<PAGE> 1
As filed with the Securities and Exchange Commission on May 28, 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. 39
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 40
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)
[x] 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)
[ ] 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
The purpose of this post-effective amendment is to satisfy an undertaking
to file a post-effective amendment, using financial statements which to do not
need to be certified, reflecting four to six months worth of operating and
performance history for the National Municipal Bond Portfolio. The Prospectuses
for the Fund's Institutional Shares, and Trust Shares of the Fund's Money
Market, Treasury Money Market and Tax-Exempt Money Market Portfolios and the
Prospectuses and Statement of Additional Information for Trust, Investor A and
Investor B Shares of the Fund's Kansas Tax-Exempt Bond Portfolios, are
incorporated herein by reference.
<PAGE> 3
CROSS REFERENCE SHEET
(Trust Shares)
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... Expense Summary
for Trust Shares
3. Condensed Financial
Information................................................. Certain Financial
Information; Financial
Highlights; Yields and Total
Returns
4. General Description
of Registrant............................................... Highlights; Investment
Objectives, Policies and
Risk Considerations;
Other Information Concerning
the Fund and Its Shares
5. Management of the Fund........................................ Management of the Fund
5A. Management's Discussion of
Fund Performance............................................ Inapplicable
6. Capital Stock and
Other Securities............................................ How to Purchase and
Redeem Shares; Dividends
and Distributions;
Taxes; Other Information
Concerning the Fund
and Its Shares
7. Purchase of Securities
Being Offered............................................... How to Purchase and
Redeem Shares
8. Redemption or Repurchase...................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings..................................... Inapplicable
</TABLE>
<PAGE> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
<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> 14
<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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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
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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
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<PAGE> 30
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.
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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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<PAGE> 33
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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<PAGE> 34
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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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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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.
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CROSS REFERENCE SHEET
(Investor A and B Shares)
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... Expense Summary
for Investor A Shares
3. Condensed Financial
Information................................................. Certain Financial
Information; Financial
Highlights; Yields and Total
Returns
4. General Description
of Registrant............................................... Highlights; Investment
Objectives, Policies and
Risk Considerations;
Other Information Concerning
the Fund and Its Shares
5. Management of the Fund........................................ Management of the Fund
5A. Management's Discussion of
Fund Performance............................................ Inapplicable
6. Capital Stock and
Other Securities............................................ How to Purchase and
Redeem Shares; Dividends
and Distributions;
Taxes; Other Information
Concerning the Fund
and Its Shares
7. Purchase of Securities
Being Offered............................................... How to Purchase and
Redeem Shares
8. Redemption or Repurchase...................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings..................................... Inapplicable
</TABLE>
<PAGE> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
<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> 83
<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> 84
<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> 85
<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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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
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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.
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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
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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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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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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
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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
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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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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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<PAGE> 127
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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<PAGE> 129
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
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<PAGE> 130
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
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<PAGE> 131
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> 132
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> 133
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
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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
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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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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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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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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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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
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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.
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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
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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> 151
------------------------------------
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> 152
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> 153
CROSS REFERENCE SHEET
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
<TABLE>
<CAPTION>
Heading in Statement of
Form N-1A Part B Item Additional Information
- --------------------- -----------------------
<S> <C> <C>
10. Cover Page............................................................... Cover Page
11. Table of Contents........................................................ Table of Contents
12. General Information and History.......................................... The Fund
13. Investment Objective and Policies........................................ Investment
Objectives and Policies
14. Management of the Fund................................................... Management of the Fund
15. Control Persons and Principal............................................ Miscellaneous
Holders of Securities
16. Investment Advisory and Other............................................ Management of the Fund;
Services Independent Auditors;
Counsel
17. Brokerage Allocation and Other........................................... Investment Objectives
Practices and Policies
18. Capital Stock and Other.................................................. Description of Shares
Securities
19. Purchase, Redemption and Pricing......................................... Net Asset Value;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status............................................................... Additional Information
Concerning Taxes
21. Underwriters............................................................. Management of the Fund
22. Calculation of Performance Data.......................................... Additional Yield and
Total Return
Information; Net Asset
Value
23. Financial Statements..................................................... Financial Statements
</TABLE>
<PAGE> 154
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> 155
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> 156
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> 157
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.
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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
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<PAGE> 159
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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<PAGE> 160
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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<PAGE> 161
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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<PAGE> 162
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> 163
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> 164
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> 165
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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mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities for a Portfolio, the
Adviser (or Sub-Adviser) will consider, among other factors, its evaluation of
the creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the benefits of sinking funds or other
protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Ratings Agencies and, if so, the ratings
assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion
value of convertible securities is determined by the market price of the
underlying stock. If the conversion value is low relative to the investment
value, the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying stock while holding fixed income securities.
RIGHTS AND WARRANTS. As stated in the Prospectuses, the
Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios (the "Equity Portfolios") may
participate in rights offerings and purchase warrants, which are privileges
issued by corporations
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enabling the owners to subscribe to and purchase a specified number of shares
of the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Portfolios could lose
the purchase value of a right or warrant if the right to subscribe to
additional shares is not exercised prior to the rights' or warrants'
expiration. Also, the purchase of rights or warrants involves the risk that
the effective price paid for the right or warrant added to the subscription
price of the related security may exceed the value of the subscribed security's
market price such as when there is no movement in the level of the underlying
security. The Portfolios will not invest more than 5% of their respective net
assets, taken at market value, in warrants, or more than 2% of their respective
net assets, taken at market value, in warrants not listed on the New York,
American or Canadian Stock Exchanges. Warrants acquired by the Portfolios in
units or attached to other securities are not subject to this restriction.
STAND-BY COMMITMENTS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may acquire "stand-by commitments" with respect to Municipal Obligations held
by a Portfolio. Under a stand-by commitment, a dealer or bank agrees to
purchase from a Portfolio, at the Portfolio's option, specified Municipal
Obligations at their amortized cost value to the Portfolio plus accrued
interest, if any. Standby commitments acquired by a Portfolio must meet the
quality standards described in the Prospectuses (be rated in the two highest
categories as determined by a Rating Agency, or, if not rated, must be of
comparable quality as determined by the Adviser pursuant to guidelines approved
by the Fund's Board of Directors). Stand-by commitments are exercisable by a
Portfolio at any time before the maturity of the underlying Municipal
Obligations and may be sold, transferred or assigned by the Portfolio only with
the underlying instruments. The Missouri Tax-Exempt Bond Portfolio expects
that its investments in stand-by commitments will not exceed 5% of the value of
its total assets under normal market conditions.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Tax-Exempt Portfolio may pay for a
stand-by commitment either separately in cash or by paying a higher price for
portfolio securities which are acquired subject to the commitment (thus
reducing the yield to maturity otherwise available for the same securities).
The Tax-Exempt Portfolios intend to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in
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the Adviser's opinion, present minimal credit risks. A Portfolio's reliance
upon the credit of these dealers, banks and broker-dealers will be secured by
the value of the underlying Municipal Obligations that are subject to the
commitment. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. Stand-by commitments acquired by a
Portfolio would be valued at zero in determining net asset value. The
acquisition of a "stand-by commitment" by the Tax-Exempt Money Market Portfolio
would thus not affect the valuation or assumed maturity of the underlying
Municipal Obligations, which would continue to be valued in accordance with the
amortized cost method. Where a Portfolio paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. If a stand-by commitment is exercised, its cost will reduce the
amount realized on the sale of the Municipal Obligations for purposes of
determining the amount of gain or loss. If a stand-by commitment expires
unexercised, its cost is added to the basis of the security to which it relates
in those instances where the stand-by commitment was acquired on the same day
as the bond, and in other cases will be treated as a capital loss at the time
of expiration. Stand-by commitments would not affect the average weighted
maturity of a Portfolio.
TAX-EXEMPT DERIVATIVES. As described in their Prospectuses
and subject to their respective investment limitations, the Tax-Exempt
Portfolios may hold tax-exempt derivatives which may be in the form of tender
option bonds, participations, beneficial interests in a trust, partnership
interests or other forms. A number of different structures have been used.
For example, interests in long-term fixed-rate Municipal Obligations, held by a
bank as trustee or custodian, are coupled with tender option, demand and other
features when the tax-exempt derivatives are created. Together, these features
entitle the holder of the interest to tender (or put), the underlying Municipal
Obligation to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, Municipal Obligations are represented by
custodial receipts evidencing rights to receive specific future interest
payments, principal payments, or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying Municipal Obligation at its
face value to the sponsor (usually a bank or broker dealer or other
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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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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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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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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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contract. Accordingly, it may be necessary for the International Equity
Portfolio to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Portfolio is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Portfolio is obligated
to deliver.
If the International Equity Portfolio retains the portfolio
security and engages in an offsetting transaction, it will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Portfolio engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline between the date the Fund enters into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, it will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices
increase, the Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. For a discussion of the Federal tax treatment of forward
contracts, see "Additional Information Concerning Taxes -- Taxation of Certain
Financial Instruments."
OPTIONS TRADING. As described in the Prospectuses, each of
the Equity and Bond Portfolios (except the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios) may purchase
put and call options listed on a national securities exchange and issued by the
Options Clearing Corporation in an amount not exceeding 10% of that Portfolio's
net assets. The International Equity Portfolio will not invest more than 5% of
its total assets in initial margin deposits and premiums (including without
limitation, puts, calls, straddles and spreads) and any combination thereof.
Options trading is a specialized activity which entails greater than ordinary
investment risks. Regardless of how much the market price of the underlying
security or index increases or decreases, the option buyer's risk is limited to
the amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying securities. A listed call
option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation,
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the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A listed put option gives the purchaser the right
to sell to a clearing corporation the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on a stock or bond index provides the holder
with the right to make or receive a cash settlement upon the exercise of the
option. The amount of this settlement will be equal to the difference between
the closing price of the index at the time of exercise and the exercise price
of the option expressed in dollars, times a specified multiple.
A Portfolio's obligation to sell a security subject to a
covered call option written by it may be terminated prior to the expiration
date of the option by the Portfolio's executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, would not be
able to sell the underlying security until the option expires or the underlying
security is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline in the underlying
security during such period. A Portfolio will write an option on a particular
security only if the Adviser or Sub-Adviser believes that a liquid secondary
market will exist on an exchange for options of the same series which will
permit the Portfolio to make a closing purchase transaction in order to close
out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred
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credit. The amount of the deferred credit is subsequently marked-to-market to
reflect the current value of the option written. The current value of the
traded option is the last sale price or, in the absence of a sale, the average
of the closing bid and asked prices. If an option expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. Any gain on a covered call
option may be offset by a decline in the market price of the underlying
security during the option period. If a covered call option is exercised, the
Portfolio may deliver the underlying security held by it or purchase the
underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the
Portfolio will realize a gain or loss. Premiums from expired options written
by a Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an Exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-
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conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The International Equity
Portfolio may purchase foreign currency put options on U.S. exchanges or U.S.
over-the-counter markets. (See "Other Applicable Investment Policies -- Options
Trading" above for a discussion of options trading). A put option gives the
Portfolio, upon payment of a premium, the right to sell a currency at the
exercise price until the expiration of the option and serves to insure against
adverse currency price movements in the underlying portfolio assets denominated
in that currency. Exchange listed options markets in the United States include
seven major currencies, and trading may be thin and illiquid. The seven major
currencies are Australian dollars, British pounds, Canadian dollars, German
marks, French francs, Japanese yen and Swiss francs.
FUTURES CONTRACTS. As discussed in the Prospectuses, the Equity
Portfolios and the U.S. Government Securities, Intermediate Corporate Bond, Bond
Index and Government & Corporate Bond Portfolios may invest in futures contracts
(and with respect to the International Equity Portfolio -- interest rate,
foreign currency and other types of financial futures contracts) and options
thereon (stock or bond index futures contracts or interest rate futures or
options) to hedge or manage risks associated with a Portfolio's securities
investments.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited
in a segregated account with the Fund's Custodian and/or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged. Positions in futures contracts may be closed out
only on an exchange which provides a secondary market for such futures.
However, there can be no assurance that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close a futures position. In the event of adverse price movements,
a Portfolio would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Portfolio had
insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when it would be disadvantageous to do so. In
addition, a Portfolio might be required to make delivery of the instruments
underlying futures contracts that it holds. The inability to close options and
futures positions also could have an adverse impact on a Portfolio's ability to
hedge effectively.
Successful use of futures by a Portfolio is also subject to
the Adviser's or Sub-Adviser's ability to predict
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movements correctly in the direction of the market. There is an imperfect
correlation between movements in the price of futures and movements in the
price of the securities which are the subject of the hedge. In addition, the
price of futures may not correlate perfectly with movement in the cash market
due to certain market distortions. Due to the possibility of price distortion
in the futures market and because of the imperfect correlation between the
movements in the cash market and movements in the price of futures, a correct
forecast of general market trends or interest rate movements by the Adviser or
Sub-Adviser may still not result in a successful hedging transaction over a
short time frame.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required,
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a futures contract may result in
immediate and substantial loss (or gain) to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.
Utilization of futures transactions by a Portfolio involves
the risk of loss by the Portfolio of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond the limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.
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The trading of futures contracts is also subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
ADRS AND EDRS. The Intermediate Corporate Bond, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios may invest their assets in
securities such as ADRs and EDRs, which are receipts issued by a U.S. bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs and EDRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR and EDR prices are denominated in
U.S. dollars, even though the underlying security may be denominated in a
foreign currency. The underlying security may be subject to foreign government
taxes which would reduce the yield on such securities. Investments in such
instruments involve risks similar to those of investing directly in foreign
securities. Such risks include political or economic instability of the issuer
or the country of issue, the difficulty of predicting international trade
patterns and the possibility of imposition of exchange controls. Such
securities may also be subject to greater fluctuations in price than securities
of domestic corporations. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. With respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries.
MONEY MARKET INSTRUMENTS. As stated in the Prospectuses and
subject to their respective investment policies, the Equity and Bond Portfolios
may invest in the following taxable investments for temporary defensive or
other purposes: commercial paper, bankers' acceptances, certificates of
deposit, time deposits and floating rate notes. (See "Investment Objectives
and Policies -- Money Market Portfolio" above for a discussion of cash
equivalents and "Investment Objectives and Policies -- Other Applicable
Investment Policies -- Variable and Floating Rate Instruments" above for a
discussion of variable and floating rate instruments.)
