<PAGE> 1
As filed with the Securities and Exchange Commission on September 9, 1997
Registration No. 333-33423
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1 Post-Effective Amendment No. ___
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter:
THE ARCH FUND, INC.
Area Code and Telephone Number:
1-800-551-3731
Address of Principal Executive Offices:
3435 Stelzer Road
Columbus, Ohio 43219
Name and Address of Agent for Service:
W. BRUCE McCONNEL, III
Drinker Biddle & Reath LLP
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective under the Securities Act of 1933.
It is proposed that this filing will become effective on September 11, 1997
pursuant to Rule 488 under the Securities Act of 1933.
Calculation of Registration Fee under the Securities Act of 1933: No filing fee
is required because an indefinite number of shares have previously been
registered on Form N-1A (Registration Nos. 2-79285, 811-3567) pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Registrant is filing as an
exhibit to this Registration Statement a copy of its earlier declaration under
Rule 24f-2. Pursuant to Rule 429, this Registration Statement relates to the
aforesaid Registration Statement on Form N-1A.
<PAGE> 2
THE ARCH FUND
FORM N-14
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a)
<TABLE>
<CAPTION>
ITEM NO. HEADING
- -------- -------
Part A
<S> <C>
1. Beginning of Registration Statement
and Outside Front Cover Page......... Cover Page
2. Beginning and Outside
Back Cover Page...................... Table of Contents
3. Fee Table, Synopsis Information
and Risk Factors..................... Summary; Comparative Fee Tables; Risk
Factors; Comparison of Investment
Policies and Risk Factors
4. Information About the Transaction.... Summary; Risk Factors; Information
Relating to the Proposed
Reorganization; Comparison
of Investment Policies and Risk
Factors
5. Information About the Registrant..... Summary; Risk Factors; Comparison of
Investment Policies and Risk Factors;
Additional Information About Arch;
Additional Information About Arrow
5A. Management's Discussion of
Fund Performance..................... Appendix II
6. Information About the Company
Being Acquired....................... Summary; Risk Factors; Comparison of
Investment Policies and Risk Factors;
Additional Information About Arch;
Additional Information About Arrow
7. Voting Information................... Summary; Information Relating to
Voting Matters
8. Interest of Certain Persons
and Experts.......................... Additional Information About Arch;
Additional Information About Arrow
9. Additional Information Required
for Reoffering by Persons Deemed
to be Underwriters................... Inapplicable
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. HEADING
- -------- -------
Part B
<S> <C>
10. Cover Page........................... Statement of Additional Information
Cover Page
11. Table of Contents.................... Table of Contents
12. Additional Information
About the Registrant................. Statement of Additional Information
of The ARCH Fund, Inc. dated
May 31, 1997 (as revised
August 29, 1997)*
13. Additional Information
About the Company Being
Acquired............................. Combined Statement of Additional
Information of Arrow Funds' Equity,
Fixed Income and Municipal Income
Portfolios dated November 30, 1996*
14. Financial Statements................ Financial Statements*; Pro Forma
Financial Statements
</TABLE>
Part C
Items 15-17. Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Registration Statement.
-ii-
<PAGE> 4
Dear Arrow Fund Shareholder:
The Board of Trustees of Arrow Funds has called a special meeting to consider a
proposal that could improve the level of services available to shareholders. At
this meeting, shareholders of the Arrow Equity, Arrow Fixed Income and Arrow
Municipal Income Portfolios (the "Arrow Portfolios") will be asked to approve a
proposal to combine the Arrow Portfolios with The ARCH Fund, Inc. - a $3 billion
mutual fund complex managed by Mississippi Valley Advisors Inc.
After carefully studying the merits of the proposal, the Board of Trustees has
determined that a consolidation between the two fund families will provide
substantial value for Arrow Portfolio shareholders. To move forward, however, a
majority of the shareholders of the Arrow Portfolios must first vote in favor of
the transaction. Accordingly, enclosed you'll find a proxy card for the upcoming
shareholder meeting scheduled to be held on November 12, 1997. IT IS IMPORTANT
THAT YOU COMPLETE, SIGN AND RETURN YOUR CARD AS SOON AS POSSIBLE TO ENSURE YOUR
VOTE IS COUNTED AT THE MEETING.
The Arrow Fund Board of Trustees unanimously endorses the proposed
reorganization that is discussed in detail in the combined proxy statement and
fund prospectus we've sent you. The consolidation of the Arrow Portfolios with
The ARCH Fund, Inc. will benefit shareholders in two key ways:
1. Shareholders will now be able to choose from 18 investment portfolios
versus the 4 investment portfolios that are now available through
Arrow Funds. The wide array of additional investment options will
include international, asset allocation and market index funds.
Shareholders will also be able to exchange from one portfolio to
another without incurring any transaction charges.
2. By combining the assets of the Arrow Portfolios and the ARCH Funds,
fund expense ratios may decline, which would ultimately translate
into better returns for fund shareholders.
The reorganization of the Arrow Portfolios into The ARCH Fund, Inc., pending
shareholder approval, is slated for late November 1997. In connection with the
reorganization, you should note the following:
- Trust shareholders will be able to continue to invest on a no
load basis.
- The reorganization will be a tax free event.
- Two Arrow portfolios - the Arrow Fixed Income Portfolio and the Arrow
Municipal Income Portfolio - will be combined into comparable ARCH
portfolios with similar
<PAGE> 5
investment objectives and policies and that are managed by the same
investment professionals at Mississippi Valley Advisors Inc. One
Arrow portfolio - the Arrow Equity Portfolio - will be reorganized
into a newly created portfolio within The ARCH Fund, Inc. and that
will continue to be managed by Carl Enloe who has managed the Arrow
Equity Portfolio since its inception. The remaining Arrow portfolio
- the Arrow Government Money Market Portfolio - will be liquidated
prior to the reorganization.
- The value of your investment will not change as a result of the
reorganization.
The enclosed materials should provide you with the necessary details to make an
informed decision about the proposal.
We are truly excited about the reorganization and the potential benefits it
provides to current shareholders who invest in the Arrow Portfolios. Hopefully,
you will agree by voting "yes" and returning your proxy card as soon as
possible.
Sincerely,
Chairman, Arrow Funds
<PAGE> 6
THE ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on November 12, 1997
To Arrow Shareholders:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders
("Shareholders") of the Fixed Income Portfolio, Municipal Income Portfolio and
Equity Portfolio (each, an "Arrow Portfolio") of Arrow Funds ("Arrow") will be
held at Federated Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh,
Pennsylvania 15222-3779 on November 12, 1997 at 2:00 p.m. Eastern Time for the
following purposes:
ITEM 1. With respect to each Arrow Portfolio:
To consider and act upon a proposal to approve an Agreement and Plan
of Reorganization (the "Reorganization Agreement") and the
transactions contemplated thereby, including (a) the transfer of
substantially all of the assets and liabilities of Arrow's Fixed
Income, Municipal Income and Equity Portfolios to corresponding
investment portfolios (the "Arch Portfolios") of The ARCH Fund, Inc.
in exchange for shares of the Arch Portfolios; (b) the distribution
of the Arch Portfolios' shares so received to shareholders of the
Arrow Portfolios; and (c) the termination under state law of Arrow.
ITEM 2. With respect to each Arrow Portfolio:
To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
The proposed reorganization and related matters are described in the
attached Combined Proxy Statement/Prospectus. Appendix I to the Combined Proxy
Statement/Prospectus is a copy of the Reorganization Agreement.
Shareholders of record as of the close of business on _________, 1997 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment(s)
thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY ARROW'S BOARD
OF TRUSTEES. THIS IS IMPORTANT TO
<PAGE> 7
ENSURE A QUORUM AT THE SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME
BEFORE THEY ARE EXERCISED BY SUBMITTING TO ARROW A WRITTEN NOTICE OF REVOCATION
OR A SUBSEQUENTLY EXECUTED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING
IN PERSON.
------------------------
Secretary
September ___, 1997
-2-
<PAGE> 8
COMBINED PROXY STATEMENT/PROSPECTUS
DATED SEPTEMBER __, 1997
ARROW FUNDS
19th Floor
1001 Liberty Avenue
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
1-800-866-6040
THE ARCH FUND, INC.
3435 Stelzer Road
Columbus, Ohio 43219-3035
1-800-452-ARCH (2724)
This Combined Proxy Statement/Prospectus is furnished in connection with
the solicitation of proxies by the Board of Trustees of Arrow Funds ("Arrow") in
connection with a Special Meeting (the "Meeting") of Shareholders
("Shareholders") of Arrow's Fixed Income, Municipal Income and Equity Portfolios
to be held on November 12, 1997 at 2:00 p.m. Eastern Time at Federated Investors
Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania 15222-3799, at
which Shareholders will be asked to consider and approve a proposed Agreement
and Plan of Reorganization dated __________, 1997 (the "Reorganization
Agreement"), by and between Arrow and The Arch Fund, Inc. ("Arch") and the
matters contemplated therein. A copy of the Reorganization Agreement is attached
as Appendix I.
Arrow and Arch are open-end, series, management investment companies. As a
result of the recent merger of Mark Twain Bancshares, Inc., the parent of
Arrow's former investment adviser, Mark Twain Bank, and Mercantile
Bancorporation Inc. (the "Holding Company Merger"), Mississippi Valley Advisors
Inc. ("MVA") and its affiliates are now providing investment advisory and other
services to both Arch and Arrow. MVA and its affiliates are subsidiaries of
Mercantile Bancorporation Inc. In reviewing the proposed reorganization (the
"Reorganization"), the Arrow Board considered the consummation of the Holding
Company Merger; the recommendation of MVA that Arrow and Arch be consolidated in
an effort to promote more efficient operations, eliminate duplicative costs and
enhance the distribution of shares by eliminating market overlap; the fact that
the Reorganization would constitute a tax-free reorganization; and the fact that
the interests of Shareholders would not be diluted as a result of the
Reorganization.
The Reorganization Agreement provides that initially each of the following
two investment portfolios of Arrow (collectively, the "Reorganizing Portfolios")
will transfer substantially all its assets and known liabilities to the existing
Arch investment
<PAGE> 9
portfolio (collectively, the "Existing Arch Portfolios")
identified below opposite its name:
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate
Bond Portfolio
Municipal Income Portfolio National Municipal Bond
Portfolio
</TABLE>
The Reorganization Agreement also provides that the following investment
portfolio of Arrow (the "Continuing Portfolio") will subsequently transfer all
its assets and known liabilities to the newly-organized Arch investment
portfolio (the "New Arch Portfolio") identified below opposite its name:
<TABLE>
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
In exchange for the transfers of these assets and liabilities, Arch will
issue shares in the three Arch investment portfolios listed above (collectively,
the "Arch Portfolios") to the corresponding Arrow investment portfolios listed
above (collectively, the "Arrow Portfolios"). The initial transaction between
the Reorganizing Portfolios and the Existing Arch Portfolios is referred to
herein as the "Reorganizing Portfolios Transaction" and the subsequent
transaction between the Continuing Portfolio and the New Arch Portfolio is
referred to herein as the "Continuing Portfolio Transaction." The transactions
are expected to occur on or after November 14, 1997 and November 21, 1997,
respectively.
Prior to the Reorganizing Portfolios Transaction, it is expected that all
of the shareholders in the Arrow Government Money Market Portfolio will redeem
their shares in that portfolio.
The Arrow Portfolios have one class of shares outstanding. The Arch
Government & Corporate Bond and Arch Growth Equity Portfolios have four classes
of shares outstanding (Trust Shares, Institutional Shares, Investor A Shares and
Investor B Shares) and the Arch National Municipal Bond Portfolio has three
classes of shares outstanding (Trust Shares, Investor A Shares and Investor B
Shares). Holders of shares of an Arrow Portfolio will receive Investor A Shares
(which are similar to shares of the Arrow Portfolios) of the corresponding Arch
Portfolio as set forth in the table on page ___ under "Information Relating to
the Proposed Reorganization -- Description of the Reorganization Agreement."
-2-
<PAGE> 10
The Arrow Portfolios will make liquidating distributions of the Arch
Portfolios' shares to the Shareholders of the Arrow Portfolios, so that a holder
of shares in an Arrow Portfolio will receive Investor A Shares of the
corresponding Arch Portfolio with the same aggregate net asset value as the
Shareholder had in the Arrow Portfolio immediately before the transaction.
Following the Reorganization, Shareholders of the Arrow Portfolios will be
shareholders of the corresponding Arch Portfolios, and Arrow will be
deregistered as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act") and its existence will be terminated under state
law.
At [record date], 1997, Mercantile Bank National Association ("Mercantile
Bank"), an affiliate of MVA, owned of record with the power to vote
approximately _____% of the outstanding shares of the Arrow Portfolios on behalf
of customers maintaining fiduciary, employee benefit, retirement plan or other
qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
recognize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The Existing Arch Portfolios currently are conducting investment
operations as described in this Combined Proxy Statement/Prospectus. The New
Arch Portfolio has recently been organized for the purpose of continuing the
investment operations of the Arrow Equity Portfolio.
This Combined Proxy Statement/Prospectus sets forth the information that a
Shareholder of an Arrow Portfolio should know before voting on the
Reorganization Agreement (and related transactions), and should be retained for
future reference. The Prospectus relating to Investor A Shares of the Existing
Arch Portfolios dated March 31, 1997 (as supplemented August 29, 1997), which
describes the operations of those Portfolios, accompanies this Combined Proxy
Statement/Prospectus. Additional information is set forth in the Statements of
Additional Information relating to those Portfolios and this Combined Proxy
Statement/Prospectus, which are dated March 31, 1997 (as revised August 29,
1997) and September _, 1997, respectively, and in the Prospectus dated November
30, 1996 (as supplemented April 25, 1997) and Combined Statement of Additional
Information dated November 30, 1996, relating to the Arrow Portfolios. Each of
these documents is on file with the Securities and Exchange Commission (the
"SEC"), and is available without charge upon oral or written request by writing
or calling either Arrow or Arch at the respective addresses or telephone numbers
indicated above. The information contained in the Prospectus dated November 30,
1996 (as supplemented April 25, 1997) and Combined Statement of Additional
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<PAGE> 11
Information dated November 30, 1996, relating to the Arrow Portfolios is
incorporated herein by reference.
This Combined Proxy Statement/Prospectus constitutes the Proxy Statement
of Arrow for the Meeting of its Shareholders, and Arch's Prospectus for the
Investor A Shares of the Existing Arch Portfolios that have been registered with
the SEC and are to be issued in connection with the Reorganization. Because the
operations of the Arrow Equity Portfolio will be carried on by the New Arch
Portfolio, this Combined Proxy Statement/Prospectus does not constitute a
prospectus for the Investor A Shares of the New Arch Portfolio that will be
issued in the Continuing Portfolio Transaction.
This Combined Proxy Statement/Prospectus is expected to first be sent to
Shareholders on or about September __, 1997.
THE SECURITIES OF THE ARCH PORTFOLIOS HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS COMBINED PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ARROW OR ARCH.
SHARES OF THE ARCH PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, MERCANTILE BANK NATIONAL ASSOCIATION OR ANY OF ITS AFFILIATES.
SHARES OF THE ARCH PORTFOLIOS ARE NOT FEDERALLY INSURED BY, GUARANTEED BY,
OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE WILL VARY AS A RESULT
OF MARKET CONDITIONS OR OTHER FACTORS SO THAT SHARES OF THE ARCH PORTFOLIOS,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AN INVESTMENT
IN THE ARCH PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
-4-
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................................................
Proposed Reorganization.........................................
Reasons for Reorganization......................................
Federal Income Tax Consequences.................................
Overview of the Arrow Portfolios and
Arch Portfolios...............................................
Voting Information..............................................
Risk Factors....................................................
Information Relating to the Proposed Reorganization...................
Description of the Reorganization Agreement.....................
Capitalization..................................................
Federal Income Tax Consequences.................................
Comparison of Investment Policies and Risk Factors....................
Arrow Fixed Income Portfolio and Arch Government &
Corporate Bond Portfolio......................................
Arrow Municipal Income Portfolio and Arch
National Municipal Bond Portfolio.............................
Investment Policies and Risks -- General........................
Investment Limitations..........................................
Purchase and Redemption Information, Exchange
Privileges, Distribution and Pricing..........................
Other Information...............................................
Information Relating to Voting Matters................................
General Information.............................................
Shareholder and Board Approvals.................................
Appraisal Rights................................................
Quorum..........................................................
Annual Meetings.................................................
Additional Information about Arch.....................................
Additional Information about Arrow....................................
Litigation............................................................
Financial Statements..................................................
Other Business........................................................
Shareholder Inquiries.................................................
Appendix I - Agreement and Plan of Reorganization..................... I-1
Appendix II - Management's Discussion of Fund Performance ............ II-1
Appendix III - Shareholder Transactions and Services................. III-1
</TABLE>
<PAGE> 13
SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the related transactions, and is
qualified by reference to the more complete information contained elsewhere in
this Combined Proxy Statement/Prospectus, the Prospectuses and Statements of
Additional Information of Arrow and Arch, and the Reorganization Agreement
attached to this Combined Proxy Statement/Prospectus as Appendix I. Arrow's
Combined Annual Report to Shareholders and the most recent Combined Semi-Annual
Report to Shareholders may be obtained free of charge by calling 1-800-866-6040
(Texas residents call 1-800-618-8573) or by writing to Arrow c/o Federated
Investors, Federated Investors Tower, 19th Floor, 1001 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3779. Arch's Annual Report to Shareholders and
the most recent Semi-Annual Report to Shareholders may be obtained free of
charge by calling 1-800-452-ARCH (2724) or by writing to Arch at 3435 Stelzer
Road, Columbus, Ohio 43219-3085.
PROPOSED REORGANIZATION. Based upon their evaluation of the relevant information
presented to them, and in light of their fiduciary duties under federal and
state law, Arrow's and Arch's Boards of Trustees and Directors, respectively,
including their members who are not "interested persons" within the meaning of
the 1940 Act, have determined that the proposed Reorganization is in the best
interests of Arrow's and Arch's Shareholders, respectively, and that the
interests of existing Shareholders of Arrow and Arch, respectively, will not be
diluted as a result of such Reorganization.
The Cover Page and pages ___-___ hereof summarize the proposed
Reorganization.
REASONS FOR THE REORGANIZATION. The primary reason for the Reorganization is the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. Consummation of the Holding Company Merger on April 25, 1997
resulted in the automatic termination of the existing investment advisory
agreement between the Arrow Portfolios and Mark Twain Bank, a wholly-owned
subsidiary of Mark Twain Bancshares, Inc. In anticipation of the Holding Company
Merger and to provide continuity in investment advisory services to the Arrow
Portfolios, shareholders of the Arrow Portfolios approved a new investment
advisory agreement with MVA, a wholly-owned subsidiary of Mercantile Bank and an
indirect wholly-owned subsidiary of Mercantile Bancorporation Inc., effective
April 25, 1997.
MVA has recommended that each of the Arrow Portfolios be reorganized as
described in this Combined Proxy Statement/Prospectus in an effort to promote
more efficient operations, eliminate duplicative costs and enhance the
distribution of shares by eliminating market overlap. In light of this
recommendation, after consideration of the reasons
<PAGE> 14
therefor and the proposed operations of the combined portfolios after the
Reorganization, and in consideration of the fact that the Reorganization will be
tax-free and will not dilute the interests of Arrow Shareholders, the Board of
Trustees of Arrow has authorized the Agreement and Plan of Reorganization and
recommended approval of the Reorganization by Shareholders.
FEDERAL INCOME TAX CONSEQUENCES. Shareholders of the Arrow Portfolios will
recognize no gain or loss for federal income tax purposes on their receipt of
Investor A Shares of the Arch Portfolios. Shareholders of the Arch Portfolios
will have no federal tax consequences from the Reorganization. The Arch
Portfolios will incur no federal tax consequences from their issuance of
Investor A Shares in the Reorganization. See "Information Relating to the
Proposed Reorganization -- Federal Income Tax Consequences."
OVERVIEW OF THE ARROW PORTFOLIOS AND ARCH PORTFOLIOS. There are no material
differences between the investment objectives and policies of the Continuing
Portfolio and the New Arch Portfolio. The investment objectives and policies of
the Reorganizing Portfolios are similar to those of the corresponding Existing
Arch Portfolios.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The Arrow Fixed Income Portfolio's investment objective is current income.
The Arch Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital.
Each Portfolio pursues its objective by investing in a diversified portfolio of
U.S. Government and investment grade corporate debt securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Arrow Municipal Income Portfolio's investment objective is current
income which is exempt from federal regular income tax. The Arch National
Municipal Bond Portfolio's investment objective is to seek as high a level of
current income exempt from regular federal income tax as is consistent with
conservation of capital. Each Portfolio pursues its objective by investing at
least 80% of its total assets in a diversified portfolio of municipal
securities.
See "Comparison of Investment Policies and Risk Factors" below and the
Arrow Prospectus for the Arrow Portfolios and the Arch Prospectus for Investor A
Shares of the Existing Arch Portfolios, which are incorporated herein by
reference, for a description of the similarities and differences between the
investment objectives and policies of the Reorganizing Portfolios and the
Existing Arch Portfolios.
-2-
<PAGE> 15
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARROW PORTFOLIOS. MVA serves as
investment adviser for Arrow and is entitled to receive advisory fees from the
Arrow Portfolios, computed and paid daily, at the following annual rates,
expressed as a percentage of average daily net assets:
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR
ENDED SEPTEMBER 30, 1996
ARROW PORTFOLIOS ADVISORY FEE (AFTER FEE WAIVERS)*
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income Portfolio .60% .59%
Municipal Income Portfolio .70% .11%
Equity Portfolio .75% .72%
============================================================================================
</TABLE>
* Paid to Mark Twain Bank pursuant to the investment advisory
agreement then in effect.
Pursuant to the Arrow investment advisory agreement, MVA provides
investment research and supervision to the Arrow Portfolios and conducts a
continuous program of investment evaluation and of appropriate sale or other
disposition of each Arrow Portfolio's assets. MVA also directs the investments
of the Arrow Portfolios in accordance with the Portfolios' investment
objectives, policies and limitations, and creates and maintains all necessary
books and records.
Administrative services are provided to the Arrow Portfolios by Federated
Administrative Services ("Federated"), a subsidiary of Federated Investors. For
its services, Federated receives a fee, calculated and paid daily, at the annual
rate of .15% of the average aggregate daily net assets of all investment
portfolios of Arrow up to $250 million of such aggregate assets, .125% of the
next $250 million of such aggregate assets, .10% of the next $250 million of
such aggregate assets, and .075% of such aggregate assets in excess of $750
million. The minimum annual administration fee for each investment portfolio of
Arrow is $50,000. For the fiscal year ended September 30, 1996, Federated
received administration fees at the effective annual rates of .17%, .29% and
.15% of the average daily net assets of the Fixed Income, Municipal Income and
Equity Portfolios, respectively.
Federated Services Company, a subsidiary of Federated Investors, serves as
Arrow's transfer agent, dividend disbursing agent and portfolio recordkeeper.
Mercantile Bank provides custodial services to each Arrow Portfolio.
Federated Securities Corp. ("FSC"), a subsidiary of
Federated Investors, is the principal distributor for Arrow.
-3-
<PAGE> 16
Under the distribution agreement, FSC acts as the agent of Arrow in connection
with the offering of shares of each Arrow Portfolio.
Arrow has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act (the "Arrow 12b-1 Plan"). Under the Arrow 12b-1 Plan, the shares of
each Arrow Portfolio bear the expense of distribution fees payable to FSC at an
annual rate of up to .25% of the average daily net asset value of such
Portfolio's outstanding shares to finance activities which are principally
intended to result in the sale of shares subject to the Arrow 12b-1 Plan. FSC
may enter into agreements with financial institutions which provide distribution
and/or administrative services as agents for their customers who beneficially
own shares. Administrative services provided by such financial institutions may
include, without limitation: providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.
The Arrow 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arrow Portfolios under
the Arrow 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by FSC for distribution purposes. FSC may earn a profit from
payments made by Arrow Portfolios under the Arrow 12b-1 Plan.
For the fiscal year ended September 30, 1996, FSC was entitled to receive
fees from the Arrow Portfolios pursuant to the Arrow 12b-1 Plan in the aggregate
amount of $238,312, all of which was voluntarily waived. Such fees represent
.25% of the average daily net assets of the Arrow Portfolios during such period.
CERTAIN ARRANGEMENTS WITH SERVICE PROVIDERS - ARCH PORTFOLIOS. MVA serves as
investment adviser for Arch and is entitled to receive advisory fees from the
Arch Portfolios, computed daily and paid monthly, at the following annual rates,
expressed as a percentage of average daily net assets:
-4-
<PAGE> 17
<TABLE>
<CAPTION>
============================================================================================
ACTUAL ADVISORY
FEE FOR YEAR/PERIOD*
ENDED NOVEMBER 30, 1996
ARCH PORTFOLIO ADVISORY FEE (AFTER WAIVERS)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Government & Corporate
Bond Portfolio .45% .45%
National Municipal Bond
Portfolio .55% .00%
Growth Equity Portfolio .75% .00%**
============================================================================================
</TABLE>
* For the period November 18, 1996 (commencement of operations) through
November 30, 1996 with respect to the Arch National Municipal Bond
Portfolio.
** The Arch Growth Equity Portfolio has not yet commenced operations.
As investment adviser, MVA manages the investments of each Arch Portfolio,
makes decisions with respect to and places orders for all purchases and sales of
each Portfolio's securities, and maintains certain records relating to such
purchases and sales.
See "Management of the Fund--Investment Adviser and Sub-Adviser" in Arch's
Prospectus for Investor A Shares of the Existing Arch Portfolios, which
accompanies this Combined Proxy Statement/Prospectus and which is incorporated
herein by reference, for additional information on MVA.
Administrative services are provided to the Arch Portfolios by BISYS Fund
Services Ohio, Inc. ("BISYS Ohio"), a subsidiary of The BISYS Group, Inc. For
its services, BISYS Ohio is entitled to receive a fee from each Arch Portfolio,
computed daily and payable monthly, at the annual rate of 0.20% of each
Portfolio's average daily net assets. For the fiscal year ended November 30,
1996, BISYS Ohio received administration fees (net of fee waivers) at the
effective annual rate of 0.10% of the average daily net assets of the Arch
Government & Corporate Bond Portfolio and 0.05% of the average daily net assets
of the Arch National Municipal Bond Portfolio. See "Management of the Fund --
Administrator" in Arch's Prospectus for Investor A Shares of the Existing Arch
Portfolios which accompanies this Combined Proxy/Prospectus and which is
incorporated herein by reference, for additional information on Arch's
administrator.
BISYS Ohio also serves as Arch's transfer and dividend disbursing agent.
See "Management of the Fund -- Custodian, SubCustodian and Transfer Agent" in
Arch's Prospectus for Investor A
-5-
<PAGE> 18
Shares of the Existing Arch Portfolios, which accompanies this Combined
Proxy/Prospectus and which is incorporated herein by reference, for additional
information on Arch's transfer and dividend disbursing agent.
Custodial services are provided to Arch by Mercantile Bank. See
"Custodian, Sub-Custodian and Transfer Agent" in Arch's Prospectus for Investor
A Shares of the Existing Arch Portfolios, which accompanies this Combined Proxy
Statement/Prospectus which is incorporated herein by reference, for additional
information about Arch's custodian.
BISYS Fund Services ("BISYS"), an affiliate of BISYS Ohio, serves as
distributor of the shares of Arch's investment portfolios.
Arch has adopted a Distribution and Services Plan pursuant to Rule 12b-1
under the 1940 Act (the "Arch 12b-1 Plan") with respect to Investor A Shares of
its investment portfolios. Under the Arch 12b-1 Plan, Investor A Shares of each
of the Arch Portfolios bear the expense of (i) distribution fees paid to BISYS
at an annual rate of up to .10% of the average daily net assets of such
Portfolio's outstanding Investor A Shares in consideration for distribution
services and the assumption of related expenses primarily intended to result in
the sale of Investor A Shares, and (ii) shareholder servicing fees paid to
securities brokers, dealers and other such organizations ("Service
Organizations") for administrative support services provided to their customers
who are the beneficial owners of Investor A Shares at the annual rate of up to
.20% of the average daily net asset value of such Portfolio's Investor A Shares
beneficially owned by such customers. The Arch 12b-1 Plan authorizes Arch to
enter into servicing agreements with Service Organizations that require the
Service Organizations receiving such compensation to perform certain services
with respect to the beneficial owners of Investor A Shares of an Arch Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries regarding their
investments.
The Arch 12b-1 Plan is a "compensation" type plan as opposed to a
"reimbursement" type plan. Accordingly, payments by the Arch Portfolios under
the Arch 12b-1 Plan are based on the expressed fee rather than on specific
amounts expended by BISYS for distribution purposes. BISYS may earn a profit
from payments made by the Arch Portfolios under the Arch 12b-1 Plan.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to BISYS and other broker-dealers pursuant to the Arch 12b-1 Plan in
the aggregate amount of $15,982, which represents .30% of the average net assets
of the Existing Arch Portfolios' Investor A Shares during that period subject
to the Arch 12b-1 Plan.
-6-
<PAGE> 19
Arch has adopted an Administrative Services Plan (the "Arch Services
Plan") with respect to Trust Shares of its investment portfolios. Under the Arch
Services Plan, Trust Shares of each of the Arch Portfolios bear the expense of
shareholder servicing fees paid to Service Organizations for administrative
services provided to their customers who are the beneficial owners of Trust
Shares at the annual rate of up to .30% of the average daily net asset value of
such Portfolio's Trust Shares beneficially owned by such customers. Like the
Arch 12b-1 Plan, the Arch Services Plan authorizes Arch to enter into servicing
agreements with Service Organizations that require the Service Organizations
receiving such compensation to perform certain services with respect to the
beneficial owners of Trust Shares of an Arch Portfolio. These services are the
same services which Service Organizations are required to provide under the Arch
12b-1 Plan described above.
For the fiscal year ended November 30, 1996, the Existing Arch Portfolios
paid fees to Service Organizations pursuant to the Arch Services Plan in the
aggregate amount of $157 which represents .30% of the average daily net assets
of the Existing Arch Portfolios' Trust Shares during that period subject to the
Plan.
COMPARATIVE FEE TABLES. Set forth in the tables below is information regarding
(i) the fees and expenses paid by shares of each Arrow Portfolio as of its most
recent fiscal year, restated to reflect the fees and expenses that each Arrow
Portfolio expects to incur during the current fiscal year, (ii) the fees and
expenses paid by each Existing Arch Portfolio as of its most recent fiscal year,
restated in the case of the Arch National Municipal Bond Portfolio to reflect
the fees and expenses which that Portfolio expects to incur during the current
fiscal year, or, in the case of the New Arch Portfolio, the fees and expenses
which that Portfolio expects to incur during the current fiscal year, and (iii)
estimated fees and expenses on a pro forma basis giving effect to the proposed
Reorganization.
-7-
<PAGE> 20
COMPARATIVE FEE TABLES
<TABLE>
<CAPTION>
===================================================================================================================================
Arch
Arrow Government &
Fixed Income Corporate Bond Pro Forma Combined
Portfolio Portfolio Portfolio
------------ ---------------------------------- ------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .60% .45% .45% .45% .45%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .65% .20%(5)(6) .20%(5)(6) .20%(5)(6) .20%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.25%(3) .95%(6) .65%(6) .95%(6) .65%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Fixed Income Portfolio can pay up to 0.25% of its average daily
net assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive
all 12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Fixed Income Portfolio in the
table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.27% for the fiscal year ended September 30, 1996. The
Total Operating Expenses for the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 1.50% absent the voluntary waivers
detailed in note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Government &
Corporate Bond Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.30% and .30% for Investor A Shares and Trust Shares, respectively, of the
Arch Government & Corporate Bond Portfolio, and Total Operating Expenses
would be 1.05% and 1.05% for Investor A Shares and Trust Shares,
respectively, of the Arch Government & Corporate Bond Portfolio.
-8-
<PAGE> 21
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Fixed Income Portfolio(1) $47 $73 $101 $181
Arch Government & Corporate
Bond Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
Pro Forma Combined Portfolio
Investor A Shares(1) $54 $74 $95 $156
Trust Shares $ 7 $21 $36 $ 81
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-9-
<PAGE> 22
<TABLE>
<CAPTION>
===================================================================================================================================
Arrow Arch
Municipal Income National Municipal Pro Forma Combined
Portfolio Portfolio Portfolio
----------------- ---------------------------------- ----------------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(5) None 4.50%(5) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
----
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(after fee waivers) .11%(2) .00%(6) .00%(6) .00%(6) .00%(6)
12b-1 Fees (after fee waivers) .00%(3) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) 1.21% .12%(7)(8) .12%(7)(8) .12%(7)(8) .12%(7)(8)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.32%(4) .42%(8) .12%(8) .42%(8) .12%(8)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) Without fee waivers, the Advisory Fee for the Arrow Municipal Income
Portfolio would be .70%.
(3) The Arrow Municipal Income Portfolio can pay up to 0.25% of its average
daily net assets as a 12b-1 fee. For the foreseeable future, FSC plans to
waive all 12b-1 fees.
(4) The Annual Operating Expenses for the Arrow Municipal Income Portfolio in
the table above are based on expenses expected to be incurred during the
fiscal year ending September 30, 1997. The Total Operating Expenses for
the Portfolio were 1.20% for the fiscal year ended September 30, 1996. The
Total Operating Expenses of the Portfolio during the fiscal year ended
September 30, 1997 are expected to be 2.16% absent the voluntary waivers
detailed in notes (2) and (3).
(5) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(6) Without fee waivers, Advisory Fees for the Arch National Municipal Bond
Portfolio would be .55%.
(7) Without fee waivers, administration fees for the Arch National Municipal
Bond Portfolio would be .20%.
