0.63)
Net realized gains .................. -- -- (0.01) (0.04) (0.07) (0.08)
--------- -------- --------- -------- -------- ---------
Total Distributions ............. (0.55) (0.27) (0.56) (0.59) (0.65) (0.71)
--------- -------- --------- -------- -------- ---------
Net Asset Value, End of Period ......... $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97
========= ======== ========= ======== ======== =========
Total Return (excludes sales charges) .. 4.41% 4.32%(b) 8.91% 1.53% 11.47% 10.24%
Ratios/Supplementary Data:
Net Assets at end of period (000) ... $ 25,144 $ 24,726 $ 24,318 $ 27,919 $ 23,223 $ 12,635
Ratio of expenses to average net
assets ............................ 0.85% 0.95%(c) 0.84% 0.65% 0.63% 0.85%
Ratio of net investment income to
average net assets................. 4.75% 4.64%(c) 5.02% 4.75% 5.11% 5.75%
Ratio of expenses to average net
assets* ........................... 1.05% 1.18%(c) 1.18% 1.12% 1.18% 1.49%
Ratio of net investment income to
average net assets* ............... 4.55% 4.44%(c) 4.68% 4.28% 4.56% 5.11%
Portfolio turnover................... 3.66% 1.55% -- 20.00% 15.00% 21.00%
</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) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
(b) Not annualized.
(c) Annualized.
(d) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year end from May 31 to
November 30.
See notes to financial statements
-124-
<PAGE> 152
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Ended Ended March 1, 1995
November 30, November 30, to May 31,
1996 1995 (e) 1995 (a)
---------------- ---------------- ----------------
Investor B Investor B Investor B
Shares Shares Shares
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .......................................... $ 11.74 $ 11.52 $ 11.19
------- ------- -------
Investment Activities
Net investment income ...................................................... 0.45 0.22 0.11
Net realized and unrealized losses from investments ........................ (0.06) 0.22 0.33
------- ------- -------
Total from Investment Activities ....................................... 0.39 0.44 0.44
------- ------- -------
Distributions
Net investment income ...................................................... (0.45) (0.22) (0.11)
------- ------- -------
Total Distributions .................................................... (0.45) (0.22) (0.11)
------- ------- -------
Net Asset Value, End of Period ................................................ $ 11.68 $ 11.74 $ 11.52
======= ======= =======
Total Return (excludes sales charges) ......................................... 3.48% 3.88%(b) 8.61%(c)
Ratios/Supplementary Data:
Net Assets at end of period (000) .......................................... $ 675 $ 433 $ 94
Ratio of expenses to average net assets .................................... 1.65% 1.77%(d) 1.76%(d)
Ratio of net investment income to average net assets ....................... 3.96% 3.82%(d) 4.00%(d)
Ratio of expenses to average net assets* ................................... 1.75% 1.87%(d) 1.88%(d)
Ratio of net investment income to average net assets*....................... 3.86% 3.72%(d) 3.89%(d)
Portfolio turnover.......................................................... 3.66% 1.55% --
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated Investor shares as
"Investor A" shares and authorized the issuance of a third series of shares
designated as "Investor B" shares. These financial highlights of Investor B
shares cover the period from March 1, 1995 (commencement of operations)
through May 31, 1995.
(b) Not annualized.
(c) Represents total return for the Investor A Shares from June 1, 1994 to
February 28, 1995, plus the total return for the Investor B Shares for the
period from March 1, 1995 to May 31, 1995.
(d) Annualized.
(e) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year end from May 31 to
November 30.
See notes to financial statements
-125-
<PAGE> 153
THE ARCH FUND, INC.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Years Ended May 31,
November 30, November 30, ---------------------------------------------------
1996 1995 (c) 1995 1994 1993 1992
---------------- ---------------- ---------- ---------- --------- ---------
Trust Trust Trust Trust Trust Trust
Shares Shares Shares Shares Shares Shares
---------------- ---------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97 $ 10.62
-------- --------- -------- --------- -------- -------
Investment Activities
Net investment income ................ 0.57 0.28 0.57 0.58 0.60 0.64
Net realized and unrealized gains
(losses) from investments .......... (0.05) 0.22 0.40 (0.37) 0.64 0.43
-------- --------- -------- --------- -------- -------
Total from Investment Activities . 0.52 0.50 0.97 0.21 1.24 1.07
-------- --------- -------- --------- -------- -------
Distributions
Net investment income ................ (0.57) (0.28) (0.57) (0.58) (0.60) (0.64)
Net realized gains ................... -- -- (0.01) (0.04) (0.07) (0.08)
-------- --------- -------- --------- -------- -------
Total Distributions .............. (0.57) (0.28) (0.58) (0.62) (0.67) (0.72)
-------- --------- -------- --------- -------- -------
Net Asset Value, End of Period .......... $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97
======== ========= ======== ========= ======== =======
Total Return ............................ 4.62% 4.41%(a) 9.12% 1.73% 11.70% 10.37%
Ratios/Supplementary Data:
Net Assets at end of period (000) .... $ 55,905 $ 47,773 $ 44,336 $ 47,743 $ 32,777 $ 6,609
Ratio of expenses to average net
assets ............................. 0.65% 0.78%(b) 0.64% 0.45% 0.43% 0.73%
Ratio of net investment income to
average net assets ................. 4.95% 4.83%(b) 5.22% 4.96% 5.30% 5.87%
Ratio of expenses to average net
assets* ............................ 0.75% 0.88%(b) 1.16% 1.13% 0.98% 1.38%
Ratio of net investment income to
average net assets* ................ 4.85% 4.73%(b) 4.70% 4.28% 4.75% 5.22%
Portfolio turnover.................... 3.66% 1.55% -- 20.00% 15.00% 21.00%
</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) Not annualized.
(b) Annualized.
(c) Upon reorganizing as a portfolio of The ARCH Fund, Inc., the Missouri
Tax-Exempt Bond Portfolio changed its fiscal year end from May 31 to
November 30.
See notes to financial statements
-126-
<PAGE> 154
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
November 18, 1996
to
November 30, 1996 (a)
-------------------------
Investor A
Shares
-------------------------
<S> <C>
Net Asset Value, Beginning of Period ............................................................... $ 10.00
-------
Investment Activities
Net investment income ........................................................................... 0.02
Net realized and unrealized gains from investments .............................................. 0.05
-------
Total from Investment Activities ............................................................ 0.07
-------
Distributions
Net investment income ........................................................................... (0.02)
-------
Total Distributions ......................................................................... (0.02)
-------
Net Asset Value, End of Period ..................................................................... $ 10.05
=======
Total Return (excludes sales charge) ............................................................... 0.73%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) ............................................................... $ 1
Ratio of expenses to average net assets ......................................................... 0.37%(c)
Ratio of net investment income to average net assets ............................................ 9.08%(c)
Ratio of expenses to average net assets* ........................................................ 1.07%(c)
Ratio of net investment income to average net assets* ........................................... 8.38%(c)
Portfolio turnover .............................................................................. 0.00%
- ------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-127-
<PAGE> 155
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
November 18, 1996
to
November 30, 1996 (a)
-------------------------
Investor
B
Shares
-------------------------
<S> <C>
Net Asset Value, Beginning of Period .......................................................... $10.00
------
Investment Activities
Net investment income ...................................................................... 0.02
Net realized and unrealized gains from investments ......................................... 0.05
------
Total from Investment Activities ....................................................... 0.07
------
Distributions
Net investment income ...................................................................... (0.02)
------
Total Distributions .................................................................... (0.02)
------
Net Asset Value, End of Period ................................................................ $10.05
======
Total Return (excludes sales charge) .......................................................... 0.70%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .......................................................... $ 1
Ratio of expenses to average net assets .................................................... 1.10%(c)
Ratio of net investment income to average net assets ....................................... 8.35%(c)
Ratio of expenses to average net assets* ................................................... 1.80%(c)
Ratio of net investment income to average net assets* ...................................... 7.65%(c)
Portfolio turnover ......................................................................... 0.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-128-
<PAGE> 156
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
November 18, 1996
to
November 30, 1996 (a)
-------------------------
Trust
Shares
-------------------------
<S> <C>
Net Asset Value, Beginning of Period .......................................................... $ 10.00
---------
Investment Activities
Net investment income ...................................................................... 0.02
Net realized and unrealized gains from investments ......................................... 0.05
---------
Total from Investment Activities ....................................................... 0.07
---------
Distributions
Net investment income ...................................................................... (0.02)
---------
Total Distributions .................................................................... (0.02)
---------
Net Asset Value, End of Period ................................................................ $ 10.05
=========
Total Return (excludes sales charge) .......................................................... 0.74%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000) .......................................................... $310,413
Ratio of expenses to average net assets .................................................... 0.12%(c)
Ratio of net investment income to average net assets ....................................... 5.77%(c)
Ratio of expenses to average net assets* ................................................... 0.82%(c)
Ratio of net investment income to average net assets* ...................................... 5.07%(c)
Portfolio turnover ......................................................................... 0.00%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-129-
<PAGE> 157
THE ARCH FUND, INC.
Special Meeting of the Shareholders
(Unaudited)
At a Special Meeting of the Shareholders (the "Meeting") of the International
Equity Portfolio (the "Portfolio"), held October 18, 1996, shareholders of the
Portfolio voted the following proposals:
1. That the new Sub-Advisory Agreement dated as of August 29, 1996, between
Mississippi Valley Advisors Inc. and Clay Finlay Inc. (the "Agreement"), be
ratified and approved:
<TABLE>
<CAPTION>
Votes in Favor Votes Against
-------------- -------------
<S> <C>
4,417,517 7,564
</TABLE>
2. That the payment of sub-advisory fees to Clay Finlay Inc. pursuant to the
Agreement for the period from August 29, 1996 through the conclusion of the
Meeting to be ratified and approved:
<TABLE>
<CAPTION>
Votes in Favor Votes Against
-------------- -------------
<S> <C>
4,410,918 9,749
</TABLE>
-130-
<PAGE> 158
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 159
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 160
INVESTMENT ADVISER
Mississippi Valley Advisors Inc.
One Mercantile Center
Seventh & Washington Streets
St. Louis, Missouri 63101
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
LEGAL COUNSEL
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
This report is submitted for the general information of the shareholders of The
ARCH Funds, Inc. It is not authorized for distribution to prospective investors
unless accompanied or preceded by effective prospectuses for the Funds, which
contain information concerning the Funds, investment policies and expenses as
well as other pertinent information.
<PAGE> 1
EXHIBIT 17(k)
EQUITY AND
INCOME
FUNDS
ARROW FUNDS
COMBINED
SEMI-ANNUAL REPORT
MARCH 31, 1997
Federated Securities Corp., Distributor
Cusip 042749101
Cusip 042749200
Cusip 042749309
3041404 (5/97)
PRESIDENT'S MESSAGE
Dear Investor:
I am pleased to present your Semi-Annual Report for the Arrow Equity and Income
Funds. This report covers the six-month reporting period from October 1, 1996,
through March 31, 1997.
This report contains complete financial information, including an investment
review by the portfolio manager and a list of holdings, for the Arrow Equity
Portfolio, Arrow Fixed Income Portfolio, and Arrow Municipal Income Portfolio.
The fund-by-fund highlights are as follows:
ARROW EQUITY PORTFOLIO
<PAGE> 2
This high quality stock fund invests in many household names such as
BankAmerica, Chrysler, DuPont, General Electric, Hewlett-Packard, Intel,
Mattel, Pepsico, Pfizer, and Wal-Mart. For the six-month period ended
March 31, 1997, the fund produced a total return of 7.98%, or 4.17% when
adjusted for the fund's sales charge.* Contributing to the total return
was a $0.10 increase in net asset value, $0.05 per share in dividends,
and capital gain distributions totaling $1.05 per share. Total net
assets stood at $58.5 million on the last day of the period.