The International Equity Portfolio may invest a portion of its
assets in the obligations of foreign banks and foreign branches of domestic
banks. Such obligations may include ECDs;
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ETDs; CTDs; Schedule Bs, which are obligations issued by Canadian branches of
foreign or domestic banks; Yankee CDs; and Yankee BAs. (See "Investment
Objectives and Policies -- Money Market Portfolio" above for a description of
certain of these obligations.)
REPURCHASE AGREEMENTS. Under the terms of a repurchase
agreement, a Portfolio purchases securities from financial institutions such as
banks and broker-dealers that are deemed to be creditworthy by the Adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price.
Securities subject to repurchase agreements are held by the Portfolios'
Custodian or in the Federal Reserve/Treasury book-entry system. During the
term of any repurchase agreement, the Adviser will continue to monitor the
creditworthiness of the seller. The repurchase price generally equals 102% of
the price paid by the Portfolio plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on the
underlying portfolio securities). Under a repurchase agreement, the seller is
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price, and securities subject to repurchase
agreements are maintained by the Portfolios' Custodian in segregated accounts
in accordance with the 1940 Act. Default by the seller could, however, expose
the Portfolio to possible loss because of adverse market action or delay in
connection with the disposition of the underlying securities. Repurchase
agreements are considered to be loans by the Portfolio under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, the Portfolios (except the Treasury Money Market and the
Tax-Exempt Portfolios) may enter into reverse repurchase agreements. At the
time a Portfolio enters into such an arrangement, it will place, in a
segregated custodial account, liquid assets having a value at least equal to
the repurchase price (including accrued interest) and will subsequently monitor
the account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the price of
the securities that it is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act. Each Portfolio
intends to limit its borrowings (including reverse repurchase agreements)
during the current fiscal year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors, the
Adviser (and with respect to the International
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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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purchase price available to members of a bidding group. The Portfolios will
engage in this practice, however, only when the Adviser (or Sub-Adviser in the
case of the International Equity Portfolio), in its sole discretion, believes
such practice to be otherwise in a Portfolio's interests.
While the Adviser (or Sub-Adviser in the case of the International
Equity Portfolio) generally seeks competitive spreads or commissions, it may not
necessarily allocate each transaction to the underwriter or dealer charging the
lowest spread or commission available on the transaction. Allocation of
transactions, including their frequency, to various dealers is determined by the
Adviser or Sub-Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental
investment research to the Adviser (or Sub-Adviser) may receive orders for
transactions by a Portfolio. Information so received is in addition to and not
in lieu of services required to be performed by the Adviser (or Sub-Adviser) and
does not reduce the advisory fees payable to it by a Portfolio. Such information
may be useful to the Adviser (or Sub-Adviser) in serving both the Portfolios and
other clients, and conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Adviser (or
Sub-Adviser) in carrying out its obligations to the Portfolios. Portfolio
securities will not be purchased from or sold to the Adviser, the Sub-Adviser,
the Distributor, the Administrator or any "affiliated person" (as such term is
defined under the 1940 Act) or any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Portfolios will not give
preference to the Adviser's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements and reverse repurchase
agreements.
Investment decisions for the Portfolios are made independently
from those for other investment companies and accounts advised or managed by
the Adviser (or Sub-Adviser). Such other investment companies and accounts may
also invest in the same securities as the Portfolios. When a purchase or sale
of the same security is made at substantially the same time on behalf of a
Portfolio and another investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser (or Sub-Adviser) believes to be equitable to the
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by
the Portfolio or the size of the position obtained by the Portfolio. To the
extent permitted by law, the Adviser (or
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Sub-Adviser) may aggregate the securities to be sold or purchased for the
Portfolios with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI OBLIGATIONS
The following highlights some of the more important economic
and financial trends and considerations and is based on information from
official statements, prospectuses and other publicly available documents
relating to securities offerings of the State of Missouri, its agencies and
instrumentalities, as available on the date of this Statement of Additional
Information. The Fund has not independently verified any of the information
contained in such statements or other documents.
Missouri's population was 5,117,073 according to the 1990
decennial census of the United States Bureau of Census, which represented an
increase of 4.1% from the 1980 decennial census of 4,916,686 inhabitants.
Based on July, 1992 U.S. Census Bureau estimates, St. Louis and the
surrounding metropolitan area constituted the 17th largest Metropolitan
Statistical Area ("MSA") in the nation with approximately 2.52 million
inhabitants, of which 1.92 million are Missouri residents. St. Louis is
located on the eastern boundary of the state on the Mississippi River and is a
distribution center and an important site for banking and manufacturing
activity, Anchoring the western boundary is Kansas City, which is Missouri's
second largest metropolitan area. Based on July, 1992 U.S. Census Bureau
estimates, Kansas City was the 25th largest MSA nationally with approximately
1.62 million inhabitants, nearly one million of which were Missouri residents.
Kansas City is a major agri-business center for the United States and is an
important center for finance and industry. Springfield, St. Joseph, Joplin and
Columbia are also important population and industrial centers in the State.
[Source: U.S. Department of Commerce, Bureau of the Census.] Per capita
personal income in Missouri grew 3.1% between 1992 and 1993 while during the
same period per capita personal income nationally grew 3.2%. [Source: U.S.
Department of Commerce, Bureau of Economic Analysis.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally
played a dominant role in the State's economy contributing between $15 billion
and $17 billion annually. Although the concentration in farming remains above
the national average, with increasing urbanization, significant
income-generating activity has shifted from agriculture to the manufacturing
and services sectors. Earnings and employment are distributed among the
manufacturing, trade and service sectors in
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a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1990, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and manufacturing ranking third. In 1990, these
three economic sectors accounted for 66% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 15.4% of
employment, is concentrated in defense, transportation equipment and other
durable goods.
Defense-related business plays an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards.
Over the past decade, Missouri has annually ranked among the top six states in
total military contract awards. Although declining defense appropriations by
the U.S. Congress have had and will continue to have an impact on the State,
Missouri's defense related industries have rebounded and shown significant
strength over the past year. Nonetheless, McDonnell-Douglas remains the
state's largest employer with over 29,000 employees and analysts expect the
long term effects of federal downsizing in defense to be negligible. [Source:
Missouri's Economic Forecast: 1994; Mo. Dept. of Economic Development].
Limitations on State debt and bond issues are contained in
Article III, Section 37 of the Constitution of Missouri. Pursuant to this
section, the General Assembly may issue general obligation bonds solely (1) to
refund outstanding bonds (provided that the refunding bonds must mature within
25 years of issuance) or (2) upon the recommendation of the Governor, to incur
a temporary liability by reason of unforeseen emergency or of deficiency in
revenue, in an amount not to exceed $1,000,000 for any one year and to be paid
in not more than five years. When the liability exceeds $1,000,000, the
General Assembly, or the people by initiative, may submit the proposition to
incur indebtedness to the voters of the State, and the bonds may be issued if
approved by a majority of those voting. Such bonds must be retired serially
and by installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the
payment of principal and interest and may provide for an annual tax on all
taxable property in an amount sufficient for that purpose. Certain water
pollution bonds and state building bonds are also authorized pursuant to
Sections 37(b)-(e), inclusive, of Article III.
In 1971, Missouri voters approved a constitutional amendment
providing for the issuance of $150,000,000 of general obligation bonds for the
protection of the environment through
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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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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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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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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> 191
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
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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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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> 194
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> 195
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> 196
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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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> 198
<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> 199
<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
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Shares and/or Investor B Shares of the Portfolios according to formulas
prescribed by the SEC. Standardized 7 day "yield" is computed by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in a Portfolio having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, dividing the difference by the value of
the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7). The net change
in the value of an account includes the value of additional shares purchased
with dividends from the original share, and dividends declared on both the
original share and any such additional shares, net of all fees, other than
nonrecurring account or sales charges, that are charged by the Portfolio to all
shareholder accounts in proportion to the length of the base period and the
Portfolio's mean (or median) account size. The capital changes to be excluded
from the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and
depreciation. "Effective yield" is computed by compounding the unannualized
base period return (calculated as above) by adding one to the base period
return, raising the sum to a power equal to 365 divided by seven, and
subtracting one from the result. Based upon the same calculations, each
Portfolio's 30 day yields and 30 day effective yields may also be quoted. The
Tax-Exempt Money Market Portfolio's "tax-equivalent yield" is computed by
dividing the tax-exempt portion of the yield (calculated as above) by one minus
a stated federal income tax rate and adding the product to that portion, if
any, of the yield that is not tax-exempt. In addition, a "Missouri"
tax-equivalent yield may be calculated by dividing the portion of the
Tax-Exempt Money Market Portfolio's yield (calculated as above) that is exempt
from federal tax and the portion that is exempt from Missouri personal income
tax by one minus a stated tax rate and adding such figure to that portion, if
any, of the Portfolio's yield that is not exempt from federal or state income
tax. Based on the foregoing calculations, for the year ended November 30,
1996, the 7-day yields, 7-day effective yields and the 30-day yields were as
follows:
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<PAGE> 201
<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
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<PAGE> 202
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
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<PAGE> 203
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,
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<PAGE> 204
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:
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<PAGE> 205
<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:
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<PAGE> 206
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a non-money market Portfolio's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Investor A Shares and the deduction of any applicable contingent deferred
sales charge with respect to Investor B Shares.
Based on the foregoing calculations, the average annual total
returns for the year/period ended November 30, 1996 (March 31, 1997, with
respect to the National Municipal Bond Portfolio), the average annual total
returns for the 5-year period ended November 30, 1996 (where applicable) and
the average annual total returns for the period from commencement of operations
were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
For the 5 Since
For the Year Years Ended Commencement
Portfolio Ended 11/30/96 11/30/96 of Operations
--------- -------------- ------------ -------------
<S> <C> <C> <C>
U.S. Government Securities
Trust Shares(1) 4.88 6.81 8.15
Institutional Shares(7) 4.55 6.43 7.89
Investor A Shares(1) -0.13 5.52 7.35
Investor B Shares(4) -1.07 5.85 7.64
Government & Corporate Bond
Trust Shares(5) 4.82 7.16 8.04
Institutional Shares(2) 4.51 6.85 7.82
Investor A Shares(5) -0.23 5.86 7.24
Investor B Shares(4) -1.12 6.41 7.65
Short-Intermediate Municipal
Trust Shares(17) 4.15 N/A 4.52
Investor A Shares(18) 1.41 N/A 1.57
Missouri Tax-Exempt Bond(19)
Trust Shares(20) 4.62 7.32 8.14
Investor A Shares(21) -0.26 6.13 7.38
Investor B Shares(4) -1.50 6.51 7.70
</TABLE>
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<PAGE> 207
<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.
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<PAGE> 208
(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> 209
<TABLE>
<CAPTION>
Aggregate Total Return
Since Commencement
Portfolio of Operations
--------- ----------------------
<S> <C>
U.S. Government Securities
Trust Shares 94.83
Institutional Shares(1) 90.62
Investor A Shares 82.65
Investor B Shares(2) 86.86
Government & Corporate Bond
Trust Shares 90.51
Institutional Shares(1) 87.20
Investor A Shares 78.79
Investor B Shares(2) 84.74
Short-Intermediate Municipal
Trust Shares 6.66
Investor A Shares 2.45
Missouri Tax-Exempt Bond
Trust Shares 92.38
Investor A Shares 81.24
Investor B Shares(2) 85.60
National Municipal Bond
Trust Shares 0.90
Investor A Shares 0.00
Investor B Shares -0.26
Growth & Income Equity
Trust Shares 239.52
Institutional Shares(1) 236.74
Investor A Shares 221.61
Investor B Shares(2) 232.46
Small Cap Equity
Trust Shares 98.93
Institutional Shares(1) 96.92
Investor A Shares 88.55
Investor B Shares(2) 92.94
International Equity
Trust Shares 20.87
Institutional Shares(1) 19.85
Investor A Shares 14.66
Investor B Shares(2) 15.40
Balanced
Trust Shares 49.14
Institutional Shares(1) 47.93
Investor A Shares 41.55
Investor B Shares(2) 42.98
- ------------------------------
</TABLE>
(1) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A Shares for
the period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such date
represent the performance for Investor A Shares of the Portfolio which has
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<PAGE> 210
been restated to reflect the contingent deferred sales charges payable by
holders of Investor B Shares that redeem within six years of the date of
purchase. Investor B Shares are also subject to distribution and services fees
at a maximum annual rate of 1.00%. Had those distribution and services fees
been reflected, performance would have been reduced.
As stated in the Prospectuses relating to Investor A Shares and
Investor B Shares, a Portfolio may also calculate total return figures for that
Portfolio without deducting the maximum sales charge imposed on purchases or
redemptions. The effect of not deducting the sales charge will be to increase
the total return reflected.
Investors may judge the performance of the Portfolios by
comparing them to the performance of other mutual funds or mutual fund
portfolios with comparable investment objectives and policies. Such
comparisons may be made by referring to market indices such as those prepared
by Dow Jones & Co., Inc., Russell, Salomon Brothers, Inc., Lehman Brothers or
Standard & Poor's Ratings Group or any of their affiliates, the Consumer Price
Index, the EAFE Index, the NASDAQ Composite, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. Such comparisons may also be made by
referring to data prepared by Lipper Analytical Services, Inc., (a widely
recognized independent service which monitors the performance of mutual funds)
Indata, Frank Russell, CDA, and the Bank Rate Monitor (which reports average
yields for money market accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas). Other
similar yield data, including comparisons to the performance of Mercantile
repurchase agreements, or the average yield data for similar asset classes
including but not limited to Treasury bills, notes and bonds, may also be used
for comparison purposes. Comparisons may also be made to indices or data
published in the following national financial publications: IBC/Donoghue's
Money Fund Report(R), MorningStar, CDA/Wiesenberger, Money Magazine, Forbes,
Fortune, Barron's, The Wall Street Journal, The New York Times, Business Week,
American Banker, Fortune, Institutional Investor, U.S.A. Today and publications
of Ibbotson Associates, Inc. and other publications of a local or regional
nature. In addition to performance information, general information about the
Portfolios that appears in a publication such as those mentioned above may be
included in advertisements, supplemental sales literature and in reports to
Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles
(such as the effects of
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<PAGE> 211
inflation, the power of compounding and the benefits of dollar-cost averaging);
(2) discussions of general economic trends; (3) presentations of statistical
data to supplement such discussions; (4) descriptions of past or anticipated
portfolio holdings for one or more of the Portfolios within the Fund; (5)
descriptions of investment strategies for one or more of such Portfolios; (6)
descriptions or comparisons of various investment products, which may or may
not include the Portfolios; (7) comparisons of investment products (including
the Portfolios) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of rankings or ratings by recognized rating
organizations.