(8) Without fee waivers and/or expense reimbursements, Other Expenses would be
.22% and .57% for Investor A Shares and Trust Shares, respectively, of the
Arch National Municipal Bond Portfolio and Total Operating Expenses would
be 1.07% and 1.07% for Investor A Shares and Trust Shares, respectively,
of the Arch National Municipal Bond Portfolio.
-10-
<PAGE> 23
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Municipal Income $48 $75 $105 $188
Portfolio(1)
Arch National Municipal
Bond Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $49 $58 N/A N/A
Trust Shares $ 1 $ 4 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-11-
<PAGE> 24
<TABLE>
<CAPTION>
==================================================================================================================================
Arrow Arch
Equity Growth Equity Pro Forma Combined
Portfolio Portfolio Portfolio
--------- ---------------------------------- ----------------------------------
Investor A Shares Trust Shares Investor A Shares Trust Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 3.50%(1) 4.50%(4) None 4.50%(4) None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price) None None None None None
Contingent Deferred Sales
Charge (as a percentage of
offering price) None None None None None
Redemption Fee (as a percentage
of amount redeemed) None None None None None
Exchange Fee None None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees .75% .75% .75% .75% .75%
12b-1 Fees (after fee waivers) .00%(2) .30% .00% .30% .00%
Other Expenses
(after fee waivers and
expense reimbursements) .39% .23%(5)(6) .23%(5)(6) .23%(5)(6) .23%(5)(6)
---- ---- ---- ---- ----
Total Operating Expenses
(after fee waivers and
expense reimbursements) 1.14%(3) 1.28%(6) .98%(6) 1.28%(6) .98%(6)
==== ==== ==== ==== ====
===================================================================================================================================
</TABLE>
(1) Shareholders purchasing pursuant to the wrap fee program offered by
Mercantile Investment Services, Inc. (formerly Mark Twain Brokerage
Services, Inc.) are not subject to the sales charge. However, an annual
wrap fee of 2.00% will be charged by Mercantile Investment Services, Inc.
to these accounts. Additional charges may be charged by institutions in
connection with the wrap fee program.
(2) The Arrow Equity Portfolio can pay up to 0.25% of its average daily net
assets as a 12b-1 fee. For the foreseeable future, FSC plans to waive all
12b-1 fees.
(3) The Annual Operating Expenses for the Arrow Equity Portfolio in the table
above are based on expenses expected to be incurred during the fiscal year
ending September 30, 1997. The Total Operating Expenses for the Portfolio
were 1.17% for the fiscal year ended September 30, 1996. The Total
Operating Expenses of the Portfolio during the fiscal year ended September
30, 1997 are expected to be 1.39% absent the voluntary waivers detailed in
note (2).
(4) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares-- Reduced Sales Charges--Investor A Shares of the Equity and Bond
Portfolios" in the Arch Prospectus for Investor A Shares of the Existing
Arch Portfolios which accompanies this Combined Proxy Statement/Prospectus
and which is incorporated herein by reference.
(5) Without fee waivers, administration fees for the Arch Growth Equity
Portfolio would be .20%.
(6) Without fee waivers and/or expense reimbursements, Other Expenses would be
.35% and .65% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio and Total Operating Expenses would be 1.40%
and 1.40% for Investor A Shares and Trust Shares, respectively, of the
Arch Growth Equity Portfolio.
-12-
<PAGE> 25
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return, and (2) redemption at the end of the following
periods:
<TABLE>
<CAPTION>
====================================================================================
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arrow Equity Portfolio(1) $46 $70 $96 $169
Arch Growth Equity Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $45 N/A N/A
Pro Forma Combined Portfolio
Investor A Shares(1) $57 $84 N/A N/A
Trust Shares $10 $31 N/A N/A
====================================================================================
</TABLE>
(1) Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
-13-
<PAGE> 26
EXPENSE RATIOS -- ARROW PORTFOLIOS. The following table sets forth (i) the
ratios of operating expenses to average net assets of the Arrow Portfolios for
the fiscal year ended September 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arrow
Portfolios for the six-month period ended March 31, 1997 (a) after fee waivers
and expense reimbursements and (b) absent fee waivers and expense
reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
------------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.27% 1.53%
Municipal Income Portfolio 1.20% 2.04%
Equity Portfolio 1.17% 1.45%
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MARCH 31, 1997
-------------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARROW PORTFOLIOS
- ----------------
<S> <C> <C>
Fixed Income Portfolio 1.32% 1.57%
Municipal Income Portfolio 1.37% 2.21%
Equity Portfolio 1.14% 1.39%
</TABLE>
-14-
<PAGE> 27
EXPENSE RATIOS -- ARCH PORTFOLIOS. The following tables set forth (i) the ratios
of operating expenses to average net assets of the Arch Portfolios for the
fiscal year ended November 30, 1996 (a) after fee waivers and expense
reimbursements, and (b) absent fee waivers and expense reimbursements, and (ii)
the annualized ratios of operating expenses to average net assets of the Arch
Portfolios for the six-month period ended May 31, 1997 (a) after fee waivers and
expense reimbursements and (b) absent fee waivers and expense reimbursements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30, 1996
-----------------------------------
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% .75%
National Municipal Bond
Portfolio
Investor A Shares .42%* 1.12%*
Trust Shares .12%* .82%*
Growth Equity Portfolio
Investor A Shares ** **
Trust Shares ** **
</TABLE>
* Annualized
** Had not commenced operations at November 30, 1996.
-15-
<PAGE> 28
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED MAY 31, 1997
-----------------------------------
ANNUALIZED ANNUALIZED
RATIO OF OPERATING RATIO OF OPERATING
EXPENSES TO AVERAGE EXPENSES TO AVERAGE
NET ASSETS AFTER NET ASSETS ABSENT
FEE WAIVERS AND FEE WAIVERS AND
EXPENSE EXPENSE
REIMBURSEMENTS REIMBURSEMENTS
-------------- --------------
ARCH PORTFOLIOS
- ---------------
<S> <C> <C>
Government & Corporate
Bond Portfolio
Investor A Shares .95% 1.05%
Trust Shares .65% 1.05%
National Municipal Bond
Portfolio
Investor A Shares .42% 1.07%
Trust Shares .12% 1.07%
Growth Equity Portfolio
Investor A Shares N/A N/A
Trust Shares N/A N/A
</TABLE>
* Had not commenced operations at May 31, 1997.
VOTING INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with a Special Meeting of Shareholders to be held at Federated
Investors Tower, 1001 Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania, on
Wednesday, November 12, 1997 at 2:00 p.m. Eastern Time (such meeting and any
adjournments thereof hereinafter referred to as the "Meeting"). Only
Shareholders of record at the close of business on __________, 1997 will be
entitled to notice of and to vote at the Meeting. Each share or fraction thereof
is entitled to one vote or fraction thereof and all shares will vote separately
by Portfolio. Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon, or if no specification is made, the
persons named as proxies will vote in favor of each proposal set forth in the
Notice of Meeting. Proxies may be revoked at any time before they are exercised
by submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person. For additional
information, including a description of the Shareholder vote required for
approval of the Reorganization Agreement and related transactions contemplated
thereby, see "Information Relating to Voting Matters."
RISK FACTORS. The following discussion highlights the principal risk factors
associated with an investment in the Reorganizing Portfolios and the Existing
Arch Portfolios and is qualified in
-16-
<PAGE> 29
its entirety by the more extensive discussion of risk factors in "Comparison of
Investment Policies and Risk Factors."
Because of the similarities of the investment objectives and policies of
the Reorganizing Portfolios and the corresponding Existing Arch Portfolios,
management believes that an investment in an Existing Arch Portfolio involves
risks that are similar to those of the corresponding Reorganizing Portfolio.
These investment risks include those typically associated with investing in a
diversified portfolio of government or investment grade corporate bonds in the
case of the Arrow Fixed Income Portfolio and in a diversified portfolio of
municipal securities in the case of the Arrow Municipal Income Portfolio.
There are differences, however, between the Reorganizing Portfolios and
the Existing Arch Portfolios, as described below under "Comparison of Investment
Policies and Risk Factors." These differences can result in different risks. For
example, the Arrow Fixed Income Portfolio will only invest in investment grade
debt securities, i.e. securities rated in one of the four highest rating
categories assigned by one or more rating agencies or, if unrated, determined by
MVA to be of comparable quality. The Arch Government & Corporate Bond Portfolio
also will only invest in investment grade debt securities, provided, however,
that at least 65% of its assets will be invested in debt securities rated within
the three highest rating categories assigned by one or more rating agencies or,
if unrated, determined by MVA to be of comparable quality. Similarly, the Arrow
Municipal Income Portfolio will only invest in investment grade municipal
securities. The Arch National Municipal Bond Portfolio also will only invest in
investment grade municipal securities, provided, however, that at least 65% of
its assets will be invested in municipal securities rated in one of the three
highest rating categories assigned by one or more rating agencies or, if
unrated, determined by MVA to be of comparable quality. Debt securities,
including municipal securities, rated in the lowest investment grade rating
category do not have outstanding investment characteristics and may have
speculative characteristics as well.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in
investment grade debt securities of foreign issuers. The Arch Government &
Corporate Bond Portfolio may invest up to 10% of its total assets in
dollar-denominated debt obligations of foreign issuers, either directly or
indirectly through American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). Investments in the securities of foreign issuers, whether
made directly or indirectly, carry certain risks not ordinarily associated with
investments in the securities of domestic issuers.
The ARCH Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase put and call options listed on a national securities
exchange and issued by the
-17-
<PAGE> 30
Options Clearing Corporation and write covered call options (and covered put
options in the case of the Arrow Fixed Income Portfolio) listed on a national
securities exchange and issued by the Options Clearing Corporation. Unlike the
Arch Government & Corporate Bond Portfolio, the Arrow Fixed Income Portfolio may
also purchase and write unlisted over-the-counter options which are not subject
to the protections afforded by the Options Clearing Corporation. The Arrow
Municipal Income Portfolio may purchase and write listed and unlisted options as
described above, whereas the Arch National Municipal Bond Portfolio may not
enter into options transactions.
The Arch Government & Corporate Bond Portfolio and the Arrow Fixed Income
Portfolio may each purchase mortgage-related asset-backed securities. Unlike the
Arrow Fixed Income Portfolio, the Arch Government & Corporate Bond Portfolio may
purchase non-mortgage-related asset-backed securities, which involve certain
risks that are not presented by mortgage-related asset-backed securities arising
primarily from the nature of the underlying collateral (i.e. credit card
receivables and automobile loan receivables as opposed to real estate
mortgages).
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may enter into repurchase agreements and reverse repurchase
agreements. Default by a counterparty to a repurchase agreement could expose a
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by a Portfolio
will decline below the repurchase price which the Portfolio is obligated to pay.
The per share price of the Reorganizing Portfolios and the Existing
Portfolios will fluctuate with changes in the value of the investments held by
each Portfolio. Generally, the market value of debt securities will vary
inversely to changes in prevailing interest rates. There is no assurance that
any Portfolio will achieve its investment objective.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
Arrow has entered into an agreement whereby its investment portfolios
(other than the Arrow Government Money Market Portfolio) are to be acquired by
investment portfolios of Arch. Significant provisions of the Reorganization
Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Reorganization Agreement, a copy of which is
attached as Appendix I to this Combined Proxy Statement/Prospectus.
DESCRIPTION OF THE REORGANIZATION AGREEMENT. There are four separate Arrow
investment portfolios. Prior to the consummation of the transactions
contemplated by the Reorganization Agreement,
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<PAGE> 31
it is anticipated that shareholders of the Arrow Government Money Market
Portfolio will redeem their shares in that portfolio. The initial transaction in
the Reorganization is that the assets of the two Arrow Reorganizing Portfolios
will be acquired by two similar investment portfolios currently offered by Arch.
Afterwards, the Arrow Continuing Portfolio will be acquired by the new Arch
portfolio which has been organized to continue its operations.
The Reorganization Agreement provides, first, that substantially all of
the assets and liabilities of the Reorganizing Portfolios will be transferred to
the Existing Arch Portfolios identified in the table below. Not less than seven
calendar days thereafter, substantially all of the assets and liabilities of the
Continuing Portfolio will be transferred to the New Arch Portfolio identified in
the table below. The holders of shares of an Arrow Portfolio will receive
Investor A Shares of the corresponding Arch Portfolio identified in the table.
The number of Investor A Shares to be issued by each Arch Portfolio will have an
aggregate net asset value equal to the aggregate net asset value of the shares
of the corresponding Arrow Portfolio as of the regular close of the New York
Stock Exchange, currently 4:00 p.m. Eastern Time, on the same business day on
which each transaction will be consummated. The number of Investor A Shares
received by an Arrow shareholder may be different from the number of Arrow
shares previously held, but the value of such shares in the aggregate will equal
the aggregate value held previously by such shareholders. Arrow shareholders
will not pay a sales charge in connection with their receipt of Investor A
Shares of the Arch Portfolios.
<TABLE>
<CAPTION>
REORGANIZING PORTFOLIOS EXISTING ARCH PORTFOLIOS
- ----------------------- ------------------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio
Municipal Income Portfolio National Municipal Bond Portfolio
<CAPTION>
CONTINUING PORTFOLIO NEW ARCH PORTFOLIO
- -------------------- ------------------
<S> <C>
Equity Portfolio Growth Equity Portfolio
</TABLE>
The Reorganization Agreement provides that Arrow will declare a dividend
or dividends prior to the Reorganizing Portfolios Transaction which, together
with all previous dividends, will have the effect of distributing to the
Shareholders of each of the Reorganizing Portfolios all undistributed ordinary
income earned and net capital gains realized up to and including the effective
time of the Reorganizing Portfolios Transaction.
Following the transfers of assets and liabilities from the Arrow
Portfolios to the Arch Portfolios, and the issuances of
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<PAGE> 32
Investor A Shares by the Arch Portfolios to the Arrow Portfolios, each of the
Arrow Portfolios will distribute the Investor A Shares of the Arch Portfolios
pro rata to the holders of shares of the Arrow Portfolios as described above in
liquidation of the Arrow Portfolios. Each holder of shares of an Arrow Portfolio
will receive an amount of Investor A Shares of the corresponding Arch Portfolio
of equal value, plus the right to receive any declared and unpaid dividends or
distributions. Following the Reorganization, Shareholders of the Arrow
Portfolios will be shareholders of the corresponding Arch Portfolios, and Arrow
will be deregistered as an investment company under the 1940 Act and its
existence terminated under state law.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of customers maintaining fiduciary, employee benefit, retirement plan or
other qualified accounts at Mercantile Bank. Arch and Arrow have been advised by
Mercantile Bank that it intends to exchange the Investor A Shares of the Arch
Portfolios that it receives in these capacities for Trust Shares of the same
Arch Portfolios. Mercantile Bank intends to effect this exchange, which it has
been advised by Drinker Biddle & Reath LLP will not cause shareholders to
realize taxable gains or losses, promptly after the Reorganization because it
believes that Trust Shares are more appropriate than Investor A Shares for these
customers.
The stock transfer books of Arrow will be permanently closed after the
Reorganization. If any Arrow Portfolio shares held by a former Arrow Portfolio
shareholder are represented by share certificates, the certificate must be
surrendered to Arch's transfer agent for cancellation before the Arch Portfolio
shares issued to the shareholder in the Reorganization may be redeemed. Arch
will not issue share certificates with respect to the Arch Portfolio shares
issued in connection with the Reorganization.
The Reorganization is subject to a number of conditions, including
approval of the Reorganization Agreement and the transactions contemplated
thereby as described in this Combined Proxy Statement/Prospectus by the
Shareholders of the Arrow Portfolios; the receipt of certain legal opinions
described in the Reorganization Agreement; the receipt of certain certificates
from the parties concerning the continuing accuracy of the representations and
warranties in the Reorganization Agreement and other matters; and the parties'
performance in all material respects of their agreements and undertakings in the
Reorganization Agreement. Assuming satisfaction of the conditions in the
Reorganization Agreement, the Reorganizing Portfolios Transaction is expected to
occur on or after November 14, 1997 and the Continuing Portfolio Transaction is
expected to occur on or after November 21, 1997.
Arch and Arrow will each be responsible for the payment of its own
expenses incurred in connection with the Reorganization. Arch estimates that
it will bear approximately $_____ of the total cost of the Reorganization and
Arrow estimates that it will bear approximately $_____ of the total cost of the
Reorganization. If the Reorganization is consummated, the expenses of the Arrow
Portfolios will be assumed by the corresponding Arch Portfolios.
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<PAGE> 33
The Reorganization may be terminated at any time prior to its consummation
by Arch or Arrow if the conditions specified in the Reorganization Agreement are
not satisfied or by the mutual consent of Arch and Arrow. The Reorganization
Agreement provides further that at any time prior to or (to the fullest extent
permitted by law) after approval of the Reorganization Agreement by the
Shareholders of Arrow (a) the parties thereto may, by written agreement approved
by their respective Boards of Trustees or Directors or authorized officers and
with or without the approval of their shareholders, amend any of the provisions
of the Reorganization Agreement; and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations with or without the approval of such party's shareholders.
Section 15(f) of the 1940 Act provides that when a change in the control
of an investment adviser occurs, the investment adviser or any of its affiliated
persons may receive any amount or benefit in connection therewith under certain
conditions. One condition is that for three years thereafter, at least 75% of
the board of directors of the surviving investment company are not "interested
persons" of the company's investment adviser or of the investment adviser of the
terminating investment company. Another condition is that no "unfair burden" is
imposed on the investment company as a result of the transaction relating to the
change of control, or any express or implied terms, conditions or understandings
applicable thereto. The term "unfair burden" as defined in the 1940 Act includes
any arrangement during the two-year period after the transaction whereby the
investment adviser (or predecessor or successor adviser), or any "interested
person" of any such adviser, receives or is entitled to receive any
compensation, directly or indirectly, from the investment company or its
security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Arch intends to
comply with the conditions set forth in Section 15(f).
In its consideration and approval of the Reorganization at a meeting on
August 18, 1997, the Board of Trustees of Arrow considered the effect of the
Holding Company Merger of Mark Twain Bancshares, Inc. and Mercantile
Bancorporation Inc. on Arrow; the recommendation of MVA with respect to the
proposed consolidation of Arrow and Arch; the tax-free nature of the
Reorganization; and the fact that the interests of Shareholders would not be
diluted as a result of the Reorganization.
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<PAGE> 34
After consideration of all of the foregoing factors, together with certain
other factors and information considered to be relevant, Arrow's Board of
Trustees unanimously approved the Reorganization Agreement and directed that it
be submitted to Shareholders for approval. ARROW'S BOARD OF TRUSTEES RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE REORGANIZATION AGREEMENT.
The Board of Trustees of Arrow has not determined what action it will take
in the event the Shareholders of any Arrow Portfolio fail to approve the
Reorganization Agreement or for any reason the Reorganization is not
consummated. In either such event, the Trustees may choose to consider
alternative dispositions of the Arrow Portfolios' assets, including the sale of
assets to, or merger with, another investment company, or the possible
liquidation of any of the Arrow Portfolios.
At a meeting held on June 17, 1997, the Arch Board of Directors considered
the proposed Reorganization. Based upon their evaluation of the relevant
information provided to them, and in light of their fiduciary duties under
federal and state law, the Board of Directors unanimously determined that the
proposed Reorganization was in the best interests of the Arch Portfolios and
their respective shareholders and that the interests of existing shareholders of
the Arch Portfolios would not be diluted as a result of effecting the
transaction.
CAPITALIZATION. Because the Reorganizing Portfolios will be combined in
the Reorganization with the Existing Arch Portfolios, the total capitalization
of each of the Existing Arch Portfolios after the Reorganization is expected to
be greater than the current capitalization of the corresponding Reorganizing
Portfolios. The following table sets forth (i) the capitalization of each of the
Reorganizing Portfolios as of May 31, 1997; (ii) the capitalization of each of
the Existing Arch Portfolios as of May 31, 1997; and (iii) the pro forma
capitalization of each of the Existing Arch Portfolios as adjusted to give
effect to the Reorganization. If consummated, the capitalization of each
Portfolio is likely to be different at the time of the Reorganizing Portfolios
Transaction as a result of daily share purchase and redemption activity in the
Portfolios.
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<PAGE> 35
<TABLE>
<CAPTION>
===================================================================================================
ARCH
ARROW GOVERNMENT &
FIXED INCOME CORPORATE BOND PRO FORMA
PORTFOLIO PORTFOLIO COMBINED PORTFOLIO
===================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $28,125,845 $4,606,807 $32,732,652
Trust Shares N/A $141,220,745 $141,220,745
Shares Outstanding
Shares/Investor A Shares 2,898,396 458,760 3,260,224
Trust Shares N/A 14,062,830 14,062,830
Net Asset Value Per Share
Shares/Investor A Shares $9.59 $10.04 $10.04
Trust Shares N/A $10.04 $10.04
===================================================================================================
</TABLE>
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<PAGE> 36
<TABLE>
<CAPTION>
====================================================================================================
ARROW ARCH
MUNICIPAL INCOME NATIONAL MUNICIPAL PRO FORMA
PORTFOLIO BOND PORTFOLIO COMBINED PORTFOLIO
====================================================================================================
<S> <C> <C> <C>
Total Net Assets
Shares/Investor A Shares $13,450,961 $542,574 $13,993,535
Trust Shares N/A $325,883,666 $325,883,666
Shares Outstanding
Shares/Investor A Shares 1,304,417 54,515 1,406,385
Trust Shares N/A 32,725,131 32,725,131
Net Asset Value Per Share
Shares/Investor A Shares $10.31 $9.95 $9.95
Trust Shares N/A $9.96 $9.96
====================================================================================================
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. Consummation of the Reorganization is subject
to the condition that Arrow and Arch receive an opinion from Drinker Biddle &
Reath LLP, based on certain factual assumptions and in reliance on certain
factual representations by the management of Arrow and Arch, to the effect that
for federal income tax purposes: (i) the transfer of all of the assets and
liabilities of each of the Arrow Portfolios to the corresponding Arch Portfolio
in exchange for Investor A Shares of the corresponding Arch Portfolio and the
liquidating distribution to Shareholders of the Arrow Portfolio of the Investor
A Shares of the Arch Portfolio so received, as described in the Reorganization
Agreement, will constitute a reorganization within the meaning of Section
368(a)(1)(C), Section 368(a)(1)(D) or Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, and both the Arrow Portfolio and the Arch
Portfolio will be considered "a party to the reorganization" within the meaning
of Section 368(b) of the Code; (ii) no gain or loss will be recognized by the
Arrow Portfolios as a result of such transactions; (iii) no gain or loss will be
recognized by the Arch Portfolios as a result of such transactions; (iv) no gain
or loss will be recognized by the Shareholders of any Arrow Portfolio on the
distribution to them of Investor A Shares of the corresponding Arch Portfolio in
exchange for their shares of the Arrow Portfolio; (v) the aggregate basis of the
Investor A Shares of an Arch Portfolio received by a Shareholder of an Arrow
Portfolio will be the same as the aggregate basis of the Shareholder's Arrow
Portfolio shares immediately prior to the Reorganization; (vi) the basis of each
Arch Portfolio in the assets of the corresponding Arrow Portfolio received
pursuant to the Reorganization will be the same as the basis of the assets in
the hands of the Arrow Portfolio immediately before the Reorganization; (vii) a
Shareholder's holding period for Investor A Shares of an Arch Portfolio will be
determined by including the period for which the Shareholder held the Arrow
Portfolio shares exchanged therefor, provided that the Shareholder held such
Arrow Portfolio shares as a capital asset; and (viii) each Arch Portfolio's
holding period with respect to the assets received in the Reorganization will
include the period for which such assets were held by the corresponding Arrow
Portfolio.
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<PAGE> 37
Arch and Arrow have not sought a tax ruling from the Internal Revenue
Service ("IRS"), but are acting in reliance upon the opinion of counsel
discussed in the previous paragraph. That opinion is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders should
consult their own advisers concerning the potential tax consequences to them,
including state and local income taxes.
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The investment objectives and policies of the Reorganizing Portfolios are,
in many respects, similar to those of the corresponding Existing Arch
Portfolios. There are, however, certain differences. The following discussion
summarizes some of the more significant similarities and differences in the
investment policies and risk factors of the Reorganizing Portfolios and their
corresponding Existing Arch Portfolios and is qualified in its entirety by the
discussion elsewhere herein, and in the Prospectuses and Statements of
Additional Information of the Reorganizing Portfolios and the Existing Arch
Portfolios incorporated herein by reference.
INVESTMENT POLICIES AND RISK -- GENERAL
The investment objective of each of the Reorganizing Portfolios and of
each of the Existing Arch Portfolios is fundamental, meaning that it may not be
changed without the vote of the holders of a majority of the Portfolio's
outstanding shares (as defined in the 1940 Act). Unless otherwise indicated, the
investment policies of the Reorganizing Portfolios and Existing Arch Portfolios
are not fundamental and may be changed by the respective Boards of Trustees or
Directors.
ARROW FIXED INCOME PORTFOLIO AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
The investment policies of the Portfolios are similar, but not identical.
Both Portfolios invest at least 65% of their respective assets (under normal
conditions, in the case of the Arrow Fixed Income Portfolio) in U.S. Government
and investment grade corporate debt securities. Both Portfolios will only invest
in investment grade securities, i.e. securities rated at the time of purchase in
the four highest rating categories assigned by a rating agency or, if unrated,
determined by MVA to be of comparable quality, although the Arch Government &
Corporate Bond Portfolio must (i) invest a minimum of 65% of its assets in
securities rated in the three highest rating categories assigned by a rating
agency or, if unrated, determined by MVA to be of comparable quality, and (ii)
maintain a dollar-weighted average portfolio quality of at least "A" or higher.
Debt securities with the lowest investment grade rating do not have outstanding
investment characteristics and may have speculative characteristics as well.
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<PAGE> 38
The debt securities in which each Portfolio may invest include fixed and
variable rate bonds, debentures, notes, and securities convertible into or
exchangeable for common stock (the Arrow Portfolio may also invest in securities
convertible into or exchangeable for preferred stock). The Arrow Fixed Income
Portfolio may also invest in preferred stock and units, which are debt
securities with stock or warrants to buy stock attached.
The Arrow Fixed Income Portfolio may invest up to 10% of its assets in the
debt securities of foreign issuers. Such securities include the securities of
foreign governments, foreign governmental agencies or supranational
organizations or investment grade debt securities of foreign corporations. The
Arch Government & Corporate Bond Portfolio may invest up to 10% of its total
assets in dollar-denominated debt obligations of foreign issuers, either
directly or indirectly through ADRs and EDRs. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of foreign issuers. Such
risks include future political and economic developments and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
The Arrow Fixed Income Portfolio may invest in mortgage-related
asset-backed securities, including collateralized mortgage obligations ("CMOs"),
rated in one of the three highest rating categories assigned by one or more
rating agencies or determined to be of comparable quality by MVA. The Arch
Government & Corporate Bond Portfolio may invest in investment grade
mortgage-related asset-backed securities, including CMOs, as well as
non-mortgage-related asset-backed securities, although investments in
non-mortgage-related asset-backed securities will not exceed 25% of the
Portfolio's total assets at the time of purchase. The average life of
asset-backed securities varies with the underlying instruments or assets and
market conditions, which in the case of mortgages have maximum maturities of
forty years. The average life of a mortgage-backed instrument, in particular, is
likely to be substantially less than the original maturity of the mortgages
underlying the securities as the result of unscheduled principal payments and
mortgage prepayments. The relationship between mortgage prepayment and interest
rates may give some high-yielding mortgage-backed securities less potential for
growth in value than conventional bonds with comparable maturities. In addition,
in periods of falling interest rates, the rate of mortgage prepayments tends to
increase. During such periods, the reinvestment of prepayment proceeds by a
Portfolio will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. When interest rates rise, the value of
an asset-backed security generally will decline; however, when interest rates
decline, the value of an
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<PAGE> 39
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict. The collateral
supporting non-mortgage-related asset-backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Non-mortgage-related asset-backed securities involve certain risks that are not
presented by mortgage-backed securities arising primarily from the nature of the
underlying assets (i.e., credit card and automobile loan receivables as opposed
to real estate mortgages). For example, credit card receivables are generally
unsecured and the repossession of automobiles and other personal property upon
the default of the debtor may be difficult or impracticable in some cases. The
Arch Government & Corporate Bond Portfolio may also invest in first mortgage
loans, income participation loans and participations in certificates of pools of
mortgages.
Each Portfolio may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation, provided,
however, that the Arch Government & Corporate Bond Portfolio will not invest
more than 10% of its net assets in such options. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Each Portfolio may
also write covered call options (and covered put options in the case of the
Arrow Fixed Income Portfolio) listed on a national securities exchange and
issued by the Options Clearing Corporation, limited in amount with respect to
the Arch Government & Corporate Bond Portfolio to not more than 20% of the value
of the Portfolio's net assets. The Arrow Fixed Income Portfolio may also
purchase and write unlisted over-the-counter options which are not subject to
the protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members which fail to perform
them in connection with the purchase or sale of options.
Each Portfolio may purchase and sell futures contracts and options on
futures contracts as a hedge against anticipated changes in interest rates or
market conditions. Neither Portfolio will purchase or sell futures contracts or
related options for hedging purposes if, immediately after purchase, the
aggregate initial margin deposits and premiums paid by a Portfolio on its open
futures and options positions exceeds 5% of the Portfolio's total assets. When
futures and related options are used as a hedging device, there is a risk that
the prices of the securities subject to the futures contract may not correlate
with the prices of a Portfolio's investment securities. This may cause the
futures contract and any related options to react differently than the
Portfolio's investment securities to market changes.
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<PAGE> 40
The Arch Government & Corporate Bond Portfolio may hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such time and
in such proportions as, in the opinion of MVA, prevailing market or economic
conditions warrant. Such short-term obligations may include commercial paper,
bankers acceptances, certificates of deposit, demand and time deposits of
domestic and foreign banks and savings and loan associations, and obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Arrow Fixed Income Portfolio may invest in commercial
paper rated in the top two rating categories assigned by one or more rating
agencies; time and savings deposits (including certificates of deposit) in
certain domestic banks and certificates of deposit and other time deposits
issued by the foreign branches of such domestic banks; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Each Portfolio may purchase "stripped" securities limited, with respect to
the Arch Government & Corporate Bond Portfolio, to stripped U.S. Treasury and
agency obligations. Stripped securities are issued at a discount to their face
value and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
Each Portfolio may purchase "when-issued" securities, and the Arch
Government & Corporate Bond Portfolio may also purchase and sell securities on a
forward commitment or delayed settlement basis. Both Portfolios may enter into
repurchase and reverse repurchase agreement transactions, lend their portfolio
securities and invest in the securities of other investment companies. Neither
Portfolio will invest more than 15% of the value of its net assets in illiquid
securities.
ARROW MUNICIPAL INCOME PORTFOLIO AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
The Portfolios have similar, but not identical, investment policies. As a
matter of fundamental policy, each Portfolio invests at least 80% of its total
assets in municipal securities, primarily bonds (at least 65% under normal
market conditions) with respect to the Arch National Municipal Bond Portfolio.
Each Portfolio purchases only investment grade municipal securities, i.e.
securities rated in the top four rating categories assigned by one or more
rating agencies or, if unrated, determined by MVA to be of comparable quality,
provided, however, that (i) the Arch National Municipal Bond Portfolio will
invest, under normal conditions, at least 65% of its assets in municipal
securities that are rated at the time of purchase in one of the three highest
rating categories assigned by one or more rating agencies or, if unrated,
determined by MVA to be of comparable quality, and (ii) the Arrow Municipal
Income Portfolio may invest in
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<PAGE> 41
short-term municipal securities rated in the highest rating category by one or
more rating agencies.
The Arch National Municipal Bond Portfolio may invest 25% or more of its
net assets in (i) municipal securities whose issuers are in the same state, (ii)
municipal securities the interest on which is paid solely from revenues of
similar projects, and (ii) private activity bonds. The Arrow Municipal Income
Portfolio may invest more than 25% of the value of its assets in industrial
development bonds. Both Portfolios may invest in participation interests (the
Arch Portfolio may also invest in other tax-exempt derivative instruments) and
variable and floating rate municipal securities.
During temporary defensive periods, the Arch National Municipal Bond
Portfolio (i) may invest in taxable obligations, such as obligations of the U.S.
Government, its agencies and instrumentalities, including "stripped securities",
and debt securities (including commercial paper) of issuers having, at the time
of purchase, a quality rating within the two highest rating categories assigned
by one or more rating agencies, and (ii) may hold without limit uninvested cash
reserves which do not earn income pending investment.
Unlike the Arch National Municipal Bond Portfolio, the Arrow Municipal
Income Portfolio may purchase listed and unlisted put and call options and write
listed and unlisted covered call options and covered put options. See
"Comparison of Investment Policies and Risk Factors -- Arrow Fixed Income
Portfolio and Arch Government & Corporate Bond Portfolio" above.
The Arrow Municipal Income Portfolio may enter into repurchase agreements
and reverse repurchase agreements, whereas the Arch National Municipal Bond
Portfolio may not. Each Portfolio may purchase "when-issued" securities and the
Arch National Municipal Bond Portfolio may also purchase and sell securities on
a forward commitment or delayed settlement basis and enter into stand-by
commitments. Each Portfolio may lend its portfolio securities and invest in the
securities of other investment companies. While both Portfolios may invest up to
15% of their respective net assets in illiquid securities, the Arrow Municipal
Income Portfolio may only invest up to 10% of its net assets in restricted
municipal securities.
INVESTMENT LIMITATIONS
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
change their fundamental investment limitations without the affirmative vote of
the holders of a majority of the outstanding shares (as defined in the 1940 Act)
of the particular Reorganizing Portfolio or Existing Arch Portfolio. The
investment limitations of the Reorganizing Portfolios and the corresponding
Existing Arch Portfolios are similar, but not identical.