ARROW FIXED INCOME PORTFOLIO
Arrow Fixed Income Portfolio invests in a combination of corporate bonds
issued by many well-known companies, and government bonds. The fund paid
dividends totaling $0.33 per share over the period, while its net asset
value decreased by $0.11 due to bond market volatility. For the
six-month period ended March 31, 1997, total return was 2.21%, or -1.35%
when adjusted for the fund's sales charge.* On the last day of the
period, total net assets stood at $28.2 million.
ARROW MUNICIPAL INCOME PORTFOLIO
This fund, designed for tax-sensitive investors, pursues income free of
federal income tax through a portfolio of investment-grade, long-term
municipal bonds.** On the last day of the period, Arrow Municipal Income
Portfolio included bonds issued by municipalities across 14 states. The
fund paid tax-free dividends of $0.22 per share during the period, while
its net asset value declined by $0.04 due to bond market volatility. For
the six-month period ended March 31, 1997, total return was 1.76%, or
-1.78% when adjusted for the fund's sales charge.* Total net assets
stood at $13.8 million on the last day of the period.
Finally, please note that on April 25, 1997, Mississippi Valley Advisors Inc.
succeeded Mark Twain Bank as the investment adviser to the Arrow Funds. This
change is a result of a merger of Mark Twain Bancshares, Inc., the parent
company of Mark Twain Bank, into Mercantile Bancorporation Inc. The terms of
the Arrow Funds' new investment advisory contract with Mississippi Valley
Advisors Inc. are substantially similar to the previous investment advisory
contract between Arrow Funds and Mark Twain Bank.
Thank you for selecting an Arrow Fund to pursue your financial goals. You
<PAGE> 3
have our commitment to bring you the highest level of service as we keep you up
to date on your investment progress.
Sincerely,
[Graphic]
Edward C. Gonzales
President
May 15, 1997
* Performance quoted reflects past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
** Income may be subject to the federal alternative minimum tax and state and
local taxes.
INVESTMENT REVIEW
ARROW EQUITY PORTFOLIO
The equity markets and the Arrow Equity Fund have provided an attractive return
for an extended period of time. This has been the case also for the past twelve
months, but not without some volatility. Common stocks generally declined from
about April - May of 1996 through July and then began a strong recovery phase
that lasted until December, only to lose ground during that last month of the
year.
Equities started off in January and February 1997 with a strong advance. Most
market averages and the Arrow Equity Fund were up about 10% to 11% during this
time. The primary support for the markets came from increasing corporate
earnings, a modestly advancing economy, low inflation, and moderating bond
yields.
The Federal Reserve Board's recent move to raise short-term interest rates has
weakened the yield support underpinning the equity markets, and in our view,
has been one of the reasons for the heavy selling of stocks in recent weeks.
The resulting drop in stock prices has little to do with fundamentals, and more
to do with a very nervous market. This is typical of
<PAGE> 4
a "correction." We have not experienced what is classified as a "market
correction," a drop in stock prices of about 10%, for some time, and that type
of environment may be overdue.
Despite near-term uncertainty, we expect a relatively favorable environment for
financial assets in the coming months. That includes continuing moderate
economic growth, modest inflation, and rising corporate earnings. However, we
expect continued selective strength in common stocks, accompanied by a degree
of volatility. How selective? Just five companies, IBM, Intel, Microsoft, Coca
Cola and General Electric, accounted for almost one quarter of the 20.3% price
gain for 1996 in the Standard & Poor's 500 Stock Index.*
At this time it is especially important to stay invested in companies with
solid fundamentals and develop a somewhat defensive posture. We especially
favor those companies that have visible and predictable earnings growth
prospects.
ARROW FIXED INCOME PORTFOLIO
The Arrow Fixed Income Portfolio had total net assets of $28.2 million as of
March 31, 1997. The fund had an average maturity of 13 years, with 32% of the
fund's net assets invested in U.S. Treasury and Government Agency securities,
and 65% invested in investment grade corporate bonds.
Interest rates moved higher during the period, with ten-year U.S. Treasury
securities increasing 20 basis points to a 6.9% yield on March 31, 1997 versus
a 6.70% yield on September 30, 1996. Thirty-year government bonds increased in
yield to a 7.10% yield versus a 6.92% yield at the end of the third quarter of
1996. On March 25, 1997, the Federal Reserve Board raised short-term interest
rates by one quarter of one percent. It was the first tightening of monetary
policy in two years. While continuing stronger economic numbers is a negative
for the markets, inflation is still relatively low and the recent strength of
the dollar versus the Japanese yen and the German mark should slow economic
growth in the U.S. to a more moderate pace. We therefore do not see longer-term
interest rates increasing substantially from current levels, with the upside on
thirty-year government securities being in the 7-1/4% to 7-1/2% range.
* The Standard & Poor's 500 Index is an unmanaged index of common stocks in
industry, transportation, and financial and public utility companies.
<PAGE> 5
Investments cannot be made in an index.
ARROW MUNICIPAL INCOME PORTFOLIO
During the six-month reporting period ended March 31, 1997, total returns from
the municipal market have been only slightly positive. Municipal supply
increased during the fourth quarter of 1996, which limited upward movement of
bond prices. During the latter part of the first quarter of 1997, the Federal
Open Market Committee raised short-term interest rates by one-quarter of one
percent. This change in policy caused bond valuations to decline further. Total
return for the municipal market was essentially flat to down slightly during
the first quarter of 1997.
The Arrow Municipal Income Portfolio finished the first quarter of 1997 with a
positive total return (not adjusted for sales charge), due to defensive
measures taken late in 1996. The fund remains slightly more defensive in terms
of duration, but has remained nearly fully invested and diversified. We expect
the economy to continue growing moderately, which may necessitate further
increases in short-term interest rates during the next few quarters, but we
believe long bond yields are probably near their high. The fund continues to
emphasize high-quality issues.
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- 88.9%
COMMERCIAL SERVICES -- 2.2%
53,000 Reynolds & Reynolds Co., Class A $1,265,375
CONSUMER DURABLES -- 2.6%
18,000 Brunswick Corp. 483,750
22,000 Chrysler Corp. 660,000
15,000 Mattel, Inc. 360,000
Total 1,503,750
CONSUMER NON-DURABLES -- 8.0%
2,000 Gillette Co. 145,250
32,000 PepsiCo, Inc. 1,044,000
</TABLE>
<PAGE> 6
<TABLE>
<C> <S> <C>
22,000 Philip Morris Cos., Inc. 2,510,750
35,000 UST, Inc. 975,625
Total 4,675,625
ELECTRONIC TECHNOLOGY -- 12.0%
25,000 Hewlett-Packard Co. 1,331,250
15,000 Intel Corp. 2,086,875
15,000 McDonnell-Douglas Corp. 915,000
25,000 (a)Sun Microsystems, Inc. 721,875
14,000 United Technologies Corp. 1,053,500
17,000 Varian Association, Inc. 909,500
Total 7,018,000
ENERGY MINERALS -- 2.6%
5,000 Texaco, Inc. 547,500
25,000 Unocal Corp. 953,125
Total 1,500,625
FINANCE -- 26.1%
4,000 Aflac, Inc. 150,000
6,000 American International Group, Inc. 704,250
<CAPTION>
SHARES VALUE
<C> <S> <C>
COMMON STOCKS -- CONTINUED
FINANCE -- CONTINUED
17,000 BankAmerica Corp. $ 1,712,750
13,000 Citicorp 1,407,250
40,000 Federal Home Loan Mortgage Corp. 1,090,000
20,000 Federal National Mortgage Association 722,500
80,000 Green Tree Financial Corp. 2,700,000
11,000 Household International, Inc. 947,375
56,250 MBNA Corp. 1,567,969
25,000 NationsBank Corp. 1,384,375
10,000 Norwest Corp. 462,500
27,000 Travelers Group, Inc. 1,292,625
4,000 Wells Fargo & Co. 1,136,500
Total 15,278,094
HEALTH SERVICES -- 1.5%
18,000 United Healthcare Corp. 857,250
HEALTH TECHNOLOGY -- 13.2%
25,000 Abbott Laboratories 1,403,125
20,000 (a)Amgen, Inc. 1,117,500
</TABLE>
<PAGE> 7
<TABLE>
<S> <C> <C>
20,000 Medtronic, Inc. 1,245,000
14,000 Merck & Co., Inc. 1,179,500
7,000 Pfizer, Inc. 588,875
30,000 Schering Plough Corp. 2,182,500
Total 7,716,500
INDUSTRIAL SERVICES -- 1.7%
15,000 Halliburton Co. 1,016,250
NON-ENERGY MINERALS -- 1.9%
40,000 Texas Industries, Inc. 1,100,000
PROCESS INDUSTRIES -- 1.3%
14,000 Avery Dennison Corp. 539,000
2,000 Du Pont (E.I.) de Nemours & Co. 212,000
Total 751,000
<CAPTION>
SHARES VALUE
<S> <C> <C>
COMMON STOCKS -- CONTINUED
PRODUCER MANUFACTURING -- 8.9%
22,000 Allied-Signal, Inc. $1,567,500
5,000 Dover Corp. 262,500
5,000 General Electric Co. 496,250
17,000 Illinois Tool Works, Inc. 1,387,625
8,000 Raychem Corp. 659,000
20,000 (a)Thermo Electron Corp. 617,500
8,000 (a)U.S. Filter Corp. 247,000
Total 5,237,375
RETAIL TRADE -- 2.4%
15,000 Home Depot, Inc. 802,500
22,000 Wal-Mart Stores, Inc. 613,250
Total 1,415,750
TECHNOLOGY SERVICES -- 0.3%
5,000 Computer Associates International, Inc. 194,375
TELECOMMUNICATIONS -- 1.3%
15,000 Lucent Technologies, Inc. 791,250
TRANSPORTATION -- 2.9%
15,000 (a)AMR Corp. 1,237,500
16,000 Illinois Central Corp. 504,000
Total 1,741,500
TOTAL COMMON STOCKS (IDENTIFIED COST $38,834,648) 52,062,719
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
U.S. TREASURY SECURITIES -- 3.4%
$2,000,000 United States Treasury Bill, 4/24/1997 (AT AMORTIZED COST) $ 1,993,381
MUTUAL FUNDS -- 7.5%
2,526,371 Goldman Sachs ILA Treasury Instruments 2,526,371
1,816,756 SEI Government Portfolio Money Market Fund 1,861,756
TOTAL MUTUAL FUND SHARES (AT NET ASSET VALUE) 4,388,127
TOTAL INVESTMENTS (IDENTIFIED COST $45,216,156) (B) $58,444,227
</TABLE>
(a) Non-income producing security.
(b) The cost of investments for federal tax purposes amounts to $45,216,156.