In addition, with respect to the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios the benefits of
tax-free investments may be communicated in advertisements or communications to
shareholders. For example, the tables below present the approximate yield that
a taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 4.50% to
7.00%. The yields below are for illustration purposes only and are not
intended to represent current or future yields for the Portfolios, which may be
higher or lower than those shown. The tax brackets shown below will be indexed
for inflation for years after 1997. Investors should consult their tax advisor
with specific reference to their own tax situation.
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
SINGLE RETURN
<TABLE>
<CAPTION>
--------Tax-Exempt Yields---------
<S> <C> <C> <C> <C> <C> <C>
Sample Taxable Federal
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
FROM
$0 TO
$24,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$24,000 TO
$58,150 28.00% 6.25% 6.64% 7.64% 9.03% 9.72%
FROM
$58,150 TO
$121,300 31.00% 6.52% 7.25% 7.97% 9.42% 10.41%
FROM
$121,300 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 212
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY
----------Tax-Exempt Yields-----------
<S> <C> <C> <C> <C> <C> <C>
Sample Taxable Federal
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6.50% 7.00%
FROM
$0 TO
$40,000 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
FROM
$40,000 TO
$96,900 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
FROM
$96,900 TO
$147,700 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
FROM
$147,700 TO
$263,750 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
</TABLE>
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<PAGE> 213
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
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<PAGE> 214
Portfolios' shares with bank deposits, savings accounts, and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses, and market conditions. The
current yield and performance of the Portfolios may be obtained by calling the
Fund at: INVESTOR A OR INVESTOR B SHARES - 1-800-452-ARCH; OR TRUST OR
INSTITUTIONAL SHARES - 1-800-452-4015.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors
to issue up to seven billion full and fractional shares of capital stock, and
to classify or reclassify any unissued shares of the Fund into one or more
additional classes or by setting or changing in any one or more respects, their
respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. Pursuant to such authority the Fund's Board of
Directors has authorized the issuance of fifty-seven classes of shares
representing interests in one of seventeen investment Portfolios: the Treasury
Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, Kansas Tax-Exempt
Bond (not described in this Statement of Additional Information), National
Municipal Bond, Equity Income, Equity Index, Growth & Income Equity, Small Cap
Equity, International Equity and Balanced Portfolios. Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares in each Portfolio
(except the Treasury Money Market, Intermediate Corporate Bond, Bond Index and
Equity Index Portfolios, which do not offer Investor B Shares, the Tax-Exempt
Money Market and Short-Intermediate Municipal Portfolios, which do not offer
Institutional or Investor B Shares and the Missouri Tax-Exempt Bond and Kansas
Tax-Exempt Bond Portfolios, which do not offer Institutional Shares) are
offered through separate prospectuses to different categories of investors.
Portfolio shares have no preemptive rights and only such conversion or exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectuses, the shares will be fully paid and nonassessable.
Except as noted in the Prospectuses with respect to certain
sub-transfer agency expenses borne by Institutional Shares and below with
respect to the Administrative Services Plans for Trust Shares and Institutional
Shares and the Distribution and Services Plans for Investor A Shares and
Investor B Shares, shares of the Portfolios bear the same types of ongoing
expenses with respect
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<PAGE> 215
to the Portfolio to which they belong. In addition, Investor A Shares (other
than Investor A Shares of the Money Market Portfolios) are subject to a
front-end sales charge and Investor B Shares are subject to a contingent
deferred sales charge as described in the Prospectuses. The classes also have
different exchange privileges, and Investor B Shares are subject to conversion
as described in the Prospectus for those shares.
In the event of a liquidation or dissolution of the Fund, shares of a
Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation,
except that Trust Shares of a particular Portfolio will be solely responsible
for that Portfolio's payments pursuant to the Administrative Services Plan for
those shares, Institutional Shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative
Service Plan for those shares, Investor A Shares of a particular Portfolio will
be solely responsible for that Portfolio's payments pursuant to the
Distribution and Services Plan for those shares and Investor B Shares of a
particular Portfolio will be solely responsible for that Portfolio's payments
pursuant to the Distribution and Services Plan for those shares. In addition,
Institutional Shares will be solely responsible for the payment of certain
sub-transfer agency fees attributable to those shares.
Holders of all outstanding shares of a particular Portfolio
will vote together in the aggregate and not by class, except that only Trust
Shares of a Portfolio will be entitled to vote on matters submitted to a vote
of shareholders pertaining to a Portfolio's Administrative Services Plan for
Trust Shares, only Institutional Shares of a Portfolio's will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Administrative Services Plan for Institutional Shares, only
Investor A Shares of a Portfolio will be entitled to vote on matters submitted
to a vote of shareholders pertaining to such Portfolio's Distribution and
Services Plan for Investor A Shares and only Investor B Shares of a Portfolio
will be entitled to vote on matters submitted to a vote of shareholders
pertaining to such Portfolio's Distribution and Services Plan for Investor B
Shares. Further, shareholders of all of the Portfolios, irrespective of class,
will vote in the aggregate and not separately on a Portfolio-by-Portfolio
basis, except as otherwise required by law or when the Board of Directors
determines that the matter to be voted upon affects only the interests of the
shareholders of a particular Portfolio or class of shares. Rule
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<PAGE> 216
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each series (Portfolio) affected by the matter. A Portfolio is considered to
be affected by a matter unless it is clear that the interests of each Portfolio
in the matter are identical or that the matter does not affect any interest of
the Portfolio. Under the Rule, the approval of an investment advisory
agreement or any change in a fundamental investment objective or investment
policy would be effectively acted upon with respect to a Portfolio only if
approved by a majority of the outstanding shares of that Portfolio. However,
the Rule also provides that the ratification of the appointment of independent
auditors, the approval of principal underwriting contracts, and the election of
directors may be effectively acted upon by shareholders of the Fund's
Portfolios voting without regard to Portfolio or class.
Shares in the Fund's Portfolios will be issued without
certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses are not intended as a substitute
for careful tax planning. Potential investors should consult their tax
advisors with specific reference to their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate
entity under the Code. Each Portfolio intends to qualify each year as a
regulated investment company. In order to so qualify for a taxable year under
the Code, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain other requirements set forth
below.
At least 90% of the gross income for a taxable year of each
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the
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<PAGE> 217
Portfolio's business of investing in such stock, securities or currencies (the
"Gross Income Requirement")
A Portfolio also must derive less than 30% of its gross income for a
taxable year from gains realized on the sale or other disposition of securities
and certain other investments held for less than three months (the "Short-Short
Gain Test"). Interest (including original issue discount and accrued market
discount) received by a Portfolio upon maturity or disposition of a security
held for less than three months will not be treated as gross income derived from
the sale or other disposition of such security within the meaning of this
requirement. However, any income that is attributable to real market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose. With respect to covered call options, if the
call is exercised by the holder, the premium and the price received on exercise
constitute the proceeds of sale, and the difference between the proceeds and the
cost of the securities subject to the call is capital gain or loss. Premiums
from expired call options written by a Portfolio and net gains from closing
purchase transactions are treated as short-term capital gains for federal income
tax purposes, and losses on closing purchase transactions are short-term capital
losses. With respect to forward contracts, futures contracts, options on futures
contracts, and other financial instruments subject to the mark-to-market rules
described below under "Taxation of Certain Financial Instruments," the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a contract, option or financial instrument will be treated as being derived
from a security held for three months or more (regardless of the actual period
for which the contract, option or instrument is held) if the gain arises as a
result of a constructive sale under the mark-to-market rules, and will be
treated as being derived from a security held for less than three months only if
the contract, option or instrument is terminated (or transferred) during the
taxable year (other than by reason of mark-to-market) and less than three months
have elapsed between the date the contract, option or instrument is acquired and
the termination date. Increases and decreases in the value of a Portfolio's
forward contracts, futures contracts, options on futures contracts and other
investments that qualify as part of a "designated hedge," as defined in Section
851(g) of the Code, may be netted for purposes of determining whether the
Short-Short Gain Test is met.
Finally, at the close of each quarter of its taxable year, at
least 50% of the value of a Portfolio's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which a Portfolio has not
invested more than 5% of the value of its total assets in
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<PAGE> 218
securities of such issuer and as to which that Portfolio does not hold more
than 10% of the outstanding voting securities of such issuer) and no more than
25% of the value of such Portfolio's total assets may be invested in the
securities of any one issuer (other than U.S. government securities and
securities of other regulated investment companies), or in two or more issuers
which the Portfolio controls and which are engaged in the same or similar
trades or businesses.
Each Portfolio will designate any distribution of the excess
of net long-term capital gain over net short-term capital loss as a capital
gain dividend in a written notice mailed to shareholders within 60 days after
the close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the shareholder has held these
shares. Shareholders should note that, upon the sale or exchange of Portfolio
shares, if the shareholder has not held such shares for more than six months,
any loss on the sale or exchange of those shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
Ordinary income to individuals is taxable at a maximum marginal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35%.
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions would be taxable as ordinary income to
shareholders, to the extent of the Portfolio's current and
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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> 220
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> 221
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> 222
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> 223
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> 224
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Lyle L. Meyer Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation (manu-
Corporation facturer of paperboard and
8182 Maryland Avenue packaging materials), April
St. Louis, MO 63105 1989 to present; President,
Age: 60 Smurfit Pension & Insurance Services
Company, November 1982 to December 1992.
Ronald D. Winney* Director and Treasurer, Ralston
Ralston Purina Company Treasurer Purina Company
Checkerboard Square Since 1985.
St. Louis, MO 63164
Age: 54
W. Bruce McConnel, III Secretary Partner of the law
Suite 1100 firm of Drinker Biddle
1345 Chestnut Street & Reath, LLP Philadelphia,
Philadelphia, PA 19107 Pennsylvania Since 1977.
Age: 54
Walter B. Grimm* Assistant From June, 1992 to present,
3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, OH 43219 Services; From 1989 to June, 1992
Age: 51 President of Leigh
Investments Consulting/
Investments (investment
firm).
Stephen G. Mintos* Vice President From April, 1987 to present,
3435 Stelzer Road and Assistant employee of BISYS Fund
Columbus, OH 43219 Treasurer Services.
Age: 43
</TABLE>
* Messrs. Grimm, Winney, and Mintos are "interested persons" of the Fund as
defined in the 1940 Act.
Each Director receives an annual fee of $10,000 plus
reimbursement of expenses incurred as a Director. The Chairman of the Board
and President of the Fund receives an additional annual fee of $5,000 for his
services in these capacities. For
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<PAGE> 225
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> 226
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> 227
<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> 228
________________________
(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> 229
<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> 230
<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> 231
<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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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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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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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> 235
<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> 236
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> 237
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> 238
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> 239
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> 240
For the fiscal year or period ended November 30, 1996,
pursuant to the Administrative Services Plan for Trust Shares, the Portfolios
(other than the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios which had not commenced operations as of November 30,
1996) were charged the following amounts:
ADMINISTRATIVE SERVICES PLAN - TRUST SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $151,479 $0 $0 $151,479
Money Market $565,091 $0 $0 $517,174
Tax-Exempt Money Market $19,823 $0 $0 $19,823
U.S. Government Securities $0 $0 $0 $0
Government & Corporate Bond $157 $0 $0 $157
Short-Intermediate Municipal $0 $0 $0 $0
Missouri Tax-Exempt Bond $0 $0 $0 $0
National Municipal Bond $0 $0 $0 $0
Growth & Income Equity $546 $0 $0 $546
Small Cap Equity $0 $0 $0 $0
International Equity $0 $0 $0 $0
Balanced $40 $0 $0 $40
</TABLE>
For the fiscal year ended November 30, 1996, pursuant to the
Administrative Services Plan for Institutional shares, the Portfolios (other
than the Intermediate Corporate Bond, Bond Index, Equity Income and Equity
Index Portfolios which had not commenced operations as of November 30, 1996)
paid the following amounts:
ADMINISTRATIVE SERVICES PLAN - INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $13,166 $0 $0 $13,166
Money Market $49,165 $0 $0 $49,165
</TABLE>
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<PAGE> 241
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities $4,441 $0 $0 $4,441
Government & Corporate Bond $34,976 $0 $0 $34,976
Growth & Income Equity $157,199 $0 $0 $157,199
Small Cap Equity $66,514 $0 $0 $66,514
International Equity $11,858 $0 $0 $11,858
Balanced $133,169 $0 $0 133,969
</TABLE>
For the fiscal year ended November 30, 1996, the
Administrator, MVA and/or various service organizations waived no fees with
respect to the Administrative Services Plans.
OTHER PLAN INFORMATION. The Board of Directors has approved
each Plan and its respective arrangements with the Distributor, Service
Organizations and broker-dealer based on information provided by the Fund's
service contractors that there is a reasonable likelihood that these Plans and
arrangements will benefit the Portfolios and their shareholders. Pursuant to
each Plan, the Board of Directors reviews, at least quarterly, a written report
of the amounts of distribution fees and servicing fees expended pursuant to
each Plan and the Service Organizations and the purposes for which the
expenditures were made. So long as the Fund has one or more of the above
described Plans in effect, the selection and nomination of the members of the
Board of Directors who are not "interested persons" (as defined in the 1940
Act) of the Fund will be committed to the discretion of such Disinterested
Directors.
Depending upon the terms governing the particular customer
accounts, Service Organizations and other institutions may also charge their
customers directly for cash management and other services provided in
connection with the accounts, including, for example, account maintenance fees,
compensating balance requirements, or fees based upon account transactions,
assets, or income. An investor should therefore read the Prospectuses and this
Statement of Additional Information in light of the terms of his or her account
with a Service Organization, or other institution before purchasing shares of a
Portfolio.