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<PAGE> 42
Each of the Reorganizing Portfolios and each of the Existing Arch
Portfolios is a "diversified" investment portfolio and, therefore, has a
fundamental policy limiting investments in securities of any one issuer (other
than cash, cash items or securities issued by the U.S. Government, its agencies
and instrumentalities and, with respect to the Reorganizing Portfolios,
repurchase agreements collateralized by such securities) to 5% of the value of a
Portfolio's total assets, except that up to 25% of the value of a Portfolio's
total assets may be invested without regard to this 5% limitation. In addition,
none of the Reorganizing Portfolios or the Existing Arch Portfolios may acquire
more than 10% of the outstanding voting securities of any one issuer, except
that the Existing Arch Portfolios may invest up to 25% of their respective total
assets without regard to such 10% limitation.
The Reorganizing Portfolios may not issue senior securities, except that
each Portfolio may borrow money directly or through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, for temporary purposes. The Existing Arch Portfolios may
not borrow money or issue senior securities, except that each Portfolio may
borrow from banks and the Arch Government & Corporate Bond Portfolio may enter
into reverse repurchase agreements for temporary purposes in amounts not in
excess of 10% of the Portfolio's total assets at the time of such borrowing.
Neither a Reorganizing Portfolio nor an Existing Arch Portfolio will purchase
securities while its borrowings, including reverse repurchase agreements, exceed
5% of the total assets of such Portfolio.
The Reorganizing Portfolios and the Existing Arch Portfolios may mortgage,
pledge or hypothecate their assets only to secure permitted indebtedness, and
then may only pledge assets having a market value not exceeding the lesser of
the dollar amounts borrowed or 15%, in the case of the Reorganizing Portfolios,
or 10% in the case of the Existing Arch Portfolios, of the value of the
Portfolio's total assets.
The investment limitations described in the foregoing paragraphs regarding
diversification and borrowing are fundamental with respect to both the
Reorganizing Portfolios and Existing Arch Portfolios. The limitation with
respect to pledging portfolio assets is fundamental as to the Existing Arch
Portfolios, but not fundamental as to the Reorganizing Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
make loans, except that: (i) the Reorganizing Portfolios may lend portfolio
securities up to one-third of the value of their respective total assets; and
(ii) the Reorganizing Portfolios may purchase or hold certain debt instruments
and may enter into repurchase agreements; and (iii) each Existing Arch Portfolio
may purchase or hold debt instruments, lend portfolio
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<PAGE> 43
securities, and, except for the Arch National Municipal Bond Portfolio, enter
into repurchase agreements. The foregoing limitations on securities lending are
fundamental limitations for both the Reorganizing Portfolios and the Existing
Arch Portfolios.
The Reorganizing Portfolios and the Existing Arch Portfolios may not
invest 25% or more of the value of their respective total assets in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) with respect to the Reorganizing Funds,
(i) there is no limitation concerning cash, certain money market instruments, or
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities and repurchase agreements collateralized by such securities
and (ii) no more than 25% of the Arrow Municipal Income Portfolio's total assets
may be invested in a governmental subdivision of any one state, territory or
possession of the United States; (b) with respect to the Arch Government &
Corporate Bond Portfolio, (i) there is no limitation with respect to (i)
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered to be
in the industry of their parents if their activities are primarily related to
financing the activities of their parents; and (iii) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry); and
(c) with respect to the Arch National Municipal Bond Portfolio, there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the U.S. Government, the
District of Columbia, or any of their authorities, agencies, instrumentalities
or political subdivisions. The foregoing investment limitations with respect to
industry concentration of investments are fundamental investment limitations as
to both the Reorganizing Portfolios and the Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase or sell real estate, except that the Portfolios may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate. The foregoing limitations on investments in
real estate are fundamental as to both the Reorganizing Portfolios and the
Existing Arch Portfolios.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
act as an underwriter of securities within the meaning of the Securities Act of
1933, except to the extent that the purchase of obligations directly from the
issuer thereof, or the disposition of securities, in accordance with a
Portfolio's investment objective, policies and limitations may be deemed to be
underwriting. The foregoing limitation on underwriting is fundamental as to both
the Reorganizing Portfolios and Existing Arch Portfolios.
-31-
<PAGE> 44
The Existing Arch Portfolios may not purchase securities of companies for
the purpose of exercising control. The foregoing limitation is fundamental as to
such Portfolios. The Reorganizing Portfolios are not subject to a similar
limitation.
Neither the Reorganizing Portfolios nor the Existing Arch Portfolios may
purchase securities on margin, make short sales of securities or maintain a
short position, except that (i) each Portfolio may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
portfolio securities, (ii) this limitation shall not apply to the Arch
Government & Corporate Bond Portfolio's transactions in options and futures
contracts and related options, and (iii) with respect to the Arrow Fixed Income
Portfolio, the deposit or payment of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin. The foregoing limitation is
fundamental as to both the Reorganizing Portfolios and the Existing Arch
Portfolios.
The Reorganizing Portfolios may not purchase or sell commodities,
commodity contracts, or commodities futures contracts. The Existing Arch
Portfolios may not purchase or sell commodities contracts, or invest in oil, gas
or mineral exploration or development programs.
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTION AND
PRICING. The purchase, redemption, exchange privileges and distribution policies
of the Arrow Portfolios and the Arch Portfolios are discussed below in Appendix
III to this Combined Proxy Statement/Prospectus.
OTHER INFORMATION. Arrow and Arch are registered as open-end, series, management
investment companies under the 1940 Act. Currently, Arrow offers four investment
portfolios and Arch offers seventeen investment portfolios.
Arrow is organized as a Massachusetts business trust and is subject to the
provisions of its Declaration of Trust and By-Laws. Arch is organized as a
Maryland corporation and is subject to the provisions of its Articles of
Incorporation and By-Laws. Although the rights of shareholders of a Maryland
corporation vary in certain respects from the rights of shareholders of a
Massachusetts business trust, the attributes of a share of common stock in Arch
are comparable to those of a share of beneficial interest in Arrow. Shares of
both Arrow and Arch: (i) are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held; (ii) will vote in
the aggregate and not by class except as otherwise expressly required by law or
when class voting is permitted by the respective Boards of Trustees or
Directors; and (iii) are entitled to participate equally in the dividends and
distributions that are declared with respect to a particular class and in the
net distributable assets of such class on
-32-
<PAGE> 45
liquidation. Shares of the Arch Portfolios have a par value of $.001, while the
shares of the Arrow Portfolios have no par value. In addition, shares of the
Arrow Portfolios and Arch Portfolios have no preemptive rights and only such
conversion and exchange rights as the respective Boards of Trustees or Directors
may grant in their discretion. When issued for payment as described in their
respective Prospectuses, Arrow Portfolio shares and Arch Portfolio shares are
validly issued, fully paid and non-assessable by such entities except as
required under Massachusetts law with respect to Arrow, and Maryland law with
respect to Arch. Arch is not required under Maryland General Corporation Law to
hold annual shareholder meetings and intends to do so only if required by the
1940 Act. Shareholders have the right to remove Directors. To the extent
required by law, Arch will assist in shareholder communications in such matters.
The foregoing is only a summary. Shareholders may obtain copies of the
Declaration of Trust and By-Laws of Arrow and the Articles of Incorporation and
By-laws of Arch upon written request at the addresses shown on the cover page of
this Combined Proxy Statement/Prospectus.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Proxy Statement/Prospectus is being furnished
in connection with the solicitation of proxies by Arrow's Board of Trustees in
connection with the Meeting. It is expected that the solicitation of proxies
will be primarily by mail. Officers and service contractors of Arrow may also
solicit proxies by telephone, telegraph, facsimile or personal interview. Any
shareholder giving a proxy may revoke it at any time before it is exercised by
submitting to Arrow a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and voting in person.
Only shareholders of record at the close of business on __________, 1997
will be entitled to vote at the Meeting. On that date there were outstanding and
entitled to be voted ___________ shares of the Arrow Fixed Income Portfolio,
__________ shares of the Arrow Municipal Income Portfolio, __________ shares of
the Arrow Equity Portfolio. Each share or fraction thereof is entitled to one
vote or fraction thereof, and all shares will vote separately by Fund.
At [record date], 1997, Mercantile Bank owned of record with the power to
vote approximately _____% of the outstanding shares of the Arrow Portfolios on
behalf of its customers. Arrow and Arch have been advised by Mercantile Bank
that it intends to vote the shares of each Arrow Portfolio over which it has
voting power "FOR" the Reorganization.
If the accompanying proxy is executed and returned in time for the
Meeting, the shares covered thereby will be voted in
-33-
<PAGE> 46
accordance with the proxy on all matters that may properly come before the
Meeting or any adjournment thereof. For information on adjournment of the
meeting, see "Quorum" below.
SHAREHOLDER AND BOARD APPROVALS. The Reorganization Agreement (and the
transactions contemplated thereby) is being submitted for approval at the
Meeting by the holders of a majority of the outstanding shares of the Arrow
Fixed Income Portfolio, the Arrow Municipal Income Portfolio and the Arrow
Equity Portfolio in accordance with the provisions of Arrow's Declaration of
Trust and the requirements of the 1940 Act. The term "majority of the
outstanding shares" of an Arrow Portfolio as used herein means the lesser of (a)
67% of the shares of the particular Arrow Portfolio present at the Meeting if
the holders of more than 50% of the outstanding shares of the Arrow Portfolio
are present in person or by proxy, or (b) more than 50% of the outstanding
shares of such Arrow Portfolio.
In tallying shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a proposal
because instructions have not been received from the beneficial owners) will be
counted for purposes of determining whether or not a quorum is present for
purposes of convening the meeting. On the Reorganization proposal, abstentions
and broker non-votes will be considered to be a vote against the Reorganization
proposal.
The approval of the Reorganization by the shareholders of the
corresponding Arch Portfolios is not being solicited because their approval or
consent is not necessary for the Reorganization to be consummated.
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Reorganizing Portfolios and the percentage of Investor A Shares of the
corresponding Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
REORGANIZING INVESTOR A SHARES
PORTFOLIO'S OF EXISTING ARCH
REORGANIZING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the name, address and share ownership of the
persons who owned of record 5% or more of the outstanding shares of the
Continuing Portfolio are listed below. Prior to the Continuing Portfolio
Transaction, the New Arch Portfolio will have only nominal assets. The persons
who owned of record 5% or more of the outstanding shares of the Continuing
-34-
<PAGE> 47
Portfolio will not materially change upon consummation of the Continuing
Portfolio Transaction.
<TABLE>
<CAPTION>
=======================================================================================
PERCENTAGE OF PERCENTAGE OF
CONTINUING INVESTOR A SHARES
PORTFOLIO'S OF NEW ARCH
CONTINUING SHARES OWNED ON PORTFOLIO OWNED
PORTFOLIO NAME AND ADDRESS RECORD DATE ON CONSUMMATION
=======================================================================================
<S> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
At [record date], 1997, the trustees and officers of Arrow, as a group,
owned less than 1% of the outstanding shares of each of the Arrow Portfolios. At
[record date], 1997, the directors and officers of Arch owned less than 1% of
the outstanding shares of each of the Arch Portfolios.
At [record date], 1997, the name, address, and share ownership of the
persons who owned of record 5% or more of the Trust Shares or Investor A Shares
of the Existing Arch Portfolios and the percentage of Trust Shares or Investor A
Shares of the Existing Arch Portfolios that would be owned by those persons upon
the consummation of the Reorganizing Portfolios Transaction based on their
holdings on that date are as follows:
<TABLE>
<CAPTION>
==================================================================================================
PERCENTAGE OF
EXISTING ARCH
EXISTING CLASS OF PERCENTAGE OF PORTFOLIO'S PERCENTAGE OF
ARCH SHARES CLASS OWNED ON SHARES OWNED ON CLASS OWNED ON
PORTFOLIO NAME AND ADDRESS OWNED RECORD DATE RECORD DATE CONSUMMATION
==================================================================================================
<S> <C> <C> <C> <C> <C>
[TO BE PROVIDED]
</TABLE>
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share appraisal
under Arrow's Declaration of Trust or under the laws of the Commonwealth of
Massachusetts in connection with the Reorganization. Shareholders have, however,
the right to redeem from Arrow their Arrow Portfolio shares at net asset value
until the effective time of the Reorganization with respect to each Arrow
Portfolio, and thereafter shareholders may redeem the Investor A Shares of the
Arch Portfolios acquired by them in the Reorganization at net asset value.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement and the transactions contemplated thereby are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of a majority of those shares affected by the
adjournment that are represented at
-35-
<PAGE> 48
the Meeting in person or by proxy. If a quorum is present, the persons named as
proxies will vote those proxies which they are entitled to vote FOR the
Reorganization Agreement, in favor of such adjournments, and will vote those
proxies required to be voted AGAINST such proposal against any adjournment. A
shareholder vote may be taken with respect to one or more Arrow Portfolios prior
to any such adjournment if sufficient votes have been received for approval with
respect to any such Arrow Portfolio. A quorum is constituted with respect to an
Arrow Portfolio by the presence in person or by proxy of the holders of more
than 50% of the outstanding shares of the Portfolio entitled to vote at the
Meeting. Arrow proxies properly executed and marked with a negative vote or an
abstention will be considered to be present at the Meeting for the purposes of
determining the existence of a quorum for the transaction of business.
ANNUAL MEETINGS. Arch does not presently intend to hold annual meetings of
shareholders for the election of directors and other business unless and until
such time as less than a majority of the directors holding office have been
elected by the shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Shareholders have
the right to call a meeting of shareholders to consider the removal of one or
more directors or for other matters and such meetings will be called when
requested in writing by the holders of record of 25% or more of Arch's
outstanding shares of common stock. To the extent required by law, Arch will
assist in shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT ARCH
Information about the Existing Arch Portfolios is included in the
Prospectus for Investor A Shares accompanying this Combined Proxy
Statement/Prospectus, which is incorporated by reference herein. Additional
information about these Portfolios is included in the Statement of Additional
Information relating to this Combined Proxy Statement/Prospectus and in these
Portfolios' Statement of Additional Information dated March 31, 1997 (as revised
August 29, 1997) which has been filed with the SEC. A copy of either Statement
of Additional Information may be obtained without charge by writing to Arch
at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling Arch at 1-800-452-ARCH
(2724). Arch is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, as applicable, and, in accordance with
such requirements, files proxy materials, reports and other information with
the SEC. These materials can be inspected and copied at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Arch's offices listed above and at the SEC's Regional Offices
at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained
-36-
<PAGE> 49
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549, at
prescribed rates.
The current directors and officers of Arch (other than Lyle L. Meyer who
has indicated that he intends to resign from the Board of Directors on or about
September 16, 1997) will continue as directors and officers following the
Reorganization. Additionally, subject to the approval of Arch's shareholders,
Arch expects to add two additional directors to the Board of Directors either
prior to or shortly after the Reorganization. As of the date of this Combined
Proxy Statement/Prospectus, no nominees to serve as such additional directors
have been recommended by the Board of Directors for submission to shareholders.
The name and address of the current directors and officers, as well as
information concerning his or her principal occupations during the past five
years are set forth below.
<TABLE>
<CAPTION>
=======================================================================================================
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS
WITH ARCH DURING PAST 5 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham* 53 Chairman of Board; Treasurer, St. Louis
St. Louis President and University, August 1996 to
University Director present; Treasurer, Washington
3500 Lindell University, 1981 to 1995.
Fitzgerald Hall
St. Louis, MO 63131
- -------------------------------------------------------------------------------------------------------
Robert M. Cox, Jr. 51 Director Senior Vice President and
Emerson Electric Co. Advisory Director, Emerson
8000 W. Florissant Ave. Electric Co.
P.O. Box 4100
St. Louis, MO 63136-8506
- -------------------------------------------------------------------------------------------------------
Joseph J. Hunt 54 Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and
3544 Watson Road Ornamental Iron Workers
St. Louis, MO 63139 (International Labor Union),
January 1994 to present;
General Organizer, International
Association of Bridge,
Structural and Ornamental
Iron Workers, September 1983
to December 1993.
- -------------------------------------------------------------------------------------------------------
James C. Jacobsen 61 Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping
Chesterfield, MO 63017 softgoods); Vice Chairman,
Kellwood Company.
- -------------------------------------------------------------------------------------------------------
Lyle L. Meyer 60 Director Vice President, The Jefferson
Jefferson Smurfit Smurfit Corporation
Corporation (manufacturer of paperboard
8182 Maryland Avenue and packaging materials);
St. Louis, MO 63105 President, Smurfit Pension &
Insurance Services Company.
- -------------------------------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE> 50
<TABLE>
<S> <C> <C> <C>
Ronald D. Winney* 54 Director and Treasurer, Ralston Purina
Ralston Purina Company Treasurer Company.
Checkerboard Square
St. Louis, MO 63164
- -------------------------------------------------------------------------------------------------------
W. Bruce McConnel, III 54 Secretary Partner of the law firm of
Suite 1100 Drinker Biddle & Reath LLP,
1345 Chestnut Street Philadelphia, Pennsylvania.
Philadelphia, PA 19107
- -------------------------------------------------------------------------------------------------------
Walter B. Grimm* 51 Vice President and Employee of BISYS Fund
3435 Stelzer Road Assistant Treasurer Services.
Columbus, OH 43219
- -------------------------------------------------------------------------------------------------------
David Bunstine* 32 Assistant Secretary Employee of BISYS Fund
3435 Stelzer Road Services.
Columbus, OH 43219
=======================================================================================================
</TABLE>
- ------------------------
* Messrs. Woodham, Winney, McConnel, Grimm and Bunstine are "interested persons"
of the Fund as defined in the 1940 Act.
ADDITIONAL INFORMATION ABOUT ARROW
Information about the Arrow Portfolios is incorporated herein by reference
to its Prospectuses dated November 30, 1996 (as supplemented April 25, 1997) and
Statement of Additional Information dated November 30, 1996, copies of which may
be obtained without charge by writing or calling Arrow at the address and
telephone number shown on the cover page of this Combined Proxy
Statement/Prospectus. Reports and other information filed by Arrow can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
The name and address of each trustee and officer of Arrow as well as
information concerning his or her principal occupations during the past five
years are as follows:
-38-
<PAGE> 51
<TABLE>
<CAPTION>
=======================================================================================================
Date of Position(s) held Principal Occupations During Past
Name and Address Birth with Arrow 5 Years**
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John F. Donahue@* 7/28/24 Chairman and Chairman and Trustee, Federated
Federated Investors Tower Trustee Investors, Federated Advisers,
Pittsburgh, PA Federated Management, Federated
Research; Chairman and Director,
Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.;
Chief Executive Officer and
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Thomas G. Bigley 2/3/34 Trustee Chairman of the Board, Children's
One Oxford Centre Hospital of Pittsburgh; formerly,
28th Floor Senior Partner, Ernst & Young LLP;
Pittsburgh, PA Director MED 3000 Group, Inc.;
Member of Executive Committee,
University of Pittsburgh; Director
or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
John T. Conroy, Jr. 6/23/37 Trustee President, Investment Properties
Wood/IPC Commercial Corporation; Senior Vice
Department President, John R. Wood and
John R. Wood & Associates, Inc., Realtors;
Associates, Realtors Partner or Trustee in private real
3255 Tamiami Trail North estate ventures in Southwest
Naples, FL Florida; formerly, President,
Naples Property Management, Inc.
and Northgate Village Development
Corporation; Director or Trustee
of the Funds.
- -------------------------------------------------------------------------------------------------------
William J. Copeland 7/4/18 Trustee Director and Member of the
One PNC Plaza Executive Committee, Michael
23rd Floor Baker, Inc; formerly, Vice
Pittsburgh, PA Chairman and Director, PNC Bank,
N.A. and PNC Bank Corp.; Director,
Ryan Homes, Inc.; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
James E. Dowd 5/18/22 Trustee Attorney-at-law; Director, The
571 Hayward Mill Road Emerging Germany Fund, Inc.;
Concord, MA Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.* 10/11/32 Trustee Professor of Medicine, University
3471 Fifth Avenue of Pittsburgh; Medical Director,
Suite 1111 University of Pittsburgh Medical
Pittsburgh, PA Center - Downtown; Member, Board
of Directors, University of
Pittsburgh Medical Center;
formerly, Hematologist,
Oncologist, and Internist,
Presbyterian and Montefiore
Hospitals; Director or Trustee of
the Funds.
- -------------------------------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@ 6/18/24 Trustee Attorney of Counsel, Miller,
Miller, Ament, Henry & Ament, Henny & Kochuba; Director,
Kochuba Eat'N Park Restaurants, Inc.;
205 Ross Street formerly, Counsel, Horizon
Pittsburgh, PA Financial, F.A., Western Region;
Director or Trustee of the Funds.
</TABLE>
-39-
<PAGE> 52
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Edward C. Gonzales* 10/22/30 President, Vice Chairman, Treasurer and
Federated Investors Tower Treasurer and Trustee, Federated Investors; Vice
Pittsburgh, PA Trustee President, Federated Advisers,
Federated Management, Federated
Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd; Executive Vice
President and Director, Federated
Securities Corp.; Trustee,
Federated Shareholder Services
Company; Trustee or Director of
some of the Funds; President,
Executive Vice President and
Treasurer of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Peter E. Madden 3/16/42 Trustee Consultant; Former State
One Royal Palm Way Representative, Commonwealth of
100 Royal Palm Way Massachusetts; formerly,
Palm Beach, FL President, State Street Bank and
Trust Company and State Street
Boston Corporation;
Director or Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Gregor F. Meyer 10/6/26 Trustee Attorney, Retired Member of
203 Kensington Court Miller, Ament, Henny & Kochuba;
Pittsburgh, PA Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants,
Inc.; Director or Trustee of the
Funds.
- -------------------------------------------------------------------------------------------------------
John E. Murray, Jr., J.D., 12/20/32 Trustee President, Law Professor, Duquesne
S.J.D. University; Consulting Partner,
President Mollica and Murray; Director or
Duquesne University Trustee of the Funds.
Pittsburgh, PA
- -------------------------------------------------------------------------------------------------------
Wesley W. Posvar 9/14/25 Trustee Professor, International Politics;
1202 Cathedral of Learning Management Consultant; Trustee,
University of Pittsburgh Carnegie Endowment for
Pittsburgh, PA International Peace, RAND
Corporation, Online Computer
Library Center, Inc., National
Defense University, and U.S. Space
Foundation; President Emeritus,
University of Pittsburgh; Founding
Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency
Management Advisory Board; and Czech
Management Center, Prague; Director or
Trustee of the Funds.
- -------------------------------------------------------------------------------------------------------
Marjorie P. Smuts 6/21/35 Trustee Public Relations/ Marketing/
4905 Bayard Street Conference Planning; Director or
Pittsburgh, PA Trustee of the Funds.
</TABLE>
-40-
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
J. Christopher Donahue 4/11/49 Executive President and Trustee, Federated
Federated Investors Tower Vice President Investors, Federated Advisers,
Pittsburgh, PA Federated Management and Federated
Research; President and Director,
Federated Research Corp. and
Federated Global Research Corp.;
President, Passport Research,
Ltd.; Trustee, Federated
Shareholder Services Company and
Federated Shareholder Services;
Director, Federated Services
Company; President or Executive
Vice President of the Funds;
Director or Trustee of some of the
Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and
Trustee of the Company.
- -------------------------------------------------------------------------------------------------------
John W. McGonigle 10/26/38 Executive Executive Vice President,
Federated Investors Tower Vice President Secretary and Trustee, Federated
Pittsburgh, PA and Investors; Trustee, Federated
Secretary Advisers, Federated Management,
and Federated Research; Director,
Federated Research Corp. and
Federated Global Research Corp.;
Trustee, Federated Shareholder
Services Company; Director,
Federated Services Company;
President and Trustee, Federated
Shareholder Services; Director,
Federated Securities Corp.;
Executive Vice President and
Secretary of the Funds; Treasurer
of some of the Funds.
- -------------------------------------------------------------------------------------------------------
Richard B. Fisher 5/17/23 Vice President Executive Vice President and
Federated Investors Tower Trustee, Federated Investors;
Pittsburgh, PA Chairman and Director, Federated
Securities Corp.; President or
Vice President of some of the
Funds; Director or Trustee of
some of the Funds.
- -------------------------------------------------------------------------------------------------------
Charles L. Davis, Jr. 3/23/60 Vice President Vice President and Assistant
Federated Investors Tower and Assistant Treasurer of some of the Funds.
Pittsburgh, PA Treasurer
=======================================================================================================
</TABLE>
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
** As used in the above, "the Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor Series:
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA
Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust;
-41-
<PAGE> 54
Federated Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federal Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated
Tax-Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund Inc.; First Priority Funds; Fixed
Income Securities, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment Series
Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government Money Market
Trust; Liquid Cash Trust; Managed Series Trust; Money Market Management, Inc.;
Money Market Obligations Trust; Money Market Obligations Trust II; Money Market
Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; WesMark Funds and World Investment Series, Inc.
LITIGATION
Neither Arrow nor Arch is involved in any litigation that would have any
material adverse financial effect upon either the Arrow Portfolios or the Arch
Portfolios.
FINANCIAL HIGHLIGHTS
ARROW FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for shares of the Arrow Portfolios for the six-month period ended
March 31, 1997. This information is derived from the Arrow Portfolios' unaudited
financial statements for the six-month period ended March 31, 1997. The data
should be read in conjunction with the unaudited financial statements and
related notes which are contained in the Arrow Portfolios' Semi-Annual Report to
Shareholders dated March 31, 1997 and incorporated by reference into the
Statement of Additional Information related to this Combined Proxy
Statement/Prospectus. The financial highlights for the Arrow Portfolios for
prior periods are contained in Arrow's Prospectus dated November 30, 1996 (as
supplemented April 25, 1997) for the Arrow Portfolios and the financial
statements for prior periods are contained in the Arrow Portfolios' Annual
Report to Shareholders dated September 30, 1996 and are incorporated by
reference into Arrow's Combined Statement of Additional Information with respect
to the Arrow Portfolios dated November 30, 1996, which Prospectus and Combined
Statement of Additional Information are incorporated herein by reference.
-42-
<PAGE> 55
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Fixed Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ............... $ 9.70
Income from investment operations
Net investment income ............................ 0.33
Net realized and unrealized
gain/loss on investments ....................... (0.11)
----------
Total from investment operations ................. 0.22
Less Distributions
Distributions from net investment
income ......................................... (0.33)
Distributions from net realized
gains on investments ........................... --
----------
Total distributions .............................. (0.33)
----------
Net asset value, end of period ..................... $ 9.59
----------
Total return(a) .................................... 2.21%
Ratios to average net assets
Expenses ......................................... 1.32%*
Net investment income ............................ 5.74%*
Expense waiver/reimbursement(b) .................. 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) .......... $ 28,229
Portfolio turnover ............................... 25%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-43-
<PAGE> 56
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Municipal Income Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................... $ 10.26
Income from investment operations
Net investment income ................................ 0.22
Net realized and unrealized
gain/loss on investments ........................... (0.04)
----------
Total from investment operations ..................... 0.18
Less Distributions
Distributions from net investment
income ............................................. (0.22)
Distributions from net realized
gains on investments ............................... --
----------
Total distributions .................................. (0.22)
----------
Net asset value, end of period ......................... $ 10.22
----------
Total return(a) ........................................ 1.76%
Ratios to average net assets
Expenses ............................................. 1.37%*
Net investment income ................................ 4.29%*
Expense waiver/reimbursement(b) ...................... 0.84%*
Supplemental Data
Net assets, end of period (000 omitted) .............. $ 13,795
Portfolio turnover ................................... 7%
=================================================================================
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
-44-
<PAGE> 57
Selected data for a share of beneficial interest
outstanding throughout the period indicated
Arrow Equity Portfolio
<TABLE>
<CAPTION>
=================================================================================
Six Months
Ended
March 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period ................. $ 15.06
Income from investment operations
Net investment income .............................. 0.06
Net realized and unrealized
gain/loss on investments ......................... 1.14
------------
Total from investment operations ................... 1.20
Less Distributions
Distributions from net investment
income ........................................... (0.05)
Distributions from net realized
gains on investments ............................. (1.05)
------------
Total distributions ................................ 1.10
------------
Net asset value, end of period ....................... $ 15.16
------------
Total return(a) ...................................... 7.98%
Ratios to average net assets
Expenses ........................................... 1.14%*
Net investment income .............................. 0.50%*
Expense waiver/reimbursement(b) .................... 0.25%*
Supplemental Data
Net assets, end of period (000 omitted) ............ $ 58,555
Average commission rate paid(c) .................... $ 0.0905
Portfolio turnover ................................. 7%
</TABLE>
* Computed on an annualized basis
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
-45-
<PAGE> 58
ARCH FINANCIAL HIGHLIGHTS. The tables set forth below present financial
information for the six-month period ended May 31, 1997 for Investor A Shares
and Trust Shares of the Existing Arch Portfolios. This information is derived
from the Existing Arch Portfolios' unaudited financial statements for the
six-month period ended May 31, 1997. The data should be read in conjunction with
the unaudited financial statements and related notes which are contained in
Arch's Semi-Annual Report to Shareholders dated May 31, 1997 and incorporated by
reference into the Statement of Additional Information related to this Combined
Proxy Statement/Prospectus. The financial highlights for the Investor A Shares
and Trust Shares of the Existing Arch Portfolios for prior periods are contained
in Arch's Prospectuses for Investor A Shares and Trust Shares dated March 31,
1997 (as supplemented August 29, 1997), and the financial statements for the
Existing Arch Portfolios for prior periods are contained in Arch's Annual Report
to Shareholders dated November 30, 1996 and are incorporated by reference into
Arch's Statement of Additional Information dated March 31, 1997 (as revised
August 29, 1997), which Prospectuses and Statement of Additional Information
are incorporated herein by reference.
-46-
<PAGE> 59
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch Government & Corporate Bond Portfolio
<TABLE>
<CAPTION>
====================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
------------------------------
Investor A Trust
Shares Shares
- ------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.34 $ 10.34
----------- -----------
Income Activities
Net investment income .................. 0.28 0 .30
Net realized and unrealized gains
(losses) from investments ............ (0.30) (0.30)
----------- -----------
Total from Investment Activities ..... (0.02) --
----------- -----------
Distributions
Net investment income .................. (0.28) (0.30)
----------- -----------
Total Distributions .................. (0.28) (0.30)
----------- -----------
Net asset value, End of Period ........... $ 10.04 $ 10.04
=========== ===========
Total Returns ............................ (0.14%)(b)(c) 0.01%(c)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 4,607 $ 141,221
Ratio of expenses to average net
assets (including waivers) ........... $ 0.95%(d) 0.65%(d)
Ratio of net investment income to
average net assets (including waivers) 5.64%(d) 5.93%(d)
Ratio of expenses to average net
assets (before waivers)* ............. 1.05%(d) 0.75%(d)
Ratio of net investment income to
average net assets (before waivers)* . 5.54%(d) 5.83%(d)
Portfolio turnover ..................... 77% 77%
========================================================================================
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) As of December 1, 1990, the Portfolio designated the existing series of
shares as "Investor Shares". In addition, on February 1, 1991, the
Portfolio issued a second series of shares which were designated as "Trust
Shares". On September 27, 1994, the Portfolio redesignated the Investor
Shares as "Investor A" Shares.
(b) Excludes sales charge.
(c) Not Annualized.
(d) Annualized.
-47-
<PAGE> 60
Selected data for a share(a) of common stock
outstanding throughout the period indicated
Arch National Municipal Bond Portfolio
<TABLE>
<CAPTION>
========================================================================================
Six Months
Ended
May 31, 1997
(Unaudited)
---------------------------------
Investor A Trust
Shares Shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, Beginning of Period ..... $ 10.05 $ 10.05
----------- -----------
Income Activities
Net investment income .................. 0.27 .28
Net realized and unrealized gains
(losses) from investments ............ (0.10) (0.09)
----------- -----------
Total from Investment Activities ..... 0.17 0.19
----------- -----------
Distributions
Net investment income .................. (0.27) (0.28)
----------- -----------
Total Distributions .................. (0.27) (0.28)
----------- -----------
Net asset value, End of Period ........... $ 9.95 $ 9.96
=========== ===========
Total Returns ............................ 1.69%(a)(b) 1.91%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) ...... $ 543 $ 325,884
Ratio of expenses to average net
assets (including waivers) ........... 0.33%(c) 0.13%(c)
Ratio of net investment income to
average net assets (including waivers) 5.34%(c) 5.61%(c)
Ratio of expenses to average net
assets (before waivers)* ............. .82%(c) 0.73%(c)
Ratio of net investment income to
average net assets (before waivers)* . 4.85%(c) 5.01%(c)
Portfolio turnover ..................... 51% 51%
========================================================================================
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) Excludes sales charge.
(b) Not Annualized.
(c) Annualized.
-48-
<PAGE> 61
FINANCIAL STATEMENTS
The financial highlights for the Arrow Portfolios for the fiscal year
ended September 30, 1996 included in Arrow's Prospectus with respect to the
Arrow Portfolios dated November 30, 1996 (as supplemented April 25, 1997) and
the financial statements for the Arrow Portfolios for the fiscal year ended
September 30, 1996 contained in Arrow's Annual Report to Shareholders dated
September 30, 1996 for the Arrow Portfolios and incorporated by reference into
the Combined Statement of Additional Information for the Arrow Portfolios dated
November 30, 1996, which Prospectus and Combined Statement of Additional
Information are incorporated by reference into this Combined Proxy/Prospectus,
have been incorporated herein in reliance on the reports of KPMG Peat Marwick
LLP, independent auditors, given on the authority of that firm as experts in
accounting and auditing.
The financial highlights for the Investor A Shares and Trust Shares of the
Existing Arch Portfolios for the fiscal year ended November 30, 1996 included in
Arch's Prospectuses for Investor A Shares and Trust Shares of the Existing Arch
Portfolios dated March 31, 1997 (as supplemented August 29, 1997) and the
financial statements for the Existing Arch Portfolios contained in Arch's Annual
Report to Shareholders dated November 30, 1996 and incorporated by reference
into Arch's Statement of Additional Information dated March 31, 1997 (as revised
August 29, 1997), which Prospectuses and Supplement of Additional Information
are incorporated by reference into this Combined Proxy Statement/ Prospectus,
have been incorporated herein in reliance on the reports of KPMG Peat Marwick
LLP, independent auditors, given on the authority of that firm as experts in
accounting and auditing.