The net unrealized appreciation of investments on a federal tax basis amounts
to $13,228,071 which is comprised of $14,043,135 appreciation and $815,064
depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($58,554,898) at March 31, 1997.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $45,216,156) $58,444,227
Cash 8,130
Income receivable 102,531
Deferred expenses 1,612
Total assets 58,556,500
LIABILITIES:
Accrued expenses 1,602
NET ASSETS for 3,862,138 shares outstanding $58,554,898
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C>
NET ASSETS CONSIST OF:
Paid in capital $42,015,621
Net unrealized appreciation of investments 13,228,071
Accumulated net realized gain on investments 3,263,064
Undistributed net investment income 48,142
Total Net Assets $58,554,898
NET ASSET VALUE, AND REDEMPTION PROCEEDS PER SHARE:
$58,554,898 / 3,862,138 shares outstanding $15.16
Offering Price Per Share (100/96.50 of $15.16)* $15.71
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $431,697
Interest 62,569
Total income 494,266
EXPENSES:
Investment advisory fee $225,024
Administrative personnel and services fee 43,254
Custodian fees 11,960
Transfer and dividend disbursing agent fees and expenses 14,619
Directors'/Trustees' fees 723
Auditing fees 6,488
Legal fees 1,716
Portfolio accounting fees 23,693
Distribution services fee 75,008
Share registration costs 8,179
Printing and postage 2,784
Insurance premiums 1,965
Miscellaneous 2,625
Total expenses 418,038
</TABLE>
<PAGE> 10
<TABLE>
<S> <C> <C>
Waivers--
Waivers of distribution services fee (75,008)
Net expenses 343,030
Net investment income 151,236
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 3,511,369
Net change in unrealized appreciation of investments 980,648
Net realized and unrealized gain on investments 4,492,017
Change in net assets resulting from operations $ 4,643,253
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 151,236 $ 423,781
Net realized gain on investments ($3,511,369 and $4,600,860 net gain,
respectively, as computed for federal tax purposes) 3,511,369 4,612,534
Net change in unrealized appreciation (depreciation) 980,648 (11,835)
Change in net assets resulting from operations 4,643,253 5,024,480
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment
income (180,833) (381,222)
Distributions from net realized gains (3,886,419) (218,057)
Change in net assets resulting from distributions to shareholders (4,067,252) (599,279)
SHARE TRANSACTIONS--
Proceeds from sale of shares 10,910,353 12,339,545
Net asset value of shares issued to shareholders in payment of
distributions declared 389,067 47,007
Cost of shares redeemed (8,893,275) (4,946,669)
</TABLE>
<PAGE> 11
<TABLE>
<S> <C> <C>
Change in net assets resulting from share transactions 2,406,145 7,439,883
Change in net assets 2,982,146 11,865,084
NET ASSETS:
Beginning of period 55,572,752 43,707,668
End of period (including undistributed net investment income
of $48,142 and $77,739, respectively) $58,554,898 $55,572,752
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MARCH 31, YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.06 $13.80 $ 9.74 $10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.06 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss)
on investments 1.14 1.32 4.05 (0.25) 0.02
Total from investment operations 1.20 1.44 4.15 (0.18) 0.06
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain
on investments (1.05) (0.07) -- (0.03) --
Total distributions (1.10) (0.18) (0.09) (0.10) (0.04)
NET ASSET VALUE, END OF PERIOD $15.16 $15.06 $13.80 $ 9.74 $10.02
TOTAL RETURN(B) 7.98% 10.48% 42.90% (1.84)% 0.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.14%* 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.50%* 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.25%* 0.28% 0.30% 0.28% 0.30%*
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $58,555 $55,573 $43,708 $30,282 $31,159
Average commission rate paid(d) $0.0905 $0.0756 -- -- --
Portfolio turnover 25% 45% 45% 127% 54%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS -- 64.5%
AEROSPACE & DEFENSE -- 1.8%
$ 500,000 Rockwell International Corp., 6.75%, 9/15/2002 492,840
BANKING -- 8.3%
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C>
1,000,000 Bank of Scotland, Edinburgh, 6.50%, 2/15/2011 892,150
500,000 BankAmerica Corp., 7.50%, 10/15/2002 504,795
500,000 NationsBank Corp., 6.50%, 3/15/2006 466,085
500,000 NationsBank Corp., 6.875%, 2/15/2005 482,765
Total 2,345,795
CONSUMER PRODUCTS -- 6.8%
1,000,000 Kimberly Clark Corp., 7.875%, 2/1/2023 967,360
1,000,000 Philip Morris Cos., Inc., 7.75%, 1/15/2027 952,780
Total 1,920,140
FINANCE -- 8.4%
500,000 MBNA Corp., 6.875%, 10/1/1999 499,250
1,000,000 Smurfit Capital, 6.75%, 11/20/2005 944,360
1,000,000 Travelers Group, Inc., 6.25%, 12/1/2005 926,370
Total 2,369,980
INDUSTRIAL -- 23.3%
500,000 La Quinta Inns, Inc., 7.25%, 3/15/2004 487,175
1,000,000 Millenium America, Inc., 7.00%, 11/15/2006 947,920
1,000,000 Tele-Communications, Inc., 9.875%, 6/15/2022 1,073,700
1,000,000 Time Warner, Inc., 8.05%, 1/15/2016 975,640
1,000,000 USX Corp., 9.375%, 5/15/2022 1,133,860
1,000,000 WMX Technologies, Inc., 7.125%, 6/15/2001 999,660
</TABLE>
<PAGE> 14
<TABLE>
<C> <S> <C>
1,000,000 WARF International Finance Ltd., 7.625%, 3/13/2007 972,030
Total 6,589,985
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OF SHARES VALUE
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
OIL -- 3.4%
1,000,000 Phillips Petroleum Co., 7.92%, 4/15/2023 $ 969,960
UTILITIES -- 12.5%
674,000 Arkansas Electric Co-op Corp., 7.33%, 6/30/2008 671,843
1,000,000 Central LA Electric Co., 6.95%, 6/12/2006 956,450
1,000,000 Duke Power Co., 7.375%, 3/1/2023 921,000
500,000 Midwest Power Systems, Inc., 7.00%, 2/15/2005 486,715
500,000 United Telephone Co. of Florida, 7.25%, 12/15/2004 497,940
Total 3,533,948
TOTAL CORPORATE BONDS (IDENTIFIED COST $18,767,970) 18,222,648
GOVERNMENT BONDS -- 31.5%
FOREIGN MUNICIPAL -- 1.8%
500,000 Ontario, Province, Canada, 7.375%, 1/27/2003 506,080
GOVERNMENT AGENCIES -- 5.3%
500,000 Federal Home Loan Bank, 6.32%, 2/1/2000 495,690
1,000,000 Federal National Mortgage Association, 7.55%, 6/10/2004 994,690
Total 1,490,260
</TABLE>
<PAGE> 15
U.S. TREASURY SECURITIES -- 24.4%
3,000,000 U.S. Treasury Bond, 7.50%, 11/15/2016 3,087,000
1,000,000 U.S. Treasury Note, 5,875%, 2/15/2004 945,000
1,500,000 U.S. Treasury Note, 7.50%, 5/15/2002 1,547,190
1,250,000 U.S. Treasury Note, 8.00%, 5/15/2001 1,307,150
Total 6,887,230
TOTAL GOVERNMENT BONDS
(IDENTIFIED COST $9,275,418) 8,883,570
MUTUAL FUND -- 2.6%
720,022 Goldman Sachs ILA Treasury Money Market Fund
(AT NET ASSET VALUE) 720,000
TOTAL INVESTMENTS
(IDENTIFIED COST $28,763,410)(A) 27,826,240
(a) The cost of investments for federal tax purposes amounts to $28,763,410.
The net unrealized depreciation of investments on a federal tax basis
amounts to $937,170 which is comprised of $39,465 appreciation and
$976,635 depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($28,229,184) at March 31, 1997.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $28,763,410) $27,826,240
Income receivable 543,692
Deferred expenses 1,998
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C>
Total assets 28,371,930
LIABILITIES:
Income distribution payable $139,793
Accrued expenses 2,953
Total liabilities 142,746
NET ASSETS for 2,943,000 shares outstanding $28,229,184
NET ASSETS CONSIST OF:
Paid in capital $30,075,419
Net unrealized depreciation of investments (937,170)
Accumulated net realized loss on investments (909,065)
Total Net Assets $28,229,184
NET ASSET VALUE, AND REDEMPTION PROCEEDS PER SHARE:
$28,229,184 / 2,943,000 shares outstanding $9.59
Offering Price Per Share (100/96.50 of $9.59)* $9.94
</TABLE>
* See "What shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 30,901
Interest 992,466
Total income 1,023,367
EXPENSES:
Investment advisory fee $86,990
Administrative personnel and services fee 24,863
Custodian fees 11,934
Transfer and dividend disbursing agent fees
and expenses 19,004
Directors'/Trustees' fees 1,492
Auditing fees 5,968
Legal fees 1,487
Portfolio accounting fees 24,406
Distribution services fee 36,246
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
<S> <C> <C>
Share registration costs 6,881
Printing and postage 1,532
Insurance premiums 1,813
Miscellaneous 4,568
Total expenses 227,184
Waivers --
Waiver of distribution services fee (36,246)
Net expenses 190,938
Net investment income 832,429
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 53,460
Net change in unrealized depreciation of investments (368,730)
Net realized and unrealized loss on investments (315,270)
Change in net assets resulting from operations $517,159
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 832,429 $1,705,740
Net realized gain (loss) on investments ($53,460 net gain, and $540,150
net loss, respectively, as computed for federal tax purposes) 53,460 (184,315)
Net change in unrealized appreciation (depreciation) (368,730) (843,230)
Change in net assets resulting from operations 517,159 678,195
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (832,429) (1,705,740)
SHARE TRANSACTIONS --
Proceeds from sale of shares 2,742,731 6,570,600
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
Net asset value of shares issued to shareholders in
payment of distributions declared 12,062 27,485
Cost of shares redeemed (2,918,670) (7,523,659)
Change in net assets resulting from
share transactions (163,877) (925,574)
Change in net assets (479,147) (1,953,119)
NET ASSETS:
Beginning of period 28,708,331 30,661,450
End of period $28,229,184 $28,708,331
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MARCH 31, YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993(A)
----------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.70 $10.06 $9.31 $10.75 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.33 0.57 0.59 0.59 0.44
Net realized and unrealized gain (loss)
on investments (0.11) (0.36) 0.75 (1.41) 0.75
Total from investment operations 0.22 0.21 1.34 (0.82) 1.19
LESS DISTRIBUTIONS
Distributions from net investment income (0.33) (0.57) (0.59) (0.59) (0.44)
Distributions from net realized gain
on investments -- -- -- (0.03) --
Total distributions (0.33) (0.57) (0.59) (0.62) (0.44)
NET ASSET VALUE, END OF PERIOD $9.59 $9.70 $10.06 $9.31 $10.75
TOTAL RETURN(B) 2.21% 2.12% 14.89% (7.85%) 12.09%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.32%* 1.27% 1.22% 1.15% 1.05%*
Net investment income 5.74%* 5.84% 6.17% 5.86% 5.71%*
</TABLE>
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C>
Expense waiver/reimbursement(c) 0.25%* 0.26% 0.26% 0.26% 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $28,229 $28,708 $30,661 $32,743 $42,715
Portfolio turnover 25% 55% 53% 28% 28%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
(A) LONG-TERM MUNICIPALS -- 91.6%
CALIFORNIA -- 5.3%
$700,000 Long Beach Harbor, CA, Revenue Bonds (Series A), 7.25% 5/15/2019 733,194
GEORGIA -- 4.0%
500,000 Appling County, GA Development Authority, PCR Refunding Bonds,
7.00% (Olglethorpe Power Corp.)/(MBIA Insured), 1/1/2012 548,930
ILLINOIS -- 7.5%
500,000 Illinois Housing Development Authority, Mortgage Revenue Bonds
(Series D-1), 6.40%, 8/1/2017 510,550
</TABLE>
<PAGE> 20
<TABLE>
<C> <S> <C>
485,000 Waukegan, IL, GO UT Bonds, 6.80% 12/30/2007 521,074
Total 1,031,624
INDIANA -- 3.7%
500,000 Ball State University, University Revenue Bonds (Series G), 6.125%
(FGIC Insured), 7/1/2014 511,975
IOWA -- 8.6%
500,000 Iowa Student Loan Liquidity Corporation, Student Loan Revenue Bonds
(Series B), 6.75%, 3/1/2004 529,635
650,000 Ottumwa Iowa Community School District, GO UT Bonds, 5.60% (CGIC
Insured), 6/1/2010 655,324
Total 1,184,959
KENTUCKY -- 2.7%
350,000 Kentucky Higher Education Student Loan Corporation, Insured Student
Loan Revenue Bonds (Series D), 7.10%, 12/1/2011 373,618
MISSISSIPPI -- 3.9%
500,000 Mississippi Higher Education, Student Loan Revenue Bonds
(Sub-Series C), 7.50% (Guaranteed Student Loans LOC), 9/1/2009 532,190
MISSOURI -- 22.5%
340,000 Kansas City, MO, Sewer Authority, Refunding Revenue Bonds, 6.40%,
3/1/2010 352,628
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
(A)LONG-TERM MUNICIPALS -- CONTINUED
MISSOURI -- CONTINUED
$ 500,000 Missouri State Environmental Improvement & Energy Authority,
Refunding Revenue Bonds, 5.50% (Associated Electric Cooperative
Thomas Hill), 12/1/2010 $ 500,170
300,000 Missouri State HEFA, Revenue Bonds, 6.50% (St. Louis University)/
</TABLE>
<PAGE> 21
<TABLE>
<S> <C> <C>
(AMBAC Insured), 8/1/2016 321,003
120,000 Missouri State Housing Development Commission, SFM Revenue Bonds
(Series A), 6.00% (GNMA COL), 6/1/2015 121,100
740,000 Missouri State Housing Development Commission, SFM Revenue Bonds
(Series A), 6.625% (GNMA COL), 12/1/2017 762,200
1,000,000 Missouri State, Third State Building GO UT Refunding Bonds (Series B),
6.30%, 11/1/2012 1,041,610
Total 3,098,711
NEVADA -- 3.9%
500,000 Clark County, NV, Pollution Control, Refunding Revenue Bonds
(Series B), 6.60% (Nevada Power Co.), 6/1/2019 534,870
PENNSYLVANIA -- 5.3%
545,000 Delaware County, PA, GO UT Refunding Bonds, 6.00% (United States
Treasury PRF), 11/15/2002 (@102) 575,896
155,000 Delaware County, PA, Refunding Bonds, 6.00%, 11/15/2014 157,682
Total 733,578
TEXAS -- 12.5%
500,000 North Texas Higher Education Authority, Inc., Student Loan Revenue
Refunding Bonds (Series D), 6.30% (Guaranteed Student Loans LOC),
4/1/2010 489,905
155,000 Texas State, GO UT Bonds (Series A), 6.60% (Veterans Housing
Assistance Fund), 12/1/2016 158,120
1,000,000 Texas State, GO UT Bonds (Series A), 7.00%, 8/1/2011 1,078,590
Total 1,735,615
VIRGINIA -- 4.2%
550,000 Virginia State Housing Development Authority, Revenue Bonds (Series B),
</TABLE>
<PAGE> 22
<TABLE>
<S> <C> <C>
6.55% 1/1/2011
581,691
<CAPTION>
PRINCIPAL
AMOUNT
OR
SHARES VALUE
<S> <C> <C>
(A) LONG-TERM MUNICIPALS--CONTINUED
WASHINGTON--5.6%
$725,000 King County, WA School District #415 Kent, GO UT Bonds (Series B),
6.00%, 12/1/2008 $ 766,412
WISCONSIN--1.9%
255,000 Madison, WI, IDR (Series A), 6.75% (Madison Gas & Electric Co.), 4/1/2027 268,523
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $12,365,280) 12,635,890
MUTUAL FUNDS--7.1%
666,542 Goldman Sachs ILA Tax Exempt Money Market Fund 666,542
316,223 SEI Tax Exempt Money Market Fund 316,223
TOTAL MUTUAL FUNDS (AT NET ASSET VALUE) 982,765
TOTAL INVESTMENTS (IDENTIFIED COST $13,348,045)(B) 13,618,655
</TABLE>
(a) At March 31, 1997, 29.2% of the total investments at market value were
subject to alternative minimum tax.