REGULATORY MATTERS. Banking laws and regulations currently
prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or any affiliate thereof from sponsoring, organizing, or
controlling the shares of a
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<PAGE> 242
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling,
or distributing securities such as Shares of the Portfolios. Such banking laws
and regulations do not prohibit such a holding company or affiliate, or banks,
from acting as investment adviser, transfer agent, or custodian to such an
investment company, or from purchasing shares of such a company as agent for
and upon the order of customers. Mercantile, MVA, Service Organizations that
are banks or bank affiliates, and broker-dealers that are bank affiliates are
subject to such laws and regulations, but believe they may perform the services
for the Portfolios contemplated by their respective agreements, this Prospectus
and the Statement of Additional Information without violating applicable
banking laws and regulations. In addition, State Securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision
of services on behalf of the Portfolios and their shareholders, the Fund might
be required to alter materially or discontinue its arrangements with such
companies and change its method of operation. It is not expected that
investors would suffer any adverse financial consequences as a result of any of
these occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling or distributing Shares of an investment company were
relaxed, Mercantile or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It
is not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate,
might offer to provide such services.
Conflict of interest restrictions may apply to the receipt of
compensation paid pursuant to a Servicing Agreement by a Portfolio to a
financial intermediary in connection with the investment of fiduciary funds in
a Portfolio's Shares. Institutions, including banks regulated by the
Comptroller of the Currency and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, should consult legal counsel before entering into
Servicing Agreements.
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<PAGE> 243
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> 244
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> 245
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> 246
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> 247
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> 248
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> 249
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
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"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
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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.
A-4
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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
A-5
<PAGE> 254
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities.
A-6
<PAGE> 255
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
"Aaa" securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
A-7
<PAGE> 256
probable credit stature upon completion of construction or elimination of basis
of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating
category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
A-8
<PAGE> 257
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
A-9
<PAGE> 258
principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by Thomson
BankWatch to long-term debt and indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited
A-10
<PAGE> 259
incremental risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment
of principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable
A-11
<PAGE> 260
Moody's Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following summarizes the
ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of
an investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE> 261
APPENDIX B
The U.S. Government Securities, Intermediate Corporate Bond, Bond Index,
Government & Corporate Bond, Equity Income, Equity Index, Growth & Income
Equity, Small Cap Equity, International Equity and Balanced Portfolios may
enter into futures contracts and options for hedging purposes in furtherance of
their respective investment objectives as stated in the Prospectuses. Such
transactions are described further in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is more likely to be achieved, perhaps at a lower cost
and without changing the rate of interest being earned by the Portfolio,
through using futures contracts. A Portfolio would engage in an interest rate
futures contract sale to maintain the income advantage from continued holding
of a long-term bond while endeavoring to avoid part or all of the loss in
market value that would otherwise accompany a decline in long-term securities
prices. A Portfolio would engage in an interest rate futures contract purchase
when it is not fully invested in long-term bonds but wishes to defer for a time
the purchase of long-term bonds in light of the availability of advantageous
interim investments, for example,
B-1
<PAGE> 262
shorter-term securities whose yields are greater than those available on
long-term bonds.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by the Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Portfolio is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Portfolio pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Portfolio's entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the Portfolio realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Portfolio realizes a
loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges - principally, the Chicago Board of Trade and the
Chicago Mercantile Exchange. A Portfolio would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
B-2
<PAGE> 263
II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the
value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio will
decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Portfolio to hedge
against exposure to fluctuations in exchange
B-3
<PAGE> 264
rates between the U.S. dollar and other currencies arising from multi-national
transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no price is paid or
received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon termination of
the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-market. For example, when a Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where a Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. At any time prior to expiration of
the futures contract, the adviser may elect to close the position by taking an
opposite position, subject to the availability of a secondary market, which
will operate to terminate the Portfolio's position in the futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid by or released to the Portfolio, and the Portfolio realizes
a loss or gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend to use
interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options
B-4
<PAGE> 265
contracts which are currently traded or which may subsequently become available
for trading. Such instruments may be employed in connection with the
Portfolios' hedging strategies if, in the judgment of the adviser, transactions
therein are necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in accordance with
generally accepted accounting principles.
B-5
<PAGE> 266
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL BONDS (104.1%):
Alabama (1.9%):
2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $1,997,500
3,000,000 Birmingham, Series A, 5.90%, 6/1/18 2,955,000
1,000,000 Tuscaloosa, 6.88%, 7/1/11 1,066,250
----------
6,018,750
----------
Alaska (0.3%):
1,000,000 State Housing Finance Corp. Series A, 5.70%, 12/1/11 1,003,750
----------
Arizona (3.4%):
1,000,000 Mohave County Unified School District #1, Lake Havasu, Series A, 5.90%, 7/1/15 1,016,250
1,000,000 Pima County University School District, School District No. 1, Tuscon, Series D, 6.10%, 7/1/10 1,045,000
6,400,000 Salt River Project Agricultural Impact, Power District Electrical Systems Revenue, Series C 6.20%, 1/1/12 6,576,000
1,000,000 Salt River Project Agriculture, 6.00%, 1/1/13 1,021,250
1,000,000 State Transportation Board Excise Tax, Maricopa County Regulated Area, Series B, 5.75%, 7/1/05 1,046,250
----------
10,704,750
----------
California (0.9%):
2,000,000 Southern California Public Power Authority, Series A, 5.00%, 7/1/15 1,820,000
1,000,000 State, 6.00%, 9/1/09 1,062,500
----------
2,882,500
----------
Colorado (2.9%):
6,655,000 Adams County School District, 5.40%, 12/15/13 6,480,306
1,000,000 Fort Collins, Series C, 6.00%, 12/1/09 1,032,500
1,000,000 Jefferson County School District No. R001, 5.90%, 12/15/05 1,047,500
500,000 Summit County School District No. Re1, 9.80%, 12/1/97 518,915
----------
9,079,221
----------
Connecticut (4.0%):
8,785,000 State, 5.25%, 3/1/13 8,422,619
1,000,000 State, Series A, 6.50%, 3/15/10 1,086,250
3,000,000 State, Series C, 5.80%, 3/15/07 3,105,000
----------
12,613,869
----------
Florida (5.7%):
2,000,000 Brevard County 6.00%, 9/1/11 2,052,500
8,000,000 Palm Beach County Solid Waste Authority, 5.38%, 10/1/11 7,790,000
1,000,000 State Pollution Control, Series Y, 6.50%, 7/1/11 1,061,250
1,000,000 State Board of Education Capital Outlay, 6.13%, 6/1/10 1,042,500
1,000,000 State Board of Education Capital Outlay, Series A, 5.88%, 6/1/16 1,007,500
5,000,000 State Environment 5.50%, 7/1/13 4,981,250
----------
17,935,000
----------
</TABLE>
See notes to financial statements.
<PAGE> 267
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Georgia (0.7%):
1,000,000 Atlanta, Series A, 6.10%, 12/1/19 $1,028,750
1,000,000 State, Series B, 6.30%, 3/1/09 1,091,250
----------
2,120,000
----------
Guam (0.3%):
1,000,000 Guam Government Water System Revenue, 7.00%, 7/1/09 1,071,250
----------
Hawaii (4.4%):
5,815,000 Honolulu City & County, 6.00%, 1/1/09 6,127,556
6,000,000 State, 5.50%, 3/1/14 7,818,800
----------
13,946,356
----------
Illinois (11.3%):
1,000,000 Arlington Heights, Series B, 5.88%, 12/1/12 1,013,750
3,000,000 Chicago, 6.00%, 1/1/11 3,090,000
1,000,000 Chicago, Metropolitan Water Reclamation, 5.40%, 12/1/06 1,017,500
1,000,000 Chicago, Metropolitan Water Reclamation, 5.50%, 12/1/06 1,016,250
1,000,000 Chicago, Metropolitan Water Reclamation, 6.30%, 12/1/09 1,066,250
2,000,000 Cook County, 5.90%, 11/15/16 2,000,000
1,000,000 Edwardsville, Waterworks, 6.00%, 2/1/17 1,026,250
1,000,000 Evanston, 6.13%, 12/1/11 1,035,000
1,000,000 State, 6.80%, 4/1/06 1,029,080
1,000,000 State, 6.00%, 10/1/01 1,048,750
1,000,000 State, 6.25%, 10/1/11 1,050,000
1,000,000 State, 5.88%, 6/1/09 1,022,500
3,000,000 State, 5.88%, 8/1/12 3,045,000
2,000,000 State, 5.625%, 7/1/13 1,972,500
1,000,000 State, 5.75%, 7/1/16 988,750
1,000,000 State Mbia-Ibc Insured, 5.75%, 4/1/12 1,003,750
2,000,000 State Mbia-Ibc Insured, 5.50%, 8/1/14 1,935,000
8,400,000 State, 5.25%, 2/1/13 7,969,500
1,000,000 Kane County Public Building, Series B, 6.40%, 12/1/03 1,030,000
1,000,000 Lake County Water & Sewer Systems, Series A, 6.70%, 12/1/06 1,078,750
1,000,000 Lake County Water & Sewer Systems, Series A, 5.50%, 12/1/09 998,750
----------
35,437,330
----------
Indiana (5.3%):
5,000,000 Goshen-Chandler School Building, 5.75%, 1/15/10 5,043,750
3,000,000 Hammond Multi-School Building Corporation, 5.80%, 1/15/15 2,966,250
5,000,000 Hammond Multi-School Building Corp., 5.85%, 1/15/20 4,937,500
1,000,000 Transportation Finance Authority, Highway Revenue, Series A 5.75%, 6/1/12 1,017,500
1,000,000 Indianapolis Local Public Improvements, Series C, 6.50%, 2/1/08 1,057,500
1,500,000 Whitko Middle School Building Corp., 5.88%, 07/15/12 1,518,750
----------
16,541,250
----------
Kansas (0.5%):
1,000,000 Douglas County School District No. 497, 6.00%, 9/1/11 1,051,250
500,000 Johnson County School District No. 233, 6.10%, 3/1/99 603,465
----------
1,554,715
----------
</TABLE>
See notes to financial statements.
<PAGE> 268
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Louisiana (0.9%):
2,900,000 Calcasleu Parish, Daily Floater, 2/1/16, LOC Wachovia Bank $2,900,000
----------
Michigan (1.4%):
335,000 Gratiot County Economic Development, 9.25%, 10/1/00 337,399
1,000,000 Greenville Public Schools, 5.75%, 5/1/11 1,015,000
1,000,000 Johannesburg-Lewistown Area Schools, 5.00%, 5/1/13 927,500
2,000,000 Redford School District, 5.95%, 5/1/15 2,035,000
----------
4,314,899
----------
Minnesota (2.5%):
1,000,000 Minneapolis Special School District, Series A, 5.70%, 2/1/09 1,026,250
6,000,000 Monticello Independent Schools, 5.40%, 2/1/15 5,797,500
1,000,000 Northern Municipal Power Agency,
Minneapolis Electric System Revenue, Series A
5.90%, 1/1/08 1,035,250
----------
7,860,000
----------
Mississippi (0.3%):
1,000,000 State, 6.20%, 2/1/08 1,058,750
----------
Missouri (3.8%):
250,000 Blue Springs, Waterworks & Sewer Revenue, 6.10%, 9/1/98 252,245
300,000 Blue Springs, Waterworks & Sewer Revenue, 6.20%, 9/1/99 302,568
1,000,000 Independence, Electrical Utility Revenue, 7.10%, 6/1/04 1,040,000
1,000,000 Kansas City, 6.50%, 3/1/06 1,050,000
1,200,000 State Health & Educational Facilities,
St. Louis University, Series A,
7.75%, 6/1/07 1,230,180
1,000,000 State Health & Education Facilities,
SSM Health Care, Series Aa,
6.25%, 6/1/07 1,065,000
1,000,000 State Health & Educational Facilities, Barnes Hospital, 7.13%, 12/15/12 1,102,500
1,500,000 State Health & Education Facilities,
SSM Health Care Projects, Series B,
7.00%, 6/1/05 1,646,250
1,000,000 St. Louis County, 7.20%, 2/1/05 1,085,000
2,000,000 Springfield School District R12 Series A, 6.75%, 03/01/11 2,147,500
1,000,000 Springfield School District R12, 6.38%, 3/1/12 1,061,250
----------
11,982,493
----------
Nebraska (0.7%):
1,000,000 Public Power District Revenue, Series A, 5.50%, 1/1/13 982,500
1,000,000 Omaha Public Power District Electric Rev, Series B, 6.00%, 2/1/07 1,065,000
----------
2,047,500
----------
Nevada (1.0%):
3,000,000 State, 6.50%, 12/1/12 3,225,000
----------
</TABLE>
See notes to financial statements.
<PAGE> 269
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
New Hampshire (1.6%):
1,000,000 Concord, 6.15%, 10/15/01 $1,051,250
1,000,000 State Capital Improvements, Series B, 6.45%, 11/1/08 1,081,250
3,000,000 State Turnpike System Revenue, 6.00%, 4/1/13 3,030,000
----------
5,162,500
----------
New Jersey (3.4%):
8,000,000 State, 6.00%, 7/15/09 8,559,840
2,000,000 State, Series D, 5.90%, 2/15/08 2,087,500
----------
10,647,340
----------
North Carolina (3.4%):
2,000,000 Eastern Municipal Power Agency, Series B, 6.00%, 1/1/13 2,027,500
1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 987,500
8,000,000 State, 5.20%, 3/1/13 7,780,000
----------
10,795,000
----------
Ohio (1.3%):
1,000,000 Columbus Sewer Improvement No. 27-E-U, 6.30%, 2/15/12 1,048,750
2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%, 5/1/13 2,072,500
1,000,000 Hamilton City Electric, Series A, 6.00%, 10/15/12 1,036,250
----------
4,157,500
----------
Oklahoma (0.5%):
500,000 Oklahoma City, New Public Housing, 5.75%, 5/1/98 508,590
1,000,000 Tulsa, 6.25%, 6/1/11 1,045,000
----------
1,553,590
----------
Pennsylvania (4.8%):
1,000,000 Allegheny County, Series C-40, 5.90%, 5/1/07 1,045,000
1,500,000 Burrell School District, 5.85%, 11/15/16 1,490,625
1,000,000 Easttown Township, 5.65%, 8/1/17 988,750
9,000,000 State, 5.13%, 9/15/11 8,617,500
1,000,000 State Higher Education Facility, 5.88%, 1/1/15 1,003,750
2,000,000 State Higher Educational Facilities,
University of Pennsylvania, Series B
5.88%, 1/1/15 2,007,500
----------
15,153,125
----------
Tennessee (1.6%):
1,000,000 Bradley County, Tennessee, Vm, 11/01/17* 1,000,000
1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 1,037,500
1,000,000 Metropolitan Government Nashville & Davidson, 6.13%, 5/15/19 1,026,250
1,000,000 Metropolitan Government Nashville & Davidson Cnty,
Water & Sewer 5.75%, 1/1/15 992,500
1,000,000 Shelby County, Series B, 5.88%, 3/1/12 1,025,000
----------
5,081,250
----------
</TABLE>
See notes to financial statements.