OTHER BUSINESS
Arrow's Board knows of no other business to be brought before the Meeting.
However, if any other matters come before the Meeting, it is the intention that
proxies which do not contain specific restrictions to the contrary will be voted
on such matters in accordance with the judgment of the persons named in the
enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to Arrow in writing at the address
on the cover page of this Combined Proxy Statement/Prospectus or by telephoning
1-800-866-6040.
* * *
-49-
<PAGE> 62
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
-50-
<PAGE> 63
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
THE ARCH FUND(R), INC.
AND
ARROW FUNDS
_____________________, 1997
I-1
<PAGE> 64
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C> <C>
I. Transfer of Assets of Arrow Funds............................. I-5
II. Liquidating Distributions and Termination of
Arrow......................................................... I-8
III. Effective Times of the Reorganization......................... I-10
IV. Certain Representations, Warranties and
Agreements of Arrow........................................... I-10
V. Certain Representations, Warranties and
Agreements of Arch............................................ I-18
VI. Shareholder Action on Behalf of the Acquired
Portfolios.................................................... I-23
VII. N-14 Registration Statement and Proxy
Solicitation Materials........................................ I-24
VIII. Delivery of Assets and Shares. . . . ......................... I-25
IX. Arch Conditions............................................... I-25
X. Arrow Conditions.............................................. I-33
XI. Tax Documents................................................. I-38
XII. Finder's Fees................................................. I-38
XIII. Announcements................................................. I-38
XIV. Further Assurances............................................ I-39
XV. Termination of Representations and
Warranties.................................................... I-39
XVI. Termination of Agreement...................................... I-39
XVII. Amendment and Waiver.......................................... I-41
XVIII. Governing Law................................................. I-41
XIX. Successors and Assigns........................................ I-41
XX. Beneficiaries................................................. I-42
XXI. Arrow Liability............................................... I-42
XXII. Arch Liability................................................ I-43
XXIII. Notices....................................................... I-43
XXIV. Expenses...................................................... I-44
XXV. Entire Agreement.............................................. I-45
XXVI. Counterparts.................................................. I-45
</TABLE>
I-2
<PAGE> 65
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of
__________, 1997 between THE ARCH FUND(R), INC., a Maryland corporation
("Arch"), and ARROW FUNDS, a Massachusetts business trust ("Arrow").
WHEREAS, Arrow currently consists of four investment portfolios,
i.e. the Arrow Government Money Market Portfolio, the Arrow Fixed Income
Portfolio, the Arrow Municipal Income Portfolio and the Arrow Equity Portfolio;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio, the Arrow Municipal
Income Portfolio and the Arrow Equity Portfolio as of the Effective Time of the
Reorganization (as defined in Article III) with respect to each such Portfolio
be transferred to, and be acquired and assumed by, certain Arch portfolios in
exchange for Investor A Shares of the Arch portfolios which shall thereafter be
distributed by Arrow to the holders of the shares of its portfolios, all as
described in this Agreement (the "Reorganization");
WHEREAS, the parties intend that one of the Arch portfolios, the
ARCH Growth Equity Portfolio, will have nominal assets and liabilities before
the Reorganization and will
<PAGE> 66
continue the investment operations of the Arrow Equity Portfolio (the
"Continuing Portfolio") after the Reorganization;
WHEREAS, the parties intend that substantially all of the assets and
known liabilities of the Arrow Fixed Income Portfolio and the Arrow Municipal
Income Portfolio (the "Reorganizing Portfolios" and, together with the
Continuing Portfolio, the "Acquired Portfolios") shall be acquired and assumed
by the Arch Government & Corporate Bond Portfolio and the Arch National
Municipal Bond Portfolio, respectively;
WHEREAS, the parties intend that the Reorganization with respect to
the Reorganizing Portfolios will occur on a date that is prior to the
Reorganization with respect to the Continuing Portfolio;
WHEREAS, the parties have been advised that the shareholders of the
Arrow Government Money Market Portfolio will redeem their shares in that
portfolio prior to the Effective Time of the Reorganization with respect to the
Reorganizing Portfolios;
WHEREAS, the parties intend that the transfers of assets,
assumptions of liabilities, and distributions of Investor A Shares be treated as
tax-free reorganizations under Section
I-4
<PAGE> 67
368(a)(1)(C), (D) or (F) of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the parties intend that in connection with the
Reorganization each of the Acquired Portfolios shall be terminated and Arrow
shall be deregistered as an investment company and dissolved under state law as
described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and subject to the terms and conditions hereof,
and intending to be legally bound hereby, Arch and Arrow agree as follows:
I. TRANSFER OF ASSETS OF ARROW FUNDS.
1.01 At the Effective Time of the Reorganization (as defined in Article
III) with respect to each of the Acquired Portfolios, all property of every
description, and all interests, rights, privileges and powers of such Acquired
Portfolio other than cash in an amount necessary to pay any unpaid dividends and
distributions as provided in Article IV, Section 4.01(h) (such assets, the
"Acquired Portfolio Assets"), shall be transferred and conveyed by such Acquired
Portfolio to Arch on behalf of one of its portfolios as set forth in Article I,
Section 1.02 (each, an "Acquiring Portfolio"), and shall be accepted by Arch on
behalf of such Acquiring Portfolio, and Arch, on behalf of such Acquiring
Portfolio, shall assume all known liabilities, whether
I-5
<PAGE> 68
accrued, absolute, contingent or otherwise, of such Acquired Portfolio reflected
in the calculation of such Acquired Portfolio's net asset value (the "Acquired
Portfolio Liabilities"), so that at and after the Effective Time of the
Reorganization with respect to such Acquired Portfolio: (i) all assets of such
Acquired Portfolio shall become and be the assets of its Acquiring Portfolio;
and (ii) all known liabilities of such Acquired Portfolio reflected as such in
the calculation of such Acquired Portfolio's net asset value shall attach to its
Acquiring Portfolio as aforesaid and may thenceforth be enforced against such
Acquiring Portfolio to the extent as if the same had been incurred by it.
Without limiting the generality of the foregoing, the Acquired Portfolio Assets
shall include all property and assets of any nature whatsoever, including,
without limitation, all cash, cash equivalents, securities, claims and
receivables (including dividend and interest receivables) owned by an Acquired
Portfolio, and any deferred or prepaid expenses shown as an asset on an Acquired
Portfolio's books, at the Effective Time of the Reorganization of such Acquired
Portfolio, and all good will, all other intangible property and all books and
records belonging to an Acquired Portfolio. Recourse by any person for the
Acquired Portfolio Liabilities assumed by an Acquiring Portfolio shall, at and
after the Effective Time of the Reorganization of such Acquired Portfolio, be
limited to such Acquiring Portfolio.
I-6
<PAGE> 69
1.02 The assets of each Acquired Portfolio shall be acquired by the
Acquiring Portfolio identified below opposite its name:
<TABLE>
<CAPTION>
Arrow Portfolios Arch Portfolios
- ---------------- ---------------
<S> <C>
Fixed Income Portfolio Government & Corporate Bond
Portfolio (Class D Common Stock)
Municipal Income Portfolio National Municipal Bond Portfolio
(Class N Common Stock)
Equity Portfolio Growth Equity Portfolio
(Class S Common Stock)
</TABLE>
1.03 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, Arch shall simultaneously
issue at the applicable Effective Time of the Reorganization to each Acquired
Portfolio a number of full and fractional (to the third decimal place) Investor
A Shares of the Acquiring Portfolio specified in Article I, Section 1.02, all
determined and adjusted as provided in this Agreement. The number of Investor A
Shares of each Acquiring Portfolio so issued will have an aggregate net asset
value equal to the net value of the Acquired Portfolio Assets that are
represented by the shares of the Acquired Portfolio, the holders of which shall
receive Investor A Shares of the Acquiring Portfolio, as specified in Article I,
Section 1.02, all determined and adjusted as provided in this Agreement.
1.04 The net asset value of the Investor A Shares of the Acquiring
Portfolios and the net asset value of the shares of the Acquired Portfolios
shall be determined as of the applicable
I-7
<PAGE> 70
Effective Time of the Reorganization with respect to each Acquired Portfolio.
1.05 The net asset value of the Investor A Shares of each Acquiring
Portfolio shall be computed in the manner set forth in such Acquiring
Portfolio's then current prospectuses under the Securities Act of 1933, as
amended (the "1933 Act"). In determining the value of the securities transferred
by the Acquired Portfolios to the Acquiring Portfolios, each security shall be
priced in accordance with the policies and procedures of Arch described in its
then current prospectuses and statements of additional information and adopted
by Arch's Board of Directors. For such purposes, price quotations and the
security characteristics relating to establishing such quotations shall be
determined by Arch, such determination being subject to the approval of Arrow,
and shall be subject to adjustment by the amount, if any, agreed to by the
parties hereto.
II. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF ARROW. Immediately after
the Effective Time of the Reorganization with respect to each Acquired
Portfolio, such Acquired Portfolio shall distribute in complete liquidation pro
rata to the record holders of its shares at the applicable Effective Time of the
Reorganization the Investor A Shares of the Acquiring Portfolio identified in
Article I, Section 1.02, to be received by the record holders of the shares of
such Acquired Portfolio. In addition, each shareholder of record of an Acquired
Portfolio
I-8
<PAGE> 71
shall have the right to receive any unpaid dividends or other distributions
which were declared before the applicable Effective Time of the Reorganization
with respect to the shares of such Acquired Portfolio that are held by the
shareholder at the applicable Effective Time of the Reorganization. In
accordance with instructions it receives from Arrow, Arch shall record on its
books the ownership of Investor A Shares of each Acquiring Portfolio by the
record holders of the shares of the Acquired Portfolio identified in Article I,
Section 1.02. No redemption or repurchase of any Acquiring Portfolio shares
credited to Arrow shareholders of record with respect to the Acquired Portfolio
shares represented by share certificates shall be permitted until such
certificates have been surrendered to Arch's transfer agent for cancellation.
All of the issued and outstanding shares of each Acquired Portfolio shall be
cancelled on the books of Arrow at the Effective Time of the Reorganization of
such Acquired Portfolio and shall thereafter represent only the right to receive
the Investor A Shares of the Acquiring Portfolio identified in Article I,
Section 1.02, following which the Acquired Portfolio's transfer books shall be
closed permanently. As soon as practicable after the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall make all filings
and take all other steps as shall be necessary and proper to effect its complete
dissolution, and shall file an application pursuant to Section 8(f) of the
Investment Company Act of 1940, as amended (the "1940 Act") for an order
declaring
I-9
<PAGE> 72
that it has ceased to be an investment company. After the Effective Time of the
Reorganization with respect to the Continuing Fund, Arrow shall not conduct any
business except in connection with its liquidation, dissolution, and
deregistration.
III. EFFECTIVE TIMES OF THE REORGANIZATION. The Effective Time of the
Reorganization with respect to the Reorganizing Portfolios shall be 4:00 p.m.,
Eastern Time, on November 14, 1997, or on such other date as may be agreed to in
writing by the duly authorized officers of both parties hereto. The Effective
Time of the Reorganization with respect to the Continuing Portfolio shall be
4:00 p.m., Eastern Time, on November 21, 1997, or on such other date as may be
agreed to in writing by the duly authorized officers of both parties hereto.
IV. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARROW.
4.01 Arrow, on behalf of itself and each Acquired Portfolio, represents
and warrants to, and agrees with, Arch as follows:
4.01 (a) Arrow is a Massachusetts business trust duly created
pursuant to its Declaration of Trust for the purpose of acting
as a management investment company under the 1940 Act and is
validly existing
I-10
<PAGE> 73
under the laws of, and duly authorized to transact business
in, the Commonwealth of Massachusetts. It is registered with
the Securities and Exchange Commission (the "SEC") as an
open-end, management investment company under the 1940 Act and
such registration is in full force and effect.
4.01 (b) Arrow has power to own all of its properties and assets and,
subject to the approvals of shareholders referred to herein,
to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local
authorizations to carry on its business as now being conducted
and to consummate the transactions contemplated by this
Agreement.
4.01 (c) This Agreement has been duly authorized, executed and
delivered by Arrow, and represents Arrow's valid and binding
contract, enforceable in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights and
to general principles of equity. The execution and delivery of
this Agreement does not and will not, and the
I-11
<PAGE> 74
consummation of the transactions contemplated by this
Agreement will not, violate Arrow's Declaration of Trust or
By-Laws or any agreement or arrangement to which it is a party
or by which it is bound.
4.01 (d) Each Acquired Portfolio has elected to qualify and has
qualified as a regulated investment company under Part I of
Subchapter M of the Code, as of and since its first taxable
year; has been a regulated investment company under such Part
of the Code at all times since the end of its first taxable
year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company until the Effective
Time of the Reorganization with respect to such Acquired
Portfolio.
4.01 (e) All federal, state, local and foreign income, profits,
franchise, sales, withholding, customs, transfer and other
taxes, including interest, additions to tax and penalties
(collectively, "Taxes") relating to the Acquired Portfolio
Assets due or properly shown to be due on any return filed by
or on behalf of any Acquired Portfolio with respect to taxable
periods ending on or prior
I-12
<PAGE> 75
to, and the portion of any interim period up to, the date
hereof have been fully and timely paid or provided for; and
there are no levies, liens, or other encumbrances relating to
Taxes existing, threatened or pending with respect to the
Acquired Portfolio Assets. At the Effective Time of the
Reorganization with respect to each Acquired Portfolio, all
returns and reports of Arrow and such Acquired Portfolio
respecting Taxes required by law to have been filed by such
time shall have been filed.
4.01 (f) The financial statements of each Acquired Portfolio for its
fiscal year ended September 30, 1996, examined by KPMG Peat
Marwick LLP, copies of which have been previously furnished to
Arch, present fairly the financial position of each Acquired
Portfolio as of such date and the results of its operations
for the year then ended, in conformity with generally accepted
accounting principles.
4.01 (g) The unaudited financial statements of each Acquired
Portfolio for the six-month period ended March 31, 1997,
copies of which have been previously furnished to Arch,
present fairly the
I-13
<PAGE> 76
financial position of each Acquired Portfolio as of such date
and the results of its operations for the six-month period
then ended, in conformity with generally accepted accounting
principles.
4.01 (h) Prior to the Effective Time of the Reorganization
applicable to the Reorganizing Portfolios, each of
the Reorganizing Portfolios shall have declared a
dividend, with a record date and ex-dividend date
prior thereto, which, together with all previous
dividends, shall have the effect of distributing
to its shareholders all of its net investment
company income, if any, for the taxable year ended
on September 30, 1997 and for the period from said
date to and including the Effective Time of the
Reorganization applicable to the Reorganizing
Portfolios (computed without regard to any
deduction for dividends paid), and all of its net
capital gain, if any, realized in such taxable
year and period.
4.01 (i) At the Effective Time of the Reorganization with respect
to each Acquired Portfolio, there shall be no known
liabilities of such Acquired Portfolio, whether accrued,
absolute, contingent or
I-14
<PAGE> 77
otherwise, not reflected in the net asset value per share of
its outstanding shares.
4.01 (j) There are no legal, administrative or other proceedings
pending or, to Arrow's knowledge, threatened against Arrow or
an Acquired Portfolio which could result in liability on the
part of Arrow or an Acquired Portfolio.
4.01 (k) Subject to the approvals of shareholders referred to herein,
at the Effective Time of the Reorganization with respect to
each Acquired Portfolio, Arrow shall have full right, power
and authority to sell, assign, transfer and deliver the
Acquired Portfolio Assets of such Acquired Portfolio and, upon
delivery and payment for the Acquired Portfolio Assets as
contemplated herein, an Acquiring Portfolio shall acquire good
and marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership
or transfer thereof (except as imposed by federal or state
securities laws).
4.01 (l) No consent, approval, authorization or order of any court or
governmental authority is required
I-15
<PAGE> 78
for the consummation by Arrow of the transactions contemplated
by this Agreement, except such as may be required under the
1933 Act, the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act, the rules and regulations under
those Acts, and state securities laws.
4.01 (m) Insofar as the following relate to Arrow, the registration
statement filed by Arch on Form N-14 relating to the shares of
certain Acquiring Portfolios that will be registered with the
SEC pursuant to this Agreement, which, without limitation,
shall include a proxy statement of Arrow and the prospectus of
Arch with respect to the transactions contemplated by this
Agreement, and any supplement or amendment thereto or to the
documents contained or incorporated therein by reference (the
"N-14 Registration Statement"), on the effective date of the
N-14 Registration Statement, at the time of any shareholders'
meetings referred to herein and at each Effective Time of the
Reorganization: (i) shall comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act,
the rules and regulations thereunder, and state securities
laws, and (ii) shall not contain any untrue
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statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading.
4.01 (n) All of the issued and outstanding shares of each Acquired
Portfolio have been duly and validly issued, are fully paid
and non-assessable, and were offered for sale and sold in
conformity with all applicable federal and state securities
laws, and no shareholder of an Acquired Portfolio has any
preemptive right of subscription or purchase in respect of
such shares.
4.01 (o) Arrow shall not sell or otherwise dispose of any shares of
an Acquiring Portfolio to be received in the transactions
contemplated herein, except in distribution to its
shareholders as contemplated herein.
4.01 (p) Arrow has valued, and will continue to value, its
portfolio securities and other assets in accordance with
applicable legal requirements.
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V. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF ARCH.
5.01 Arch, on behalf of itself and each Acquiring Portfolio, represents
and warrants to, and agrees with, Arrow as follows:
5.01 (a) Arch is a corporation duly organized and validly
existing under the laws of the State of Maryland. It
is registered with the SEC as an open-end, management
investment company under the 1940 Act and such
registration is in full force and effect.
5.01 (b) Arch has power to own all of its properties and
assets and to carry out and consummate the
transactions contemplated herein, and has all
necessary federal, state and local authorizations
to carry on its business as now being conducted
and to consummate the transactions contemplated by
this Agreement.
5.01 (c) This Agreement has been duly authorized, executed
and delivered by Arch, and represents Arch's valid
and binding contract, enforceable in accordance with
its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization,
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arrangement, moratorium, and other similar laws of
general applicability relating to or affecting
creditors' rights and to general principles of
equity. The execution and delivery of this Agreement
does not and will not, and the consummation of the
transactions contemplated by this Agreement will not,
violate Arch's Article of Incorporation or By-Laws or
any agreement or arrangement to which it is a party
or by which it is bound.
5.01 (d) Each Acquiring Portfolio has elected or will elect
to qualify as a regulated investment company under
Part I of Subchapter M of the Code, and each of
the first two Acquiring Portfolios listed in
Article I, Section 1.02, has so qualified as of
and at all times since the end of its first
taxable year and intends to continue to so
qualify.
5.01 (e) The financial statements of each of the first two
Acquiring Portfolios listed in Article I, Section
1.02, for its fiscal year or period ended November
30, 1996, examined by KPMG Peat Marwick LLP, copies
of which have been previously furnished to Arrow,
present fairly the financial
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position of each such Acquiring Portfolio as of such
date and the results of its operations for the year
or period then ended, in conformity with generally
accepted accounting principles.
5.01 (f) The unaudited financial statements of each of the
first two Acquiring Portfolios listed in
Article I, Section 1.02, for the six-month period
ended May 31, 1997, copies of which have been
previously furnished to Arrow, present fairly the
financial position of each such Acquiring
Portfolio as of such date and the results of its
operations for the six-month period then ended, in
conformity with generally accepted accounting
principles.
5.01 (g) At the Effective Time of the Reorganization with
respect to each Acquiring Portfolio, there shall
be no known liabilities applicable to the Investor
A Shares of such Acquiring Portfolio, whether
accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of such
Acquiring Portfolio's Investor A Shares.
5.01 (h) There are no legal, administrative or other
proceedings pending or, to Arch's knowledge,
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threatened against Arch or an Acquiring Portfolio
which could result in liability on the part of Arch
or an Acquiring Portfolio.
5.01 (i) No consent, approval, authorization or order of
any court or governmental authority is required
for the consummation by Arch of the transactions
contemplated by this Agreement, except such as may
be required under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01 (j) Insofar as the following relate to Arch, the N-14
Registration Statement on its effective date, at
the time of any shareholders' meetings referred to
herein and at each Effective Time of the
Reorganization: (i) shall comply in all material
respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws,
and (ii) shall not contain any untrue statement of
a material fact or omit to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading.
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5.01 (k) The Investor A Shares of each Acquiring Portfolio
to be issued and delivered to an Acquired
Portfolio for the account of record holders of
shares of such Acquired Portfolio pursuant to the
terms hereof, shall have been duly authorized as
of the Effective Time of the Reorganization
applicable to such Acquiring Portfolio and, when
so issued and delivered, shall be duly and validly
issued, fully paid and non-assessable, and no
shareholder of Arch shall have any preemptive
right of subscription or purchase in respect
thereto.
5.01 (l) Arch has valued, and will continue to value, its
portfolio securities and other assets in
accordance with applicable legal requirements.
5.01 (m) The Board of Directors of Arch complies with the
requirements of Section 15(f)(1)(A) of the 1940
Act as of the date hereof. If its Board of
Directors ceases to comply with such requirements
at any time within three years after the Effective
Time of the Reorganization with respect to the
Continuing Portfolio, Arch will take such action
as is necessary to restore such compliance as soon
as is reasonably practicable.
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VI. SHAREHOLDER ACTION ON BEHALF OF THE ACQUIRED PORTFOLIOS.
6.01 As soon as practicable after the effective date of the N-14
Registration Statement, but in any event prior to the Effective Time of the
Reorganization applicable to the Reorganizing Portfolios and as a condition to
the Reorganization, Arrow shall hold a meeting of the shareholders of the
Acquired Portfolios for the purpose of considering and voting upon:
6.01 (a) Approval of this Agreement and the transactions
contemplated hereby, including, without
limitation:
(i) The transfer of the Acquired Portfolio Assets
belonging to each Acquired Portfolio to an
Acquiring Portfolio, and the assumption by such
Acquiring Portfolio of the Acquired Portfolio
Liabilities of such Acquired Portfolio, in
exchange for Investor A Shares of such
Acquiring Portfolio, as set forth in Article I,
Section 1.02.
(ii) The liquidation of each Acquired Portfolio
through the distribution to its record
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holders of Investor A Shares of an Acquiring
Portfolio as described in this Agreement.
6.01 (b) Such other matters as may be determined by the
parties hereto.
6.02 Approval of this Agreement and the transactions contemplated
herein by the shareholders of the Acquired Portfolios shall constitute the
waiver of the application of any fundamental policy of such Acquired Portfolios
that might be deemed to prevent them from taking the actions necessary to
effectuate the Reorganization as described, and such policies, if any, shall be
deemed to have been amended accordingly.
VII. N-14 REGISTRATION STATEMENT AND PROXY SOLICITATION MATERIALS. Arch
shall file the N-14 Registration Statement under the 1933 Act, and Arrow shall
file the combined prospectus/proxy statement contained therein under the 1934
Act and 1940 Act proxy rules, with the SEC as promptly as practicable. Each of
Arch and Arrow has cooperated and shall continue to cooperate with the other,
and has furnished and shall continue to furnish the other with the information
relating to itself that is required by the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations under each of those Acts and state securities laws, to
be included in the N-14 Registration Statement.
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VIII. DELIVERY OF ASSETS AND SHARES. Delivery of the Acquired Portfolio
Assets and the Investor A Shares of each Acquiring Portfolio to be issued
pursuant to Article I shall occur at the Effective Time of the Reorganization
applicable to such Acquired Portfolio, or on such other date, and at such place
and time, as may be determined by the President or any Vice President of each
party hereto. To the extent any Acquired Portfolio Assets are, for any reason,
not transferred at the applicable Effective Time of the Reorganization, Arrow
shall cause such Acquired Portfolio Assets to be transferred in accordance with
this Agreement at the earliest practicable date thereafter.
IX. ARCH CONDITIONS.
9.01 The obligations of Arch hereunder with respect to each Acquiring
Portfolio shall be subject to the following conditions precedent:
9.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
shareholders of each Acquired Portfolio, in the
manner required by law.
9.01 (b) Arrow shall have duly executed and delivered to
Arch such bills of sale, assignments, certificates
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and other instruments of transfer ("Transfer
Documents") as may be necessary or desirable to
transfer all right, title and interest of Arrow and
such Acquired Portfolio in and to the Acquired
Portfolio Assets of such Acquired Portfolio. The
Acquired Portfolio Assets shall be accompanied by all
necessary state stock transfer stamps or cash for the
appropriate purchase price therefor.
9.01 (c) All representations and warranties of Arrow made
in this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of such Acquired Portfolio since September 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
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9.01 (d) Arch shall have received an opinion of Dickstein,
Shapiro, Morin & Oshinsky LLP, addressed to Arch
in form reasonably satisfactory to Arch and dated
the Effective Time of the Reorganization
applicable to each Acquired Portfolio, substan-
tially to the effect that: (i) Arrow is a
Massachusetts business trust duly organized and
validly existing under the laws of the
Commonwealth of Massachusetts; (ii) the shares of
each Acquired Portfolio outstanding at the
applicable Effective Time of the Reorganization
are duly authorized, validly issued, fully paid
and non-assessable by such Acquired Portfolio, and
to such counsel's knowledge no shareholder of such
Acquired Portfolio has any option, warrant or pre-
emptive right to subscription or purchase in
respect thereof; (iii) this Agreement and the
Transfer Documents have been duly authorized,
executed and delivered by Arrow and represent its
legal, valid and binding contracts or instruments,
enforceable against Arrow in accordance with their
terms, subject to the effect of bankruptcy,
insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors'
rights generally and court decisions with respect
thereto, and such counsel shall not be required to
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express an opinion with respect to the application of
equitable principles in any proceeding, whether at
law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for
particular matters to an Acquired Portfolio and its
assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the
transactions contemplated by this Agreement will not,
violate the Declaration of Trust or By-Laws of Arrow
or any material agreement known to such counsel to
which Arrow is a party or by which Arrow is bound;
and (v) to such counsel's knowledge, no consent,
approval, authorization or order of any court or
governmental authority is required for the
consummation by Arrow of the transactions
contemplated by this Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the
1940 Act, the rules and regulations under those Acts,
and such as may be required under state securities
laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion,
provided such other counsel is reasonably acceptable
to Arch.
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9.01 (e) Arch shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, substantially to the
effect that for federal income tax purposes
(i) the transfer by each Acquired Portfolio of all
of its Acquired Portfolio Assets and Acquired
Portfolio Liabilities to the corresponding
Acquiring Portfolio, in exchange for Investor A
Shares of such Acquiring Portfolio, and the
distribution of said Investor A Shares to the
shareholders of such Acquired Portfolio, as
provided in this Agreement, will each constitute a
reorganization within the meaning of Section
368(a)(1)(C), (D) or (F) of the Code and with
respect to each reorganization, the Acquired
Portfolio and the Acquiring Portfolio will each be
considered "a party to a reorganization" within
the meaning of Section 368(b) of the Code; (ii) in
accordance with Sections 361(a), 361(c)(1) and
357(a) of the Code, no gain or loss will be
recognized by any Acquired Portfolio as a result
of such transactions; (iii) in accordance with
Section 1032(a) of the Code, no gain or loss will
be recognized by an Acquiring Portfolio as a
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result of such transactions; (iv) in accordance with
Section 354(a)(1) of the Code, no gain or loss will
be recognized by the shareholders of any Acquired
Portfolio on the distribution to them by such
Acquired Portfolio of Investor A Shares of an
Acquiring Portfolio in exchange for their shares of
such Acquired Portfolio; (v) in accordance with
Section 358(a)(1) of the Code, the aggregate basis of
Investor A Shares of an Acquiring Portfolio received
by each holder of shares of an Acquired Portfolio
will be the same as the aggregate basis of the
shareholder's Acquired Portfolio shares immediately
prior to the transactions; (vi) in accordance with
Section 362(b) of the Code, the basis of the Acquired
Portfolio Assets to each Acquiring Portfolio will be
the same as the basis of such Acquired Portfolio
Assets in the hands of an Acquired Portfolio
immediately prior to the exchange; (vii) in
accordance with Section 1223 of the Code, a
shareholder's holding period for Investor A Shares of
an Acquiring Portfolio will be determined by
including the period for which the shareholder held
the shares of an Acquired Portfolio exchanged
therefor, provided that the shareholder held such
shares of an Acquired Portfolio as a capital asset;
(viii) in accordance
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with Section 1223 of the Code, the holding period of
an Acquiring Portfolio with respect to the Acquired
Portfolio Assets will include the period for which
such Acquired Portfolio Assets were held by an
Acquired Portfolio; and (ix) in accordance with
Section 381(a) of the Code, each Acquiring Portfolio
will succeed to the tax attributes of the
corresponding Acquired Portfolio described in Section
381(c) of the Code.
9.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
9.01 (g) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
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9.01 (h) Arrow shall have delivered or caused to be
delivered to Arch each account, book, record or
other document of Arrow applicable to such
Acquired Portfolio which is required to be
maintained by Section 31(a) of the 1940 Act and
Rule 31a-1 to 31a-3 thereunder (regardless of what
person possesses the same), and a copy of all
agreements and instruments to which Arrow is a
party or signatory. Arrow has instructed its
service contractors to provide Arch upon request
with access to and copies of all documents
belonging to Arrow. Arrow shall have delivered to
Arch a list of the tax costs of the securities of
each Acquired Portfolio by lot and the holding
periods of such securities, as of the Effective
Time of the Reorganization applicable to each
Acquired Portfolio.
9.01 (i) The President or any Vice President of Arrow shall
have certified that Arrow has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
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9.01 (j) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., as described in
the Agreement and Plan of Merger dated as of
October 27, 1996, shall have been consummated.
9.01 (k) The Acquired Portfolio Assets to be transferred to
an Acquiring Portfolio under this Agreement shall
include no assets which such Acquiring Portfolio
may not properly acquire pursuant to its
investment objective, policies or limitations, or
may not otherwise lawfully acquire.
9.01 (l) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both of
the Reorganizing Portfolios shall have been
consummated.
X. ARROW CONDITIONS.
10.01 The obligations of Arrow hereunder with respect to each Acquired
Portfolio shall be subject to the following conditions precedent:
10.01 (a) This Agreement and the transactions contemplated
by this Agreement shall have been approved by the
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shareholders of each Acquired Portfolio in the
manner required by law.
10.01 (b) All representations and warranties of Arch made in
this Agreement shall be true and correct in all
material respects as if made at and as of each
Effective Time of the Reorganization. As of the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, there shall have been no
material adverse change in the financial condition
of its Acquiring Portfolio since November 30,
1996, other than those changes incurred in the
ordinary course of business as an investment
company. No action, suit or other proceeding
shall be threatened or pending before any court or
governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the
transactions contemplated herein.
10.01 (c) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arrow in form
reasonably satisfactory to it and dated the Effective
Time of the Reorganization applicable to each
Acquired Portfolio, substantially to the effect that:
(i) Arch is a corporation duly
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organized and validly existing under the laws of the
State of Maryland; (ii) the Investor A Shares of each
Acquiring Portfolio to be delivered at such time to
an Acquired Portfolio as provided for by this
Agreement are duly authorized and upon delivery will
be validly issued, fully paid and non-assessable by
such Acquiring Portfolio, and to such counsel's
knowledge no shareholder of an Acquiring Portfolio
has any option, warrant or pre-emptive right to
subscription or purchase in respect thereof; (iii)
this Agreement has been duly authorized, executed and
delivered by Arch and represents its legal, valid and
binding contract, enforceable against Arch in
accordance with its terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with
respect thereto, and such counsel shall not be
required to express an opinion with respect to the
application of equitable principles in any
proceeding, whether at law or in equity, or with
respect to the provisions of this Agreement intended
to limit liability for particular matters to an
Acquiring Portfolio and its assets; (iv) the
execution and delivery of this Agreement did not,
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and the consummation of the transactions contemplated
by this Agreement will not, violate the Articles of
Incorporation or By-Laws of Arch, or any material
agreement known to such counsel to which Arch is a
party or by which Arch is bound; and (v) to such
counsel's knowledge no consent, approval,
authorization or order of any court or governmental
authority is required for the consummation by Arch of
the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act,
the 1934 Act, the 1940 Act, the rules and regulations
under those Acts and such as may be required under
state securities laws. Such opinion may rely on the
opinion of other counsel to the extent set forth in
such opinion, provided such other counsel is
reasonably acceptable to Arrow.
10.01 (d) Arrow shall have received an opinion of Drinker
Biddle & Reath LLP, addressed to Arch and Arrow in
form reasonably satisfactory to them and dated the
Effective Time of the Reorganization applicable to
each Acquired Portfolio, with respect to the matters
specified in Article IX, Section 9.01(e).
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10.01 (e) The N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order
suspending such effectiveness shall have been
instituted, or, to the knowledge of Arch,
contemplated by the SEC and the parties shall have
received all permits and other authorizations
necessary under state securities laws to
consummate the transactions contemplated by this
Agreement.
10.01 (f) The SEC shall not have issued any unfavorable
advisory report under Section 25(b) of the 1940 Act
nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act.
10.01 (g) The President or any Vice President of Arch shall
have certified that Arch has performed and
complied in all material respects with each of its
agreements and covenants required by this
Agreement to be performed or complied with by it
prior to or at each Effective Time of the
Reorganization.
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10.01 (h) The merger between Mercantile Bancorporation, Inc.
and Mark Twain Bancshares Inc., described in the
Agreement and Plan of Reorganization dated as of
October 27, 1996, shall have been consummated.
10.02 (i) With respect to the Reorganization of the
Continuing Portfolio, the Reorganization of both
of the Reorganizing Portfolios shall have been
consummated.
XI. TAX DOCUMENTS. Arrow shall deliver to Arch at each Effective Time
of the Reorganization confirmations or other adequate evidence as to the
adjusted tax basis of the Acquired Portfolio Assets delivered to an Acquiring
Portfolio in accordance with the terms of this Agreement.