(b) The cost of investments for federal tax purposes amounts to $13,348,045. The
net unrealized appreciation of investments on a federal tax basis amounts to
$270,610 which is comprised of $285,624 appreciation and $15,014
depreciation at March 31, 1997.
Note: The categories of investments are shown as a percentage of net assets
($13,795,291) at March 31, 1997.
<PAGE> 23
The following acronyms are used throughout this portfolio:
AMBAC - American Municipal Bond Assurance Corporation
CGIC - Capital Guaranty Insurance Corporation
COL - Collateralized
FGIC - Financial Guaranty Insurance Company
GNMA - Government National Mortgage Association
GO - General Obligation
HEFA - Health and Education Facilities Authority
IDR - Industrial Development Revenue
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance
PCR - Pollution Control Revenue
PRF - Prerefunded
SFM - Single Family Mortgage
UT - Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified and tax cost $13,348,045) $13,618,655
Cash 100
Income receivable 226,151
Deferred expenses 1,282
Total assets 13,846,188
LIABILITIES:
Income distribution payable $49,640
Accrued expenses 1,257
Total liabilities 50,897
NET ASSETS for 1,349,879 shares outstanding $13,795,291
NET ASSETS CONSIST OF:
Paid in capital $13,854,163
Net unrealized appreciation of investments 270,610
Accumulated net realized loss on investments (329,482)
</TABLE>
<PAGE> 24
<TABLE>
<S> <C>
Total Net Assets $13,795,291
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$13,795,291 / 1,349,879 shares outstanding $10.22
Offering Price Per Share (100/96.50 of $10.22)* $10.59
</TABLE>
*See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $406,301
EXPENSES:
Investment advisory fee $50,185
Administrative personnel and services fee 24,863
Custodian fees 1,792
Transfer and dividend disbursing agent fees and expenses 16,252
Directors'/Trustees' fees 947
Auditing fees 6,284
Legal fees 1,348
Portfolio accounting fees 24,730
Distribution services fee 17,923
Share registration costs 6,142
Printing and postage 3,216
Insurance premiums 1,377
Miscellaneous 3,579
Total Expenses 158,638
Waivers --
Waiver of investment advisory fee $(42,299)
Waiver of distribution services fee (17,923)
Total waivers (60,222)
Net expenses 98,416
Net investment income 307,805
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
</TABLE>
<PAGE> 25
<TABLE>
<S> <C>
Net realized gain on investments........................ 31,968
Net change in unrealized appreciation of investments.... (89,523)
Net realized and unrealized loss on investments....... (57,555)
Change in net assets resulting from operations...... $250,330
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED) YEAR ENDED
MARCH 31, SEPTEMBER 30,
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income....................................................... $ 307,885 $ 763,708
Net realized gain (loss) on investments ($31,968 net gain and
$284,885 net loss, respectively, as computed for federal tax purposes)...... 31,968 70,342
Net change in unrealized appreciation (depreciation)........................ (89,523) (648)
Change in net assets resulting from operations............................ 250,330 833,402
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income.................................... (307,885) (763,708)
SHARE TRANSACTIONS --
Proceeds from sale of shares................................................ 388,776 1,294,036
Net asset value of shares issued to shareholders in payment of
distributions declared...................................................... 8,955 22,639
Cost of shares redeemed..................................................... (1,491,846) (4,175,893)
Change in net assets resulting from share transactions.................... (1,094,115) (2,859,218)
Change in net assets.................................................... (1,151,670) (2,789,524)
NET ASSETS:
Beginning of period......................................................... 14,946,961 17,736,485
End of period............................................................... $13,795,291 $14,946,961
</TABLE>
<PAGE> 26
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(UNAUDITED)
MARCH 31, YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 10.26 $ 10.22 $ 9.87 $ 10.61 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ 0.22 0.47 0.46 0.47 0.32
Net realized and unrealized gain (loss)
on investments............................... (0.04) 0.04 0.35 (0.72) 0.61
Total from investment operations............. 0.18 0.51 0.81 (0.25) 0.93
LESS DISTRIBUTIONS
Distributions from net
investment income............................ (0.22) (0.47) (0.46) (0.47) (0.32)
Distributions from net realized gain
on investments............................... -- -- -- (0.02) --
Total distributions.......................... (0.22) (0.47) (0.46) (0.49) (0.32)
NET ASSET VALUE, END OF PERIOD................ $ 10.22 $ 10.26 $ 10.22 $ 9.87 $ 10.61
TOTAL RETURN(B)............................... 1.76% 5.04% 8.46% (2.41%) 9.43%
RATIOS TO AVERAGE NET ASSETS
Expenses..................................... 1.37%* 1.20% 1.09% 0.85% 0.72%*
Net investment income........................ 4.29%* 4.49% 4.70% 4.62% 4.71%*
Expense waiver/reimbursement(c).............. 0.84% 0.84% 0.80% 0.81% 0.85%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)...... $13,795 $14,947 $17,736 $23,187 $24,087
Portfolio turnover........................... 7% 20% 38% 27% 14%
</TABLE>
<PAGE> 27
(a) Reflects operations for the period from February 1, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY AND INCOME FUNDS COMBINED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
1. ORGANIZATION
Arrow Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company. The
Trust consists of four diversified portfolios (individually referred to as the
"Fund," or collectively as the "Funds"). The following portfolios are included
herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
<S> <C>
Arrow Equity Portfolio ("Equity Fund") Capital appreciation by investing primarily in equity securities.
Arrow Fixed Income Portfolio Current income by investing primarily in a portfolio of U.S. government and investment
("Fixed Income Fund") grade corporate securities.
Arrow Municipal Income Portfolio Current income which is exempt from regular federal income tax by investing primarily in a
("Municipal Income Fund") diversified portfolio of municipal securities.
</TABLE>
The financial statements of Arrow Government Money Market Portfolio are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
<PAGE> 28
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS - Municipal bonds are valued by an independent
pricing service, taking into consideration yield, liquidity, risk,
credit quality, coupon, maturity, type of issue, and any other factors
or market data the pricing service deems relevant. U.S. government
securities and listed corporate bonds are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of sixty days
or less at the time of purchase may be valued at amortized cost, which
approximates fair market value. Investments in other open-end regulated
investment companies are valued at net asset value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS - Interest income and
expenses are accrued daily. Bond premium and discount, if applicable,
are amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded
on the ex-dividend date.
FEDERAL TAXES - It is the Funds' policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute
to shareholders each year substantially all of their income.
Accordingly, no provisions for federal tax are necessary.
At September 30, 1996, the funds listed below, for federal tax purposes,
had capital loss carryforwards, which will reduce each fund's taxable
income arising from future net realized gain on investments, if any, to
the extent permitted by the Code, and thus will reduce the amount of the
distributions to shareholders which would otherwise be necessary to
relieve the funds of any liability for federal tax.
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
<PAGE> 29
<TABLE>
<CAPTION>
CARRYFORWARD CARRYFORWARD CARRYFORWARD TOTAL
FUND TO EXPIRE IN TO EXPIRE IN TO EXPIRE IN CAPITAL LOSS
2002 2003 2004 CARRYFORWARDS
<S> <C> <C> <C> <C>
Fixed Income Fund $24 $227,158 $540,150 $767,332
Municipal Income Fund -- 76,653 284,885 361,538
</TABLE>
Additionally, net capital losses on Fixed Income Fund of $195,217,
attributable to security transactions incurred after October 31, 1995, were
treated as arising on October 1, 1996, the first day of the Fund's next
taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES -- The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
<PAGE> 30
value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
EQUITY FUND FIXED INCOME FUND MUNICIPAL INCOME FUND
SIX MONTHS YEAR SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Shares sold 718,054 867,438 276,196 661,379 37,670 126,133
Shares issued to share-
holders in payment of
distributions declared 25,709 3,298 1,217 2,772 871 2,204
Shares redeemed (572,168) (346,978) (295,025) (750,074) (144,871) (407,947)
Net change resulting
from share
transactions 171,595 523,758 (17,612) (85,923) (106,330) (279,610)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Mark Twain Bank, the Funds' investment adviser
(the "Adviser"), receives for its services an annual investment advisory
fee based on a percentage of each Fund's average daily net assets as
follows:
<TABLE>
<CAPTION>
FUND ADVISORY FEE
<S> <C>
Equity Fund 0.75%
Fixed Income Fund 0.60%
Municipal Income Fund 0.70%
</TABLE>
The Adviser may voluntarily choose to waive any portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its
sole discretion.
<PAGE> 31
ADMINISTRATIVE FEE -- Federated Administrative Services ("FAS") provides the
Funds with certain administrative personnel and services. The fee paid to FAS
is based on the level of average aggregate net assets of the Funds for the
period.