<PAGE> 270
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Texas (12.9%):
3,000,000 Austin Independent School District, 5.75%, 8/1/15 $3,003,750
1,000,000 Fort Worth Water & Sewer Revenue, Series B, 6.05%, 2/15/06 1,058,750
8,000,000 Harris County Health, 5.50%, 6/1/17 7,530,000
3,500,000 Harris County Health Care Facilities,
Frn, 12/01/25 Methodist Hospital, LOC Morgan Guaranty Trust 3,500,000
715,000 Houston, Series C, 6.25%, 3/1/12 738,238
1,000,000 Humble Independent School District, 6.25%, 2/1/07 1,063,750
1,000,000 Manor Independent School District, 5.70%, 8/1/10 1,017,500
1,000,000 Royse City Independent School District, 5.50%, 2/15/15 980,000
1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 1,003,750
1,000,000 State Public Financing Authority, Series A, 5.70%, 10/1/07 1,027,500
3,000,000 State Public Finance Authority, Series A, 5.95%, 10/1/15 3,063,750
6,750,000 State Water, 5.40%, 8/1/21 6,353,438
2,000,000 Water Development Board Revenue, Series A, 5.75%, 7/15/15 1,990,000
1,000,000 University of Texas, Permanent University Fund, Series A, 6.25%, 7/1/13 1,032,500
7,500,000 University of Texas, Series B 5.10%, 8/15/13 7,040,625
----------
40,403,551
----------
Utah (2.3%):
1,000,000 Davis County School District, 7.00%, 6/1/04 1,067,500
1,000,000 Davis County School District, 6.65%, 6/1/04 1,077,500
4,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/12 4,055,000
1,000,000 Intermountain Power Agency, Utah Power Supply, Series B, 6.00%, 7/1/15 999,970
----------
7,199,970
----------
Virginia (2.8%):
1,000,000 Newport News, Series A, 6.13%, 6/1/10 1,051,250
2,000,000 Richmond Public Improvement, Series-B, 6.25%, 1/15/18 2,055,000
1,000,000 State Public School Authority, 5.90%, 7/15/11 1,023,750
4,920,000 State, 5.13%, 5/15/12 4,680,150
----------
8,810,150
----------
Washington (12.1%):
1,000,000 Grant County Public Utility, District No. 002 Electric Revenue, Series F, 5.70%, 1/1/15 982,500
1,000,000 King County, Series A, 6.00%, 12/1/09 1,040,000
1,000,000 King County Library System, 6.05%, 12/1/07 1,063,750
1,500,000 King County School District #415 Kent, 5.75%, 6/1/11 1,522,500
2,000,000 King County School District #415 Kent, 5.88%, 6/1/16 2,007,500
1,000,000 Seattle Municipal Light & Power Revenue, 6.20%, 7/1/06 1,073,750
1,000,000 Seattle Municipal Light & Power Revenue, 6.25%, 7/1/07 1,070,000
1,000,000 Snohomish County Public Utility,
District No. 001 Electrical Revenue, Series A 6.90%, 1/1/06 1,077,500
1,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.45%, 1/1/06 1,085,000
3,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.00%, 1/1/13 3,063,750
2,000,000 Snohomish County Public Utility,
District No. 001 Electric Revenue, 6.50%, 1/1/12 2,112,500
1,000,000 Snohomish County School District #2, Everett, Series A, 6.80%, 12/1/03 1,077,500
1,000,000 Snohomish County School District #2, 6.20%, 12/1/12 1,048,750
1,000,000 Spokane, 6.13%, 1/1/09 1,035,000
3,000,000 Spokane Regular Solid Waste Management, 5.50%, 12/1/10 2,985,000
</TABLE>
See notes to financial statements.
<PAGE> 271
THE ARCH FUND, INC.
NATIONAL MUNICIPAL BOND PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Washington, continued:
4,190,000 State, 5.50%, 1/01/17 $4,022,400
8,000,000 State Motor Vehicle Fuel Tax, Series D, 5.38%, 1/1/22 7,620,000
1,000,000 State, Series Dd-14 & Series B, 5.75%, 9/1/07 1,031,250
1,000,000 State, Series R92-A, 6.25%, 9/1/09 1,045,000
1,000,000 Tacoma Electrical System Revenue, 6.13%, 1/1/11 1,051,250
1,000,000 Tacoma Electric System, 6.25%, 1/1/15 1,032,500
------------
38,047,400
------------
West Virginia (2.5%)
7,940,000 School Building, 5.40%, 7/01/10 7,840,750
------------
Wisconsin (2.6%):
1,000,000 Dane County, Series A, 5.65%, 3/1/12 1,003,750
1,000,000 Green Bay Area Public School District, Series A, 5.50%, 4/1/12 991,250
3,000,000 Kenosha, Series B, 5.85%, 12/1/11 3,052,500
3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 3,071,250
------------
8,118,750
-----------
Total Municipal Bonds 327,268,259
------------
INVESTMENT COMPANIES (0.0%):
27,000 Federated Tax-Free Trust Mutual Fund 27,000
1,000 Nuveen Tax Exempt Money Market Fund 1,000
------------
Total Investment Companies 28,000
------------
Total Cost $324,440,065 $327,296,259
============
- ---------
</TABLE>
Percentages indicated are based on net assets of $314,293,528.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................... $5,440,055
Unrealized Depreciation......................... 2,583,861
----------
$2,856,194
==========
</TABLE>
* Variable rate securities having liquidity sources through bank letters of
credit or other credit and/or liquidity agreements. The interest rate, which
will change periodically, is based upon bank prime rates or an index of
market interest rates. The rates reflected on the Schedule of Portfolio
Investments is the rate in effect at March 31, 1997.
- - Put and demand features exist allowing the Fund to require the repurchase of
the investment within variable time periods less than one year.
See notes to financial statements.
<PAGE> 272
THE ARCH FUND, INC.
Statement of Assets and Liabilities
March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
National
Municipal
Bond
Portfolio
------------
<S> <C>
ASSETS:
Investments at Value (Cost 324,440,065) $327,296,259
------------
Total Investments 327,296,259
Cash 408
Interest and dividends receivable 4,116,845
Unamortized Organization Costs 29,795
Prepaid expenses and other assets 74,421
------------
TOTAL ASSETS 331,517,728
------------
LIABILITIES:
Dividends payable 1,504,196
Payable to brokers for investments purchased 15,689,040
Accrued expenses and other payables:
Administrative fees 2,853
Distribution and services fees 76
Custodian fees 473
Transfer Agent fees 6,451
Other 21,111
------------
TOTAL LIABILITIES 17,224,200
------------
NET ASSETS:
Capital 306,296,212
Net unrealized appreciation from investments 2,856,194
Accumulated undistributed net realized gains from
investment transactions 5,141,122
------------
NET ASSETS $314,293,528
============
Net Assets
Investor A Shares $ 499,422
Investor B Shares 993
Trust Shares 313,793,113
------------
Total $314,293,528
============
Outstanding units of beneficial interest (shares)
Investor A Shares 50,968
Investor B Shares 101
Trust Shares 32,009,572
------------
Total 32,060,641
============
Net asset value
Investor A Shares-redemption price per share $ 9.80
Investor B Shares-offering price per share* 9.80
Trust Shares-offering and redemption price per share 9.80
============
Maximum Sales Charge: Investor A Shares 4.50%
------------
Maximum Offering Price (100%/(100%) - Maximum Sales Charge)
of net asset value adjusted to nearest cent) per share:
Investor A Shares $ 10.26
============
</TABLE>
- -------
* Redemption price of Investor B Shares varies based on length of time held.
<PAGE> 273
THE ARCH FUND, INC.
Statements of Operations
For the four month period ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
National
Municipal
Bond
Portfolio
------------
<S> <C>
INVESTMENT INCOME:
Interest income $ 5,946,947
Dividend income 56,784
------------
Total income 6,003,731
------------
EXPENSES:
Investment advisory fees 570,287
Administration fees 103,687
Distribution and services fees (Investor A Shares) 174
Distribution and services fees (Investor B Shares) 4
Custodian and accounting fees 3,423
Legal and audit fees 12,778
Organization Costs 2,122
Directors' fees and expenses 3,248
Transfer agent fees 18,684
Registration and filing fees 25,984
Printing costs 11,123
Other 2,088
------------
Total Expenses 753,602
Less: fee waivers and expense reimbursements (617,005)
------------
Net Expenses 136,597
------------
Net Investment Income 5,867,134
------------
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains from investment transactions 5,025,797
Change in unrealized appreciation (depreciation) from investments (12,725,042)
------------
Net realized/unrealized gains (losses)from investments (7,699,245)
------------
Change in net assets resulting from operations $ (1,832,111)
============
- ---------
</TABLE>
<PAGE> 274
THE ARCH FUND, INC.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
National
Municipal
Bond Portfolio
---------------------------------
Four Month
Period Ended November 18,
March 31, 1996 to
1997 November 30,
(Unaudited) 1996 (a)
----------- ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income $ 5,867,134 $ 735,988
Net realized gains (losses) on investment
transactions 5,025,797 115,325
Net change in unrealized appreciation
(depreciation) from investments (12,725,042) 1,278,075
------------ ------------
Change in net assets resulting from operations (1,832,111) 2,129,388
------------ ------------
DISTRIBUTIONS TO INVESTOR A SHAREHOLDERS:
From net investment income (3,194) (4)
DISTRIBUTIONS TO INVESTOR B SHAREHOLDERS:
From net investment income (16) (3)
DISTRIBUTIONS TO TRUST SHAREHOLDERS:
From net investment income (5,863,932) (735,973)
------------ ------------
Change in net assets from shareholder distributions (5,867,142) (735,980)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued 16,003,452 314,008,996
Dividends reinvested 1,168 --
Cost of shares redeemed (4,426,482) (4,987,761)
------------ ------------
Change in net assets from share transactions 11,578,138 309,021,235
------------ ------------
Change in net assets 3,878,885 310,414,643
NET ASSETS:
Beginning of period 310,414,643 --
------------ ------------
End of period $314,293,528 $310,414,643
============ ============
Share Transactions:
Issued 1,604,613 31,400,289
Reinvested 118 --
Redeemed (446,195) (498,183)
------------ ------------
Change in shares 1,158,536 30,902,106
============ ============
</TABLE>
- -----------
(a) Period from commencement of operations.
<PAGE> 275
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
1. ORGANIZATION
The ARCH Fund, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end management investment
company. As of March 31, 1997, the Fund is authorized to offer the following
investment portfolios: Money Market, Treasury Money Market, Tax-Exempt Money
Market, Growth & Income Equity, Small Cap Equity, International Equity,
Balanced, Government & Corporate Bond, U.S. Government Securities, Short
Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Intermediate Corporate Bond, Bond Index, Equity Income and Kansas Tax-Exempt
Bond Portfolios. The Fund was organized as a Maryland corporation on September
9, 1982. The Kansas Tax-Exempt Bond Portfolio has not yet commenced operations.
The accompanying financial statements and financial highlights are those of the
National Municipal Bond Portfolio (the "Portfolio") only.
The Portfolio's investment objective is as follows. The National Municipal Bond
Portfolio seeks as high a level of interest income exempt from federal income
tax as is consistent with conservation of capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from these estimates.
SECURITIES VALUATION:
The Securities of the National Municipal Bond Portfolio that are traded on a
recognized exchange are valued at the last sale price on the national
-Continued-
<PAGE> 276
THE ARCH FUND,INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
securities market. Securities traded only on over-the-counter markets are valued
on the basis of market value when available. Securities for which there were no
transactions are valued at the mean of the most recent bid and asked prices.
Securities maturing in 60 days or less are valued at amortized cost. Securities,
including restricted securities, for which market quotations are not readily
available, are valued at fair market value by the investment adviser in
accordance with guidelines approved by the Fund's Board of Directors.
Investments in investment companies are valued at their respective net asset
values as reported by such companies. The differences between cost and market
values of the investments of the variable net asset portfolios are reflected as
unrealized appreciation or depreciation.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded on the trade date. Realized gains and
losses on investments sold are recorded on the identified cost basis. Interest
income is accrued on a daily basis. Dividend income is recorded on the
ex-dividend date. Realized and unrealized gains and losses are allocated based
upon relative net assets of each class of shares. Approximately $14,302,000 of
net unrealized appreciation was carried over upon conversion of the Mercantile
Common Trust Fund M (Common Trust Fund) to the National Municipal Bond Portfolio
on November 18, 1996. Thus, the decrease in net unrealized appreciation of
$12,725,042 as disclosed in the accompanying statement of operations includes a
decrease from the unrealized appreciation carried over from the Common Trust
Fund.