XII. FINDER'S FEES. Each party represents and warrants to each of the
other parties hereto that there is no person who is entitled to any finder's or
other similar fee or commission arising out of the transactions contemplated by
this Agreement.
XIII. ANNOUNCEMENTS. Any announcements or similar publicity with
respect to this Agreement or the transactions contemplated herein shall be at
such time and in such manner as the parties shall agree; provided, that nothing
herein shall prevent either party upon notice to the other party from making
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such public announcements as such party's counsel may consider advisable in
order to satisfy the party's legal and contractual obligations.
XIV. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments, and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
XV. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Arrow and Arch set forth in this Agreement shall terminate
upon the consummation of the Reorganization.
XVI. TERMINATION OF AGREEMENT.
16.01 This Agreement may be terminated as to one or more investment
portfolios by a party at any time at or prior to (i) the Effective Time of the
Reorganization of the Reorganizing Portfolios, or (ii) with respect to the
Continuing Portfolio and the corresponding Acquired Portfolio, at any time at or
prior to the Effective Time of the Reorganization of the Continuing
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Portfolio, by its Board of Trustees, in the case of Arrow, or its Board of
Directors, in the case of Arch, as provided below:
(a) By Arch if the conditions set forth in Article IX
are not satisfied as specified in said Article;
(b) By Arrow if the conditions set forth in Article X
are not satisfied as specified in said Article; or
(c) By the mutual consent of the parties.
16.02 If a party terminates this Agreement as to one or more investment
portfolios because one or more of the conditions precedent have not been
fulfilled, or if this Agreement is terminated by mutual consent, this Agreement
will become null and void without any liability of either party or any of their
investment portfolios to the other; provided, however, that if such termination
is by Arch pursuant to Section 16.01(a) as a result of a breach by Arrow of any
of its representations, warranties or covenants in this Agreement, or such
termination is by Arrow pursuant to Section 16.01(b) as a result of a breach by
Arch of any of its representations, warranties or covenants in this Agreement,
nothing herein shall affect the non-breaching party's right to damages on
account of such other party's breach.
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XVII. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the shareholders of
Arrow, (a) the parties hereto may, by written agreement authorized by the Board
of Directors of Arch and the Board of Trustees of Arrow or their authorized
officers and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) either party may waive any breach by
the other party or the failure to satisfy any of the conditions to its
obligations (such waiver to be in writing and authorized by the President or any
Vice President of the waiving party with or without the approval of such party's
shareholders).
XVIII. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Maryland, without giving effect to the conflicts of law principles
otherwise applicable therein.
XIX. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
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XX. BENEFICIARIES. Nothing contained in this Agreement shall be deemed
to create rights in or eliminate liabilities of persons not parties hereto,
other than the successors and permitted assigns of the parties.
XXI. ARROW LIABILITY.
21.01 The names "Arrow Funds" and "Board of Trustees of Arrow Funds"
refer, respectively, to the trust created and the trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated July 1, 1992, which is hereby referred to and a copy of which is on
file at the office of the State Secretary of the Commonwealth of Massachusetts
and at the principal office of Arrow. The obligations of Arrow entered into in
the name or on behalf thereof by any of the trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the trustees, shareholders or representatives of Arrow personally, but bind
only the trust property, and all persons dealing with any series of shares of
Arrow must look solely to the trust property belonging to such series for the
enforcement of any claims against Arrow.
21.02 Both parties specifically acknowledge and agree that any
liability of Arrow under this Agreement with respect to an Acquired Portfolio,
or in connection with the transactions
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contemplated herein with respect to an Acquired Portfolio, shall be discharged
only out of the assets of that Acquired Portfolio and that no other portfolio of
Arrow shall be liable with respect thereto.
XXII. ARCH LIABILITY. Both parties specifically acknowledge and agree
that any liability of Arch under this Agreement with respect to an Acquiring
Portfolio, or in connection with the transactions contemplated herein with
respect to an Acquiring Portfolio, shall be discharged only out of the assets of
that Acquiring Portfolio and that no other portfolio of Arch shall be liable
with respect thereto.
XXIII. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to a nationally recognized
overnight courier service, in each case properly addressed to the party entitled
to receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in writing
by notice similarly given by one party to the other party hereto:
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If to Arch:
Jerry V. Woodham, Chairman of the Board
The ARCH Fund, Inc.
Saint Louis University
Fitzgerald Hall
3500 Lindell Blvd.
St. Louis, MO 63131
Telecopier Number: (314) 977-2298
With a copy to:
Henry S. Hilles, Jr., Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2878
If to Arrow:
Arrow Funds
c/o Gail Cagney, Esq.
Federated Investors
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
Telecopier Number: (412) 288-8141
With a copy to:
Matthew G. Maloney, Esq.
Dickstein, Shapiro, Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, DC 20037
Telecopier Number: (202) 887-0689
XXIV. EXPENSES. Each party shall each be responsible for the payment
of all expenses incurred by such party, in connection with this Agreement and
the transactions contemplated hereby.
I-44
<PAGE> 107
XXV. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXVI. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers designated below as of the date
first written above.
THE ARCH FUND, INC.
ATTEST:
___________________________ By: _______________________
ARROW FUNDS
ATTEST:
____________________________ By: ________________________
I-45
<PAGE> 108
APPENDIX II
MANAGEMENT'S DISCUSSION
OF FUND PERFORMANCE
<PAGE> 109
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
Q. How will you manage this new Portfolio?
A. The Fund was launched on November 18, 1996, and invests in high-quality
municipal securities in various municipalities across the country. It will
maintain an average credit quality of around AA1 under present conditions. One
reason for this is that the municipal market generally has not paid much in
additional yield to investors who take on the added risk in lower-quality
issues. The Portfolio's average maturity initially will be approximately ten
years. However, that will change as market conditions warrant. The Portfolio's
income may be subject to certain state and local taxes and, depending on an
investor's tax status, the federal alternative minimum tax.
II-1
<PAGE> 110
- --------------------------------------------------------------------------------
Value of a $10,000 Investment
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Investor A Investor A Investor B Investor B Lehman Brothers Aggregate
(No Load) (Load)* (CDSC)** (No CDSC) Bond Index
<S> <C> <C> <C> <C> <C>
6/88 10,000 9,551 10,000 10,000 10,000
11/88 10,266 9,805 9,770 10,266 10,265
11/89 11,476 10,960 11,076 11,476 11,738
11/90 12,045 11,504 11,754 12,045 12,627
11/91 13,586 12,976 13,286 13,586 14,447
11/92 14,647 13,989 14,447 14,647 15,727
11/93 16,145 15,367 16,045 16,145 17,441
11/94 15,609 14,857 15,609 15,609 16,907
11/95 18,104 17,232 17,994 17,994 19,889
11/96 18,920 18,070 18,675 18,675 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Investor A (No Load) 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
Investor A * -0.23% 5.86% 7.24%
- -------------------------------------------------------------------------
Investor B (No CDSD) 3.79% 6.57% 7.65%
- -------------------------------------------------------------------------
Investor B (CDSC) ** -1.12% 6.41% 7.65%
- -------------------------------------------------------------------------
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
Value of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
Lehman Brothers
Aggregate
Trust Institutional Bond Index
<S> <C> <C> <C>
6/88 10,000 10,000 10,000
11/88 10,266 10,266 10,265
11/89 11,476 11,476 11,738
11/90 12,045 12,045 12,627
11/91 13,616 13,586 14,447
11/92 14,724 14,647 15,727
11/93 16,278 16,145 17,441
11/94 15,785 15,609 16,907
11/95 18,359 18,104 19,889
11/96 19,244 18,920 21,096
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Aggregate Total Return
as of 11/30/96
- -------------------------------------------------------------------------
Since
Inception
1 Year 5 Year (6/15/88)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Trust 4.82% 7.16% 8.04%
- -------------------------------------------------------------------------
Institutional 4.51% 6.85% 7.82%
- -------------------------------------------------------------------------
</TABLE>
The ARCH Government & Corporate Bond Portfolio is measured against the Lehman
Brothers Aggregate Bond Index, an unmanaged Index comprised of the Lehman
Brothers Government-Corporate Bond Index and two Lehman Brothers asset-backed
securities Indices. Investors cannot purchase the Index directly, although they
can invest in the underlying securities. The performance of the Index does not
reflect the deduction of expenses associated with a mutual fund, such as sales
charges, investment-management and fund-accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares of the Portfolio, which has been restated to
reflect the contingent deferred sales charges payable by holders of Investor B
shares who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance would
have been reduced.
Q. What were the conditions in the taxable bond market during the 12 months
ended November 30, 1996?
A. The bond market has been volatile. The ten-year Treasury bond started the
period yielding 5.70%. That yield rose to 7.10% around mid-year, then fell to
6.10%. Investors worried that the Federal Reserve would raise short-term
interest rates around the middle of the summer, because the economy had grown so
quickly in the first quarter. Then the Fed didn't do anything, and the fear
receded--so bond prices started to rise again. We started to see another rally
toward the end of the 12-month period.
Q. How did you structure the Portfolio to address those conditions?
A. We invested about 75% of the Portfolio in Treasuries, with the rest in
mortgage-backed securities. Corporate bonds seemed very expensive to us, with
yields only about 12 one-hundredths of a percentage point higher than Treasury
yields--and they have much more credit risk than Treasury or agency debt. Thus,
we used mortgage-backed issues instead of corporates to enhance the Portfolio's
yield.
The Portfolio's average maturity rose from 8.6 years to 10.8 years during the
period. We increased the maturity to take advantage of higher interest rates. We
implemented the change by selling some of our shorter Treasuries and buying
five- to ten-year mortgages. Such securities recently provided 0.75 to 1.25
percentage points of extra yield over Treasuries of comparable maturities. In
fact, we increased our Portfolio's mortgage-backed exposure from 26% to 35%,
currently*.
Q. How did you manage credit risk in the Portfolio?
A. We currently have an average quality rating of AAA, the same rating that we
had at the beginning of the year. The Portfolio's holdings currently are
comprised almost entirely of United States Treasury and agency- guaranteed
mortgage debt. The Portfolio holds almost no corporate issues because we believe
that the small current yield advantage of corporates over Treasuries does not
justify corporate debt's additional credit risk.
Q. Where are you finding the best values in the bond market?
A. Mortgage-backed securities clearly offer the most value in our securities
universe. Our intent is to continue to increase the Portfolio's mortgage
exposure from the current 35% to the 40% to 45% level. Corporates will remain on
our watch list, and we will increase the Portfolio's corporate exposure when
their yields improve relative to yields on Treasury issues.*
Q. What is your outlook for the bond market and the Portfolio?
A. We're neutral on the market right now. We don't see anything fundamental
about the economy that would cause rates to rise or fall in the immediate
future. But we will pay close attention to the psychology of the market, which
can be a very different matter. People's expectations have a large effect on the
bond market, and we'll pay close attention to changes in those expectations.
That way, we'll be prepared to make changes in the Portfolio to reflect such
psychological factors.
ARROW FIXED INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
The Arrow Fixed Income Portfolio had total net assets of $28.7 million as of
September 30, 1996. The fund had an average maturity of 11.5 years, with 36% of
the fund's assets invested in U.S. Treasury and Government Agency issues, and
57% invested in investment grade corporate bonds.
Interest rates, after moving substantially higher in the first quarter of the
year, settled into a trading range environment in the second and third quarter.
Thirty-year Treasury securities spent most of the period fluctuating in a range
of 7.20% on the high side, to 6.70% on the low side, closing at a 6.92% yield on
September 30, 1996. Stronger economic data in the second quarter caused yields
to rise, while weaker numbers in the third quarter resulted in declining rates.
Inflation in the U.S. economy continues to be moderate. The Consumer Price Index
core rate (the CPI less food and energy prices), has risen 2.8% year to date
through September versus 3% for all of 1995. While 1996 has not been favorable
for the bond market, a continued slowing in the economy and favorable inflation
numbers should eventually result in lower long-term interest rates.
ARROW FIXED INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW FIXED INCOME PORTFOLIO
II-2
<PAGE> 111
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Fixed Income Portfolio (the "Fund") from January 3, 1993 (start of performance)
to September 30, 1996, compared to the Lehman Brothers Government/Corporate
Total Index ("LBGCTI").
The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Fixed
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
Government/Corporate Total Index ("LBGCTI"). is represented by a broken dotted
line. The line graph is a visual representation of a comparison of change in
value of a hypothetical investment in the Fixed Income Portfolio and the LBGCTI
for the period from January 3, 1993 to September 30, 1996. The "y" axis
reflects the cost of the investment. The "x" axis reflects computation periods
from the ending value of the hypothetical investment in the Fixed Income
Portfolio as compared to the LBGCTI; the ending values are $11,694 and $12,760,
respectively. Beneath the list of the components that correspond to the line
graph are the following total return data for the Fixed Income Portfolio: total
return figures for the 1 year, and start of performance. The corresponding
total figures are as follows: -1.41%; and 4.28%, respectively. The performance
disclaimer and footnotes are listed directly under the graphic presentation.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBGCTI is adjusted to reflect reinvestment of dividends
on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBGCTI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. This index is
unmanaged.
ARROW MUNICIPAL INCOME PORTFOLIO
MANAGEMENT DISCUSSION AND ANALYSIS
Interest rates increased beginning in the first quarter of 1996 on concerns of
fears of rising inflation due to higher commodity prices and stronger economic
growth. This continued until the latter part of the third quarter when signs of
economic strength began to ease. Thus far, inflation has remained subdued.
Municipal supply remains somewhat low in many areas. This has enabled municipal
prices to remain firm, and thus municipals have outperformed taxables for most
of the year. Going forward, the economic signals are mixed as to whether the
economy will strengthen or weaken further going into 1997.
Therefore, the fund remains somewhat defensive with emphasis being placed on
intermediate average maturities and short to intermediate duration, along with
preference for premium coupon issues.
ARROW MUNICIPAL INCOME PORTFOLIO
GROWTH OF $10,000 INVESTED IN ARROW MUNICIPAL INCOME PORTFOLIO
The graph below illustrates the hypothetical investment of $10,000 in the Arrow
Municipal Income Portfolio (the "Fund") from January 3, 1993 (start of
performance) to September 30, 1996, compared to the Lehman Brothers State
General Obligations Bond Index ("LBSGOBI").
The graphic presentation here displayed consists of a line graph. The
corresponding components of the line graph are listed underneath. The Municipal
Income Portfolio is represented by a solid line, whereas the Lehman Brothers
State General Obligations Bond Index ("LBSGOBI") is represented by a broken
dotted line. The line graph is a visual representation of a comparison of
change in value of a hypothetical investment in the Municipal Income Portfolio
and the LBSGOBI for the period from January 3, 1993 to September 30, 1996. The
"y" axis reflects the cost of the investment. The "x" axis reflects computation
periods from the ending value of the hypothetical investment in the Municipal
Portfolio as compared to the LBSGOBI; the ending values are $11,740 and
$13,255, respectively. Beneath the list of the components that correspond to
the line graph are the following total return data for the Municipal Portfolio:
total return figures for the 1 year, and start of performance. The
corresponding total figures are as follows: 1.37%; and 4.48%, respectively. The
performance disclaimer and footnotes are listed directly under the graphic
presentation.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THE ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF
OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
* Represents a hypothetical investment of $10,000 in the Fund, after deducting
the maximum sales charge of 3.50% ($10,000 investment minus $350 sales charge
= $9,650). The Fund's performance assumes the reinvestment of all dividends
and distributions. The LBSGOBI is adjusted to reflect reinvestment of
dividends on securities in the index.
** Total return quoted reflects all applicable sales charges.
The LBSGOBI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. This
index is unmanaged.
II-3
<PAGE> 112
APPENDIX III
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services that
are available in connection with: (1) Investor A Shares and Trust Shares of the
Arch Portfolios, and (2) shares of the Arrow Portfolios.
A. GENERAL
1. SALES CHARGES AND EXEMPTIONS
Arch Portfolios -- Investor A Shares and Trust Shares
(a) Investor A Shares of each Arch Portfolio are sold with a
maximum 4.50% front-end sales charge.
(b) The Arch Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) directors and officers of Arch and the
immediate family members of such individuals; (2) directors, current and retired
employees and participants in employee benefit/retirement plans (future and
current annuitants) of Mercantile Bancorporation Inc. or any of its affiliates
or BISYS or its affiliates and the immediate family members of such individuals;
(3) brokers, dealers, and agents who have a sales agreement with BISYS, and
their employees (and the immediate family members of such individuals); (4)
customers who purchase pursuant to a wrap fee program offered by any
broker-dealer or other financial institution or financial planning organization;
(5) individuals who purchase Investor A Shares with the proceeds of Trust Shares
or Institutional Shares redeemed in connection with a rollover of benefits paid
by a qualified retirement or employee benefit plan or distribution on behalf of
any other qualified account administered by Mercantile Bank or its affiliated or
correspondent banks, within 60 days of receipt of such payment; (6) investors
who purchase Investor A Shares through a payroll deduction program; (7)
employees of any sub-adviser to Arch; (8) former holders of Southwestern Bell
Visa cards that had been issued by Mercantile Bank of Illinois, N.A. and who
participated in the Automatic Investment Program (credit cards may not be used
for the purchase of Shares); (9) investors exchanging Trust Shares of a
Portfolio received from the distribution of assets held in a qualified trust,
agency or custodian account with the trust department of Mercantile Bank or any
of its affiliated or correspondent banks; or (10) other investment companies
distributed by BISYS or its affiliates.
The sales charge will not apply to purchases of Investor A
Shares made through the reinvestment of dividends and distributions on Investor
A Shares. The sales charge also will
III-1
<PAGE> 113
not apply to exchanges between Arch's portfolios to the extent that a
shareholder has a credit for previously paid sales charges on purchases of
Investor A Shares of Arch's portfolios.
(c) The Arch Portfolios also offer rights of accumulation,
quantity discounts, letter of intent programs and a reinvestment privilege that
can reduce or eliminate the sales charge payable on Investor A Share purchases.
(d) Trust Shares of the Arch Portfolios are sold without any
sales charge.
Arrow Portfolios
(a) Shares of the Arrow Portfolios are sold with a maximum
3.50% front-end sales charge.
(b) The Arrow Portfolios offer sales charge exemptions to the
following classes of shareholders: (1) current and retired employees of
Mercantile Bancorporation Inc. (formerly Mark Twain Bancshares, Inc.) and its
subsidiaries; (2) Arrow's Trustees and their spouses and children under 21; (3)
participants in all qualified retirement plans administered by Mercantile Bank
(formerly Mark Twain Bank); (4) investors who purchase shares through the
Mercantile Bank (formerly Mark Twain Bank) trust department; and (5) investors
purchasing pursuant to a Mercantile Investment Services, Inc. (formerly Mark
Twain Brokerage Services, Inc.) wrap fee program.
The sales charge will not apply to purchases of shares made
through the reinvestment of dividends and distributions. The sales charge also
will not apply to exchanges between Arrow's portfolios to the extent that a
shareholder has previously paid a sales charge on purchasing shares of any of
Arrow's portfolios.
(c) The Arrow Portfolios also offer rights of accumulation,
quantity discounts, concurrent purchase programs, letter of intent programs and
a reinvestment privilege that can reduce or eliminate the sales charge payable
on share purchases.
III-2
<PAGE> 114
B. PURCHASE POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Minimum Initial Investor A Shares - $1,000 for $1,000 for initial
Investments initial purchases of ($5,000 for purchases ($500 for
initial purchases in connection with initial purchases by
the Automatic Exchange Program, $50 employees of Mercantile
for initial purchases in connection Bancorporation, Inc.
with Automatic Investment Program, (formerly Mark Twain
no minimums for initial purchases Bancshares, Inc.) and
via a sweep program at a financial its subsidiaries and
institution, through a payroll their spouses and
deduction program or through a wrap children under 21 and
fee program). $250 for initial
purchases in connection
Trust Shares - None with an IRA).
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Subsequent Investor A Shares - $100 ($50 for $100 minimum for any
Investments subsequent purchases through an investor.
Automatic Investment Program, $25 for
subsequent purchases through a payroll
deduction program, no minimums for subsequent
purchases through a sweep or wrap fee
program).
Trust Shares - None
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Investor A Shares - Shares may be Shares may be purchased
Investment Plan purchased monthly through automatic on a regular basis once
deductions of at least $50 from a an account has been
shareholder's checking account. opened through automatic
deductions from a
Trust Shares - None shareholder's checking
account in the minimum
amount of $100.
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase Methods Investor A Shares - Shares are sold Shares are sold to
through broker/dealers or other customers of Mercantile
organizations acting on behalf of Bancorporation Inc.
their customers by telephone or by (formerly Mark Twain
mail. Bancshares, Inc.)
through an appropriate
Trust Shares - Shares are sold to subsidiary.
financial institutions acting on
their own behalf or on behalf of
certain qualified accounts.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment methods Investor A Shares - By check, bank By check or federal
draft, money order or federal funds. funds.
Trust Shares - By federal funds.
===================================================================================================================================
</TABLE>
An Arrow shareholder who, at the effective time of the Reorganization
with respect to a particular Arrow Portfolio, meets the Arrow, but not the Arch,
minimum investment requirement, will not be required to redeem the Arch Investor
A Shares received in connection with the Reorganization, unless the
III-3
<PAGE> 115
balance in the shareholder's account drops below the Arrow
minimum as a result of redemptions.
The Arch Portfolios and Arrow Portfolios each reserve the right to
reject any purchase order.
C. REDEMPTION POLICIES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption Methods Investor A Shares - By mail or Through Mercantile
telephone through the same Bancorporation Inc.
broker/dealer organization that (formerly Mark Twain
placed the purchase order. Bancshares, Inc.) by
mail or telephone.
Trust Shares - By mail or telephone
through the same financial institution
that placed the purchase order.
- -----------------------------------------------------------------------------------------------------------------------------------
Payment Methods Investor A Shares - By check or By check or wire.
wire to the broker/dealer Payment is normally made
organization that placed the within 7 days, but Arrow
purchase order. Payment is attempts to honor
normally made within three business requests received by
days, but Arch may take up to 7 mail within one business
days to honor redemption requests. day and requests
received by telephone
Trust Shares - By wire. Payment is within 5 business days.
normally made the next business
day.
- -----------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Investor A Shares - Yes ($10,000 Yes ($10,000 minimum
Plan minimum balance/$50 minimum per balance/$100 minimum per
transaction). transaction).
Trust Shares - None
===================================================================================================================================
</TABLE>
A shareholder of record may be required to redeem Investor A Shares or
Trust Shares in any Arch Portfolio upon 60 days' written notice if the balance
in the shareholder's account in that Portfolio drops below $500 as the result of
a redemption request. The Arrow Portfolios, upon thirty days' written notice,
may redeem shares in any account if the account balance falls below $1,000. The
Arch Portfolios and the Arrow Portfolios may also redeem shares involuntarily
when appropriate in light of their responsibilities under the 1940 Act, and may
make payment for redemptions in securities in lieu of cash.
III-4
<PAGE> 116
D. SHARE EXCHANGES
<TABLE>
<CAPTION>
===================================================================================================================================
ARCH PORTFOLIOS ARROW PORTFOLIOS
===================================================================================================================================
<S> <C> <C>
By Mail Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
By Telephone Investor A Shares - Yes Yes.
Trust Shares - Yes
- -----------------------------------------------------------------------------------------------------------------------------------
Minimum Investor A Shares - At least equal At least equal to minimum
to minimum required for the required for the Portfolio
Portfolio for which shares are for which shares are
exchanged. exchanged.
Trust Shares - None
===================================================================================================================================
</TABLE>
Investor A Shares of the Arch Portfolio may be exchanged for Investor A
Shares of another portfolio offered by Arch or for Trust Shares or Institutional
Shares in the same Portfolio if the shareholder has a qualified trust, agency or
custodian account with the trust department of Mercantile Bank or any of its
affiliated or correspondent banks and the Trust Shares or Institutional Shares
are to be held in that account. Trust Shares of an Arch Portfolio may be
exchanged for Trust Shares of another portfolio offered by Arch or for Investor
A Shares of the same portfolio in connection with the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile Bank or any of its affiliated or correspondent banks.
Shareholders who exchange into any portfolio of Arch or Arrow that
imposes a sales charge may be subject to such sales charge if applicable and not
previously paid. Exchanges are only available in states where exchanges can
lawfully be made from one portfolio to another, and must satisfy the
requirements relating to the minimum initial investment in a portfolio. Arch and
Arrow reserve the right to reject any telephone exchange request and to modify
or terminate the exchange privilege (1) in the case of Arch, upon sixty days'
written notice to shareholders, or (ii) in the case of Arrow, with respect to
any shareholder who makes more than six exchanges in a year or more than three
exchanges in a calendar quarter, upon prior notification.
Arch also offers an Automatic Exchange Program enabling Investor A
shareholders to automatically exchange Investor A Shares of one portfolio for
Investor A Shares of another portfolio.
III-5
<PAGE> 117
E. RESPONSIBILITY FOR TELEPHONE INSTRUCTIONS
The Arch Portfolios and Arrow Portfolios and their respective service
contractors may be liable for losses due to unauthorized or fraudulent telephone
instructions if they do not follow reasonable procedures to verify the
authenticity of such instructions.
II. DIVIDENDS AND DISTRIBUTIONS
All Arch Portfolios and Arrow Portfolios distribute their net capital
gains to shareholders at least annually. The following table shows the
Portfolios' policies concerning the declaration and payment of dividends from
net investment income.
DIVIDENDS DECLARED DAILY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Government & Corporate Fixed Income Portfolio
Bond Portfolio
National Municipal Bond Portfolio Municipal Income Portfolio
DIVIDENDS DECLARED MONTHLY/PAID MONTHLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
Growth Equity Portfolio None
DIVIDENDS DECLARED AND PAID QUARTERLY
ARCH PORTFOLIOS ARROW PORTFOLIOS
None Equity Portfolio
III-6
<PAGE> 118
PART B
<PAGE> 119
ARROW FUNDS
19TH FLOOR
1001 LIBERTY AVENUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
ARCH FUND, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
STATEMENT OF ADDITIONAL INFORMATION
(1997 SPECIAL MEETING OF SHAREHOLDERS OF
ARROW FUNDS)
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Combined Proxy Statement/Prospectus dated
September __, 1997 for the Special Meeting of Shareholders of the Fixed Income
Portfolio, Municipal Income Portfolio and Equity Portfolio of Arrow Funds, to be
held on November 12, 1997. Copies of the Combined Proxy Statement/Prospectus may
be obtained at no charge by calling Arrow Funds at 1-800-866-6040.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Proxy Statement/Prospectus.
Further information about Investor A Shares and Trust Shares of the
Existing Arch Portfolios is contained in and incorporated by reference to Arch's
Statement of Additional Information with respect to the Existing Arch Portfolios
dated March 31, 1997 (as revised August 29, 1997), a copy of which is included
herewith. The audited financial statements and related independent accountant's
report for the Existing Arch Portfolios contained in Arch's Annual Report to
Shareholders dated November 30, 1996, and the unaudited financial statements for
the Existing Arch Portfolios contained in Arch's Semi-Annual Report to
Shareholders dated May 31, 1997 are incorporated herein by reference. No other
parts of the Annual or Semi-Annual Reports are incorporated by reference herein.
Further information about shares of the Arrow Portfolios is contained
in and incorporated by reference to Arrow's Combined Statement of Additional
Information dated November 30, 1996, a copy of which is included herewith. The
audited financial statements and related independent accountant's report for
the Arrow Portfolios contained in Arrow's Annual Report to Shareholders dated
November 30, 1996, and the unaudited financial statements for the Arrow
Portfolios contained in Arrow's Semi-Annual Report to Shareholders dated March
31, 1997 are
B-1
<PAGE> 120
incorporated herein by reference. No other parts of the Annual or Semi-Annual
Reports are incorporated by reference herein.
The date of this Statement of Additional Information is September __,
1997.
B-2
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information....................................................... B-4
Pro Forma Financial Statements............................................ PFS-1
</TABLE>
B-3
<PAGE> 122
GENERAL INFORMATION
The Shareholders of the Fixed Income Portfolio, Municipal Income
Portfolio and Equity Portfolio (collectively, the "Arrow Portfolios") of Arrow
Funds ("Arrow") are being asked to approve or disapprove an Agreement and Plan
of Reorganization (the "Reorganization Agreement") dated as of ___________, 1997
between Arrow and The Arch Fund, Inc. ("Arch"), and the transactions
contemplated thereby. The Reorganization Agreement contemplates the transfer of
substantially all of the assets and liabilities of the Arrow Portfolios to
corresponding portfolios of Arch (collectively, the "Arch Portfolios") in
exchange for full and fractional Investor A Shares representing interests in
such corresponding Arch Portfolios. The Investor A Shares issued by Arch will
have an aggregate net asset value equal to the aggregate net asset value of the
shares of the respective Arrow Portfolios that are outstanding immediately
before the effective time of the Reorganization with respect to each Arrow
Portfolio.
Following the exchange, the Arrow Portfolios will make a liquidating
distribution of the corresponding Arch Portfolios' Investor A Shares to their
shareholders. Each shareholder owning shares of a particular Arrow Portfolio at
the effective time of the Reorganization with respect to that Portfolio will
receive Investor A Shares of the corresponding Arch Portfolio of equal value,
plus the right to receive any unpaid dividends and distributions that were
declared before the effective time of the Reorganization on Arrow Portfolio
shares. Upon completion of the Reorganization, Arrow will be terminated under
state law and deregistered as an investment company under the Investment Company
Act of 1940, as amended.
The Special Meeting of Shareholders of the Arrow Portfolios to consider
the Reorganization Agreement and the related transactions will be held on
November 12, 1997 at 2:00 p.m. Eastern Time at Federated Investors Tower, 1001
Liberty Avenue, 19th Floor, Pittsburgh, Pennsylvania 15222-3779. For further
information about the transaction, see the Combined Proxy Statement/Prospectus.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities such as shares
of the Arch Portfolios, but do not prohibit such a bank holding company or its
affiliates or banks generally from acting as investment adviser, transfer agent,
or custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of customers. Mercantile Bank, MVA
B-4
<PAGE> 123
and financial intermediaries which agree to provide shareholder support services
that are banks or bank affiliates are subject to such banking laws and
regulations. Should legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with their services to
the Arch Portfolios, Arch might be required to alter materially or discontinue
its arrangement with such companies and change its method of operation. It is
anticipated, however, that any resulting change in Arch's method of operation
would not affect an Arch Portfolio's net asset value per share or result in
financial loss to any shareholder.
B-5
<PAGE> 124
ARROW MUNICIPAL INCOME PORTFOLIO
ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The pro forma combined statement of assets and liabilities, including the pro
forma combined schedule of investments reflect the accounts of the Arrow
Municipal Income Portfolio and the accounts of the Arch National Municipal Bond
Portfolio as of May 31, 1997 and the related pro forma combined statement of
operations and for the period November 18, 1996 (commencement of operations of
the Arch National Municipal Bond Portfolio) through May 31, 1997.
The pro forma combined financial statements give effect to the proposed transfer
of the assets and liabilities of the Arrow Municipal Income Portfolio in
exchange for shares of the Arch National Municipal Bond Portfolio. Under the
terms of the Agreement and Plan of Reorganization between Arrow Funds and The
Arch Fund, Inc. (the "Plan"), the combination of the Arrow Municipal Income
Portfolio and the Arch National Municipal Bond Portfolio will be treated as a
tax-free business combination. Accordingly, the historical cost of investment
securities will be carried forward to the surviving portfolio and the results of
operations of the surviving portfolio for the pre-combining periods will not be
restated. The pro forma combined financial statements do not reflect the
expenses of the Arrow and Arch Portfolios in carrying out their obligations
under the Plan as these expenses are immaterial to the financial statements.
Each Portfolio has a similar investment objective which will remain unchanged as
a result of the combination.
The pro forma financial statements should be read in conjunction with the
historical financial statements of each Portfolio incorporated by reference to
the respective prospectuses or statements of additional information. The pro
forma combined statement of assets and liabilities has been prepared as if the
combination had taken place at May 31, 1997. Certain amounts have been
reclassified to conform to current presentation.
2. PRO FORMA OPERATIONS
The pro forma combined statement of operations assumes similar rates of gross
investment income from the investments of each Portfolio. Accordingly, the
combined gross investment income is equal to the sum of the gross investment
income of each Portfolio.
Pro forma operating expenses reflect the expected expenses of the Arch National
Municipal Bond Portfolio after combination. As such, pro forma fees for
investment advisory, administration, distribution, custodian and
-2-
<PAGE> 125
2. PRO FORMA OPERATIONS (CONTINUED)
accounting services, director and trustee, and legal and audit were calculated
based on the fee schedules in effect at May 31, 1997 for the Arch National
Municipal Bond Portfolio.
3. SURVIVING ENTITY
The Arch National Municipal Bond Portfolio will be the surviving entity for
accounting purposes. This determination was based upon the relative size of each
Portfolio and that the surviving portfolio will be managed by the Arch National
Municipal Bond Portfolio's current adviser employing current investment
objectives, policies and restrictions.