DISTRIBUTION SERVICES FEE -- The Funds have adopted a Distributor Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the
Funds will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' shares. The Plan provides that the Funds may
incur distribution expenses up to 0.25% of average daily net assets, annually,
to compensate FSC. The distributor may voluntarily choose to waive any portion
of its fee. The distributor can modify or terminate this voluntary waiver at
any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES -- Federated Services Company
("FServ"), through its subsidiary, Federated Shareholder Services Company
("FSSC") serves as transfer and dividend disbursing agent for the Funds. The
fee paid to FSSC is based on the size, type, and number of accounts and
transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES -- FServ also maintains the Fund's accounting
records for which it receives a fee. The fee is based on the level of each
Fund's average daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES -- Mark Twain Bank is the Funds' custodian. The fee is based on
the level of each Fund's average daily net assets for the period, plus
out-of-pocket expenses.
ORGANIZATIONAL EXPENSES -- Organizational expenses for the Funds were borne
initially by FAS. The Funds have agreed to reimburse FAS for the organizational
expenses during the five-year period following November 24, 1992 (the date the
Trust became effective). For the six months ended March 31, 1997, each Fund
paid the following amounts to FAS pursuant to this agreement:
<PAGE> 32
<TABLE>
<CAPTION>
EXPENSES OF AMOUNTS REIMBURSED TO FAS
ORGANIZING FOR THE SIX MONTHS ENDED
FUND THE FUND MARCH 31, 1997
<S> <C> <C>
Equity Fund $17,560 $2,524
Fixed Income Fund 17,401 2,456
Municipal Income Fund 16,729 2,346
</TABLE>
GENERAL -- Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended March 31, 1997, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
<S> <C> <C>
Equity Fund $14,145,966 $21,016,202
Fixed Income Fund 6,997,988 7,873,901
Municipal Income Fund 923,770 2,661,022
</TABLE>
6. SUBSEQUENT EVENT
Effective April 25, 1997, in connection with the merger of Mark Twain
Bancshares, Inc., the parent company of Mark Twain Bank, into Mercantile
Bancorporation Inc., Mississippi Valley Advisors Inc. succeeded Mark Twain Bank
as the investment adviser to the Trust. The terms of the investment advisory
contract between the Trust and Mississippi Valley Advisors Inc. are
substantially similar to the investment advisory contract between the Trust and
Mark Twain Bank.
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
<PAGE> 33
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Edward C. Gonzales
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Edward C. Gonzales
President and Treasurer
J. Christopher Donahue
Executive Vice President
John W. McGonigle
Executive Vice President and Secretary
Charles L. Davis, Jr.
Vice President and Assistant Treasurer
Richard B. Fisher
Vice President
Gail Cagney
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the funds' prospectus which contains facts
concerning their objectives and policies, management fees, expenses and other
information.
<PAGE> 1
EXHIBIT 17(l)
EQUITY AND INCOME FUNDS
Arrow Funds
Combined Annual Report
September 30, 1996
[Graphic]
Mark Twain Bank
Investment Adviser
PRESIDENT'S MESSAGE
Dear Investor:
I am pleased to present you with the Annual Report for your investment in the
Arrow Equity and Income Funds. This report covers the one-year period from
October 1, 1995 through September 30, 1996.
This report begins with a commentary by the portfolio manager, and follows with
a complete list of holdings and financial statements for Arrow Equity Portfolio,
Arrow Fixed Income Portfolio, and Arrow Municipal Income Portfolio.
Please note the following performance summary for each Arrow fund over the
period:
* ARROW EQUITY PORTFOLIO produced a total return of 10.48% based on net asset
value, or 6.62% reflecting the fund's sales charge.* This return was due to
dividends of $0.18 per share, and a 9% increase in share price from the first
day of the period to the last day. At the end of the report period, net assets
stood at more than $55.6 million.
* ARROW FIXED INCOME PORTFOLIO paid dividends of $0.57 per share, while
achieving a total return of 2.12% based on net asset value, or -1.41%
reflecting the fund's sales charge.* The total return reflects a difficult
interest rate environment during the period that caused bond prices to fall.
At the end of the report period, net assets stood at more than $28.7 million.
* ARROW MUNICIPAL INCOME PORTFOLIO paid tax-free dividends of $0.47 per share.**
Through this dividend stream and a slight increase in net asset value, the
fund achieved a total return of 5.04%, or 1.37% reflecting the fund's sales
charge.* At the end of the report period, net assets stood at more than $14.9
million.
Thank you for pursuing your financial goals through the Arrow Funds. Consider
reinvesting your earnings automatically in additional shares. It's a convenient
way to pursue the advantage of compounding -- and increase your opportunity to
participate in key financial markets over time.
Sincerely,
[Graphic]
Edward C. Gonzales
President
November 15, 1996
* Performance quoted reflects past performance. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
** Income may be subject to the federal alternative minimum tax and state
and local taxes.
ARROW EQUITY PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The equity markets have been a pleasant surprise, to date, to just about
everyone. Especially the degree of strength registered by a majority of the
market averages. The second quarter ended June 30, 1996 saw the Standard &
Poor's Daily Stock Price Index of 500 Common Stocks ("S&P 500") return 4.5% with
the Dow Jones Average up a more modest 1.8%, but stocks were losing momentum
toward the quarter end. The downward trend continued through July as the S&P
lost 4.4% and the Dow dropped 2.0%.
The earlier euphoria was clearly missing from the stock market, as the second
half got under way. There was good reason for concern at that point. Not only
were legitimate issues being raised on the economic, inflation, and interest
rate fronts, but, valuation levels, (i.e., price-earnings ratios and dividend
yields) suggested that stocks were vulnerable to any
<PAGE> 2
deterioration in market fundamentals.
However, the stock market began to recover during the month of August and
developed even more strength in September with most market averages reaching
record levels. This bull market, as all such markets, has been driven by three
factors: liquidity, rising earnings, and lower bond yields.
Liquidity has poured into both stocks and bonds and out of bank deposits, money
market funds, and "real" assets at a record pace. Cash flows into equities so
far this year have exceeded all of 1993's record high of $129 billion, by a wide
margin.
This year's third quarter could represent the last difficult earnings comparison
of U.S. Corporations. While normally this could upset the financial markets,
companies have done an excellent job of lowering Wall Street's expectations.
Therefore, poor third quarter earnings may not present a huge problem, however,
having said that, we believe earnings on average will be somewhat better than
expected. Looking into the fourth quarter and beyond, we believe economic growth
will slow a bit. This fact, in addition to what we believe is moderate (5%-6%)
money growth, should help keep both short- and long-term yields in check.
The most difficult environment for the equity markets is a recessionary period.
At this time we do not see a recession on the horizon, but with some signs of
the economy slowing, it's something to monitor. At the present time we are
cautiously optimistic. We view the equity market to be within a fairly valued
range. We continue to feel, however, it is more important to search out
attractive common stocks rather than concentrate on the "market."
ARROW EQUITY PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW EQUITY PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Equity Portfolio (the "Fund") from January 3, 1993 (start of performance) to
September 30, 1996, compared to the Standard & Poor's Daily Stock Price Index of
500 Common Stocks ("S&P 500").
[Graphic] omitted, see appendix A
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The S&P 500 is adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The S&P 500 is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
ARROW FIXED INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The Arrow Fixed Income Portfolio had total net assets of $28.7 million as of
September 30, 1996. The fund had an average maturity of 11.5 years, with 36% of
the fund's assets invested in U.S. Treasury and Government Agency issues, and
57% invested in investment grade corporate bonds.
Interest rates, after moving substantially higher in the first quarter of the
year, settled into a trading range environment in the second and third quarter.
Thirty-year Treasury securities spent most of the period fluctuating in a range
of 7.20% on the high side, to 6.70% on the low side, closing at a 6.92% yield on
September 30, 1996. Stronger economic data in the second quarter caused yields
to rise, while weaker numbers in the third quarter resulted in declining rates.
Inflation in the U.S. economy continues to be moderate. The Consumer Price Index
core rate (the CPI less food and energy prices), has risen 2.8% year to date
through September versus 3% for all of 1995. While 1996 has not been favorable
for the bond market, a continued slowing in the economy and favorable inflation
numbers should eventually result in lower long-term interest rates.
ARROW FIXED INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW FIXED INCOME PORTFOLIO
<PAGE> 3
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Fixed Income Portfolio (the "Fund") from January 3, 1993 (start of performance)
to September 30, 1996, compared to the Lehman Brothers Government/Corporate
Total Index ("LBGCTI").
[Graphic] omitted, see appendix B
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBGCTI is adjusted to reflect reinvestment of dividends
on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBGCTI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
ARROW MUNICIPAL INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
Interest rates increased beginning in the first quarter of 1996 on concerns of
fears of rising inflation due to higher commodity prices and stronger economic
growth. This continued until the latter part of the third quarter when signs of
economic strength began to ease. Thus far, inflation has remained subdued.
Municipal supply remains somewhat low in many areas. This has enabled municipal
prices to remain firm, and thus municipals have outperformed taxables for most
of the year. Going forward, the economic signals are mixed as to whether the
economy will strengthen or weaken further going into 1997.
Therefore, the fund remains somewhat defensive with emphasis being placed on
intermediate average maturities and short to intermediate duration, along with
preference for premium coupon issues.
ARROW MUNICIPAL INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW MUNICIPAL INCOME PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Municipal Income Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Lehman Brothers State
General Obligations Bond Index ("LBSGOBI").
[Graphic] omitted, see appendix C
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBSGOBI is adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBSGOBI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<PAGE> 4
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS -- 97.9%
CHEMICALS -- 0.5%
5,000 Eastman Chemical Co. $ 291,875
CONSUMER DURABLES -- 1.6%
34,000 Mattel, Inc. 879,750
CONSUMER NON-DURABLES -- 10.2%
8,000 Anheuser-Busch Cos., Inc. 301,000
2,000 Gillette Co. 144,250
20,000 IBP, Inc. 465,000
2,000 Nike, Inc., Class B 243,000
32,000 PepsiCo, Inc. 904,000
22,000 Philip Morris Cos., Inc. 1,974,500
35,000 UST, Inc. 1,036,875
10,000 V.F. Corp. 601,250
Total 5,669,875
ELECTRONIC TECHNOLOGY -- 7.9%
22,000 Hewlett-Packard Co. 1,072,500
13,000 Intel Corp. 1,240,688
3,000 (a)Sun Microsystems, Inc. 186,375
15,000 Texas Industries, Inc. 898,125
21,000 Varian Associates, Inc. 1,008,000
Total 4,405,688
ENERGY MINERALS -- 1.1%
7,000 Ashland, Inc. 278,250
5,000 Phillips Petroleum Co. 213,750
5,000 (a)Santa Fe Energy Resource, Inc. 71,250
2,000 Unocal Corp. 72,000
Total 635,250
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS -- CONTINUED
ENTERTAINMENT -- 0.6%
15,000 Brunswick Corp. $ 360,000
FINANCE -- 28.9%
25,000 Aflac, Inc. 887,500
11,000 American International Group, Inc. 1,108,250
20,000 BankAmerica Corp. 1,642,500
4,000 Citicorp 362,500
10,000 Federal Home Loan Mortgage Corp. 978,750
20,000 Federal National Mortgage Association 697,500
80,000 Green Tree Financial Corp. 3,140,000
18,000 Household International, Inc. 1,480,500
37,500 MBNA Corp. 1,303,125
15,000 NationsBank Corp. 1,303,125
12,000 Norwest Corp. 490,500
25,000 Travelers Group, Inc. 1,228,125
5,500 Wells Fargo & Co. 1,430,000
Total 16,052,375
HEALTH SERVICES -- 1.3%
16,000 United Healthcare Corp. 666,000
HEALTH TECHNOLOGY -- 12.1%
25,000 Abbott Laboratories 1,231,250
15,000 (a)Amgen, Inc. 946,875
22,000 Medtronic, Inc. 1,410,750
15,000 Merck & Co., Inc. 1,055,625
30,000 Schering Plough Corp. 1,845,000
7,000 (a)Sofamor Danek Group, Inc. 216,125
Total 6,705,625
HOTELS -- 0.6%
12,000 Hilton Hotels Corp. 340,500
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS -- CONTINUED
INDUSTRIAL SERVICES -- 3.7%
17,000 Fluor Corp. $ 1,045,500
20,000 Halliburton Co. 1,032,500
Total 2,078,000
MACHINERY & EQUIPMENT -- 7.2%
35,000 Chrysler Corp. 1,001,875
12,000 Deere & Co. 504,000
21,000 Dover Corp. 1,002,750
8,000 McDonnell-Douglas Corp. 420,000
20,000 Thermo Electron Corp. 810,000
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
2,000 United Technologies Corp. 240,250
Total 3,978,875
PROCESS INDUSTRIES -- 1.4%
15,750 Archer-Daniels-Midland Co. 303,188
7,000 Avery Dennison Corp. 388,500
3,000 (a)Sealed Air Corp. 111,750
Total 803,438
PRODUCER MANUFACTURING -- 10.7%
20,000 Allied Signal, Inc. 1,317,500
7,000 Armstrong World Industries, Inc. 436,625
3,000 General Electric Co. 273,000
17,000 Gleason Corp. 663,000
18,000 Illinois Tool Works, Inc. 1,298,250
16,000 Raychem Corp. 1,200,000
8,000 (a)U.S. Filter Corp. 273,000
9,000 Xerox Corp. 482,625
Total 5,944,000
</TABLE>
ARROW EQUITY PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS -- CONTINUED
RETAIL TRADE -- 1.9%
5,000 Family Dollar Stores, Inc. $ 86,875
8,000 Home Depot, Inc. 455,000
3,000 (a)Vons Companies, Inc. 128,625
15,000 Wal-Mart Stores, Inc. 395,625
Total 1,066,125
TECHNOLOGY SERVICES -- 5.5%
6,750 Computer Associates International, Inc. 403,312
5,000 Electronic Data Systems Corp. 306,875
60,000 Reynolds & Reynolds Co., Class A 1,567,500
10,000 (a)Sterling Software, Inc. 763,750
Total 3,041,437
TRANSPORTATION -- 1.4%
25,000 Illinois Central Corp. 790,625
UTILITIES -- 1.3%
14,000 AT&T Corp. 731,500
TOTAL COMMON STOCKS (IDENTIFIED COST $42,193,515) 54,440,938
MUTUAL FUNDS -- 1.9%
1,051,482 Goldman Sachs ILA Treasury Instruments 1,051,482
1,712 SEI Government Portfolio Money Market Fund 1,712
TOTAL MUTUAL FUNDS (AT NET ASSET VALUE) 1,053,194
TOTAL INVESTMENTS (IDENTIFIED COST $43,246,709)(B) $55,494,132
</TABLE>
<PAGE> 6
(a) Non-income producing security.