SECURITIES LENDING:
To increase return, the National Municipal Bond Portfolio may, from time to
time, lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities pursuant to agreements requiring that the loans be
continuously secured by collateral equal, at all times, in value to at least the
market value of the securities loaned. Collateral for such loans may include
cash, securities of the U.S. Government, or its agencies or instrumentalities,
irrevocable letters of credit, or any combination thereof. The collateral must
be valued daily, and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Portfolio. By lending its
securities, the Portfolio can increase its income by continuing to receive
interest or dividends on the loaned securities as well as either investing the
cash collateral in short-term instruments or obtaining yield in the form of
interest paid by the borrower when U.S. Government securities are used as
collateral. Loans are subject to termination by the Portfolio or the borrower at
any time. The risks, to the Portfolio, of securities lending are that the
borrower may not provide additional collateral when required or return the
securities when due. In addition, if cash collateral invested by the Portfolio
is less than the amount required to be returned to the borrower as a result of a
decrease in the value of the cash collateral investments, the Portfolio must
compensate the borrower for the deficiency. At March 31, 1997, the Portfolio did
not have any securities on loan.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends on each share of the Portfolio are determined in the same manner,
irrespective of class, except that shares of each class bear separate fees
under either a Distribution and Services Plan or an Administrative Services
Plan adopted for each class and enjoy certain exclusive voting rights on
matters relating to these fees. It is the policy of the National Municipal Bond
Portfolio to declare dividends daily from net investment income and to pay such
dividends no later than five business days after the end of the month. Net
realized capital gains for each Portfolio, if any, are distributed at least
annually. Additional distributions of net investment income and capital gains
may be made at the discretion of the Board of Directors in order to avoid the
4% excise tax to which a Portfolio is subject with respect to certain
undistributed amounts of net investment income and capital gains.
Dividends from net investment income and from net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for foreign currency transactions, expiring capital
loss carryforwards and deferrals of certain losses. Permanent book and tax
basis differences have been reclassified among the components of net assets.
<PAGE> 277
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
FEDERAL INCOME TAXES:
It is the policy of the Portfolio to qualify or to continue to qualify
as a regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and net
realized capital gains sufficient to relieve it from all, or substantially all,
federal income taxes.
ORGANIZATION COSTS:
The Portfolio bears all costs in connection with its organization, including
the fees and expenses of registering and qualifying shares for distribution
under Federal and state securities regulations. All such costs are amortized
using the straight-line method over a period of five years from the date the
Portfolio commenced operations, i.e., November 18, 1996 for the National
Municipal Bond Portfolio.
OTHER:
Operating expenses of the Fund not directly attributable to a particular
Portfolio or to any class of shares of a portfolio are prorated among the
portfolios based on the relative net assets of each portfolio or other
appropriate basis. Operating expenses directly attributable to a portfolio are
charged directly to that portfolio's operations. Fees paid under either a
Distribution and Services Plan or an Administrative Services Plan are borne by
the specific class of shares to which they apply.
3. SHARES OF COMMON STOCK
The Fund is authorized to issue three classes of shares in the Portfolio:
Investor A shares, Investor B shares and Trust shares. Investor A shares are
sold with a front-end sales charge. Investor B Shares may be subject to
contingent deferred sales charges ("CDSC") based on the lesser of the net asset
value of the shares on the redemption date or the original cost of the shares
redeemed. The following table sets forth the time schedule of redemptions of
Investor B Shares subject to CDSC:
<TABLE>
<CAPTION>
CDSC
(percentage of
Number of Years amount subject
Elapsed Since Purchase to the charge)
- ---------------------- --------------
<S> <C>
Less than one 5.0%
One, but less than two 4.0%
Two, but less than three 3.0%
Three, but less than four 3.0%
Four, but less than five 2.0%
Five, but less than six 1.0%
Six or more None
</TABLE>
Each class of shares in the Portfolio has identical rights and privileges except
with respect to the fees paid by the classes under either a Distribution and
Services Plan or an Administrative Services Plan, expenses allocable exclusively
to each class of shares, voting rights on matters affecting a single class of
shares, the exchange privilege of each class of shares, and the automatic
conversion of Investor B Shares of the Portfolio into Investor A Shares of the
Portfolio eight years after purchase.
As of November 30, 1996, the Fund's Articles of Incorporation authorize the
Board of Directors, in its discretion, to issue up to seven billion full and
fractional shares of capital stock, $0.001 par value per share, and to classify
or reclassify any unissued shares of the Fund into one or more additional
classes. Pursuant
<PAGE> 278
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, continued
MARCH 31, 1997
(Unaudited)
to such authority, as of November 30, 1996, the Fund had classified shares as
follows representing interests in the Portfolio:
<TABLE>
<CAPTION>
CLASS SHARES (000) REPRESENT INTERESTS IN:
- --------------------- ------------ --------------------------------
PORTFOLIO CLASS
--------------------------------
<S> <C> <C> <C>
Class N Shares...................... 25,000 National Municipal Bond Investor A
Class N--Special Series 1 Shares.... 50,000 National Municipal Bond Trust
Class N--Special Series 2 Shares.... 25,000 National Municipal Bond Investor B
</TABLE>
Each Portfolio share represents an equal, proportionate interest in the
Portfolio with respect to other shares outstanding, irrespective of series.
4. CAPITAL SHARE TRANSACTIONS
Transactions in portfolio shares of the Fund were as follows:
See TABLE 1, attached.
5. PURCHASES AND SALES OF INVESTMENT SECURITIES
Purchases and sales of securities (excluding short-term securities) during the
four month period ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -----
<S> <C> <C>
National Municipal Bond...... $136,871,365 $107,677,175
</TABLE>
6. RELATED PARTY TRANSACTIONS
Investment advisory services are provided to the Fund by Mississippi Valley
Advisors Inc. ("MVA"), a wholly owned subsidiary of Mercantile Bank National
Association ("Mercantile"), which in turn is a wholly owned subsidiary of
Mercantile Bancorporation Inc. Under the terms of the investment advisory
agreement, MVA is entitled to receive fees based on a percentage of the average
daily net assets of the Fund. Mercantile serves as custodian for the Fund.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS") is
an Ohio limited partnership. BISYS Fund Services Ohio, Inc. (the "Company"),
and BISYS are subsidiaries of The BISYS Group, Inc.
The Company, with whom certain officers of the Fund are affiliated, serves the
Fund as Administrator. Such officers are paid no fees directly by the Fund for
serving as officers of the Fund. Under the terms of the administration
agreement, the Company receives fees computed as 0.20% of the average daily net
assets of the Portfolio. The Company serves the Fund as Transfer Agent. BISYS
serves as the Funds' distributor and is entitled to receive commissions on sales
of Investor A Shares and Investor B Shares of the Portfolio.
With respect to Investor A Shares of the Portfolio, the Fund has adopted a
Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, the portfolio may pay (i) up to 0.10% of the average
daily net assets of the Portfolio's outstanding Investor A Shares to BISYS or
another organization for distribution services performed and expenses assumed
relating to the Portfolio's Investor A shares and (ii) up to 0.20% of the
average daily net assets of the Portfolio's outstanding Investor A Shares to
broker-dealers and other organizations for shareholder administrative services
provided pursuant to servicing agreements under the Plan.
Similarly, with respect to Investor B Shares, the Fund has adopted a
Distribution and Services Plan (the
<PAGE> 279
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
(Unaudited)
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
the Plan, the Portfolio may pay (i) up to 0.75% of the average daily net assets
of the Portfolio's outstanding Investor B Shares to BISYS or another
organization for distribution services performed and expenses assumed relating
to the Portfolio's Investor B Shares and (ii) up to 0.25% of the average daily
net assets of the Portfolio's Investor B Shares to broker-dealers and other
organizations for shareholder administrative services provided pursuant to
servicing agreements under the Plan.
With respect to Trust Shares of the Portfolio, the Fund has adopted an
Administrative Services Plan pursuant to which Trust Shares are sold to banks
and other financial institutions on behalf of their qualified accounts. The
Portfolio may pay these banks and other financial Institutions, which have
agreed to provide certain shareholder administrative services for their clients
or account holders, up to 0.30% of the average daily net assets of the
Portfolio's Trust Shares.
Fees may be voluntarily reduced to assist the Portfolio in maintaining
competitive expense ratios.
Information regarding these transactions is as follows for the four month
period ended March 31, 1997:
See Table 2, attached.
<PAGE> 280
Table 1
-------
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
(UNAUDITED)
TRANSACTIONS IN CAPITAL SHARES FOR THE GROUP WERE AS FOLLOWS:
<TABLE>
<CAPTION>
National Municipal
Bond Portfolio
-----------------------------------
Four month November 16
period ended 1996 to
March 31, November 30
1997 1996(a)
------------ ------------
<S> <C> <C>
CAPITAL TRANSACTIONS
Investor A Shares:
Proceeds from shares issued ............................... $ 726,236 $ 1,000
Dividends reinvested ...................................... 558 --
Shares redeemed ........................................... (219,306) --
----------- ------------
Change in net assets from Investor A share
transactions ............................................ $ 507,489 $ 1,000
=========== ============
Investor B Shares:
Proceeds from shares issued ............................... $ -- $ 1,000
Dividends reinvested ...................................... 13 --
Shares redeemed ........................................... -- --
----------- ------------
Change in net assets from Investor B share
transactions ............................................ $ 13 $ 1,000
=========== ============
Trust Shares:
Proceeds from shares issued ............................... $15,277,216 $314,006,996
Dividends reinvested ...................................... 596 --
Shares redeemed ........................................... (4,207,176) (4,987,761)
----------- ------------
Change in net assets from Trust share
transactions ............................................ $ 11,070,636 $309,019,235
============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued .................................................... 72,954 100
Reinvested ................................................ 58 --
Redeemed .................................................. (22,142) --
----------- ------------
Change in Investor A shares ............................... 50,868 100
=========== ============
Investor B Shares:
Issued .................................................... -- 100
Reinvested ................................................ 1 --
Redeemed .................................................. -- --
----------- ------------
Change in Investor B shares ............................... 1 100
=========== ============
Trust Shares:
Issued .................................................... 1,531,660 31,400,088
Reinvested ................................................ 60 --
Redeemed .................................................. (424,053) (498,183)
----------- ------------
Change in Trust Shares .................................... 1,107,667 30,901,905
=========== ============
(a) Period from commencement of operations.
</TABLE>
<PAGE> 281
TABLE 2
-------
THE ARCH FUND, INC.
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1997
For the four-month period ended March 31, 1997:
(Unaudited)
<TABLE>
<CAPTION>
Investment Advisory Fees Administration Fees
------------------------------- -------------------
Annual fee
before Fund Transfer
Voluntary Voluntary Voluntary Custodian Accounting Agent
fee reductions fee reductions fee reductions Fees Fees Fees
-------------- -------------- -------------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
National Municipal
Bond Portfolio.......... 0.55% $570,287 $46,660 $867 $2,556 $18,684
</TABLE>
<PAGE> 282
THE ARCH FUND, INC.
National Municipal Bond
Investor A Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Investor A Investor A
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.18 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
(0.07) 0.07
Total from Investment Activities
DISTRIBUTIONS
Net investment income (0.18) (0.02)
------ ------
Total Distributions (0.18) (0.02)
------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (Excludes sales charge) (0.72)%(b) 0.73%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 499 $ 1
Ratio of expenses to average net assets 0.33%(c) 0.37%(c)
Ratio of net investment income to average net assets 5.37%(c) 9.08%(c)
Ratio of expenses to average net assets* 1.02%(c) 1.07%(c)
Ratio of net investment income to average net assets* 4.68%(c) 8.38%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
<PAGE> 283
THE ARCH FUND, INC.
National Municipal Bond
Investor B Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Investor B Investor B
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.16 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
Total from Investment Activities (0.09) 0.07
DISTRIBUTIONS
Net investment income (0.16) (0.02)
------ ------
Total Distributions (0.16) (0.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (Excludes sales charge) (0.95)%(b) 0.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at end of period (000) $ 1 $ 1
Ratio of expenses to average net assets 1.09%(c) 1.10%(c)
Ratio of net investment income to average net assets 4.71%(c) 8.35%(c)
Ratio of expenses to average net assets* 1.09%(c) 1.80%(c)
Ratio of net investment income to average net assets* 4.71%(c) 7.65%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
<PAGE> 284
THE ARCH FUND, INC.