<PAGE> 126
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS (101.21%):
ALABAMA (1.48%):
-- $2,000,000 $2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $0 $2,027,500
-- 3,000,000 3,000,000 Birmingham, Series A, 5.90%, 6/1/18 -- 3,015,000
----------------------------------
Total -- 5,042,500
----------------------------------
ALASKA (0.30%):
-- 1,000,000 1,000,000 State Housing Finance Corp.,
Series A, 5.70%, 12/1/11 -- 1,011,250
----------------------------------
ARIZONA (2.89%):
-- 1,000,000 1,000,000 Mohave County Unified School District
No. 1, Series A, 5.90%, 7/1/15 -- 1,036,250
-- 6,400,000 6,400,000 Salt River Project Agricultural Impact,
Series C, 6.20%, 1/1/12 -- 6,696,000
-- 1,000,000 1,000,000 Salt River Project Agriculture Impact,
6.00%, 1/1/13 -- 1,032,500
-- 1,000,000 1,000,000 State Transportation Board Excise Tax,
Series B, 5.75%, 7/1/05 -- 1,057,500
----------------------------------
Total -- 9,822,250
----------------------------------
CALIFORNIA (1.08%):
-- 1,000,000 1,000,000 California State, 6.00%, 9/1/09 -- 1,082,500
700,000 -- 700,000 Long Beach CA, Harbor Revenue Bonds,
Series A, 7.25%, 5/15/19 732,165 --
-- 2,000,000 2,000,000 Southern California Public Power
Authority, Series A, 5.00%, 7/1/15 -- 1,855,000
----------------------------------
Total 732,165 2,937,500
----------------------------------
COLORADO (1.97%):
-- 6,655,000 6,655,000 Adams County Colorado School District, 5.40%,
12/15/13 -- 6,679,956
----------------------------------
CONNECTICUT (3.45%):
-- 3,000,000 3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 -- 3,135,000
-- 8,785,000 8,785,000 Connecticut State, Series A, 5.25%, 3/1/13 -- 8,587,338
----------------------------------
Total -- 11,722,338
----------------------------------
FLORIDA (6.32%):
-- 2,000,000 2,000,000 Brevard County, 6.00%, 9/1/11 -- 2,075,000
-- 5,525,000 5,525,000 Florida State Department of Transportation,
5.25%, 7/1/17 -- 5,379,969
-- 5,000,000 5,000,000 Florida State Environmental, 5.50%, 7/1/13 -- 5,062,500
-- 8,000,000 8,000,000 Palm Beach County Solid Waste Authority, 5.38%,
10/1/11 -- 7,940,000
-- 1,000,000 1,000,000 State Board of Education Capital Outlay Pub.
Ed., Series A, 5.88%, 6/1/16 -- 1,022,500
----------------------------------
Total -- 21,479,969
----------------------------------
GEORGIA (0.80%):
500,000 -- 500,000 Appling County, GA Development Authority, PCR,
Refunding, Oglethorpe Power Corp. Hatch
Project, MBIA Insured, 7.00%, 1/1/12 550,980 --
-- 1,000,000 1,000,000 Atlanta, Series A, 6.10%, 12/1/19 -- 1,041,250
-- 1,000,000 1,000,000 Georgia State, Series B, 6.30%, 3/1/09 -- 1,113,750
----------------------------------
Total 550,980 2,155,000
----------------------------------
HAWAII (4.18%):
-- 8,000,000 8,000,000 Hawaii State, Series CN, 5.50%, 3/1/14,
Insured by FGIC -- 8,000,000
-- 5,815,000 5,815,000 Honolulu City & County, 6.00%, 1/1/09 -- 6,214,781
----------------------------------
Total -- 14,214,781
----------------------------------
ILLINOIS (10.72%):
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.40%,
12/1/06 -- 1,027,500
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.50%,
12/1/08 -- 1,031,250
-- 3,000,000 3,000,000 Chicago, 6.00%, 1/1/11, Insured by AMBAC -- 3,146,250
-- 2,000,000 2,000,000 Cook County, 5.90%, 11/15/16, Insured by FGIC -- 2,040,000
-- 9,090,000 9,090,000 Cook County, 6.25%, 11/15/12 9,885,375
-- 1,000,000 1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 -- 1,040,000
500,000 -- 500,000 Illinois Housing Development Authority,
Mortgage Revenue, Series D-1,
6.40%, 8/1/17 514,625 --
-- 1,000,000 1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA -- 1,016,250
-- 3,000,000 3,000,000 Illinois State, 5.88%, 8/1/12 -- 3,082,500
-- 8,400,000 8,400,000 Illinois State, 5.25%, 2/1/13 -- 8,127,000
-- 2,000,000 2,000,000 Illinois State, 5.63%, 7/1/13 -- 2,010,000
-- 2,000,000 2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA -- 1,975,000
-- 1,000,000 1,000,000 Illinois State, 5.75%, 7/1/16 -- 1,006,250
485,000 -- 485,000 Waukegan, GO UT, 6.80%, 12/30/07 526,041 --
----------------------------------
Total 1,040,666 35,387,375
----------------------------------
INDIANA (5.54%):
500,000 -- 500,000 Ball State University, University Revenue,
Series G, 6.13%, 7/1/14, Insured by FGIC 517,515 --
-- 5,000,000 5,000,000 Goshen-Chandler School Building, 5.75%,
1/15/10 -- 5,093,750
-- 3,000,000 3,000,000 Hammond Multi-School Building Corp., 5.80%,
1/15/15 0 3,018,750
-- 5,000,000 5,000,000 Hammond Multi-School Building Corp., 5.85%,
1/15/20 -- 5,031,250
-- 3,500,000 3,500,000 Transportation Finance Authority, Series A,
5.75%, 6/1/12 -- 3,622,500
-- 1,500,000 1,500,000 Whitko Middle School Building Corp., 5.88%,
7/15/12 -- 1,543,125
----------------------------------
Total 517,515 18,309,375
----------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (101.21%):
ALABAMA (1.48%):
-- $2,000,000 $2,000,000 Birmingham, Series A, 5.70%, 6/1/13 $2,027,500
-- 3,000,000 3,000,000 Birmingham, Series A, 5.90%, 6/1/18 3,015,000
---------------
Total 5,042,500
---------------
ALASKA (0.30%):
-- 1,000,000 1,000,000 State Housing Finance Corp.,
Series A, 5.70%, 12/1/11 1,011,250
---------------
ARIZONA (2.89%):
-- 1,000,000 1,000,000 Mohave County Unified School District
No. 1, Series A, 5.90%, 7/1/15 1,036,250
-- 6,400,000 6,400,000 Salt River Project Agricultural Impact,
Series C, 6.20%, 1/1/12 6,696,000
-- 1,000,000 1,000,000 Salt River Project Agriculture Impact,
6.00%, 1/1/13 1,032,500
-- 1,000,000 1,000,000 State Transportation Board Excise Tax,
Series B, 5.75%, 7/1/05 1,057,500
---------------
Total 9,822,250
---------------
CALIFORNIA (1.08%):
-- 1,000,000 1,000,000 California State, 6.00%, 9/1/09 1,082,500
700,000 -- 700,000 Long Beach CA, Harbor Revenue Bonds,
Series A, 7.25%, 5/15/19 732,165
-- 2,000,000 2,000,000 Southern California Public Power
Authority, Series A, 5.00%, 7/1/15 1,855,000
---------------
Total 3,669,665
---------------
COLORADO (1.97%):
-- 6,655,000 6,655,000 Adams County Colorado School District, 5.40%,
12/15/13 6,679,956
---------------
CONNECTICUT (3.45%):
-- 3,000,000 3,000,000 Connecticut State, Series A, 5.80%, 3/15/07 3,135,000
-- 8,785,000 8,785,000 Connecticut State, Series A, 5.25%, 3/1/13 8,587,338
---------------
Total 11,722,338
---------------
FLORIDA (6.32%):
-- 2,000,000 2,000,000 Brevard County, 6.00%, 9/1/11 2,075,000
-- 5,525,000 5,525,000 Florida State Department of Transportation,
5.25%, 7/1/17 5,379,969
-- 5,000,000 5,000,000 Florida State Environmental, 5.50%, 7/1/13 5,062,500
-- 8,000,000 8,000,000 Palm Beach County Solid Waste Authority, 5.38%,
10/1/11 7,940,000
-- 1,000,000 1,000,000 State Board of Education Capital Outlay Pub.
Ed., Series A, 5.88%, 6/1/16 1,022,500
---------------
Total 21,479,969
---------------
GEORGIA (0.80%):
500,000 -- 500,000 Appling County, GA Development Authority, PCR,
Refunding, Oglethorpe Power Corp. Hatch
Project, MBIA Insured, 7.00%, 1/1/12 550,980
-- 1,000,000 1,000,000 Atlanta, Series A, 6.10%, 12/1/19 1,041,250
-- 1,000,000 1,000,000 Georgia State, Series B, 6.30%, 3/1/09 1,113,750
---------------
Total 2,705,980
---------------
HAWAII (4.18%):
-- 8,000,000 8,000,000 Hawaii State, Series CN, 5.50%, 3/1/14,
Insured by FGIC 8,000,000
-- 5,815,000 5,815,000 Honolulu City & County, 6.00%, 1/1/09 6,214,781
---------------
Total 14,214,781
---------------
ILLINOIS (10.72%):
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.40%,
12/1/06 1,027,500
-- 1,000,000 1,000,000 Chicago Metropolitan Water Reclamation, 5.50%,
12/1/08 1,031,250
-- 3,000,000 3,000,000 Chicago, 6.00%, 1/1/11, Insured by AMBAC 3,146,250
-- 2,000,000 2,000,000 Cook County, 5.90%, 11/15/16, Insured by FGIC 2,040,000
-- 9,090,000 9,090,000 Cook County, 6.25%, 11/15/12 9,885,375
-- 1,000,000 1,000,000 Edwardsville Waterworks, 6.00%, 2/1/17 1,040,000
500,000 -- 500,000 Illinois Housing Development Authority,
Mortgage Revenue, Series D-1,
6.40%, 8/1/17 514,625
-- 1,000,000 1,000,000 Illinois State, 5.75%, 4/1/12, Insured by MBIA 1,016,250
-- 3,000,000 3,000,000 Illinois State, 5.88%, 8/1/12 3,082,500
-- 8,400,000 8,400,000 Illinois State, 5.25%, 2/1/13 8,127,000
-- 2,000,000 2,000,000 Illinois State, 5.63%, 7/1/13 2,010,000
-- 2,000,000 2,000,000 Illinois State, 5.50%, 8/1/14, Insured by MBIA 1,975,000
-- 1,000,000 1,000,000 Illinois State, 5.75%, 7/1/16 1,006,250
485,000 -- 485,000 Waukegan, GO UT, 6.80%, 12/30/07 526,041
---------------
Total 36,428,041
---------------
INDIANA (5.54%):
500,000 -- 500,000 Ball State University, University Revenue,
Series G, 6.13%, 7/1/14, Insured by FGIC 517,515
-- 5,000,000 5,000,000 Goshen-Chandler School Building, 5.75%,
1/15/10 5,093,750
-- 3,000,000 3,000,000 Hammond Multi-School Building Corp., 5.80%,
1/15/15 3,018,750
-- 5,000,000 5,000,000 Hammond Multi-School Building Corp., 5.85%,
1/15/20 5,031,250
-- 3,500,000 3,500,000 Transportation Finance Authority, Series A,
5.75%, 6/1/12 3,622,500
-- 1,500,000 1,500,000 Whitko Middle School Building Corp., 5.88%,
7/15/12 1,543,125
---------------
Total 18,826,890
---------------
</TABLE>
<PAGE> 127
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
IOWA (0.35%):
$500,000 -- $500,000 Iowa Student Loan Liquidity Corporation,
Student Loan Revenue Bonds, Series B,
6.75%, 3/1/04 $530,260 --
650,000 -- 650,000 Ottumwa, IA, Community School District,
GO UT Bonds, 5.60%, 6/1/10, CGIC Insured 663,761 --
------------------------------
Total 1,194,021 --
------------------------------
KENTUCKY (1.88%):
350,000 -- 350,000 Kentucky Higher Education Student Loan
Corporation, Insured Student Loan
Revenue Bonds, Series D, 7.10%, 12/1/11 376,464 --
-- 6,000,000 6,000,000 Daviess County Kentucky, 4.15%*, 6/2/97 -- 6,000,000
------------------------------
Total 376,464 6,000,000
------------------------------
LOUISIANA (0.21%):
-- 700,000 700,000 Calcasieu Parish, 4.00% 2/1/16 -- 700,000
------------------------------
MASSACHUSETTS (3.63%):
-- 4,975,000 4,975,000 Massachusetts Bay Transportation Authority,
5.40%, 3/1/08 -- 5,118,031
-- 7,115,000 7,115,000 Massachusetts State Water Pollution
Abatement Trust, 5.63%, 2/1/15 -- 7,212,831
------------------------------
Total -- 12,330,862
------------------------------
MICHIGAN (1.19%):
-- 1,000,000 1,000,000 Greenville Public Schools, 5.75%, 5/1/11 -- 1,027,500
-- 1,000,000 1,000,000 Johannesburg-Lewistown Area Schools, 5.00%,
5/1/13 -- 947,500
-- 2,000,000 2,000,000 Redford School District, 5.95%, 5/1/15 -- 2,067,500
------------------------------
Total -- 4,042,500
------------------------------
MINNESOTA (2.36%):
-- 1,000,000 1,000,000 Minneapolis Special School District,
Series A, 5.70%, 2/1/09 -- 1,038,750
-- 6,000,000 6,000,000 Monticello Minnesota Independent Schools,
5.40%, 2/1/15 -- 5,925,000
-- 1,000,000 1,000,000 Northern Municipal Power Agency, Series A,
5.90%, 1/1/08 -- 1,046,250
------------------------------
Total -- 8,010,000
------------------------------
MISSISSIPPI (0.48%):
500,000 -- 500,000 Mississippi Higher Education Student Loan
Revenue Bonds, Series C,
7.50%, 9/1/09 538,800 --
-- 1,000,000 1,000,000 Mississippi State, 6.20%, 2/1/08 -- 1,075,000
------------------------------
Total 538,800 1,075,000
------------------------------
MISSOURI (2.09%):
-- 1,000,000 1,000,000 Independence Electrical Utility Revenue,
7.10%, 6/1/04, Prerefunded 12/1/98 @ 100 -- 1,038,750
340,000 -- 340,000 Kansas City, Sewer Authority Refunding Revenue
Bonds, 6.40%, 3/1/10 354,831 --
500,000 -- 500,000 State Environmental Improvement & Energy
Authority, Refunding Revenue,
5.50%, 12/1/10 508,315 --
-- 1,500,000 1,500,000 State Health & Education Facilities,
Series B, 7.00%, 6/1/05 -- 1,665,000
-- 1,200,000 1,200,000 State Health & Educational Facilities, 7.75%,
6/1/07 -- 1,244,196
300,000 -- 300,000 State HEFA Revenue, St. Louis University,
6.50%, 8/1/16, AMBAC Insured 324,021 --
740,000 -- 740,000 State Housing Development Commission, SFM
Revenue, Series A, 6.63%,12/1/17,
GNMA Insured 765,278 --
120,000 -- 120,000 State Housing Development Commission, SFM
Revenue, Series A, 6.00%, 6/1/15,
GNMA Insured 121,571 --
1,000,000 -- 1,000,000 State, Third State Building, GO UT, Series
B, 6.30%,11/1/12 1,065,390 --
------------------------------
Total 3,139,406 3,947,946
------------------------------
NEBRASKA (0.61%):
-- 1,000,000 1,000,000 Omaha Public Power District Electric Revenue,
Series B, 6.00%, 2/1/07 -- 1,080,000
-- 1,000,000 1,000,000 Public Power District Revenue, Series A, 5.50%,
1/1/13 -- 993,750
------------------------------
Total -- 2,073,750
------------------------------
NEVADA (4.04%):
500,000 -- 500,000 Clark County, Pollution Control, Refunding Revenue,
Series B, 6.60%, 6/1/19 540,640 0
-- 5,000,000 5,000,000 Clark County Nevada School District, 5.50%, 6/15/11 -- 5,037,500
-- 5,000,000 5,000,000 Nevada State Water Utility Improvements, 5.13%,
9/1/11 -- 4,881,250
-- 3,000,000 3,000,000 Nevada State Water Utility Improvements, 6.50%,
12/1/12 -- 3,258,750
------------------------------
Total 540,640 13,177,500
------------------------------
NEW HAMPSHIRE (0.31%):
-- 1,000,000 1,000,000 Concord, 6.15%, 10/15/10 -- 1,065,000
------------------------------
NEW JERSEY (3.17%):
-- 2,000,000 2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 -- 2,120,000
-- 8,000,000 8,000,000 New Jersey State, Series E, 6.00%, 7/15/09 -- 8,660,000
------------------------------
Total -- 10,780,000
------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
IOWA (0.35%):
$500,000 -- $500,000 Iowa Student Loan Liquidity Corporation,
Student Loan Revenue Bonds, Series B,
6.75%, 3/1/04 $530,260
650,000 -- 650,000 Ottumwa, IA, Community School District,
GO UT Bonds, 5.60%, 6/1/10, CGIC Insured 663,761
------------
Total 1,194,021
------------
KENTUCKY (1.88%):
350,000 -- 350,000 Kentucky Higher Education Student Loan
Corporation, Insured Student Loan
Revenue Bonds, Series D, 7.10%, 12/1/11 376,464
-- 6,000,000 6,000,000 Daviess County Kentucky, 4.15%*, 6/2/97 6,000,000
------------
Total 6,376,464
------------
LOUISIANA (0.21%):
-- 700,000 700,000 Calcasieu Parish, 4.00% 2/1/16 700,000
------------
MASSACHUSETTS (3.63%):
-- 4,975,000 4,975,000 Massachusetts Bay Transportation Authority,
5.40%, 3/1/08 5,118,031
-- 7,115,000 7,115,000 Massachusetts State Water Pollution
Abatement Trust, 5.63%, 2/1/15 7,212,831
------------
Total 12,330,862
------------
MICHIGAN (1.19%):
-- 1,000,000 1,000,000 Greenville Public Schools, 5.75%, 5/1/11 1,027,500
-- 1,000,000 1,000,000 Johannesburg-Lewistown Area Schools, 5.00%,
5/1/13 947,500
-- 2,000,000 2,000,000 Redford School District, 5.95%, 5/1/15 2,067,500
------------
Total 4,042,500
------------
MINNESOTA (2.36%):
-- 1,000,000 1,000,000 Minneapolis Special School District,
Series A, 5.70%, 2/1/09 1,038,750
-- 6,000,000 6,000,000 Monticello Minnesota Independent Schools,
5.40%, 2/1/15 5,925,000
-- 1,000,000 1,000,000 Northern Municipal Power Agency, Series A,
5.90%, 1/1/08 1,046,250
------------
Total 8,010,000
------------
MISSISSIPPI (0.48%):
500,000 -- 500,000 Mississippi Higher Education Student Loan
Revenue Bonds, Series C,
7.50%, 9/1/09 538,800
-- 1,000,000 1,000,000 Mississippi State, 6.20%, 2/1/08 1,075,000
------------
Total 1,613,800
------------
MISSOURI (2.09%):
-- 1,000,000 1,000,000 Independence Electrical Utility Revenue,
7.10%, 6/1/04, Prerefunded 12/1/98 @ 100 1,038,750
340,000 -- 340,000 Kansas City, Sewer Authority Refunding Revenue
Bonds, 6.40%, 3/1/10 354,831
500,000 -- 500,000 State Environmental Improvement & Energy
Authority, Refunding Revenue,
5.50%, 12/1/10 508,315
-- 1,500,000 1,500,000 State Health & Education Facilities,
Series B, 7.00%, 6/1/05 1,665,000
-- 1,200,000 1,200,000 State Health & Educational Facilities, 7.75%,
6/1/07 1,244,196
300,000 -- 300,000 State HEFA Revenue, St. Louis University,
6.50%, 8/1/16, AMBAC Insured 324,021
740,000 -- 740,000 State Housing Development Commission, SFM
Revenue, Series A, 6.63%,12/1/17,
GNMA Insured 765,278
120,000 -- 120,000 State Housing Development Commission, SFM
Revenue, Series A, 6.00%, 6/1/15,
GNMA Insured 121,571
1,000,000 -- 1,000,000 State, Third State Building, GO UT, Series
B, 6.30%,11/1/12 1,065,390
------------
Total 7,087,352
------------
NEBRASKA (0.61%):
-- 1,000,000 1,000,000 Omaha Public Power District Electric Revenue,
Series B, 6.00%, 2/1/07 1,080,000
-- 1,000,000 1,000,000 Public Power District Revenue, Series A, 5.50%,
1/1/13 993,750
------------
Total 2,073,750
------------
NEVADA (4.04%):
500,000 -- 500,000 Clark County, Pollution Control, Refunding Revenue,
Series B, 6.60%, 6/1/19 540,640
-- 5,000,000 5,000,000 Clark County Nevada School District, 5.50%, 6/15/11 5,037,500
-- 5,000,000 5,000,000 Nevada State Water Utility Improvements, 5.13%,
9/1/11 4,881,250
-- 3,000,000 3,000,000 Nevada State Water Utility Improvements, 6.50%,
12/1/12 3,258,750
------------
Total 13,718,140
------------
NEW HAMPSHIRE (0.31%):
-- 1,000,000 1,000,000 Concord, 6.15%, 10/15/10 1,065,000
------------
NEW JERSEY (3.17%):
-- 2,000,000 2,000,000 New Jersey State, Series D, 5.90%, 2/15/08 2,120,000
-- 8,000,000 8,000,000 New Jersey State, Series E, 6.00%, 7/15/09 8,660,000
------------
Total 10,780,000
------------
</TABLE>
<PAGE> 128
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
NORTH CAROLINA (3.25%):
-- $2,000,000 $2,000,000 Eastern Municipal Power Agency, Series B, 6.00%,
1/1/13 -- $2,045,000
-- 1,000,000 1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 -- 1,003,750
-- 8,000,000 8,000,000 North Carolina State School Improvements, 5.20%,
3/1/13 -- 7,980,000
------------------------------
Total -- 11,028,750
------------------------------
OHIO (0.62%):
-- 2,000,000 2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%,
5/1/13 -- 2,095,000
------------------------------
OKLAHOMA (0.31%):
-- 1,000,000 1,000,000 Tulsa, 6.25%, 6/1/11 -- 1,052,500
------------------------------
PENNSYLVANIA (4.75%):
-- 1,000,000 1,000,000 Allegheny County Series C-40, 5.90%, 5/1/07 -- 1,055,000
-- 1,500,000 1,500,000 Burrell School District, 5.65%, 11/15/16 -- 1,515,000
545,000 -- 545,000 Delaware County, GO UT Refunding, 6.00%, 11/15/02 580,234 --
155,000 -- 155,000 Delaware County, PA, Refunding Bonds, 6.00%,
11/15/14 159,084 --
-- 1,000,000 1,000,000 Easttown Township, Public/Highway Improvements,
5.65%, 8/1/17 -- 1,005,000
-- 9,000,000 9,000,000 Pennsylvania State, 5.13%, 9/15/11, Insured by
AMBAC -- 8,786,250
-- 2,000,000 2,000,000 State Higher Education Facilities, Series A,
5.88%, 1/1/15 -- 2,037,500
-- 1,000,000 1,000,000 State Higher Education Facilities, Series B,
5.88%, 1/1/15 -- 1,018,750
------------------------------
Total 739,318 15,417,500
------------------------------
TENNESSEE (0.91%):
-- 1,000,000 1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 -- 1,043,750
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 5.75%, 1/1/15 -- 1,006,250
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 6.13%, 5/15/19 -- 1,036,250
------------------------------
Total -- 3,086,250
------------------------------
TEXAS (12.50%):
-- 3,000,000 3,000,000 Austin Independent School District, 5.75%, 8/1/15 -- 3,045,000
-- 3,400,000 3,400,000 Harris County Health Facilities, Series B, 4.05%,
2/15/16 -- 3,400,000
-- 2,500,000 2,500,000 Harris County Texas Health Care Facilities, 4.05%*,
6/2/97 -- 2,500,000
-- 8,000,000 8,000,000 Harris County Texas Health, 5.50%, 6/1/17 -- 7,800,000
-- 1,000,000 1,000,000 Humble Independent School District, 6.25%, 2/1/07 -- 1,072,500
-- 1,000,000 1,000,000 Manor Independent School District, 5.70%, 8/1/10 -- 1,030,000
500,000 -- 500,000 North Texas State Higher Education Authority,
Student Loan Revenue, Refunding,
Series D, 6.30%, 4/1/10 507,815 --
-- 1,000,000 1,000,000 Royse City Independent School District, 5.50%,
2/15/15 -- 1,000,000
-- 1,000,000 1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 -- 1,017,500
-- 3,000,000 3,000,000 State Public Finance Authority, Series A, 5.95%,
10/1/15 -- 3,101,250
-- 1,000,000 1,000,000 State Public Financing Authority, Series A, 5.70%,
10/1/07 -- 1,031,250
-- 6,750,000 6,750,000 Texas State Water Development, 5.40%, 8/1/21 -- 6,513,750
1,000,000 -- 1,000,000 Texas State, GO UT Water Development, Series A, 7.00%,
8/1/11 1,081,740 --
155,000 -- 155,000 Texas State, GO UT, Series A, Veterans Housing
Assistance Fund, 6.60%, 12/1/16 158,877 --
-- 7,500,000 7,500,000 University of Texas, Series B, 5.10%, 8/15/13 -- 7,190,625
-- 2,000,000 2,000,000 Water Development Board Revenue Series A, 5.75%,
7/15/15 -- 2,032,500
------------------------------
Total 1,748,432 40,734,375
------------------------------
UTAH (1.50%):
-- 4,000,000 4,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/12 -- 4,095,000
-- 1,000,000 1,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/15 -- 1,000,090
------------------------------
Total -- 5,095,090
------------------------------
VIRGINIA (2.84%):
-- 1,000,000 1,000,000 Newport News, Series A, 6.13%, 6/1/10 -- 1,058,750
-- 2,200,000 2,200,000 Peninsula Port Authority Revenue - Shell Co.,
4.00%*, 6/2/97 -- 2,200,000
-- 1,000,000 1,000,000 State Public School Authority, 5.90%, 7/15/11 -- 1,037,500
550,000 -- 550,000 State, Housing Development Authority Revenue,
Series B, 6.55%, 1/1/11 584,496 --
-- 4,920,000 4,920,000 Virginia State Trust Brd., 5.13%, 5/15/12 -- 4,772,400
------------------------------
Total 584,496 9,068,650
------------------------------
WASHINGTON (10.04%):
-- 1,000,000 1,000,000 Grant County Public Utility, Series F, 5.70%,
1/1/15 -- 1,002,500
-- 1,000,000 1,000,000 King County Library System, 6.05%, 12/1/07 -- 1,072,500
-- 1,500,000 1,500,000 King County School District No. 415, 5.75%, 6/1/11 -- 1,543,125
-- 2,000,000 2,000,000 King County School District No. 415, 5.88%, 6/1/16 -- 2,035,000
725,000 -- 725,000 King County, School District #415 Kent, GO UT,
(Series B), 6.00%, 12/1/08 779,622 --
-- 1,000,000 1,000,000 King County, Series A, 6.00%, 12/1/09 -- 1,041,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.20%,
7/1/06 -- 1,086,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.25%,
7/1/07 -- 1,082,500
-- 3,000,000 3,000,000 Snohomish County Public Utility District 001,
6.00%, 1/1/13 -- 3,082,500
-- 1,000,000 1,000,000 Snohomish County Public Utility District 001,
6.45%, 1/1/06 -- 1,105,000
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
NORTH CAROLINA (3.25%):
-- $2,000,000 $2,000,000 Eastern Municipal Power Agency, Series B, 6.00%,
1/1/13 $2,045,000
-- 1,000,000 1,000,000 Municipal Power Agency No. 1, 5.75%, 1/1/15 1,003,750
-- 8,000,000 8,000,000 North Carolina State School Improvements, 5.20%,
3/1/13 7,980,000
--------------
Total 11,028,750
--------------
OHIO (0.62%):
-- 2,000,000 2,000,000 Columbus Waterworks Enlargement No. 44, 6.00%,
5/1/13 2,095,000
--------------
OKLAHOMA (0.31%):
-- 1,000,000 1,000,000 Tulsa, 6.25%, 6/1/11 1,052,500
--------------
PENNSYLVANIA (4.75%):
-- 1,000,000 1,000,000 Allegheny County Series C-40, 5.90%, 5/1/07 1,055,000
-- 1,500,000 1,500,000 Burrell School District, 5.65%, 11/15/16 1,515,000
545,000 -- 545,000 Delaware County, GO UT Refunding, 6.00%, 11/15/02 580,234
155,000 -- 155,000 Delaware County, PA, Refunding Bonds, 6.00%,
11/15/14 159,084
-- 1,000,000 1,000,000 Easttown Township, Public/Highway Improvements,
5.65%, 8/1/17 1,005,000
-- 9,000,000 9,000,000 Pennsylvania State, 5.13%, 9/15/11, Insured by
AMBAC 8,786,250
-- 2,000,000 2,000,000 State Higher Education Facilities, Series A,
5.88%, 1/1/15 2,037,500
-- 1,000,000 1,000,000 State Higher Education Facilities, Series B,
5.88%, 1/1/15 1,018,750
--------------
Total 16,156,818
--------------
TENNESSEE (0.91%):
-- 1,000,000 1,000,000 Memphis Water Revenue, Series A, 6.00%, 1/1/12 1,043,750
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 5.75%, 1/1/15 1,006,250
-- 1,000,000 1,000,000 Metropolitan Government Nashville & Davidson
County, 6.13%, 5/15/19 1,036,250
--------------
Total 3,086,250
--------------
TEXAS (12.50%):
-- 3,000,000 3,000,000 Austin Independent School District, 5.75%, 8/1/15 3,045,000
-- 3,400,000 3,400,000 Harris County Health Facilities, Series B, 4.05%,
2/15/16 3,400,000
-- 2,500,000 2,500,000 Harris County Texas Health Care Facilities, 4.05%*,
6/2/97 2,500,000
-- 8,000,000 8,000,000 Harris County Texas Health, 5.50%, 6/1/17 7,800,000
-- 1,000,000 1,000,000 Humble Independent School District, 6.25%, 2/1/07 1,072,500
-- 1,000,000 1,000,000 Manor Independent School District, 5.70%, 8/1/10 1,030,000
500,000 -- 500,000 North Texas State Higher Education Authority,
Student Loan Revenue, Refunding,
Series D, 6.30%, 4/1/10 507,815
-- 1,000,000 1,000,000 Royse City Independent School District, 5.50%,
2/15/15 1,000,000
-- 1,000,000 1,000,000 San Antonio Electric & Gas, 5.75%, 2/1/11 1,017,500
-- 3,000,000 3,000,000 State Public Finance Authority, Series A, 5.95%,
10/1/15 3,101,250
-- 1,000,000 1,000,000 State Public Financing Authority, Series A, 5.70%,
10/1/07 1,031,250
-- 6,750,000 6,750,000 Texas State Water Development, 5.40%, 8/1/21 6,513,750
1,000,000 -- 1,000,000 Texas State, GO UT Water Development, Series A, 7.00%,
8/1/11 1,081,740
155,000 -- 155,000 Texas State, GO UT, Series A, Veterans Housing
Assistance Fund, 6.60%, 12/1/16 158,877
-- 7,500,000 7,500,000 University of Texas, Series B, 5.10%, 8/15/13 7,190,625
-- 2,000,000 2,000,000 Water Development Board Revenue Series A, 5.75%,
7/15/15 2,032,500
--------------
Total 42,482,807
--------------
UTAH (1.50%):
-- 4,000,000 4,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/12 4,095,000
-- 1,000,000 1,000,000 Intermountain Power Agency, Utah Power Supply,
Series B, 6.00%, 7/1/15 1,000,090
--------------
Total 5,095,090
--------------
VIRGINIA (2.84%):
-- 1,000,000 1,000,000 Newport News, Series A, 6.13%, 6/1/10 1,058,750
-- 2,200,000 2,200,000 Peninsula Port Authority Revenue - Shell Co.,
4.00%*, 6/2/97 2,200,000
-- 1,000,000 1,000,000 State Public School Authority, 5.90%, 7/15/11 1,037,500
550,000 -- 550,000 State, Housing Development Authority Revenue,
Series B, 6.55%, 1/1/11 584,496
-- 4,920,000 4,920,000 Virginia State Trust Brd., 5.13%, 5/15/12 4,772,400
--------------
Total 9,653,146
--------------
WASHINGTON (10.04%):
-- 1,000,000 1,000,000 Grant County Public Utility, Series F, 5.70%,
1/1/15 1,002,500
-- 1,000,000 1,000,000 King County Library System, 6.05%, 12/1/07 1,072,500
-- 1,500,000 1,500,000 King County School District No. 415, 5.75%, 6/1/11 1,543,125
-- 2,000,000 2,000,000 King County School District No. 415, 5.88%, 6/1/16 2,035,000
725,000 -- 725,000 King County, School District #415 Kent, GO UT,
(Series B), 6.00%, 12/1/08 779,622
-- 1,000,000 1,000,000 King County, Series A, 6.00%, 12/1/09 1,041,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.20%,
7/1/06 1,086,250
-- 1,000,000 1,000,000 Seattle Municipal Light & Power Revenue, 6.25%,
7/1/07 1,082,500
-- 3,000,000 3,000,000 Snohomish County Public Utility District 001,
6.00%, 1/1/13 3,082,500
-- 1,000,000 1,000,000 Snohomish County Public Utility District 001,
6.45%, 1/1/06 1,105,000
</TABLE>
<PAGE> 129
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ----------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- -------------------------------------------- ----------------------------------
Arrow Municipal ARCH National (PRO FORMA) Arrow Municipal ARCH National
Income Municipal Bond (Combined) Security Description Income Municipal Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
WASHINGTON, CONTINUED:
-- $2,000,000 $2,000,000 Snohomish County Public Utility District 001,
6.50%, 1/1/12 -- 2,142,500
-- 1,000,000 1,000,000 Snohomish County School District No. 2,
6.20%, 12/1/12 -- 1,061,250
-- 3,000,000 3,000,000 Spokane Regular Solid Waste Management,
5.50%, 12/1/10 -- $3,033,750
-- 1,000,000 1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 -- 1,046,250
-- 8,000,000 8,000,000 Washington State Motor Vehicle Fuel Tax
Series, 5.38%, 1/1/22 -- 7,810,000
-- 4,190,000 4,190,000 Washington State Series, 5.50%, 1/1/17 -- 4,148,100
-- 1,000,000 1,000,000 Washington State, Series DD-14 & Series B,
5.75%, 9/1/07 -- 1,043,750
--------------------------------
Total 779,622 33,336,225
--------------------------------
WEST VIRGINIA (2.34%):
-- 7,940,000 7,940,000 West Virginia School Building, 5.40%, 7/1/10 -- 7,949,925
--------------------------------
WISCONSIN (2.49%):
255,000 -- 255,000 Madison, IDR, Madison Gas & Electric Co.,
Series A, 6.75%, 4/1/27 269,441 --
-- 1,000,000 1,000,000 Dane County, Series A, 5.65%, 3/1/12 -- 1,013,750
-- 1,000,000 1,000,000 Green Bay Area Public School District,
Series A, 5.50%, 4/1/12 -- 1,003,750
-- 3,000,000 3,000,000 Kenosha, Series B, 5.85%, 12/1/11 -- 3,082,500
-- 3,000,000 3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 -- 3,097,500
--------------------------------
Total 269,441 8,197,500
--------------------------------
WYOMING (0.65%):
-- 2,200,000 2,200,000 Uinta County Wyoming Chevron USA, 4.00%*,
6/2/97 -- 2,200,000
--------------------------------
Total Municipal Bonds 12,751,966 331,226,617
--------------------------------
INVESTMENT COMPANIES (1.84%):
-- 2,710,000 2,710,000 Federated Tax-Free Trust Mutual Fund -- 2,710,000
496,704 -- 496,704 Goldman Sachs & Co. 496,702 --
-- 3,029,000 3,029,000 Nuveen Tax-Exempt Money Market Fund -- 3,029,000
--------------------------------
Total Investment Companies 496,702 5,739,000
--------------------------------
Total (Cost -- Arrow $12,855,001,ARCH
$331,006,272)(a) $13,248,668 $336,965,617
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------- ---------------
May 31, 1997 May 31, 1997
- -------------------------------------------- ---------------
Arrow Municipal ARCH National (PRO FORMA) (PRO FORMA)
Income Municipal Bond (Combined) Security Description (Combined)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS, CONTINUED:
WASHINGTON, CONTINUED:
-- $2,000,000 $2,000,000 Snohomish County Public Utility District 001,
6.50%, 1/1/12 2,142,500
-- 1,000,000 1,000,000 Snohomish County School District No. 2,
6.20%, 12/1/12 1,061,250
-- 3,000,000 3,000,000 Spokane Regular Solid Waste Management,
5.50%, 12/1/10 $3,033,750
-- 1,000,000 1,000,000 Tacoma Electrical System, 6.25%, 1/1/15 1,046,250
-- 8,000,000 8,000,000 Washington State Motor Vehicle Fuel Tax
Series, 5.38%, 1/1/22 7,810,000
-- 4,190,000 4,190,000 Washington State Series, 5.50%, 1/1/17 4,148,100
-- 1,000,000 1,000,000 Washington State, Series DD-14 & Series B,
5.75%, 9/1/07 1,043,750
--------------
Total 34,115,847
--------------
WEST VIRGINIA (2.34%):
-- 7,940,000 7,940,000 West Virginia School Building, 5.40%, 7/1/10 7,949,925
--------------
WISCONSIN (2.49%):
255,000 -- 255,000 Madison, IDR, Madison Gas & Electric Co.,
Series A, 6.75%, 4/1/27 269,441
-- 1,000,000 1,000,000 Dane County, Series A, 5.65%, 3/1/12 1,013,750
-- 1,000,000 1,000,000 Green Bay Area Public School District,
Series A, 5.50%, 4/1/12 1,003,750
-- 3,000,000 3,000,000 Kenosha, Series B, 5.85%, 12/1/11 3,082,500
-- 3,000,000 3,000,000 Milwaukee County, Series A, 6.00%, 9/1/09 3,097,500
--------------
Total 8,466,941
--------------
WYOMING (0.65%):
-- 2,200,000 2,200,000 Uinta County Wyoming Chevron USA, 4.00%*,
6/2/97 2,200,000
--------------
Total Municipal Bonds 343,978,583
--------------
INVESTMENT COMPANIES (1.84%):
-- 2,710,000 2,710,000 Federated Tax-Free Trust Mutual Fund 2,710,000
496,704 -- 496,704 Goldman Sachs & Co. 496,702
-- 3,029,000 3,029,000 Nuveen Tax-Exempt Money Market Fund 3,029,000
--------------
Total Investment Companies 6,235,702
--------------
Total (Cost -- Arrow $12,855,001,ARCH
$331,006,272)(a) $350,214,285
--------------
</TABLE>
Percentages indicated are based on net assets of Arrow $13,450,961 and ARCH
$326,427,257, combined of $339,878,218
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<CAPTION>
Arrow ARCH Combined
----- ---- --------
<S> <C> <C> <C>
Net unrealized appreciation $393,667 $5,959,345 $6,353,012
-------------------------------------
</TABLE>
The following acronyms are used throughout this portfolio:
AMBAC AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION
CGIC CAPITAL GUARANTY INSURANCE CORPORATION
FGIC FINANCIAL GUARANTY INSURANCE COMPANY
FSA FINANCIAL SECURITY ASSURANCE, INC.