(b) The cost of investments for federal tax purposes amounts to $43,285,853. The
net unrealized appreciation of investments on a federal tax basis amounts to
$12,208,279 which is comprised of $12,788,757 appreciation and $580,478
depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($55,572,752) at September 30, 1996.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost $43,246,709 and
tax cost $43,285,853) $ 55,494,132
Income receivable 108,385
Receivable for shares sold 290
Deferred expenses 2,988
Total assets 55,605,795
LIABILITIES:
Payable for shares redeemed $ 16,943
Accrued expenses 16,100
Total liabilities 33,043
Net Assets for 3,690,543 shares outstanding $ 55,572,752
NET ASSETS CONSIST OF:
Paid in capital $ 39,609,476
Net unrealized appreciation of investments 12,247,423
Accumulated net realized gain on investments 3,638,114
Undistributed net investment income 77,739
Total Net Assets $ 55,572,752
NET ASSET VALUE, AND REDEMPTION PROCEEDS PER SHARE:
($55,572,752 / 3,690,543 shares outstanding) $15.06
Offering Price Per Share (100/96.50 of $15.06)* $15.61
</TABLE>
* See "What Shares Cost" in the Prospectus.
<PAGE> 7
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 768,953
Interest 230,196
Total income 999,149
EXPENSES:
Investment advisory fee $ 368,254
Administrative personnel and services fee 71,420
Custodian fees 23,826
Transfer and dividend disbursing agent fees and expenses 28,471
Directors'/Trustees' fees 1,255
Auditing fees 13,085
Legal fees 3,221
Portfolio accounting fees 48,755
Distribution services fee 122,734
Share registration costs 17,853
Printing and postage 5,534
Insurance premiums 3,722
Miscellaneous 3,825
Total expenses 711,955
Waivers --
Waiver of investment advisory fee $ (13,853)
Waiver of distribution services fee (122,734)
Total waivers (136,587)
Net expenses 575,368
Net investment income 423,781
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 4,612,534
Net change in unrealized appreciation (depreciation) of investments (11,835)
Net realized and unrealized gain on investments 4,600,699
Change in net assets resulting from operations $ 5,024,480
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations --
Net investment income $ 423,781 $ 304,310
Net realized gain (loss) on investments ($4,600,860 net gain and
$664,284 net loss, respectively, as computed for federal tax purposes) 4,612,534 1,393,153
Net change in unrealized appreciation (depreciation) of investments (11,835) 10,831,819
Change in net assets resulting from operations 5,024,480 12,529,282
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (381,222) (291,654)
Distributions from net realized gains (218,057) --
Change in net assets resulting from distributions to shareholders (599,279) (291,654)
SHARE TRANSACTIONS --
Proceeds from sale of shares 12,339,545 12,062,494
Net asset value of shares issued to shareholders in payment of
distributions declared 47,007 17,333
Cost of shares redeemed (4,946,669) (10,891,483)
Change in net assets resulting from share transactions 7,439,883 1,188,344
Change in net assets 11,865,084 13,425,972
NET ASSETS:
Beginning of period 43,707,668 30,281,696
End of period (including undistributed net investment income of
$77,739 and $35,180, respectively) $ 55,572,752 $ 43,707,668
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE> 8
ARROW EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994 1993(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.80 $ 9.74 $10.02 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss) on investments 1.32 4.05 (0.25) 0.02
Total from investment operations 1.44 4.15 (0.18) 0.06
LESS DISTRIBUTIONS
Distributions from net investment income (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain on investments (0.07) -- (0.03) --
Total distributions (0.18) (0.09) (0.10) (0.04)
NET ASSET VALUE, END OF PERIOD $15.06 $13.80 $ 9.74 $10.02
TOTAL RETURN(B) 10.48% 42.90% (1.84%) 0.60%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.28% 0.30% 0.28% 0.30%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $55,573 $43,708 $30,282 $31,159
Average commission rate paid $0.0756 -- -- --
Portfolio turnover 45% 45% 127% 54%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------ -----
<C> <S> <C>
CORPORATE BONDS -- 57.1%
AEROSPACE & DEFENSE -- 1.7%
$ 500,000 Rockwell International Corp., 6.75%, 9/15/2002 $ 497,115
BANKING -- 8.3%
1,000,000 Bank of Scotland, Edinburgh, 6.50%, 2/15/2011 899,200
500,000 BankAmerica Corp., 7.50%, 10/15/2002 511,315
500,000 NationsBank Corp., 6.50%, 3/15/2006 471,605
500,000 NationsBank Corp., 6.875%, 2/15/2005 487,495
Total 2,369,615
CONSUMER PRODUCTS -- 3.5%
1,000,000 Kimberly Clark Corp., 7.875%, 2/1/2023 1,007,580
FINANCE -- 11.7%
500,000 MBNA Corp., 6.875%, 10/1/1999 502,260
1,000,000 Merrill Lynch & Co., Inc., 7.00%, 4/27/2008 964,800
1,000,000 Smurfit Capital, 6.75%, 11/20/2005 961,580
1,000,000 Travelers Group, Inc., 6.25%, 12/1/2005 930,470
Total 3,359,110
INDUSTRIAL -- 12.4%
500,000 La Quinta Inns, Inc., 7.25%, 3/15/2004 483,910
1,000,000 Time Warner, Inc., 8.05%, 1/15/2016 952,020
1,000,000 USX Corp., 9.375%, 5/15/2022 1,115,670
1,000,000 WMX Technologies, Inc., 7.125%, 6/15/2001 1,013,000
Total 3,564,600
OIL & GAS -- 3.4%
1,000,000 Phillips Petroleum Co., 7.92%, 4/15/2023 989,110
</TABLE>
<PAGE> 9
ARROW FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------ -----
<C> <S> <C>
CORPORATE BONDS -- CONTINUED
UTILITIES -- 16.1%
$ 699,000 Arkansas Electric Co-op Corp., 7.33%, 6/30/2008 $ 703,718
1,000,000 Central LA Electric Co., 6.95%, 6/21/2006 968,770
1,000,000 Duke Power Co., 7.375%, 3/1/2023 942,640
500,000 Midwest Power Systems, Inc., 7.00%, 2/15/2005 493,505
1,000,000 Systems Energy Resources, 7.80%, 8/1/2000 997,407
500,000 United Telephone Co. of Florida, 7.25%, 12/15/2004 503,565
Total 4,609,605
TOTAL CORPORATE BONDS (IDENTIFIED COST $16,730,940) 16,396,735
GOVERNMENT BONDS -- 36.3%
FOREIGN MUNICIPAL -- 1.8%
500,000 Ontario Province, Canada, 7.375%, 1/27/2003 512,035
GOVERNMENT AGENCIES -- 5.2%
500,000 Federal Home Loan Bank, 6.32%, 2/1/2000 498,560
1,000,000 Federal National Mortgage Association, 7.55%, 6/10/2004 1,006,170
Total 1,504,730
U.S. TREASURY SECURITIES -- 29.3%
3,000,000 U.S. Treasury Bond, 7.50%, 11/15/2016 3,143,130
1,500,000 U.S. Treasury Note, 7.50%, 5/15/2002 1,571,310
500,000 U.S. Treasury Note, 7.50%, 11/15/2001 521,935
1,000,000 U.S. Treasury Note, 7.875%, 8/15/2001 1,058,340
2,000,000 U.S. Treasury Note, 8.00%, 5/15/2001 2,123,180
Total 8,417,895
TOTAL GOVERNMENT BONDS (IDENTIFIED COST $10,693,270) 10,434,660
</TABLE>
ARROW FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
PREFERRED STOCKS -- 5.1%
BANKING -- 3.3%
37,500 Midland Bank PLC, Pfd. $ 946,875
FINANCE -- 1.8%
20,000 SI Financing Trust, Pfd. 515,000
TOTAL PREFERRED STOCKS (IDENTIFIED COST $1,437,500) 1,461,875
MUTUAL FUND -- 0.2%
49,993 Goldman Sachs ILA Treasury Money Market Fund (AT NET ASSET VALUE) 49,993
TOTAL INVESTMENTS (IDENTIFIED COST $28,911,703)(A) $ 28,343,263
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $28,911,703. The
net unrealized depreciation of investments on a federal tax basis amounts to
$568,440 which is comprised of $123,625 appreciation and $692,065
depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($28,708,331) at September 30, 1996.