National Municipal Bond
Trust Shares
Financial Highlights
<TABLE>
<CAPTION>
Four month
Period ended November 18, 1996
March 31, 1997 to
(Unaudited) November 30, 1996 (a)
-------------- ---------------------
Trust Trust
Shares Shares
-------------- ---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.05 $10.00
------ ------
INVESTMENT ACTIVITIES
Net investment income 0.19 0.02
Net realized and unrealized gains from investments (0.25) 0.05
------ ------
Total from Investment Activities (0.06) 0.07
DISTRIBUTIONS
Net investment income (0.19) (0.02)
------ ------
Total Distributions (0.19) (0.02)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.80 $10.05
====== ======
Total Return (0.64)%(b) 0.74%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets at the end of period (000) $313,793 $310,413
Ratio of expenses to average net assets 0.13%(c) 0.12%(c)
Ratio of net investment income to average net assets 5.65%(c) 5.77%(c)
Ratio of expenses to average net assets* 0.73%(c) 0.82%(c)
Ratio of net investment income to average net assets* 5.06%(c) 5.07%(c)
Portfolio turnover 34.96% 0.00%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
<PAGE> 285
FORM N-1A
---------
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
---------------------
(1) (a) Included in, or incorporated by reference
into, Part A: Financial Highlights for
Registrant's (i) Treasury Money Market
Portfolio for the period December 2, 1991
(commencement of operations) through
November 30, 1992 and the fiscal years ended
November 30, 1993 through November 30, 1996
(Investor A Shares and Trust Shares) and the
period January 26, 1995 through November 30,
1995 and the fiscal year ended November 30,
1996 (Institutional Shares); (ii) Money
Market Portfolio for the fiscal years ended
November 30, 1986 through November 30, 1996
(Investor A Shares and Trust Shares), the
fiscal years ended November 30, 1994 through
November 30, 1996 (Institutional Shares) and
the period January 26, 1996 through November
30, 1996 (Investor B Shares); (iii)
Tax-Exempt Money Market Portfolio for the
period July 10, 1986 (commencement of
operations) through May 31, 1987, the fiscal
years ended May 31, 1988 through May 31,
1995, the six-months ended November 30, 1995
and the fiscal year ended November 30, 1996
(Trust Shares and Investor A Shares); (iv)
U.S. Government Securities Portfolio for the
period June 2, 1988 (commencement of
operations) through November 30, 1988 and
the fiscal years ended November 30, 1989
through November 30, 1996 (Trust Shares and
Investor A Shares), the fiscal years ended
November 30, 1994 through November 30, 1996
(Institutional Shares) and the period March
1, 1995 through November 30, 1995 and the
fiscal year ended November 30, 1996
(Investor B Shares); (v) Government &
Corporate Bond Portfolio for the period June
15, 1988 (commencement of operations)
through November 30, 1988 and the fiscal
years ended November 30, 1989 through
November 30, 1996 (Trust Shares and Investor
A Shares), the fiscal years ended November
30, 1994 through November 30, 1996
(Institutional Shares) and the period March
1, 1995 through November 30,
-1-
<PAGE> 286
1996 and the fiscal year ended November 30,
1996 (Investor B Shares); (vi) Short-
Intermediate Municipal Portfolio for the
period July 11, 1995 (commencement of
operations) through November 30, 1995 and
the fiscal year ended November 30, 1996
(Trust Shares and Investor A Shares); (vii)
Missouri Tax-Exempt Bond Portfolio for the
period July 15, 1988 (commencement of
operations) through May 31, 1989, the fiscal
years ended May 31, 1990 through May 31,
1995, the six-months ended November 30, 1995
and the fiscal year ended November 30, 1996
(Trust Shares and Investor A Shares) and the
period March 1, 1995 through May 31, 1995,
the six-months ended November 30, 1995 and
the fiscal year ended November 30, 1996
(Investor B Shares); (viii) National
Municipal Bond Portfolio for the period
November 18, 1996 (commencement of
operations) through November 30, 1996 (Trust
Shares, Investor A Shares and Investor B
Shares); (ix) Growth & Income Equity
Portfolio for the period June 2, 1988
(commencement of operations) through
November 30, 1988, the fiscal years ended
November 30, 1989 through November 30, 1996
(Trust Shares and Investor A Shares), the
fiscal years ended November 30, 1994 through
November 30, 1996 (Institutional Shares) and
the period March 1, 1995 through November
30, 1995 and the fiscal year ended November
30, 1996 (Investor B Shares); (x) Small Cap
Equity (formerly Emerging Growth) Portfolio
for the period May 1, 1992 (commencement of
operations) through November 30, 1992 and
the fiscal years ended November 30, 1993
through November 30, 1996 (Trust Shares),
the period May 6, 1992 (date of initial
public offering) through November 30, 1992
and the fiscal years ended November 30, 1994
through November 30, 1996 (Investor A
Shares), the fiscal years ended November 30,
1994 through November 30, 1996
(Institutional Shares) and the period March
1, 1995 through November 30, 1995 and the
fiscal year ended November 30, 1996
(Investor B Shares); (xi) International
Equity Portfolio for the period April 4,
1994 (commencement of operations) through
November 30, 1994 and the fiscal years ended
November 30, 1995 through November 30, 1996
(Investor A Shares, Trust Shares and
Institutional Shares) and the period March
1, 1995 through
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<PAGE> 287
November 30, 1995 and the fiscal year ended
November 30, 1996 (Investor B Shares); (xii)
Balanced Portfolio for the period April 1,
1993 (commencement of operations) through
November 30, 1993 and the fiscal years ended
November 30, 1994 through November 30, 1996
(Trust Shares and Investor A Shares), the
fiscal years ended November 30, 1994 through
November 30, 1996 (Institutional Shares) and
the period March 1, 1995 through November
30, 1995 and the fiscal year ended November
30, 1996 (Investor B Shares); (xiii)
National Municipal Bond Portfolio for the
period December 1, 1996 through March 31,
1997 (Trust Shares, Investor A Shares and
Investor B Shares).
(b) Included in, or incorporated by reference
into, Part B: Unaudited financial statements
for the National Municipal Bond Portfolio
for the period December 1, 1996 through
March 31, 1997 are included herein. The
financial statements in the Registrant's
November 30, 1996 Annual Report to
Shareholders, as filed with the Commission,
are incorporated herein by reference.
(2) All required financial statements are included in, or
incorporated by reference into, Part A and Part B
hereof. All other financial statements and schedules
are inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation dated September 9,
1982.(3)
(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)
-3-
<PAGE> 288
(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)
(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)
-4-
<PAGE> 289
(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)
(2) Restated and Amended By-Laws as approved and
adopted by Registrant's Board of Directors.(6)
(3) None.
(4) None.
(5) (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)
(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
-5-
<PAGE> 290
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) Sub-Advisory Agreement between Mississippi
Valley Advisors Inc. and Clay Finlay Inc.
dated August 29, 1996.(5)
(6) (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
-6-
<PAGE> 291
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 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) Amendment No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership dated as of September
29, 1995.(1)
(7) None.
(8) (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
-7-
<PAGE> 292
(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.
(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) 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.
(h) 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.
(9) (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.
-8-
<PAGE> 293
(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)
(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)
-9-
<PAGE> 294
(h) 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.
(i) 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.
(j) 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.
(k) Addendum No. 3 to Transfer Agency 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 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.
(l) 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)
(m) 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
-10-
<PAGE> 295
Corporate Bond) Portfolios dated November
15, 1996.(6)
(n) 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)
(o) Amendment No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated as of September 29, 1995.
(1)
(p) Amendment No. 2 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated October 1, 1995.(3)
(q) (1) Distribution and Services Plan
(Investor A Shares) under Rule 12b-1
and Form of Agreement.(5)
(2) Distribution and Services Plan
(Investor B Shares) under Rule 12b-1
and Form of Agreement.(4)
(3) Administrative Services Plan (Trust
Shares) and Form of Agreement.(5)
(4) Administrative Services Plan
(Institutional Shares) and Form of
Agreement.(5)
(10) Opinion and consent of counsel.(2)
(11) (a) Consent of KPMG Peat Marwick LLP.
(b) Consent of Drinker Biddle & Reath LLP.
(12) None.
(13) (a) Purchase Agreement between Registrant and
Shearson/American Express Inc. dated
November 23, 1982, is incorporated herein by
reference to Exhibit (13) of Pre-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1, filed on November 24,
1982.
(b) Purchase Agreement between Registrant and
The Winsbury Service Corporation dated April
1, 1994 is incorporated herein by reference
to
-11-
<PAGE> 296
Exhibit (13)(b) of Post-Effective Amendment
No. 25 to Registrant's Registration
Statement on Form N-1A, filed November 8,
1994.
(c) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated as of
February 28, 1995 are incorporated herein by
reference to Exhibit (13)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(d) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated as of
July 7, 1995 are incorporated herein by
reference to Exhibit (13)(d) of Post-
Effective Amendment No. 31 to Registrant's
Registration Statement on Form N-1A, filed
September 20, 1995.
(e) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated
September 29, 1995.(3)
(f) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. dated
November 14, 1996.(6)
(g) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated
February 6, 1997.(7)
(h) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. dated
February 27, 1997.(7)
(i) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc dated April
30, 1997.
(14) None.
(15) None.
(16) (a) Schedule of Computation of Performance
Calculations for Investor A (formerly
Investor) Shares and Trust Shares of the
Money Market, Treasury Money Market,
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth and Balanced Portfolio are
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<PAGE> 297
incorporated herein by reference to Exhibit
(16) of Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form
N-1A, filed on March 31, 1994.
(b) Schedule of Computation of Performance
Calculations for Investor A (formerly
Investor), Trust and Institutional Shares of
the International Equity Portfolio is
incorporated herein by reference to Exhibit
(16)(b) of Post-Effective Amendment No. 25
to Registrant's Registration Statement on
Form N-1A, filed November 8, 1994.
(c) Schedule of Computation of Performance
Calculations for Institutional Shares of the
Money Market, Treasury Money Market,
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth, Balanced and International Equity
Portfolios is incorporated herein by
reference to Exhibit (16)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(d) Schedule of Computation of Performance
Calculations for Investor B Shares of the
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth, Balanced and International Equity
Portfolios is incorporated herein by
reference to Exhibit (16)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(e) Schedule of Computation of Performance
Calculations for Trust Shares and Investor A
Shares of the Short-Intermediate Municipal
Portfolio.(1)
(f) Schedule of Computation of Performance
Calculations for Trust and Investor A Shares
of the Tax-Exempt Money Market, Missouri
Tax- Exempt Bond and Kansas Tax-Exempt Bond
Portfolios and for Investor B Shares of the
Missouri Tax-Exempt Bond and Kansas Tax-
Exempt Bond Portfolios.(3)
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<PAGE> 298
(g) Schedule of Computation of Performance
Calculations for Trust, Investor A and
Investor B Shares of the National Municipal
Bond Portfolio.(6)
(h) Schedule of Computation of Performance
Calculations for Trust, Investor A and
Investor B Shares of the National Municipal
Bond Portfolio.
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<PAGE> 299
(18) Amended and Restated Plan Pursuant to Rule 18f-3
for Operation of a Multi-Class System.(5)
(27) Financial Data Schedules.
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.
Item 25. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
Not Applicable.
-15-
<PAGE> 300
Item 26. Number of Holders of Securities
--------------------------------
As of April 30, 1997:
Number of
Title of Class Record Holders
-------------- --------------
Class A Common Stock (The ARCH
Money Market Portfolio)...................................... 180
Class A - Special Series 1 Common Stock
(The ARCH Money Market
Portfolio).................................................... 51
Class A - Special Series 2 Common Stock
(The ARCH Money Market Portfolio)............................. 3
Class A - Special Series 3 Common Stock
(The ARCH Money Market
Portfolio).................................................... 50
Class B Common Stock (The ARCH
(Treasury Money Market
Portfolio).................................................... 12
Class B - Special Series 1 Common Stock
(The ARCH Treasury Money Market
Portfolio).................................................... 26
Class B - Special Series 2 Common Stock
(The ARCH Treasury Money Market
Portfolio).................................................... 3
Class C Common Stock (The ARCH
Growth & Income Equity
Portfolio).................................................... 1,365
Class C -Special Series 1 Common Stock
(The ARCH Growth & Income Equity
Portfolio).................................................... 15
Class C -Special Series 2 Common Stock
(The ARCH Growth & Income Equity
Portfolio).................................................... 4
Class C -Special Series 3 Common Stock
(The ARCH Growth & Income Equity
Portfolio).................................................... 572
Class D Common Stock (The ARCH
Government & Corporate Bond
Portfolio).................................................... 215
Class D - Special Series 1 Common Stock
(The ARCH Government & Corporate Bond
Portfolio).................................................... 7
Class D - Special Series 2 Common Stock
(The ARCH Government & Corporate Bond
Portfolio).................................................... 4
Class D - Special Series 3 Common Stock
(The ARCH Government & Corporate Bond
Portfolio).................................................... 59
Class E Common Stock (The ARCH
U.S. Government Securities
Portfolio).................................................... 202
Class E - Special Series 1 Common Stock
(The ARCH U.S. Government Securities
Portfolio).................................................... 5
Class E - Special Series 2 Common Stock
(The ARCH U.S. Government Securities
Portfolio).................................................... 4
-16-
<PAGE> 301
Number of
Title of Class Record Holders
-------------- --------------
Class E - Special Series 3 Common Stock
(The ARCH U.S. Government Securities
Portfolio).................................................... 59
Class F Common Stock (The ARCH Small
Cap Equity Portfolio)......................................... 868
Class F - Special Series 1 Common Stock
(The ARCH Small Cap Equity
Portfolio).................................................... 20
Class F - Special Series 2 Common Stock
(The ARCH Small Cap Equity
Portfolio).................................................... 4
Class F - Special Series 3 Common Stock
(The ARCH Small Cap Equity
Portfolio).................................................... 270
Class G Common Stock (The ARCH Balanced
Portfolio).................................................... 245
Class G - Special Series 1 Common Stock
Common Stock (The ARCH Balanced
Portfolio).................................................... 5
Class G - Special Series 2 Common Stock
Stock (The ARCH Balanced
Portfolio).................................................... 4
Class G Common Stock - Special Series 3
Common Stock (The ARCH Balanced
Portfolio).................................................... 55
Class H Common Stock (The ARCH
International Equity
Portfolio).................................................... 265
Class H - Special Series 1 Common
Stock - (The ARCH International Equity
Portfolio).................................................... 5
Class H - Special Series 2 Common Stock
(The ARCH International Equity
Portfolio).................................................... 4
Class H - Special Series 3 Common Stock
(The ARCH International Equity
Portfolio).................................................... 150
Class I Common Stock (The ARCH
Short-Intermediate Municipal
Portfolio).................................................... 5
Class I - Special Series 1 Common Stock
(The ARCH Short-Intermediate
Municipal Portfolio)......................................... 3
Class J Common Stock (The ARCH Tax-Exempt
Money Market Portfolio)...................................... 18
Class J - Special Series 1
Common Stock (The ARCH Tax-Exempt Money
Market Portfolio)............................................. 24
Class K Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio)................................... 492
Class K - Special Series 1
Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio).................................... 4
Class K - Special Series 2
Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio).................................... 45
Class L Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio).................................... 0
-17-
<PAGE> 302
Number of
Title of Class Record Holders
-------------- --------------
Class L - Special Series 1
Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio).................................... 0
Class L - Special Series 2
Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio).................................... 0
Class M - Common Stock (The ARCH Equity
Income Portfolio)............................................. 3
Class M - Special Series 1
Common Stock (The ARCH Equity Income Portfolio)............... 3
Class M - Special Series 2
Common Stock (The ARCH Equity Income Portfolio)............... 1
Class M - Special Series 3
Common Stock (The ARCH Equity Income Portfolio)............... 2
Class N - Common Stock (The ARCH National
Municipal Bond Portfolio)..................................... 8
Class N - Special Series 1
Common Stock (The ARCH National
Municipal Bond Portfolio)..................................... 3
Class N - Special Series 2
Common Stock (The ARCH National
Municipal Bond Portfolio)..................................... 1
Class O - Common Stock (The ARCH Intermediate
Corporate Bond Portfolio)..................................... 1
Class O - Special Series 1
Common Stock (The ARCH Intermediate
Corporate Bond Portfolio)..................................... 3
Class O - Special Series 2
Common Stock (The ARCH Intermediate
Corporate Bond Portfolio)..................................... 1
Class P - Common Stock (The ARCH Equity
Index Portfolio).............................................. 1
Class P - Special Series 1
Common Stock (The ARCH Equity Index
Portfolio).................................................... 1
Class P - Special Series 2
Common Stock (The ARCH Equity Index
Portfolio).................................................... 1
Class Q - Common Stock (The ARCH Bond Index
Portfolio).................................................... 4
Class Q - Special Series 1
Common Stock (The ARCH Bond Index Portfolio).................. 3
Class Q - Special Series 2
Common Stock (The ARCH Bond Index Portfolio).................. 1
Item 27. 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 (6)(a), and Sections 24 and 18, respectively, of the Custody Agreement,
incorporated herein by reference as Exhibit (8)(a) and the Transfer Agency
Agreement incorporated herein by reference as Exhibit (9)(c). The Registrant has
obtained from a major
-18-
<PAGE> 303
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 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
A. Mercantile Bank National Association ("Mercantile") is a
full-service national bank located in St. Louis, Missouri. Mississippi Valley
Advisors Inc. is a wholly-owned subsidiary of Mercantile and is responsible for
providing advisory services to each of Registrant's investment portfolios.