GNMA GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
GO GENERAL OBLIGATION
HEFA HEALTH AND EDUCATION FACILITIES AUTHORITY
IDR INDUSTRIAL DEVELOPMENT REVENUE
MBIA MUNICIPAL BOND INVESTORS ASSURANCE
PCR POLLUTION CONTROL REVENUE
SFM SINGLE FAMILY MORTGAGE
UT UNLIMITED TAX
(See Notes which are an integral part of the Financial Statements)
<PAGE> 130
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1997
(Unaudited) (Unaudited)
ARCH National
Arrow Municipal Municipal Bond (PRO FORMA)
Income Portfolio Portfolio (Combined)
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Total investments, at value (Cost -- Arrow $12,855,001 and ARCH $331,006,272) $ 13,248,668 $336,965,617 $350,214,285
Cash 326 233 559
Income receivable 255,179 5,659,660 5,914,839
Receivable for portfolio shares issued -- 1,204 1,204
Deferred expenses 917 85,880 86,797
------------ ------------ ------------
Total assets 13,505,090 342,712,594 356,217,684
Liabilities:
Income distribution payable 47,139 1,496,540 1,543,679
Payable to brokers for investments purchased -- 14,730,870 14,730,870
Accrued expenses 6,990 57,927 64,917
------------ ------------ ------------
Total liabilities 54,129 16,285,337 16,339,466
============ ============ ============
Net Assets $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Net Assets
Paid in capital 13,386,775 313,384,564 326,771,339
Net unrealized appreciation (depreciation) from investments 393,667 5,959,345 6,353,012
Accumulated net realized loss on investments (329,481) 7,083,348 6,753,867
============ ============ ============
Total Net Assets $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Net Assets
Investor A Shares 13,450,961 542,574 13,993,535
Investor B Shares -- 1,017 1,017
Trust Shares -- 325,883,666 325,883,666
Institutional Shares -- -- --
============ ============ ============
Total $ 13,450,961 $326,427,257 $339,878,218
============ ============ ============
Outstanding shares of common stock
Investor A Shares 1,304,417 54,515 1,406,370
Investor B Shares -- 102 102
Trust Shares -- 32,725,131 32,725,131
Institutional Shares -- -- --
============ ============ ============
Total 1,304,417 32,779,748 34,131,603
============ ============ ============
Net Asset Value:
Investor A Shares 10.31 9.95 9.95
Investor B Shares -- 9.96 9.96
Trust Shares -- 9.96 9.96
Institutional Shares -- -- --
============ ============ ============
Maximum Sales Charge : Investor A Shares 3.50% 4.50% 4.50%
============ ============ ============
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net
asset value adjusted to nearest cent) per share: Investor A Shares
$ 10.69 $ 10.42 $ 10.42
============ ============ ============
</TABLE>
Redemption price of Investor B Shares varies based on length of time held.
Maximum redemption charge would be 5.0% (as a percentage of offering price).
(See Notes which are an integral part of the Financial Statements)
<PAGE> 131
ARROW MUNICIPAL INCOME AND ARCH NATIONAL MUNICIPAL BOND PORTFOLIOS
Pro Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period of Period of
11/18/96 - 11/18/96 - Period ended Period ended
5/31/97 5/31/97 5/31/97 5/31/97
---------------------------------------------- ------------
Arrow ARCH
Municipal National (PRO
Income Municipal PRO FORMA FORMA)
Portfolio Bond Portfolio Adjustments (Combined)
---------------------------------------------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $ 0 $ 73,488 $ -- $ 73,488
Interest 396,959 9,698,803 -- 10,095,762
---------------------------------------------- ------------
Total income 396,959 9,772,291 -- 10,169,250
---------------------------------------------- ------------
Expenses:
Investment advisory fee $ 49,061 933,558 (10,513)(1) 972,106
Administrative personnel and services fee $ 24,953 182,509 (20,927)(2) 186,535
Custodian and accounting fees $ 25,075 5,656 (24,950)(3) 5,781
Transfer and dividend disbursing agent fees and expenses $ 14,847 31,973 -- 46,820
Directors'/Trustees' fees $ 997 4,956 (997)(4) 4,956
Legal and audit fees $ 7,480 20,116 (7,036)(5) 20,560
Organization costs -- 3,609 -- 3,609
Distribution services fee $ 17,521 415 (17,503)(6) 433
Share registration costs $ 6,389 39,648 -- 46,037
Printing and postage $ 3,241 19,191 -- 22,432
Insurance premiums $ 1,496 -- -- 1,496
Miscellaneous $ 4,404 3,231 -- 7,635
---------------------------------------------- ------------
Total expenses 155,464 1,244,862 (81,926) 1,318,400
---------------------------------------------- ------------
Expenses voluntarily reduced $ (58,872) (1,022,830) 40,561 (7) (1,041,141)
---------------------------------------------- ------------
Net expenses 96,592 222,032 (41,365) 277,259
---------------------------------------------- ------------
Net investment income 300,367 9,550,259 41,365 9,891,991
---------------------------------------------- ------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on investments $ 25,824 7,083,348 -- 7,109,172
Net change in unrealized depreciation of investments $ (114,620) (8,343,815) -- (8,458,435)
---------------------------------------------- ------------
Net realized and unrealized loss on investments (88,796) (1,260,467) -- (1,349,263)
---------------------------------------------- ------------
Change in net assets resulting from operations $ 211,571 $8,289,792 $ 41,365 $ 8,542,728
---------------------------------------------- ------------
</TABLE>
(1) To adjust Advisory fees to replace the ARCH Fund's fee structure for the
combined assets.
(2) To adjust Administration fees to replace the ARCH Fund's fee structure for
the combined assets.
(3) To adjust Custodian and Accounting fees to replace the ARCH Fund's fee
structure for the combined assets.
(4) To eliminate duplicate of Directors'/Trustees' fees.
(5) To eliminate duplicate of Legal and Audit fees.
(6) To adjust Distribution fees to replace the ARCH Fund's fee structure
for the combined assets.
(7) To adjust expenses voluntarily reduced for administration, custodian
and accounting fees per the ARCH Fund's fee structure for the combined
assets.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 132
ARROW FIXED INCOME PORTFOLIO
ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION
The pro forma combined statement of assets and liabilities, including the pro
forma combined schedule of investments, and the related pro forma combined
statement of operations reflect the accounts of the Arrow Fixed Income Portfolio
and the accounts of the Arch Government & Corporate Bond Portfolio as of May 31,
1997 and for the twelve month period then ended.
The pro forma combined financial statements give effect to the proposed transfer
of the assets and liabilities of the Arrow Fixed Income Portfolio in exchange
for shares of the Arch Government & Corporate Bond Portfolio. Under the terms of
the Agreement and Plan of Reorganization between Arrow Funds and The Arch Fund,
Inc. (the "Plan"), the combination of the Arrow Fixed Income Portfolio and the
Arch Government & Corporate Bond Portfolio will be treated as a tax-free
business combination. Accordingly, the historical cost of investment securities
will be carried forward to the surviving portfolio and the results of operations
of the surviving portfolio for the pre-combining periods will not be restated.
The pro forma combined financial statements do not reflect the expenses of the
Arrow and Arch Portfolios in carrying out their obligations under the Plan as
these expenses are immaterial to the financial statements.
Each Portfolio has a similar investment objective which will remain unchanged as
a result of the combination.
The pro forma financial statements should be read in conjunction with the
historical financial statements of each Portfolio incorporated by reference to
the respective prospectuses or statements of additional information. The pro
forma combined statement of assets and liabilities has been prepared as if the
combination had taken place at the end of the twelve month period ending May 31,
1997, while the statement of operations has been prepared for the preceding
twelve month period then ended. Certain amounts have been reclassified to
conform to current presentation.
2. PRO FORMA OPERATIONS
The pro forma combined statement of operations assumes similar rates of gross
investment income from the investments of each Portfolio. Accordingly, the
combined gross investment income is equal to the sum of the gross investment
income of each Portfolio.
Pro forma operating expenses reflect the expected expenses of the Arch
Government & Corporate Bond Portfolio after combination. As such, pro forma fees
for investment advisory, administration, distribution, custodian and
-2-
<PAGE> 133
2. PRO FORMA OPERATIONS (Continued)
accounting services, director and trustee, and legal and audit were calculated
based on the fee schedules in effect at May 31, 1997 for the Arch Government &
Corporate Bond Portfolio.
3. SURVIVING ENTITY
The Arch Government & Corporate Bond Portfolio will be the surviving entity for
accounting purposes. This determination was based upon the relative size of each
Portfolio and that the surviving portfolio will be managed by the Arch
Government & Corporate Bond Portfolio's current adviser employing current
investment objectives, policies and restrictions.
<PAGE> 134
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- ------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- ------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government &
Income & Corporate Bond (Combined) Income Portfolio Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS (1.59%):
AEROSPACE & DEFENSE (0.26%):
$500,000 -- $500,000 Rockwell International Corp.,
6.75%, 9/15/02 $497,825 $0 $497,825
-------------------------------------------------
BANKING (0.27%):
500,000 -- 500,000 BankAmerica Corp., 7.50%,
10/15/02 511,830 -- 511,830
-------------------------------------------------
FINANCE (0.26%):
500,000 -- 500,000 MBNA Corp., 6.88%, 10/1/99 501,495 -- 501,495
-------------------------------------------------
INDUSTRIAL (0.53%):
1,000,000 -- 1,000,000 WMX Technologies, Inc., 7.13%,
6/15/01 1,010,890 -- 1,010,890
-------------------------------------------------
UTILITIES (0.27%):
500,000 -- 500,000 United Telephone Co. of Florida,
7.25%, 12/15/04 505,865 -- 505,865
-------------------------------------------------
Total Corporate Bonds 3,027,905 0 3,027,905
-------------------------------------------------
GOVERNMENT BONDS (96.09%):
FOREIGN MUNICIPAL (0.27%):
500,000 -- 500,000 Province of Ontario, Canada,
7.38%, 1/27/03 512,620 -- 512,620
-------------------------------------------------
GOVERNMENT AGENCIES (32.39%):
FEDERAL HOME LOAN BANK:
500,000 -- 500,000 6.32%, 2/1/00 499,365 -- 499,365
FEDERAL HOME LOAN MORTGAGE CORP.:
-- 1,409,622 1,409,622 6.50%, 2/1/98 -- 1,397,724 1,397,724
-- 850,324 850,324 6.50%, 3/1/98 -- 843,147 843,147
-- 56,740 56,740 8.50%, 5/1/01 -- 58,336 58,336
-- 122,129 122,129 8.50%, 11/1/01 -- 125,105 125,105
-- 92,307 92,307 8.00%, 3/1/02 -- 93,951 93,951
-- 30,217 30,217 8.00%, 3/1/02 -- 30,755 30,755
-- 128,219 128,219 7.50%, 4/1/02 -- 128,658 128,658
-- 55,520 55,520 8.00%, 5/1/02 -- 56,509 56,509
-- 5,234 5,234 8.00%, 6/1/02 -- 5,327 5,327
-- 302,306 302,306 8.00%, 6/1/02 -- 307,690 307,690
-- 67,773 67,773 8.00%, 6/1/02 -- 68,980 68,980
-- 15,928 15,928 8.00%, 6/1/02 -- 16,211 16,211
-- 27,207 27,207 8.00%, 7/1/02 -- 27,692 27,692
-- 169,488 169,488 8.00%, 7/1/02 -- 172,506 172,506
-- 107,859 107,859 8.50%, 3/1/05 -- 110,487 110,487
-- 9,266 9,266 8.50%, 4/1/05 -- 9,492 9,492
-- 1,000,000 1,000,000 7.46%, 8/3/05(b) -- 998,620 998,620
-- 54,575 54,575 8.50%, 9/1/05 -- 55,905 55,905
-- 39,100 39,100 8.50%, 4/1/06 -- 40,431 40,431
934,474 -- 934,474 6.00%, 8/1/11, Pool #E20268 896,291 -- 896,291
-- 983,031 983,031 6.50%, 1/1/12 -- 959,989 959,989
-- 2,273,886 2,273,886 8.00%, 1/1/23 -- 2,318,636 2,318,636
-- 541,152 541,152 8.00%, 1/1/23 -- 551,802 551,802
FEDERAL NATIONAL MORTGAGE ASSOC.:
-- 1,337,627 1,337,627 6.00%, 11/1/00, Pool #190070 -- 1,292,897 1,292,897
1,000,000 -- 1,000,000 7.55%, 6/10/04 1,004,480 -- 1,004,480
-- 4,813,768 4,813,768 6.00%, 5/1/11, Pool #345652 -- 4,603,166 4,603,166
-- 4,808,849 4,808,849 7.00%, 7/1/11 -- 4,780,284 4,780,284
-- 947,714 947,714 6.50%, 12/1/11, Pool #367178F -- 924,609 924,609
-- 3,884,948 3,884,948 6.50%, 12/1/11, Pool #367838F -- 3,790,233 3,790,233
-- 986,384 986,384 6.00%, 1/1/12, Pool #366788 -- 943,230 943,230
-- 3,119,577 3,119,577 8.00%, 7/1/24 -- 3,175,136 3,175,136
GOVERNMENT NATIONAL MORTGAGE ASSOC.:
-- 17,265 17,265 9.50%, 2/15/01 -- 18,317 18,317
-- 33,545 33,545 9.50%, 9/15/01 -- 35,589 35,589
-- 191,553 191,553 8.00%, 1/15/02 -- 196,998 196,998
-- 39,289 39,289 8.00%, 3/15/02 -- 40,406 40,406
-- 181,696 181,696 8.00%, 3/15/02 -- 186,861 186,861
-- 185,621 185,621 8.00%, 4/15/02 -- 190,898 190,898
-- 135,812 135,812 8.00%, 7/15/02 -- 139,673 139,673
-- 90,505 90,505 9.50%, 10/15/02 -- 96,020 96,020
-- 103,670 103,670 9.50%, 1/15/06 -- 109,986 109,986
-- 151,408 151,408 8.00%, 5/15/06 -- 155,713 155,713
-- 68,507 68,507 9.50%, 7/15/07 -- 72,681 72,681
-- 399,750 399,750 8.00%, 11/15/07 -- 411,115 411,115
-- 430,306 430,306 8.00%, 12/15/07 -- 442,540 442,540
-- 686,185 686,185 9.50%, 8/15/09, Pool #400219 -- 727,995 727,995
</TABLE>
<PAGE> 135
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- -------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- -------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government
Income & Corporate Bond (Combined) Income Portfolio & Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT BONDS, CONTINUED:
GOVERNMENT AGENCIES, CONTINUED:
GOVERNMENT NATIONAL MORTGAGE
ASSOC., CONTINUED
-- $198,426 $198,426 9.50%, 9/15/09 -- $210,516 $210,516
-- 742,790 742,790 9.50%, 2/15/10 -- 788,048 788,048
-- 41,877 41,877 8.00%, 5/15/10 -- 43,068 43,068
-- 175,264 175,264 6.50%, 8/15/10 -- 171,758 171,758
-- 203,138 203,138 8.00%, 9/15/10 -- 208,913 208,913
-- 1,023,551 1,023,551 8.00%, 11/12/10 -- 1,052,651 1,052,651
-- 263,240 263,240 8.00%, 11/15/10 -- 270,724 270,724
-- 326,889 326,889 8.00%, 11/15/10 -- 336,183 336,183
-- 425,640 425,640 6.50%, 3/15/11 -- 417,127 417,127
-- 118,651 118,651 6.50%, 3/15/11 -- 116,278 116,278
-- 368,996 368,996 6.50%, 4/15/11 -- 361,616 361,616
-- 113,575 113,575 6.50%, 4/15/11 -- 111,304 111,304
-- 475,555 475,555 6.50%, 4/15/11 -- 466,044 466,044
-- 659,613 659,613 6.50%, 5/15/11 -- 646,420 646,420
-- 469,131 469,131 6.50%, 5/15/11 -- 459,749 459,749
-- 78,412 78,412 6.50%, 5/15/11 -- 76,844 76,844
-- 604,833 604,833 6.50%, 6/15/11 -- 592,737 592,737
-- 112,563 112,563 6.50%, 6/15/11 -- 110,312 110,312
-- 315,697 315,697 6.50%, 6/15/11 -- 309,383 309,383
-- 756,450 756,450 6.50%, 6/15/11 -- 741,321 741,321
-- 354,167 354,167 6.50%, 7/15/11 -- 347,084 347,084
-- 414,020 414,020 6.50%, 8/15/11 -- 405,739 405,739
-- 2,504,885 2,504,885 8.50%, 4/15/17 -- 2,596,464 2,596,464
-- 1,539,276 1,539,276 8.00%, 4/15/22 -- 1,569,092 1,569,092
-- 3,741,402 3,741,402 7.50%, 1/15/23 -- 3,727,372 3,727,372
-- 2,221,940 2,221,940 8.00%, 1/15/23 -- 2,264,979 2,264,979
-- 1,016,638 1,016,638 7.50%, 4/15/23 -- 1,012,825 1,012,825
-- 1,480,163 1,480,163 9.00%, 3/15/25 -- 1,557,398 1,557,398
1,010,000 -- 1,010,000 6.50%, 4/15/26, Pool #422323 957,500 -- 957,500
1,009,999 -- 1,009,999 6.50%, 4/15/26, Pool #415721 957,499 -- 957,499
1,010,000 -- 1,010,000 6.50%, 5/15/26, Pool #417388 957,500 -- 957,500
-- 4,898,466 4,898,466 6.50%, 6/15/26 -- 4,633,606 4,633,606
-------------------------------------------------
Total U.S. Government Agencies 5,272,635 56,317,855 61,590,490
-------------------------------------------------
U.S. TREASURY BONDS (14.64%):
1,500,000 -- 1,500,000 7.50%, 5/15/02 1,563,105 -- 1,563,105
-- 1,375,000 1,375,000 9.25%, 2/15/16 -- 1,699,624 1,699,624
3,000,000 -- 3,000,000 7.50%, 11/15/16 3,163,590 -- 3,163,590
-- 1,675,000 1,675,000 8.75%, 5/15/17(b) -- 1,989,532 1,989,532
-- 2,865,000 2,865,000 8.88%, 8/15/17 -- 3,444,217 3,444,217
-- 4,150,000 4,150,000 8.88%, 2/15/19(b) -- 5,011,042 5,011,042
-- 2,183,000 2,183,000 8.75%, 8/15/20(b) -- 2,617,744 2,617,744
-- 7,600,000 7,600,000 6.25%, 8/15/23 -- 6,927,248 6,927,248
1,500,000 -- 1,500,000 6.50%, 11/15/26 1,413,930 -- 1,413,930
-------------------------------------------------
Total U.S. Treasury Bonds 6,140,625 21,689,407 27,830,032
-------------------------------------------------
U.S. TREASURY NOTES (48.79%):
-- 32,300,000 32,300,000 5.13%, 2/28/98(b) -- 32,141,085 32,141,085
-- 1,750,000 1,750,000 6.38%, 5/15/99(b) -- 1,755,460 1,755,460
-- 11,800,000 11,800,000 6.00%,10/15/99(b) -- 11,745,012 11,745,012
3,900,000 -- 3,900,000 6.75%, 4/30/00 3,941,067 -- 3,941,067
1,500,000 -- 1,500,000 6.38%, 5/15/00 1,501,395 -- 1,501,395
-- 7,500,000 7,500,000 6.13%, 7/31/00(b) -- 7,447,275 7,447,275
-- 2,000,000 2,000,000 5.63%, 2/28/01(b) -- 1,946,980 1,946,980
1,250,000 -- 1,250,000 8.00%, 5/15/01 1,316,413 -- 1,316,413
3,000,000 -- 3,000,000 6.63%, 4/30/02 3,014,160 -- 3,014,160
1,000,000 -- 1,000,000 5.88%, 2/15/04 962,040 -- 962,040
1,500,000 -- 1,500,000 6.25%, 2/15/07 1,458,165 -- 1,458,165
-- 25,600,000 25,600,000 6.63%, 5/15/07 -- 25,534,208 25,534,208
-------------------------------------------------
Total U.S. Treasury Notes 12,193,240 80,570,020 92,763,260
-------------------------------------------------
Total Government Bonds 24,119,120 158,577,282 182,696,402
-------------------------------------------------
</TABLE>
<PAGE> 136
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Schedule of Portfolio Investments
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- --------------------------------------------- ---------------------------------------------------
May 31, 1997 May 31, 1997 May 31, 1997 May 31, 1997
- --------------------------------------------- ---------------------------------------------------
Arrow Fixed ARCH Government (PRO FORMA) Arrow Fixed ARCH Government &
Income & Corporate Bond (Combined) Income Portfolio Corporate Bond (PRO FORMA)
Portfolio Portfolio Security Description Portfolio (Combined)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MUTUAL FUND (1.91%):
-- $2,801,700 $2,801,700 Federated Money Market
Trust Fund -- $2,801,700 $2,801,700
838,421 -- 838,421 Goldman Sachs ILA Treasury
Money Market Fund 838,421 -- 838,421
---------------------------------------------------
838,421 2,801,700 3,640,121
---------------------------------------------------
---------------------------------------------------
Total Investments (Cost --
Arrow $28,140,060,
ARCH $161,041,875)(a) $27,985,446 $161,378,982 $189,364,428
---------------------------------------------------
</TABLE>
Percentages indicated are based on net assets of Arrow $28,125,846
and ARCH $162,011,503, combined of $190,137,349.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation (depreciation)of securities as follows:
<TABLE>
<CAPTION>
Arrow ARCH Combined
<S> <C> <C> <C>
Net unrealized appreciation
(depreciation) ($154,614) $337,107 $182,493
-------------------------------------------------
</TABLE>
(b) A portion of this security was loaned as of May 31, 1997.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 137
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Statement of Assets and Liabilities
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1997
(Unaudited) (Unaudited)
Government &
Arrow Fixed Corporate Bond (PRO FORMA)
Income Portfolio Portfolio (Combined)
------------- ------------- -------------
<S> <C> <C> <C>
Assets:
Investments, at value (Cost -- Arrow $28,140,060, ARCH $161,041,875) $ 27,985,446 $ 161,378,982 $ 189,364,428
Cash 15,607 -- 15,607
Income receivable 264,534 1,573,892 1,838,426
Deferred expenses 1,430 5,477 6,907
------------- ------------- -------------
Total assets 28,267,017 162,958,351 191,225,368
Liabilities:
Cash overdraft -- 68,012 68,012
Income distribution payable 130,480 776,572 907,052
Accrued expenses 10,691 102,264 112,955
------------- ------------- -------------
Total liabilities 141,171 946,848 1,088,019
------------- ------------- -------------
Net Assets $ 28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Net Assets:
Paid in capital 29,643,672 163,944,893 193,588,565
Undistributed net investment income -- 2,351 2,351
Net unrealized appreciation (depreciation) from investments (154,614) 337,107 182,493
Accumulated net realized loss on investments (1,363,212) (2,272,848) (3,636,060)
------------- ------------- -------------
Total Net Assets $28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Net Assets
Investor A Shares 28,125,846 4,606,807 32,732,653
Investor B Shares -- 575,562 575,562
Trust Shares -- 141,220,745 141,220,745
Institutional Shares -- 15,608,389 15,608,389
------------- ------------- -------------
Total $28,125,846 $ 162,011,503 $ 190,137,349
============= ============= =============
Outstanding shares of common stock
Investor A Shares 2,898,396 458,760 3,260,139
Investor B Shares -- 57,297 57,297
Trust Shares -- 14,062,830 14,062,830
Institutional Shares -- 1,554,202 1,554,202
------------- ------------- -------------
Total 2,898,396 16,133,089 18,934,468
============= ============= =============
Net Asset Value:
Investor A Shares $ 9.70 $ 10.04 $ 10.04
Investor B Shares -- $ 10.05 $ 10.05
Trust Shares -- $ 10.04 $ 10.04
Institutional Shares -- $ 10.04 $ 10.04
------------- ------------- -------------
Maximum Sale Charge: Investor A Shares 3.50% 4.50% 4.50%
============= ============= =============
Maximum Offering Price (100%/(100%-Maximum Sales Charge) of net $ 10.05 $ 10.51 $ 10.51
asset value adjusted to the nearest cent) per share: Investor A Shares
</TABLE>
Redemption price of Investor B Shares varies based on length of time held.
Maximum redemption charge would be 5.0% (as a percentage of offering price).
(See Notes which are an integral part of the Financial Statements)
<PAGE> 138
ARROW FIXED INCOME AND ARCH GOVERNMENT & CORPORATE BOND PORTFOLIOS
Pro Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
12 Month Period 12 Month Period 12 Month Period
ended 5/31/97 ended 5/31/97 ended 5/31/97
-------------------------------------------------- --------------
ARCH
Government &
Arrow Fixed Corporate Bond (PRO FORMA) (PRO FORMA)
Income Portfolio Portfolio Adjustments (Combined)
-------------------------------------------------- ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $ 63,661 $ 60,323 $ -- $ 123,984
Interest 1,995,379 10,678,415 -- 12,673,794
Income from security Lending -- 51,467 -- 51,467
-------------------------------------------------- ------------
Total income 2,059,040 10,790,205 -- 12,849,245
Expenses:
Investment advisory fee 172,608 714,580 (43,152)(1) 844,036
Administrative personnel and services fee 49,952 359,498 15,176 (2) 424,626
Custodian and accounting fees 72,880 62,424 (61,571)(3) 73,733
Transfer and dividend disbursing agent fees and expenses 38,113 47,161 -- 85,274
Directors'/Trustees' fees 2,994 4,225 (2,994)(4) 4,225
Legal and audit fees 14,949 18,738 (11,554)(5) 22,133
Distribution services fee 71,920 19,561 (68,376)(6) 23,105
Share registration costs 13,802 14,005 -- 27,807
Printing and postage 3,074 17,003 -- 20,077
Insurance premiums 3,635 -- -- 3,635
Miscellaneous 9,162 (3,330) -- 5,832
-------------------------------------------------- ------------
Total expenses 453,089 1,253,865 (172,471) 1,534,483
Expenses voluntarily reduced (75,159) (158,852) 65,292 (7) (168,719)
-------------------------------------------------- ------------
Net expenses 377,930 1,095,013 (107,179) 1,365,764
================================================== ============
Net investment income $ 1,681,110 $ 9,695,192 $ 107,179 $ 11,483,481
================================================== ============
Realized and Unrealized gain (loss) on Investments:
Net realized gain (loss) on investments (424,459) (916,929) -- (1,341,388)
Net change in unrealized depreciation of investments 750,047 (3,784,547) -- (3,034,500)
-------------------------------------------------- ------------
Net realized and unrealized loss on investments 325,588 (4,701,476) -- (4,375,888)
================================================== ============
Change in net assets resulting from operations $ 2,006,698 $ 4,993,716 $ 107,179 $ 7,172,885
================================================== ============
</TABLE>
(1) To adjust Advisory fees to replace the ARCH Fund's fee structure for the
combined assets.
(2) To adjust Administration fees to replace the ARCH Fund's fee structure for
the combined assets.
(3) To adjust Custodian and Accounting fees to replace the ARCH Fund's fee
structure for the combined assets.
(4) To eliminate duplicate of Directors'/Trustees' fees.
(5) To eliminate duplicate of Legal and Audit fees.
(6) To adjust Distribution fees to replace the ARCH Fund's fee structure
for the combined assets.
(7) To adjust expenses voluntarily reduced for administration, custodian and
accounting fees per the ARCH Fund's fee structure for the combined assets.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 139
PART C
<PAGE> 140
FORM N-14
Part C - Other Information
Item 15. Indemnification
Indemnification of Registrant's principal underwriter, custodian and
transfer agent against certain losses is provided for, respectively, in Sections
1.11 and 1.12 of the Distribution Agreement, incorporated herein by reference as
Exhibit (7)(a), and Sections 24 and 18, respectively, of the Custodian
Agreement, incorporated herein by reference as Exhibit (9)(a) and the Transfer
Agency Agreement incorporated herein by reference as Exhibit (13)(i). The
Registrant has obtained from a major insurance carrier a directors' and
officers' liability policy covering certain types of errors and omissions. In no
event will the Registrant indemnify any of its directors, officers, employees or
agents against any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith or gross negligence in the
performance of his duties, or by reason of his reckless disregard of the duties
involved in the conduct of his office or under his agreement with the
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release 11330 under the Investment Company Act of 1940 in connection
with any indemnification.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 16. Exhibits
(1) (a) Articles of Incorporation dated September 9,
1982.(3)
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(b) Articles Supplementary to Registrant's
Articles of Incorporation dated October 28,
1982.(3)
(c) Articles Supplementary to Registrant's
Articles of Incorporation dated December 22,
1987.(3)
(d) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
October 30, 1990.(3)
(e) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
November 9, 1990.(3)
(f) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 19, 1991.(3)
(g) Certificate of Correction dated April 30,
1991 to Articles Supplementary dated as of
March 19, 1991.(3)
(h) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
June 25, 1991.(3)
(i) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
November 15, 1991.(3)
(j) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
January 26, 1993.(3)
(k) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 23, 1993.(3)
(l) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 7, 1994.(3)
(m) Certificate of Correction dated October 17,
1994 to Articles Supplementary dated as of
March 8, 1994 to Registrant's Articles of
Incorporation.(3)
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(n) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
February 22, 1995.(3)
(o) Articles Supplementary to Registrant's
Articles of Incorporation dated as of April
17, 1995.(3)
(p) Articles Supplementary to Registrant's
Articles of Incorporation dated June 27,
1995.(3)
(q) Articles Supplementary to Registrant's
Articles of Incorporation dated September 18,
1995.(3)
(r) Articles Supplementary to Registrant's
Articles of Incorporation dated August 30,
1996.(5)
(s) Articles Supplementary to Registrant's
Articles of Incorporation dated February 3,
1997.(7)
(t) Articles Supplementary to Registrant's
Articles of Incorporation dated June 17,
1997.(10)
(u) Form of Articles Supplementary to
Registrant's Articles of Incorporation.(9)
(2) Restated and Amended By-Laws as approved and
adopted by Registrant's Board of Directors.(6)
(3) None.