The following acronym is used throughout this portfolio:
PLC -- Public Limited Company
(See Notes which are an integral part of the Financial Statements)
<PAGE> 10
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified cost and tax cost $28,911,703) $ 28,343,263
Cash 101
Income receivable 540,372
Deferred expenses 3,692
Total assets 28,887,428
LIABILITIES:
Income distribution payable $161,371
Payable for shares redeemed 4,996
Accrued expenses 12,730
Total liabilities 179,097
Net Assets for 2,960,612 shares outstanding $ 28,708,331
NET ASSETS CONSIST OF:
Paid in capital $ 30,239,296
Net unrealized depreciation of investments (568,440)
Accumulated net realized loss on investments (962,525)
Total Net Assets $ 28,708,331
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
($28,708,331 / 2,960,612 shares outstanding) $9.70
Offering Price Per Share (100/96.50 of $9.70)* $10.05
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 43,219
Interest 2,032,179
Total income 2,075,398
EXPENSES:
Investment advisory fee $ 175,494
Administrative personnel and services fee 50,011
Custodian fees 23,517
Transfer and dividend disbursing agent fees and expenses 29,291
Directors'/Trustees' fees 2,863
Auditing fees 12,008
Legal fees 3,028
Portfolio accounting fees 49,252
Distribution services fee 73,047
Share registration costs 14,449
Printing and postage 3,086
Insurance premiums 3,751
Miscellaneous 6,147
Total expenses 445,944
Waivers --
Waiver of investment advisory fee $ (3,239)
Waiver of distribution services fee (73,047)
Total waivers (76,286)
Net expenses 369,658
Net investment income 1,705,740
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (184,315)
Net change in unrealized depreciation of investments (843,230)
Net realized and unrealized loss on investments (1,027,545)
Change in net assets resulting from operations $ 678,195
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations --
Net investment income $ 1,705,740 $ 1,895,110
Net realized loss on investments ($540,150 net loss and $227,158
net loss, respectively, as computed for federal tax purposes) (184,315) (595,593)
Net change in unrealized appreciation (depreciation) of investments (843,230) 2,957,493
Change in net assets resulting from operations 678,195 4,257,010
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (1,705,740) (1,895,110)
SHARE TRANSACTIONS --
Proceeds from sale of shares 6,570,600 6,044,571
Net asset value of shares issued to shareholders in payment of
distributions declared 27,485 31,130
Cost of shares redeemed (7,523,659) (10,519,098)
Change in net assets resulting from share transactions (925,574) (4,443,397)
Change in net assets (1,953,119) (2,081,497)
NET ASSETS:
Beginning of period 30,661,450 32,742,947
End of period $ 28,708,331 $ 30,661,450
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE> 11
ARROW FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994 1993(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.06 $ 9.31 $10.75 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.57 0.59 0.59 0.44
Net realized and unrealized gain (loss) on investments (0.36) 0.75 (1.41) 0.75
Total from investment operations 0.21 1.34 (0.82) 1.19
LESS DISTRIBUTIONS
Distributions from net investment income (0.57) (0.59) (0.59) (0.44)
Distributions from net realized gain on investment
transactions -- -- (0.03) --
Total distributions (0.57) (0.59) (0.62) (0.44)
NET ASSET VALUE, END OF PERIOD $ 9.70 $10.06 $ 9.31 $10.75
TOTAL RETURN(B) 2.12% 14.89% (7.85%) 12.09%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.27% 1.22% 1.15% 1.05%*
Net investment income 5.84% 6.17% 5.86% 5.71%*
Expense waiver/reimbursement(c) 0.26% 0.26% 0.26% 0.27%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $28,708 $30,661 $32,743 $42,715
Portfolio turnover 55% 33% 28% 28%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CREDIT
RATINGS:
PRINCIPAL MOODY'S
AMOUNT OR S&P(B) VALUE
------ --------- -----
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- 96.7%
CALIFORNIA -- 5.0%
$ 700,000 Long Beach CA, Harbor Revenue Bonds, 7.25%,
(Series A), 5/15/2019 AA- $ 741,622
GEORGIA -- 3.8%
500,000 Appling County, GA Development Authority, 7.00%,
Pollution Control Revenue Bonds, (Oglethorpe Power
Corp. Hatch Project) / (MBIA Insured), 1/1/2012 AAA 564,465
ILLINOIS -- 13.2%
500,000 Illinois Housing Development Authority, 6.40%,
Revenue Bonds, 8/1/2017 AA 511,315
400,000 Schaumburg, IL, 6.05%, GO UT Refunding Bonds,
12/1/2007 AA+ 417,180
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
CREDIT
RATINGS:
PRINCIPAL MOODY'S
AMOUNT OR S&P(B) VALUE
------ --------- -----
<C> <S> <S> <C>
500,000 Springfield, IL, 6.50%, Water Revenue Bonds, 3/1/2015 AA 523,230
485,000 Waukegan, IL, GO UT, 6.80%, 12/30/2007 A1 524,804
Total 1,976,529
INDIANA -- 3.4%
500,000 Ball State University, 6.125%, University Revenue Bonds
(Series G) / (FGIC Insured), 7/1/2014 AAA 516,750
IOWA -- 8.1%
500,000 Iowa Student Loan Liquidity Corporation, 6.75%,
Student Loan Revenue Bonds (Series B), 3/1/2004 Aa1 548,465
650,000 Ottumwa, IA, Community School District, 5.60%,
GO UT Bonds, (FSA Insured), 6/1/2010 AAA 656,520
Total 1,204,985
KENTUCKY -- 2.5%
350,000 Kentucky Higher Education Student Loan Corporation,
7.10%, Insured Student Loan Revenue Bonds (Series D),
12/1/2011 AA- 375,161
</TABLE>
ARROW MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
CREDIT
RATINGS:
PRINCIPAL MOODY'S
AMOUNT OR S&P(B) VALUE
------ --------- -----
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- 96.7%
(A)LONG-TERM MUNICIPALS -- CONTINUED
MASSACHUSETTS -- 3.4%
$ 500,000 Massachusetts State, GO UT, 6.00%, (Series A), 6/1/2011 A+ $ 508,790
MISSISSIPPI -- 3.6%
500,000 Mississippi Higher Education Student Loan Revenue
Bonds, 7.50%, (Series C), 9/1/2009 A 537,410
MISSOURI -- 21.0%
340,000 Kansas City, MO, 6.40%, Sewer Authority Refunding
Revenue Bonds, 3/1/2010 AA- 356,249
500,000 Missouri State Environmental Improvement & Energy
Authority, 5.50%, Refunding Revenue Bonds, 12/1/2010 AA 500,620
145,000 Missouri State Housing Development Commission,
6.00%, SFM Revenue Bonds (Series A) / (GNMA COL),
6/1/2015 AAA 146,850
740,000 Missouri State Housing Development Commission,
6.625%, SFM Revenue Bonds (Series A) / (GNMA COL),
12/1/2017 AAA 763,895
300,000 Missouri State, 6.50%, HEFA Revenue Bonds (St. Louis
University) / (AMBAC Insured), 8/1/2016 AAA 321,876
1,000,000 Missouri State, Third State Building, 6.30%, GO UT
Bonds (Series B), 11/1/2012 AAA 1,052,430
Total 3,141,920
NEVADA -- 3.6%
500,000 Clark County, NV, 6.60%, Pollution Control, Refunding
Revenue Bonds (Series B), 6/1/2019 AAA 543,090
PENNSYLVANIA -- 4.7%
700,000 Delaware County, PA, 6.00%, GO UT Refunding Bonds,
11/15/2014 AA 710,857
TEXAS -- 11.8%
500,000 North Texas State Higher Education Student Loan
Revenue Bonds, 6.30%, (Series D), 4/1/2010 A 502,775
</TABLE>
ARROW MUNICIPAL INCOME PORTFOLIO
<TABLE>
<CAPTION>
CREDIT
PRINCIPAL RATINGS:
AMOUNT MOODY'S
OR SHARES OR S&P(B) VALUE
--------- --------- -----
<C> <S> <S> <C>
(A)LONG-TERM MUNICIPALS -- CONTINUED
TEXAS -- CONTINUED
$ 155,000 Texas State, 6.60%, GO UT Bonds (Series A)/(Veterans
Housing Assistance Fund), 12/1/2016 AA $ 158,704
1,000,000 Texas State, 7.00%, GO UT Water Development,
(Series A), 8/1/2011 AA 1,096,140
Total 1,757,619
VIRGINIA -- 3.9%
550,000 Virginia State, 6.55%, Housing Development Authority,
(Series B), 1/1/2011 AA+ 581,350
WASHINGTON -- 6.9%
725,000 King County, WA, School District #415 Kent, 6.00%,
GO UT Bonds (Series B), 12/1/2008 AA- 763,700
245,000 Washington State, 6.00%, Refunding Bonds
(Series R-92C), 9/1/2004 AA 260,338
Total 1,024,038
WISCONSIN -- 1.8%
255,000 Madison, WI, 6.75%, IDR (Madison Gas & Electric Co.),
4/1/2027 AA 270,157
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $14,094,610) 14,454,743
MUTUAL FUNDS -- 2.1%
317,640 Goldman Sachs & Co. (AT NET ASSET VALUE) 317,640
TOTAL INVESTMENTS (IDENTIFIED COST $14,412,250)(C) $14,772,383
</TABLE>
<PAGE> 13
(a) At September 30, 1996, 27.4% of the total investments at market value were
subject to alternative minimum tax.
(b) Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings. Current credit ratings are
unaudited.
(c) The cost of investments for federal income tax purposes amounts to
$14,412,250. The net unrealized appreciation of investments on a federal tax
basis amounts to $360,133 which is comprised of $375,063 appreciation and
$14,930 depreciation at September 30, 1996.
Note: The categories of investments are shown as a percentage of net assets
($14,946,961) at September 30, 1996.
The following acronyms are used throughout this portfolio:
AMBAC -- American Municipal Bond Assurance Corporation
COL -- Collateralized
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance, Inc.
GNMA -- Government National Mortgage Association
GO -- General Obligation
HEFA -- Health and Education Facilities Authority
IDR -- Industrial Development Revenue
MBIA -- Municipal Bond Investors Assurance
SFM -- Single Family Mortgage
UT -- Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value (identified and tax cost $14,412,250) $ 14,772,383
Cash 100
Income receivable 251,546
Deferred expenses 2,372
Total assets 15,026,401
LIABILITIES:
Payable for shares redeemed $ 13,338
Income distribution payable 54,096
Accrued expenses 12,006
Total liabilities 79,440
Net Assets for 1,456,209 shares outstanding $ 14,946,961
NET ASSETS CONSIST OF:
Paid in capital $ 14,948,278
Net unrealized appreciation of investments 360,133
Accumulated net realized loss on investments (361,450)
Total Net Assets $ 14,946,961
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
($14,946,961 / 1,456,209 shares outstanding) $10.26
Offering Price Per Share (100/96.50 of $10.26)* $10.63
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 967,102
EXPENSES:
Investment advisory fee $ 119,078
Administrative personnel and services fee 50,011
Custodian fees 4,253
Transfer and dividend disbursing agent fees and expenses 31,296
Directors'/Trustees' fees 1,504
Auditing fees 13,033
Legal fees 3,510
Portfolio accounting fees 54,636
Distribution services fee 42,531
Share registration costs 14,028
Printing and postage 6,266
Insurance premiums 1,830
Miscellaneous 4,315
Total expenses 346,291
Waivers --
Waiver of investment advisory fee $ (100,366)
Waiver of distribution services fee (42,531)
Total waivers (142,897)
Net expenses 203,394
Net investment income 763,708
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 70,342
Net change in unrealized appreciation (depreciation) of investments (648)
Net realized and unrealized gain on investments 69,694
Change in net assets resulting from operations $ 833,402
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS --
Net investment income $ 763,708 $ 894,154
Net realized gain (loss) on investments ($284,885 net loss and $76,653
net loss, respectively, as computed for federal tax purposes) 70,342 (410,829)
Net change in unrealized appreciation (depreciation) of investments (648) 943,061
Change in net assets resulting from operations 833,402 1,426,386
DISTRIBUTIONS TO SHAREHOLDERS --
Distributions from net investment income (763,708) (894,154)
SHARE TRANSACTIONS --
Proceeds from sale of shares 1,294,036 961,834
Net asset value of shares issued to shareholders in payment of
distributions declared 22,639 24,481
Cost of shares redeemed (4,175,893) (6,968,741)
Change in net assets resulting from share transactions (2,859,218) (5,982,426)
Change in net assets (2,789,524) (5,450,194)
NET ASSETS:
Beginning of period 17,736,485 23,186,679
End of period $ 14,946,961 $ 17,736,485
</TABLE>
(See Notes which are an integral part of the Financial Statements)
ARROW MUNICIPAL INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994 1993(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.22 $ 9.87 $10.61 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.47 0.46 0.47 0.32
Net realized and unrealized gain (loss) on investments 0.04 0.35 (0.72) 0.61
Total from investment operations 0.51 0.81 (0.25) 0.93
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994 1993(A)
---- ---- ---- -------
<S> <C> <C> <C> <C>
LESS DISTRIBUTIONS
Distributions from net investment income (0.47) (0.46) (0.47) (0.32)
Distributions from net realized gain on investments -- -- (0.02) --
Total distributions (0.47) (0.46) (0.49) (0.32)
NET ASSET VALUE, END OF PERIOD $10.26 $10.22 $ 9.87 $10.61
TOTAL RETURN(B) 5.04% 8.46% (2.41%) 9.43%
RATIOS TO AVERAGE NET ASSETS
Expenses 1.20% 1.09% 0.85% 0.72%*
Net investment income 4.49% 4.70% 4.62% 4.71%*
Expense waiver/reimbursement(c) 0.84% 0.80% 0.81% 0.85%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $14,947 $17,736 $23,187 $24,087
Portfolio turnover 20% 38% 27% 14%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from February 1, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
ARROW EQUITY AND INCOME FUNDS
COMBINED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
Arrow Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company. The
Trust consists of four diversified portfolios (individually referred to as the
"Fund," or collectively as the "Funds"). The following portfolios are included
herein:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
- -------------- --------------------
<S> <C>
Arrow Equity Portfolio Capital appreciation by investing primarily
("Equity Fund") in equity securities.