B. The information required by this Item 28 with respect to each
Director and Officer of Mercantile and Mississippi Valley Advisors Inc. is
incorporated by reference to Form ADV and Schedules A and D filed by Mississippi
Valley Advisors Inc. with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (File No. 801-28897).
C. Clay Finlay Inc. is registered as an investment adviser with the
Securities and Exchange Commission and provides sub-advisory services to the
Registrant's International Equity Portfolio.
-19-
<PAGE> 304
D. The information required by this Item 28 with respect to each
Director and Officer of Clay Finlay Inc. is included in Form ADV and Schedules A
and D filed by Clay Finlay Inc. with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (File No. 801-17316).
Item 29. Principal Underwriter
---------------------
A. BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
(formerly The Winsbury Company Limited Partnership) acts as distributor
and its affiliate, BISYS Fund Services Ohio, Inc., acts as
administrator for the Registrant. BISYS Fund Services also distributes
the securities of American Performance Funds, AmSouth Mutual Funds, The
BB&T Mutual Funds Group, The Coventry Group, First Choice Funds Trust,
Fountain Square Funds, HSBC Family of Funds, The Highmark Group, The
Infinity Mutual Funds, Inc., The Kent Funds, MarketWatch Funds, MMA
Praxis Mutual Funds, M.S.D. & T. Funds, Inc., Pacific Capital Funds,
Parkstone Group of Funds, The Parkstone Advantage Funds, Pegasus Funds,
Qualivest Funds, The Republic Funds, The Riverfront Funds, Inc., SBSF
Funds, Inc. d/b/a Key Mutual Funds, The Sessions Group, Summit
Investment Trust, The Time Horizon Funds and The Victory Portfolios,
each of which is a management investment company.
B. To the best of Registrant's knowledge, the partners of BISYS Fund
Services are as follows:
Positions and Offices
Name and Principal with BISYS Positions and Offices
Business Address Fund Services with Registrant
---------------- ------------- ---------------
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
WC Subsidiary Corporation Sole Limited Partner
3435 Stelzer Road None
Columbus, Ohio 43219-3035
C. None.
Item 30. Location of Accounts and Records
--------------------------------
(1) Mercantile Bank National Association, One Mercantile Center,
8th and Locust Streets, St. Louis, MO 63101 (records
relating to its functions as custodian).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as distributor).
-20-
<PAGE> 305
(3) Mississippi Valley Advisors Inc., 7th and Washington
Streets, 21st Floor, St. Louis, MO 63101 (records relating
to its functions as investment adviser).
(4) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its function as administrator).
(5) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its function as transfer agent and dividend
disbursing agent).
(6) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, PA 19107-3496
(Registrant's Articles of Incorporation, By-Laws and Minute
Books).
(7) Clay Finlay Inc. 200 Park Avenue, 56th Floor, New York, New
York 10166 (records relating to its function as sub-adviser
to the International Equity Portfolio).
(8) Bankers Trust Company, 16 Wall Street, New York, New York 10005
(records relating to its function as sub-custodian for the
International Equity Portfolio).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
(a) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) Registrant hereby undertakes to file a post-effective amendment
with respect to the ARCH Equity Income and Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond) Portfolios, using financial statements that
need not be certified, within four to six months from the effective date of the
Registration Statement pertaining to such Portfolios.
(c) Registrant hereby undertakes to file a post-effective amendment
with respect to the ARCH Equity Index and Bond Index Portfolios, using financial
statements that need not be certified, within four to six months from the
effective date of the Registration Statement pertaining to such Portfolios.
-21-
<PAGE> 306
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and that it has duly
caused this Post- Effective Amendment No. 39 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of St. Louis and the State of Missouri, on the 28th day of May, 1997.
THE ARCH FUND, INC.
(Registrant)
/s/Jerry V. Woodham
-------------------
Jerry V. Woodham
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 39 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/Jerry V. Woodham Chairman of the May 28, 1997
- ------------------- Board and President
Jerry V. Woodham
/s/* James C. Jacobsen Director May 28, 1997
- ----------------------
James C. Jacobsen
/s/* Joseph J. Hunt Director May 28, 1997
- -------------------
Joseph J. Hunt
/s/* Robert M. Cox, Jr. Director May 28, 1997
- -----------------------
Robert M. Cox, Jr.
/s/* Lyle L. Meyer Director May 28, 1997
- ------------------
Lyle L. Meyer
/s/* Ronald D. Winney Director & Treasurer May 28, 1997
- ---------------------
Ronald D. Winney
*By: /s/Jerry V. Woodham
----------------------
Jerry V. Woodham
Attorney-in-fact
<PAGE> 307
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
(11)(a) Consent of KPMG Peat Marwick LLP.
(11)(b) Consent of Drinker Biddle & Reath LLP.
(13)(i) Purchase Agreement between Registrant
and BISYS Fund Services Ohio, Inc. dated
April 30, 1997.
(16)(h) Schedule of Computation of Performance
Calculations for Trust, Investor A and
Investor B Shares of the National
Municipal Bond Portfolio.
(27) Financial Data Schedules.
-23-
<PAGE> 1
Exhibit (11)(a)
AUDITORS' CONSENT
The Board of Directors of
The ARCH Fund, Inc.
We consent to the use of our report included herein dated January 22,
1997 for 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-as of
November 30, 1996 and for the periods indicated therein, and to the references
to our firm under the headings "Financial Highlights--National Municipal Bond
Portfolio" in the Prospectus and "Independent Accountants" in the Statement of
Additional Information.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
Columbus, Ohio
May 23, 1997
<PAGE> 1
Exhibit (11)(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post-Effective Amendment No. 39 to the Registration Statement
(No. 2-79285) on Form N-1A under the Securities Act of 1933, as amended, of The
Arch Fund. 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 the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
---------------------------------
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
May 23, 1997
<PAGE> 1
EXHIBIT (13)(I)
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an
Ohio corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby
purchases one (1) Class P share of common stock, one (1) Class P - Special
Series 1 share of common stock and one (1) Class P - Special Series 2 share of
common stock, each such share representing an interest in the ARCH Equity Index
Portfolio (the "Portfolio") at a price of $10 per share (such shares of common
stock in the Portfolio being hereinafter known as the "Shares"). BISYS Ohio
hereby acknowledges the purchase of the Shares and the Fund hereby acknowledges
receipt from BISYS Ohio of funds in the aggregate amount of $30 in full payment
for the Shares.
2. BISYS Ohio represents and warrants to the Fund that the
Shares are being acquired for investment purposes and not with a view to the
distribution thereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the 30th day of April, 1997.
THE ARCH FUND, INC.
By: /s/Jerry V. Woodham
-----------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/Stephen G. Mintos
-----------------------
Title: Executive Vice President
<PAGE> 1
THE ARCH FUND, INC.
EXHIBIT 16(h)
TOTAL RETURN
INVESTOR A SHARES
NO LOAD CALCULATIONS
NATIONAL MUNICIPAL BOND PORTFOLIO
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
- --------------------------
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = ENDING REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL PAYMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/18/96 TO 03/31/97):
(1,000.0/1,000) - 1 = 0.00%
YEAR TO DATE: (12/31/96 TO 03/31/97):
(996.1/1,000) - 1 = -0.39%
QUARTERLY: (12/31/96 TO 03/31/97):
(996.1/1,000) - 1 = -0.39%
MONTHLY: (02/28/97 TO 03/31/97):
(985.5/1,000) - 1 = -1.45%
<PAGE> 2
THE ARCH FUND, INC.
EXHIBIT 16(h)
TOTAL RETURN
INVESTOR A SHARES
LOAD CALCULATIONS
NATIONAL MUNICIPAL BOND PORTFOLIO
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 4.50%
- --------------------------
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = ENDING REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL PAYMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/18/96 TO 03/31/97):
(955.1/1,000) - 1 = -4.49%
YEAR TO DATE: (12/31/96 TO 03/31/97):
(951.3/1,000) - 1 = -4.87%
QUARTERLY: (12/31/96 TO 03/31/97):
(951.3/1,000) - 1 = -4.87%
MONTHLY: (02/28/97 TO 03/31/97):
(941.2/1,000) - 1 = -5.88%
<PAGE> 3
THE ARCH FUND, INC.
EXHIBIT 16(h)
TOTAL RETURN
INVESTOR B SHARES
NO CDSC CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
- --------------------------
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/18/96 TO 03/31/97):
(997.4/1,000) - 1 = -0.26%
YEAR TO DATE: (12/31/96 TO 03/31/97):
(994.4/1,000) - 1 = -0.56%
QUARTERLY: (12/31/96 TO 03/31/97):
(994.4/1,000) - 1 = -0.56%
MONTHLY: (02/28/97 TO 03/31/97):
(984.0/1,000) - 1 = -1.60%
<PAGE> 4
THE ARCH FUND, INC.
EXHIBIT 16(h)
TOTAL RETURN
INVESTOR B SHARES
CDSC CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 5.00%
- --------------------------
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL INVESTMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/18/96 TO 03/31/97):
(948.4/1,000) - 1 = -5.16%
YEAR TO DATE: (12/31/96 TO 03/31/97):
(945.3/1,000) - 1 = -5.47%
QUARTERLY: (12/31/96 TO 03/31/97):
(945.3/1,000) - 1 = -5.47%
MONTHLY: (02/28/97 TO 03/31/97):
(935.0/1,000) - 1 = -6.50%
<PAGE> 5
THE ARCH FUND, INC.
EXHIBIT 16(h)
TOTAL RETURN
TRUST SHARES
NO LOAD CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
AGGREGATE TOTAL RETURN
WITH SALES LOAD OF: 0.00%
- --------------------------
T = (ERV/P) - 1
WHERE: T = TOTAL RETURN
ERV = ENDING REDEEMABLE VALUE AT THE END
OF THE PERIOD OF A HYPOTHETICAL
$1,000 INVESTMENT MADE AT THE
BEGINNING OF THE PERIOD.
P = A HYPOTHETICAL INITIAL PAYMENT OF $1,000.
EXAMPLE:
SINCE INCEPTION: (11/18/96 TO 03/31/97):
(1,000.9/1,000) - 1 = 0.09%
YEAR TO DATE: (12/31/96 TO 03/31/97):
(996.7/1,000) - 1 = -0.33%
QUARTERLY: (12/31/96 TO 03/31/97):
(996.7/1,000) - 1 = -0.33%
MONTHLY: (02/28/97 TO 03/31/97):
(984.7/1,000) - 1 = -1.53%
<PAGE> 6
THE ARCH FUND, INC.
EXHIBIT 16(h)
TRUST SHARES
30-DAY S.E.C. YIELD CALCULATIONS - WITH WAIVED FEES
NATIONAL MUNICIPAL BOND FUND
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-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 during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITHOUT 0.00% LOAD:
( 1,367,370.64 - 34,106.39 )
2 * [( -------------------------------- +1) 6]-1 = 5.16%
( 32,000,334.057* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
<PAGE> 7
THE ARCH FUND, INC.
EXHIBIT 16(h)
TRUST SHARES
30-DAY S.E.C. YIELD CALCULATIONS - WITH WAIVED FEES
NATIONAL MUNICIPAL BOND FUND
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-1 =
WHERE a = Dividends and interest earned during the period
b = Expenses accrued for the period (gross)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITHOUT 0.00% LOAD:
( 1,367,370.64 - 275,067.08 )
2 * [( -------------------------------- +1) 6]-1 = 4.22%
( 32,000,334.057* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
<PAGE> 8
THE ARCH FUND, INC.
EXHIBIT 16(h)
INVESTOR A SHARES
30-DAY S.E.C. YIELD CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-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 during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITH 4.50% LOAD:
( 1,919.54 - 120.67 )
2 * [( -------------------------- +1) 6]-1 = 4.73%
( 44,953.290* 10.26 )
WITHOUT 4.50% LOAD:
( 1,919.54 - 120.67 )
2 * [( -------------------------- +1) 6]-1 = 4.95%
( 44,953.290* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
<PAGE> 9
THE ARCH FUND, INC.
EXHIBIT 16(h)
INVESTOR A SHARES
30-DAY S.E.C. YIELD CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-1 =
WHERE a = Dividends and interest earned during the period
b = Expenses accrued for the period (gross)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITH 4.50% LOAD:
( 1,919.54 - 382.76 )
2 * [( -------------------------- +1) 6]-1 = 4.03%
( 44,953.290* 10.26 )
WITHOUT 4.50% LOAD:
( 1,919.54 - 382.76 )
2 * [( -------------------------- +1) 6]-1 = 4.22%
( 44,953.290* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
<PAGE> 10
THE ARCH FUND, INC.
EXHIBIT 16(h)
INVESTOR B SHARES
30-DAY S.E.C. YIELD CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
WITH WAIVERS
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-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 during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITHOUT 0.00% LOAD:
( 4.41 - 0.90 )
2 * [( -------------------------- +1) 6]-1 = 4.28%
( 101.361* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
<PAGE> 11
THE ARCH FUND, INC.
EXHIBIT 16(h)
INVESTOR B SHARES
30-DAY S.E.C. YIELD CALCULATIONS
NATIONAL MUNICIPAL BOND FUND
WITHOUT WAIVERS
(a-b)
-------
30-Day S.E.C. Yield Equation = 2* [( (cd) +1) 6]-1 =
WHERE a = Dividends and interest earned during the period
b = Expenses accrued for the period (gross)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price (NAV for No Load) per share on the
last day of the period
WITHOUT 0.00% LOAD:
( 4.41 - 1.66 )
2 * [( -------------------------- +1) 6]-1 = 3.35%
( 101.361* 9.80 )
The performance was computed based on the thirty day period ending March 31,
1997.