Current income by investing primarily in a
Arrow Fixed Income Portfolio portfolio of U.S. government and investment
("Fixed Income Fund") grade corporate securities.
Arrow Municipal Income Portfolio Current income which is exempt from federal
("Municipal Income Fund") regular income tax by investing primarily in
a diversified portfolio of municipal securities.
</TABLE>
The financial statements of Arrow Government Money Market Portfolio are
presented separately. The assets of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which shares are held.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS -- Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities and listed
corporate bonds are generally valued at the mean of the latest bid and asked
price as furnished by an independent pricing service. Listed equity
securities are valued at the last sale price reported on a national
securities exchange. Short-term securities are valued at the prices provided
by an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value. Investments
in other open-end regulated investment companies are
14
<PAGE> 16
valued at net asset value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
FEDERAL TAXES -- It is the Funds' policy to comply with the provisions
of the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1996, the Funds, for federal tax purposes, had capital loss
carryforwards, as noted below, which will reduce each Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Funds of
any liability for federal tax.
<TABLE>
<CAPTION>
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
CARRYFORWARD CARRYFORWARD CARRYFORWARD TOTAL
TO EXPIRE IN TO EXPIRE IN TO EXPIRE IN CAPITAL LOSS
FUND 2002 2003 2004 CARRYFORWARDS
---- ---- ---- ---- -------------
<S> <C> <C> <C> <C>
Fixed Income Fund $24 $227,158 $540,150 $767,332
Municipal Income Fund -- 76,653 284,885 361,538
</TABLE>
Additionally, net capital losses on Fixed Income Fund of $195,217,
attributable to security transactions incurred after October 31, 1995 were
treated as arising on October 1, 1996, the first day of the Fund's next
taxable year.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES -- The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
using the straight-line method over a period of five years from each Fund's
commencement date.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER -- Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
EQUITY FUND 1996 1995
----------- ---- ----
<S> <C> <C>
Shares sold 867,438 1,078,775
Shares issued to shareholders in payment of distributions declared 3,298 1,543
Shares redeemed (346,978) (1,023,386)
Net change resulting from share transactions 523,758 56,932
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
FIXED INCOME FUND 1996 1995
----------------- ---- ----
<S> <C> <C>
Shares sold 661,379 625,388
Shares issued to shareholders in payment of distributions declared 2,772 3,225
Shares redeemed (750,074) (1,100,149)
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C> <C>
Net change resulting from share transactions (85,923) (471,536)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
MUNICIPAL INCOME FUND 1996 1995
--------------------- ---- ----
<S> <C> <C>
Shares sold 126,133 95,393
Shares issued to shareholders in payment of distributions declared 2,204 2,464
Shares redeemed (407,947) (712,089)
Net change resulting from share transactions (279,610) (614,232)
</TABLE>
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE -- Mark Twain Bank, the Funds' investment adviser,
(the "Adviser"), receives for its services an annual investment advisory fee
based on a percentage of each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
FUND ADVISORY FEE
<S> <C>
Equity Fund 0.75%
Fixed Income Fund 0.60%
Municipal Income Fund 0.70%
</TABLE>
The Adviser may voluntarily choose to waive any portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE -- Federated Administrative Services ("FAS") provides the
Funds with certain administrative personnel and services. The fee paid to FAS
is based on the level of average aggregate net assets of the Funds' for the
period.
DISTRIBUTION SERVICES FEE -- The Funds have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Funds will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended
to result in the sale of the Funds' shares. The Plan provides that the Funds
may incur distribution expenses up to 0.25% of average daily net assets,
annually, to compensate FSC. The distributor may voluntarily choose to waive
any portion of its fee. The distributor can modify or terminate this
voluntary waiver at any time at its sole discretion.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES -- Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the
Funds. The fee paid to FSSC is based on the size, type, and number of
accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES -- FServ also maintains the Funds' accounting
records for which it receives a fee. The fee is based on the level of each
Fund's average daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES -- Mark Twain Bank is the Funds' custodian. The fee is based
on the level of each Fund's average daily net assets for the period, plus
out-of-pocket expenses.
ORGANIZATIONAL EXPENSES -- Organizational expenses for the Funds were borne
initially by FAS. The Funds have agreed to reimburse FAS for the
organizational expenses during the five-year period following November 24,
1992 (the date the Trust became effective). For the year ended September 30,
1996, each Fund paid the following amounts to FAS pursuant to this agreement:
<TABLE>
<CAPTION>
EXPENSES OF AMOUNTS REIMBURSED TO
ORGANIZING FAS FOR THE YEAR ENDED
FUND THE FUND SEPTEMBER 30, 1996
---- -------- ------------------
<S> <C> <C>
Equity Fund $17,560 $2,976
Fixed Income Fund 17,401 3,980
Municipal Income Fund 16,729 2,733
</TABLE>
GENERAL -- Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
16
<PAGE> 18
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1996, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
<S> <C> <C>
Equity Fund $33,972,901 $20,199,315
Fixed Income Fund 15,666,332 15,491,532
Municipal Income Fund 3,302,159 5,767,406
</TABLE>
6. SUBSEQUENT EVENT
On October 27, 1996, Mark Twain Bancshares, Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain Bancshares
Inc. would merge with Mercantile Bancorp Inc., a bank holding company
headquartered in St. Louis (the "Merger"). As a result, upon completion of the
Merger, all existing subsidiaries of Mark Twain Bancshares Inc., including Mark
Twain Bank, will be merged into Mercantile Bancorp Inc. and its subsidiaries.
The Merger is expected to be completed in the second quarter of 1997, pending
approval by both companies' shareholders as well as the receipt of various
regulatory approvals and the completion of other closing conditions.
The Merger will result in a termination of the Adviser's current investment
advisory contract with the Arrow Funds. Accordingly, prior to the completion of
the Merger, the Trustees of the Funds will meet to consider matters relating the
Merger. It is anticipated that a Special Meeting of Fund shareholders will be
held to seek, among other things, approval of a new investment advisory contract
with a subsidiary of Mercantile Bancorp Inc. It is anticipated that shareholders
of a certain record date in 1997 will receive proxy materials discussing these
matters in detail, and will be entitled to vote at the Special Meeting.
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders ARROW FUNDS:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, for the Arrow Fund portfolios, listed below, as of
September 30, 1996, and the related statements of operations, changes in net
assets, and the financial highlights for each of the years or periods listed
below:
* Arrow Equity Portfolio -- statement of operations for the year ended September
30, 1996, the statement of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
or periods from January 4, 1993 (commencement of operations) to September 30,
1996.
* Arrow Fixed Income Portfolio -- statement of operations for the year ended
September 30, 1996, the statement of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each of the
years or periods from January 4, 1993 (commencement of operations) to September
30, 1996.
* Arrow Municipal Income Portfolio -- statement of operations for the year ended
September 30, 1996, the statement of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each of the
years or periods from February 1, 1993 (commencement of operations) to September
30, 1996.
These financial statements and the financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Investment securities held in custody
are confirmed to us by the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial
17
<PAGE> 19
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Arrow Equity Portfolio, Arrow Fixed Income Portfolio, and Arrow Municipal Income
Portfolio as of September 30, 1996, and the results of their operations, changes
in their net assets, and the financial highlights for each of the periods listed
above, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
November 6, 1996
TRUSTEES
John F. Donahue
Thomas G. Bigley
John T. Conroy, Jr.
William J. Copeland
James E. Dowd
Lawrence D. Ellis, M.D.
Edward L. Flaherty, Jr.
Edward C. Gonzales
Peter E. Madden
Gregor F. Meyer
John E. Murray, Jr.
Wesley W. Posvar
Marjorie P. Smuts
OFFICERS
John F. Donahue
Chairman
Edward C. Gonzales
President and Treasurer
J. Christopher Donahue
Executive Vice President
John W. McGonigle
Executive Vice President and Secretary
Charles L. Davis, Jr.
Vice President and Assistant Treasurer
Richard B. Fisher
Vice President
Gail Cagney
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal. Mark Twain Bank acts as investment adviser
for the funds. Mark Twain Brokerage Services, Inc. is a wholly owned subsidiary
of Mark Twain Bank. Possible conflicts of interest could arise between potential
investors in the Funds due to the affiliation of Mark Twain Bank and Mark Twain
Brokerage Services, Inc. and/or their existing clients.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
[Graphic]
Mark Twain Bank
Investment Adviser
Federated Securities Corp., Distributor.
Cusip 042749101
Cusip 042749200
Cusip 042749309
3101409 (11/96)
APPENDIX
A. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Equity
Portfolio is represented by a solid line, whereas the Standard &
18
<PAGE> 20
Poor's Daily Stock Price Index of 500 Common Stocks (`S&P" 500) is represented
by a broken dotted line. The line graph is a visual representation of a
comparison of change in value of a hypothetical investment in the Equity
Portfolio and the S&P 500 for the period from January 3, 1993 to September 30,
1996. The `y" axis reflects the cost of the investment. The `x" axis reflects
computation periods from the ending value of the hypothetical investment in the
Equity Portfolio as compared to the S&P 500; the ending values are $15,045 and
$17,413, respectively. Beneath the list of the components that correspond to the
line graph are the following total return data for the Equity Portfolio: total
return figures for the 1 year, and start of performance. The corresponding total
figures are as follows: 6.62%; and 11.55%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic presentation.
B. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Fixed
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
Government/Corporate Total Index ("LBGCTI"). is represented by a broken dotted
line. The line graph is a visual representation of a comparison of change in
value of a hypothetical investment in the Fixed Income Portfolio and the LBGCTI
for the period from January 3, 1993 to September 30, 1996. The "y" axis reflects
the cost of the investment. The "x" axis reflects computation periods from the
ending value of the hypothetical investment in the Fixed Income Portfolio as
compared to the LBGCTI; the ending values are $11,694 and $12,760, respectively.
Beneath the list of the components that correspond to the line graph are the
following total return data for the Fixed Income Portfolio: total return figures
for the 1 year, and start of performance. The corresponding total figures are as
follows: -1.41%; and 4.28%, respectively. The performance disclaimer and
footnotes are listed directly under the graphic presentation.
C. The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Municipal
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
State General Obligations Bond Index ("LBSGOBI") is represented by a broken
dotted line. The line graph is a visual representation of a comparison of change
in value of a hypothetical investment in the Municipal Income Portfolio and the
LBSGOBI for the period from January 3, 1993 to September 30, 1996. The "y" axis
reflects the cost of the investment. The "x" axis reflects computation periods
from the ending value of the hypothetical investment in the Municipal Portfolio
as compared to the LBSGOBI; the ending values are $11,740 and $13,255,
respectively. Beneath the list of the components that correspond to the line
graph are the following total return data for the Municipal Portfolio: total
return figures for the 1 year, and start of performance. The corresponding total
figures are as follows: 1.37%; and 4.48%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic presentation.