(4) Agreement and Plan of Reorganization filed
herewith as Appendix I to the Combined Proxy
Statement/Prospectus
(5) None.
(6) (a) Amended and Restated Advisory Agreement
between Registrant and Mississippi Valley
Advisors Inc. dated April 1, 1991.(3)
(b) Addendum No. 1 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the ARCH Treasury Money Market Portfolio,
dated September 27, 1991.(3)
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(c) Addendum No. 2 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors, Inc. with
respect to the ARCH Small Cap Equity
(formerly Emerging Growth Portfolio), dated
April 1, 1992.(3)
(d) Addendum No. 3 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the ARCH Balanced Portfolio dated April 1,
1993.(3)
(e) Addendum No. 4 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. dated March
15, 1994.(3)
(f) Addendum No. 5 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the Short-Intermediate Municipal Portfolio
dated July 10, 1995.(3)
(g) Addendum No. 6 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the Tax-Exempt Money Market, Missouri Tax-
Exempt Bond and Kansas Tax-Exempt Bond
Portfolios dated September 29, 1995.(3)
(h) Addendum No. 7 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the Equity Income, National Municipal Bond
and Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond Portfolios)
dated November 15, 1996.(6)
(i) Addendum No. 8 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with respect
to the Equity Index and Bond Index Portfolios
dated February 14, 1997.(7)
(j) Form of Addendum No. 9 to Amended and
Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors
Inc. with respect to the Small Cap Equity
Index Portfolio.(9)
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(k) Form of Addendum No. 10 to Amended and
Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors
Inc. with respect to the Growth Equity
Portfolio.(9)
(l) Sub-Advisory Agreement between Mississippi
Valley Advisors Inc. and Clay Finlay Inc.
dated August 29, 1996.(5)
(7) (a) Distribution Agreement between Registrant and
The Winsbury Company Limited Partnership
dated October 1, 1993 is incorporated herein
by reference to Exhibit (6)(a) of Post-
Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(b) Addendum No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (6)(b) of Post-Effective Amendment
No. 25 to Registrant's Registration Statement
on Form N-1A, filed November 8, 1994.
(c) Addendum No. 2 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to Investor
B Shares of the non-money market Portfolios
dated March 1, 1995 is incorporated herein by
reference to Exhibit (6)(c) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed April 14, 1995.
(d) Addendum No. 3 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the
Short-Intermediate Municipal Portfolio and
Investor B Shares of the Money Market
Portfolio is incorporated herein by reference
to Exhibit (6)(d) of Post-Effective Amendment
No. 31 to Registrant's Registration Statement
on Form N-1A, filed September 20, 1995.
(e) Addendum No. 4 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the Tax-
Exempt Money Market, Missouri Tax-Exempt Bond
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and Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
(f) Addendum No. 5 to Distribution Agreement
between Registrant and BISYS Fund Services
with respect to the Equity Income, National
Municipal Bond and Intermediate Corporate
Bond (formerly Short-Intermediate Corporate
Bond) Portfolios dated November 15, 1996.(6)
(g) Addendum No. 6 to Distribution Agreement
between Registrant and BISYS Fund Services
with respect to the Equity Index and Bond
Index Portfolios dated February 14, 1997.(7)
(h) Form of Addendum No. 7 to Distribution
Agreement between Registrant and BISYS Fund
Services with respect to the Growth Equity
and Small Cap Equity Index Portfolios.(9)
(i) Amendment No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership dated as of September 29,
1995.(1)
(8) None.
(9) (a) Custodian Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated as of April 1, 1992 is
incorporated herein by reference to Exhibit
(8)(a) of Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form
N-1A, filed March 31, 1992.
(b) Custody Fee Agreement between Registrant and Mercantile
Bank of St. Louis, National Association dated April 1,
1995 is incorporated herein by reference to Exhibit
(8)(b) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, filed
April 14, 1995.
(c) Custody Fee Agreement between Registrant and Mercantile
Bank of St. Louis, National Association dated July 10,
1995 is incorporated herein by reference to Exhibit
(8)(c) of Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, filed
September 20, 1995.
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<PAGE> 146
(d) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated September 29, 1995.(3)
(e) Custody Fee Agreement between
Registrant and Mercantile Bank National
Association dated November 15, 1996.(6)
(f) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated
February 14, 1997.(7)
(g) Form of Custody Fee Agreement between
Registrant and Mercantile Bank of St. Louis
National Association.(9)
(h) Global Sub-Custodian Agreement among Bankers
Trust Company of New York, Registrant and
Mercantile Bank of St. Louis, National
Association dated as of April 1, 1994 is
incorporated herein by reference to Exhibit
(8)(j) of Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(i) Securities Lending Amendment dated August 4,
1994 to Custodian Agreement dated April 1,
1992 between Registrant and Mercantile Bank
of St. Louis, National Association is
incorporated herein by reference to Exhibit
(8)(k) of Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(10) (a) (1) Distribution and Services Plan (Investor
A Shares) under Rule 12b-1 and Form of
Agreement.(9)
(2) Distribution and Services Plan (Investor
B Shares) under Rule 12b-1 and Form of
Agreement.(9)
(b) Amended and Restated Plan Pursuant to Rule
18f-3 for Operation of a Multi-Class System.(9)
(11) Opinion of Drinker Biddle & Reath LLP that shares will be
validly issued, fully paid and non-assessable (including
consent of such firm).(10)
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<PAGE> 147
(12) Opinion of Drinker Biddle & Reath LLP as to tax
matters and consequences (including consent of
such firm).(10)
(13) (a) Administration Agreement between Registrant
and The Winsbury Service Corporation dated
October 1, 1993 is incorporated herein by
reference to Exhibit (9)(a) of Post-Effective
Amendment No. 25 to Registrant's Registration
Statement on Form N-1A, filed November 8,
1994.
(b) Addendum No. 1 to Administration Agreement
between Registrant and The Winsbury Service
Corporation with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (9)(b) of Post-Effective Amendment
No. 25 to Registrant's Registration Statement
on Form N-1A, filed November 8, 1994.
(c) Addendum No. 2 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. (formerly known as The Winsbury
Service Corporation) with respect to Investor
B Shares of the non-money market Portfolios
dated as of March 1, 1995 is incorporated
herein by reference to Exhibit (9)(c) of
Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(d) Addendum No. 3 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Short-
Intermediate Municipal Portfolio and Investor
B Shares of the Money Market Portfolio dated
July 10, 1995 is incorporated herein by
reference to Exhibit (9)(d) of Post-Effective
Amendment No. 31 to Registrant's Registration
Statement on Form N-1A, filed September 20,
1995.(3)
(e) Addendum No. 4 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
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(f) Addendum No. 5 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Income,
National Municipal Bond and Intermediate
Corporate bond (formerly Short-Intermediate
Corporate Bond) Portfolios dated November 15,
1996.(6)
(g) Addendum No. 6 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Index
and Bond Index Portfolios dated February 14,
1997.(7)
(h) Form of Addendum No. 7 to Administration
Agreement between Registrant and BISYS Fund
Services Ohio, Inc. with respect to the
Growth Equity and Small Cap Equity Index
Portfolios.(9)
(i) Transfer Agency Agreement between Registrant and The
Winsbury Service Corporation dated October 1, 1993 is
incorporated herein by reference to Exhibit (9)(c) of
Post-Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed November 8,
1994.
(j) Addendum No. 1 to Transfer Agency Agreement
between Registrant and The Winsbury Service
Corporation with respect to the ARCH
International Equity Portfolio dated March
15, 1994 is incorporated herein by reference
to Exhibit (9)(d) of Post-Effective Amendment
No. 25 to Registrant's Registration Statement
on Form N-1A, filed November 8, 1994.
(k) Addendum No. 2 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. (formerly known as The Winsbury
Service Corporation) with respect to Investor
B Shares of the non-money market Portfolios
dated as of March 1, 1995 is incorporated
herein by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(l) Addendum No. 3 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Short-
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<PAGE> 149
Intermediate Municipal Portfolio and Investor B Shares
of the Money Market Portfolio is incorporated herein by
reference to Exhibit (9)(i) of Post-Effective Amendment
No. 31 to Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.
(m) Addendum No. 4 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
(n) Addendum No. 5 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Income,
National Municipal Bond and Intermediate
Corporate Bond (formerly Short-Intermediate
Corporate Bond) Portfolios dated November 15,
1996.(6)
(o) Addendum No. 6 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Index
and Bond Index Portfolios dated February 14,
1997.(7)
(p) Form of Addendum No. 7 to Transfer Agency
Agreement between Registrant and BISYS Fund
Services Ohio, Inc. with respect to the
Growth Equity and Small Cap Equity Index
Portfolios.(9)
(q) Amendment No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated as of September 29, 1995.(1)
(r) Amendment No. 2 to Transfer Agency Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. dated October 1, 1995.(3)
(s) (1) Administrative Services Plan (Trust
Shares) and Form of Agreement.(9)
(2) Administrative Services Plan
(Institutional Shares) and Form of
Agreement.(9)
(14) (a) Consent of KPMG Peat Marwick LLP.
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(b) Consent of Drinker Biddle & Reath LLP.
(15) None.
(16) Powers of attorney.(10)
(17) (a) Declaration of Registrant pursuant to Rule
24f-2 under the Investment Company Act of
1940.(10)
(b) Forms of Proxy.(10)
(c) Proposed Prospectuses for Investor A Shares
and Trust Shares of Registrant's Growth
Equity Portfolio.(10)
(d) Proposed Statement of Additional Information
for Registrant's Growth Equity Portfolio.(10)
(e) Prospectuses for Investor A Shares and Trust Shares of
Registrant's Government & Corporate Bond and National
Municipal Bond Portfolios dated March 31, 1997 (as
supplemented August 29, 1997).
(f) Statement of Additional Information for Registrant's
Government & Corporate Bond and National Municipal Bond
Portfolios dated March 31, 1997 (as revised August 29,
1997).
(g) Prospectus for the Arrow Equity, Fixed Income and
Municipal Income Portfolios dated November 30, 1996 (as
supplemented April 25, 1997).(10)
(h) Combined Statement of Additional Information
for the Arrow Equity, Fixed Income and
Municipal Income Portfolios dated
November 30, 1996.(10)
(i) Semi-Annual Report to Shareholders dated
May 31, 1997 for Registrant's Government &
Corporate Bond and National Municipal Bond
Portfolios.(10)
(j) Annual Report to Shareholders dated
November 30, 1996 for Registrant's
Government & Corporate Bond and National
Municipal Bond Portfolios.(10)
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(k) Semi-Annual Report dated March 31, 1997 for
Arrow Funds' Equity, Fixed Income and
Municipal Income Portfolios.(10)
(l) Annual Report dated September 30, 1996 for
Arrow Funds' Equity, Fixed Income and
Municipal Income Portfolios.(10)
1. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on January 2, 1996.
2. Filed under Rule 24f-2 as part of Registrant's Rule 24f-2
Notice on January 28, 1997.
3. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on February 28, 1996.
4. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on March 28, 1996.
5. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on October 8, 1996.
6. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A (File
No. 2-79285) on January 30, 1997.
7. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 38 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on March 31, 1997.
8. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on May 28, 1997.
9. Filed electronically as an Exhibit and incorporated herein
by reference to Post-Effective Amendment No. 40 to
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<PAGE> 152
Registrant's Registration Statement on Form N-1A (File No.
2-79285) on June 18, 1997.
10. Filed electronically as an Exhibit and incorporated herein
by reference to Registrant's Registration Statement on Form
N-14 (File No. 333-33423) on August 12, 1997.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this registration statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, as amended,
the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may
be deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the registration statement and will not be used until
the amendment is effective, and that, in determining any liability
under the Securities Act of 1933, as amended, each post-effective
amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of
them.
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SIGNATURES
As required by the Securities Act of 1933, as amended, this
Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-14 has been signed on behalf of the
Registrant, in the City of St. Louis, State of Missouri, on the
8th day of September, 1997.
THE ARCH FUND(R), INC.
Registrant
/s/ Jerry V. Woodham
------------------------------
President
As required by the Securities Act of 1933, as amended, this Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-14 has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jerry V. Woodham
- ------------------------ Chairman of the September 8, 1997
Jerry V. Woodham Board and President
*/s/ James C. Jacobsen Director September 8, 1997
- ------------------------
James C. Jacobsen
*/s/ Joseph J. Hunt Director September 8, 1997
- ------------------------
Joseph J. Hunt
*/s/ Robert M. Cox, Jr. Director September 8, 1997
- ------------------------
Robert M. Cox, Jr.
*/s/ Lyle L. Meyer Director September 8, 1997
- ------------------------
Lyle L. Meyer
*/s/ Ronald D. Winney Director & Treasurer September 8, 1997
- ------------------------
Ronald D. Winney
*By /s/ Jerry V. Woodham
--------------------
Jerry V. Woodham
Attorney-in-fact
</TABLE>
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N-14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
(14)(a) Consent of KPMG Peat Marwick LLP.
(14)(b) Consent of Drinker Biddle & Reath LLP.
(17)(e) Prospectus for Investor A Shares and Trust Shares of Registrant's
Government and Corporate Bond and National Municipal Bond Portfolios
dated March 31, 1997 (as supplemented August 29, 1997).
(17)(f) Statement of Additional Information for Registrant's Government and
Corporate Bond and National Municipal Bond Portfolios dated March
31, 1997 (as revised August 29, 1997).
</TABLE>
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<PAGE> 1
EXHIBIT 14(a)
AUDITORS' CONSENT
The Board of Directors of
The ARCH Fund,Inc.:
We consent to the use of our reports incorporated by reference dated November 6,
1996 for the Arrow Funds as of September 30, 1996 and for the periods indicated
therein and dated January 22, 1997 for The ARCH Fund, Inc. as of November 30,
1996 and for the periods indicated therein and to the references to our firm
under the headings "Financial Highlights" in the Prospectuses and "Independent
Auditors" in the Statements of Additional Information incorporated by reference
herein as well as the reference to our firm under the heading "Financial
Statements" included herein.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Columbus, Ohio
September 8, 1997
<PAGE> 1
Exhibit 14(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to
our Firm included in Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-14 under the Securities Act of 1933 and the
Investment Company Act of 1940, respectively, of the Arch Fund, Inc. This
consent does not constitute a consent under Section 7 of the Securities Act of
1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under Section 7 or under the rules and regulations of the Securities
and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
---------------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
September 8, 1997
<PAGE> 1
Exhibit 17(e)
THE ARCH FUND(R), INC.
(THE "FUND")
INVESTOR A SHARES AND INVESTOR B SHARES OF THE
ARCH MONEY MARKET, TREASURY MONEY MARKET,
TAX-EXEMPT MONEY MARKET, U.S. GOVERNMENT SECURITIES,
INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE
MUNICIPAL, MISSOURI TAX-EXEMPT BOND,
NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY,
SMALL CAP EQUITY, INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
SUPPLEMENT DATED AUGUST 29, 1997
TO PROSPECTUS DATED MARCH 31, 1997
The following Financial Highlights replace those included in the
Prospectus on pages 12 through 24:
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following tables supplement the
Fund's financial statements, which are contained in the Fund's Annual and
Semi-Annual Reports to Shareholders dated November 30, 1996 and March 31, 1997
and incorporated by reference into the Statement of Additional Information, and
set forth certain historic results for (i) Investor A Shares of each Portfolio,
and (ii) Investor B Shares of the Money Market, U.S. Government Securities,
Government & Corporate Bond, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Growth, Growth & Income Equity, Small Cap Equity, International Equity
and Balanced Portfolios. The data for the period ended May 31, 1997 for each
Portfolio is unaudited. 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
<PAGE> 2
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 and Semi-Annual Reports. Both the Statement of
Additional Information and the Annual and Semi-Annual Reports may be obtained
free of charge by contacting the Fund at the address or telephone number on page
2 of this Prospectus.
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Treasury Money Market Portfolio
(For a Share(b) outstanding throughout each period)
Investor A Shares
Six Months
Ended Year Ended Year Ended
May 31, 1997 Nov. 30, 1996 Nov. 30, 1995
Investor A Investor A Investor A
Shares Shares Shares
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 1.00 $ 1.00 $ 1.00
---------- ---------- ----------
Investment Activities
Net investment income ............... 0.022 0.044 0.048
---------- ---------- ----------
Total from Investment Activities .... 0.022 0.044 0.048
---------- ---------- ----------
Distributions
Net investment income ............... (0.022) (0.044) (0.048)
---------- ---------- ----------
Total Distributions ................. (0.022) (0.044) (0.048)
---------- ---------- ----------
Net Asset Value, End of Period ........ $ 1.00 $ 1.00 $ 1.00
========== ========== ==========
Total Return .......................... 2.23%(c) 4.46% 4.93%
Ratios/Supplemental Data:
Net Assets at end of period (000) ..... $ 5,993 $ 7,667 $ 2,776
Ratio of expenses to average net assets
(including waivers) ................. 0.77%(d) 0.81% 0.78%
Ratio of net investment income to
average net assets (including
waivers) ............................ 4.42%(d) 4.35% 4.84%
Ratio of expenses to average net assets
(before waivers)* ................... 0.92%(d) 0.96% 0.93%
Ratio of net investment income to
average net assets (before
waivers)* ........................... 4.27%(d) 4.20% 4.69%
</TABLE>
<TABLE>
<CAPTION>
Treasury Money Market Portfolio
(For a Share(b) outstanding throughout each period)
Investor A Shares
Dec. 2, 1991
Year Ended Year Ended to Nov. 30,
Nov. 30, 1994(b) Nov. 30, 1993 1992(a)(b)
Investor A Investor Investor
Shares Shares Shares
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .. $ 1.00 $ 1.00 $ 1.00
---------- ---------- ----------
Investment Activities
Net investment income ............... 0.031 0.024 0.017
---------- ---------- ----------
Total from Investment Activities .... 0.031 0.024 0.017
---------- ---------- ----------
Distributions
Net investment income ............... (0.031) (0.024) (0.017)
---------- ---------- ----------
Total Distributions ................. (0.031) (0.024) (0.017)
---------- ---------- ----------
Net Asset Value, End of Period ........ $ 1.00 $ 1.00 $ 1.00
========== ========== ==========
Total Return .......................... 3.16% 2.43% 1.79%(c)
Ratios/Supplemental Data:
Net Assets at end of period (000) ..... $ 1,713 $ 1,411 $ 3,257
Ratio of expenses to average net assets
(including waivers) ................. 0.71% 0.64% 0.58%(d)
Ratio of net investment income to
average net assets (including
waivers) ............................ 3.14% 2.41% 2.88%(d)
Ratio of expenses to average net assets
(before waivers)* ................... 0.94% 0.97% 1.02%(d)
Ratio of net investment income to
average net assets (before
waivers)* ........................... 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.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Money Market Portfolio
(For a Share(a) outstanding throughout each period)
Investor A Shares
Six Months Year ended November 30,
Ended ------------------------------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993 1992
------------ -------- -------- --------- -------- --------
Investor Investor Investor Investor Investor Investor
A Shares A Shares A Shares A Shares Shares Shares
-------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
Investment Activities
Net investment income .... 0.024 0.047 0.052 0.033 0.025 0.032
------------ ------------ ------------ ------------ ------------ ------------
Total from Investment
Activities ............ 0.024 0.047 0.052 0.033 0.025 0.032
------------ ------------ ------------ ------------ ------------ ------------
Distributions
Net investment income .... (0.024) (0.047) (0.052) (0.033) (0.025) (0.032)
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions .... (0.024) (0.047) (0.052) (0.033) (0.025) (0.032)
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============ ============
Total Return ............... 2.39%(d) 4.81% 5.33% 3.37% 2.52% 3.21%
Ratios/Supplemental Data:
Net Assets at end
of period (000) .......... $ 86,591 $ 91,166 $ 64,865 $ 48,384 $ 46,920 $ 52,224
Ratio of expenses to
average net assets
(including waivers) ...... 0.77%(e) 0.78% 0.77% 0.78% 0.79% 0.80%
Ratio of net investment
income to average net
assets (including waivers) 4.75%(e) 4.70% 5.20% 3.35% 2.50% 3.21%
Ratio of expenses to
average net assets
(before waivers)* ........ 0.92%(e) 0.93% 0.92% 0.93% 0.93% 0.94%
Ratio of net investment
income to average net
assets (before waivers)* . 4.60%(e) 4.55% 5.05% 3.20% 2.36% 3.07%
</TABLE>
<TABLE>
<CAPTION>
Year ended November 30,
------------------------------------------------------------------------------------
1991(a)
--------
Investor
Shares 1990 1989 1988 1987
-------- ------- -------- -------- --------
<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 .... 0.056 0.078 0.088 0.071 0.062
------------ ------------ ------------ ------------ ------------
Total from Investment
Activities ............ 0.056 0.078 0.088 0.071 0.062
------------ ------------ ------------ ------------ ------------
Distributions
Net investment income .... (0.056) (0.078) (0.088) (0.071) (0.062)
------------ ------------ ------------ ------------ ------------
Total Distributions .... (0.056) (0.078) (0.088) (0.071) (0.062)
------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============
Total Return ............... 5.75% 8.08% 9.21% 7.33%(b) 6.40%(b)
Ratios/Supplemental Data:
Net Assets at end
of period (000) .......... $ 60,436 $ 896,903 $ 661,145 $ 289,764 $ 220,944
Ratio of expenses to
average net assets
(including waivers) ...... 0.72% 0.55% 0.45% 0.45% 0.45%
Ratio of net investment
income to average net
assets (including waivers) 5.69% 7.77% 8.82% 7.12% 6.22%
Ratio of expenses to
average net assets
(before waivers)* ........ 0.80% 0.60% 0.60% 0.58% 0.68%
Ratio of net investment
income to average net
assets (before waivers)* . 5.61% 7.72% 8.67% 6.99% 5.99%
</TABLE>
<TABLE>
<CAPTION>
Investor B Investor B
Shares Shares
---------- ---------
Six Months Jan. 26, 1996
Ended to
May 31, 1997 Nov. 30, 1996(c)
------------ ----------------
(Unaudited)
<S> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 1.00 $ 1.00
------------ ------------
Investment Activities
Net investment income .... 0.020 0.033
------------ ------------
Total from Investment
Activities ............ 0.020 0.033
------------ ------------
Distributions
Net investment income .... (0.020) (0.033)
------------ ------------
Total Distributions .... (0.020) (0.033)
------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00
============ ============
Total Return ............... 2.01%(d) 3.35%(d)
Ratios/Supplemental Data:
Net Assets at end
of period (000) .......... $ 85 $ 41
Ratio of expenses to
average net assets
(including waivers) ...... 1.52%(e) 1.47%(e)
Ratio of net investment
income to average net
assets (including waivers) 4.03%(e) 3.73%(e)
Ratio of expenses to
average net assets
(before waivers)* ........ 1.67%(e) 1.68%(e)
Ratio of net investment
income to average net
assets (before waivers)* . 3.88%(e) 3.52%(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) 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.
(d) Not annualized.
(e) Annualized.
-4-
<PAGE> 5
<TABLE>
<CAPTION>
Tax-Exempt Money Market Portfolio(a)
(For a Share(b) outstanding throughout each period)
Investor A Shares
Six Months Year Six Months
Ended Ended Ended
May 31, Nov. 30, Nov. 30,
------- -------- --------
1997 1996 1995(f)
-------- -------- ---------
Investor Investor Investor
A Shares A Shares A Shares
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ...... $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------
Investment Activities
Net investment income .... 0.014 0.028 0.014
------------ ------------ ------------
Total from Investment
Activities ............. 0.014 0.028 0.014
------------ ------------ ------------
Distributions
Net investment income .... (0.014) (0.028) (0.014)
------------ ------------ ------------
Total Distributions ...... (0.014) (0.028) (0.014)
------------ ------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00 $ 1.00
============ ============ ============
Total Return ............... 1.38%(d) 2.83% 1.45%(d)
Ratios/Supplemental Data:
Net assets at end of period
(000) .................... $ 13,386 $ 17,984 $ 5,403
Ratio of expenses to
average net assets
(including waivers) ...... 0.77%(e) 0.75% 0.94%(e)
Ratio of net investment
income to average net
assets (including waivers) 2.72%(e) 2.78% 2.87%(e)
Ratio of expenses to
average net assets
(before waivers)* ........ 0.82%(e) 0.80% 0.99%(e)
Ratio of net investment
income to average
net assets (before
waivers)* ............... 2.67%(e) 2.73% 2.82%(e)
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------------------------------------
1995 1994(b) 1993 1992 1991
-------- --------- ---------- --------- ----------
Investor Investor Investor Investor Investor
A Shares A 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 .... 0.027 0.017 0.019 0.031 0.047
------------ ------------ ------------ ------------ ------------
Total from Investment
Activities ............. 0.027 0.017 0.019 0.031 0.047
------------ ------------ ------------ ------------ ------------
Distributions
Net investment income .... (0.027) (0.017) (0.019) (0.031) (0.047)
------------ ------------ ------------ ------------ ------------
Total Distributions ...... (0.027) (0.017) (0.019) (0.031) (0.047)
------------ ------------ ------------ ------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============
Total Return ............... 2.70% 1.73% 1.90% 3.16% 4.82%
Ratios/Supplemental Data:
Net assets at end of period
(000) .................... $ 5,138 $ 8,631 $ 6,837 $ 10,956 $ 8,286
Ratio of expenses to
average net assets
(including waivers) ...... 0.84% 0.76% 0.80% 0.87% 0.58%
Ratio of net investment
income to average net
assets (including waivers) 2.63% 1.72% 1.88% 3.10% 5.09%
Ratio of expenses to
average net assets
(before waivers)* ........ 0.93% 0.86% 0.90% 0.97% 0.68%
Ratio of net investment
income to average
net assets (before
waivers)* ............... 2.54% 1.62% 1.78% 3.00% 4.99%
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Period
Ended
May 31,
--------
1990(b) 1989(b) 1988(b) 1987(a)
--------- -------- -------- ----------
Dollar Dollar Dollar 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 .... 0.041 0.042 0.025 0.036
------------ ------------ ------------ ------------
Total from Investment
Activities ............. 0.041 0.042 0.025 0.036
------------ ------------ ------------ ------------
Distributions
Net investment income .... (0.041) (0.042) (0.025) (0.036)
------------ ------------ ------------ ------------
Total Distributions ...... (0.041) (0.042) (0.025) (0.036)
------------ ------------ ------------ ------------
Net Asset Value,
End of Period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============
Total Return ............... 5.73% 5.72% 1.81% 3.80%(d)
Ratios/Supplemental Data:
Net assets at end of period
(000) .................... 0 $ 3,083 0 $ 147,799
Ratio of expenses to
average net assets
(including waivers) ...... 0.78% 0.65% 0.65% 0.37%(c),(e)
Ratio of net investment
income to average net
assets (including waivers) 5.30% 5.38% 4.05% 4.02%(c),(e)
Ratio of expenses to
average net assets
(before waivers)* ........ 0.87% 0.83% 0.80% 0.62%(c),(e)
Ratio of net investment
income to average
net assets (before
waivers)* ............... 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.
-5-
<PAGE> 7
<TABLE>
<CAPTION>
U.S. Government Securities Portfolio
(For a Share(a) outstanding throughout each period)
Investor A Shares
Six Months Year Ended November 30,
Ended ----------------------------------------------
May 31, 1997 1996 1995 1994(a)
------------ ---- ---- -------
Investor Investor Investor Investor
A Shares A Shares A Shares Shares
-------- -------- -------- ------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.67 $ 10.85 $ 10.05 $ 11.20
--------- --------- --------- ---------
Investment Activities
Net investment income ............. 0.30 0.62 0.64 0.61
Net realized and unrealized gains
(losses) from investments ........ (0.19) (0.15) 0.80 (1.00)
--------- --------- --------- ---------
Total from Investment Activities .. 0.11 0.47 1.44 (0.39)
--------- --------- --------- ---------
Distributions
Net investment income ............. (0.29) (0.62) (0.64) (0.61)
In excess of net investment income -- -- -- --
Net realized gains ................ -- -- -- --
In excess of net realized gains ... -- (0.03) -- (0.18)
--------- --------- --------- ---------
Total Distributions .............. (0.29) (0.65) (0.64) (0.79)
--------- --------- --------- ---------
Net Asset Value, End of Period ...... $ 10.49 $ 10.67 $ 10.85 $ 10.05
========= ========= ========= =========
Total Return (excludes sales charges) 1.11%(f) 4.57% 14.66% (3.14)%
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 5,349 $ 7,153 $ 8,179 $ 9,631
Ratio of expenses to average net
assets (including waivers) ........ 0.96%(g) 0.97% 0.97% 0.96%
Ratio of net investment income to
average net assets (including
waivers) .......................... 5.63%(g) 5.82% 6.05% 5.98%
Ratio of expenses to average net
assets (before waivers)* .......... 1.06%(g) 1.07% 1.07% 1.06%
Ratio of net investment income to
average net assets (before
waivers)* ......................... 5.53%(g) 5.72% 5.95% 5.88%
Portfolio turnover** ................ 78.33% 53.76% 93.76% 50%
</TABLE>
<TABLE>
<CAPTION>
Investor A Shares
Year Ended November 30,
----------------------------------------------
1993 1992 1991(a)
---- ---- -------
Investor Investor Investor
Shares Shares Shares 1990 1989
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.80 $ 10.68 $ 10.21 $ 10.06 $ 9.94
--------- --------- --------- --------- ---------
Investment Activities
Net investment income ............. 0.59 0.62 0.75 0.76 0.85
Net realized and unrealized gains
(losses) from investments ........ 0.47 0.13 0.47 0.16 0.11
--------- --------- --------- --------- ---------
Total from Investment Activities .. 1.06 0.75 1.22 0.92 0.96
--------- --------- --------- --------- ---------
Distributions
Net investment income ............. (0.59) (0.62) (0.75) (0.77) (0.84)
In excess of net investment income -- -- -- -- --
Net realized gains ................ (0.07) (0.01) -- -- --
In excess of net realized gains ... -- -- -- -- --
--------- --------- --------- --------- ---------
Total Distributions .............. (0.66) (0.63) (0.75) (0.77) (0.84)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period ...... $ 11.20 $ 10.80 $ 10.68 $ 10.21 $ 10.06
========= ========= ========= ========= =========
Total Return (excludes sales charges) 10.03% 7.20% 12.36% 9.66% 10.40%
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 9,567 $ 7,499 $ 5,791 $ 6,856 $ 5,954
Ratio of expenses to average net
assets (including waivers) ........ 0.97% 0.95% 0.82% 0.73% 0.74%
Ratio of net investment income to
average net assets (including
waivers) .......................... 5.25% 5.72% 7.12% 7.80% 8.50%
Ratio of expenses to average net
assets (before waivers)* .......... 1.08% 1.09% 1.36% 1.28% 1.29%
Ratio of net investment income to
average net assets (before
waivers)* ......................... 5.14% 5.58% 6.58% 7.25% 7.95%
Portfolio turnover** ................ 24% 74% 36% 53% 84%
</TABLE>
<TABLE>
<CAPTION>
Investor A
Shares Investor B Shares
----------- ----------------------------------------------------
June 2, Year
1988 to Six Months Ended March 1, 1995
Nov. 30, Ended Nov. 30, to Nov. 30,
1988(b) May 31, 1997 1996 1995(c)
------- ------------ ---- -------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.00 $ 10.66 $ 10.84 $ 10.34
--------- --------- --------- ---------
Investment Activities
Net investment income ............. 0.36 0.26 0.55 0.31
Net realized and unrealized gains
(losses) from investments ........ (0.06) (0.18) (0.15) 0.50
--------- --------- --------- ---------
Total from Investment Activities .. 0.30 0.08 0.40 0.81
--------- --------- --------- ---------
Distributions
Net investment income ............. (0.36) (0.26) (0.55) (0.31)
In excess of net investment income -- -- -- --
Net realized gains ................ -- -- -- --
In excess of net realized gains ... -- -- (0.03) --
--------- --------- --------- ---------
Total Distributions .............. (0.36) (0.26) (0.58) (0.31)
--------- --------- --------- ---------
Net Asset Value, End of Period ...... $ 9.94 $ 10.48 $ 10.66 $ 10.84
========= ========= ========= =========
Total Return (excludes sales charges) 3.05%(d)(f) 0.75%(f) 3.85% 12.85%(e)
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 4,335 $ 413 $ 359 $ 41
Ratio of expenses to average net
assets (including waivers) ........ 0.79%(d) 1.66%(g) 1.66% 1.68%(g)
Ratio of net investment income to
average net assets (including
waivers) .......................... 7.26%(g) 4.92%(g) 5.06% 5.37%(g)
Ratio of expenses to average net
assets (before waivers)* .......... 1.40% 1.76%(g) 1.76% 1.78%(g)
Ratio of net investment income to
average net assets (before
waivers)* ......................... 6.65%(g) 4.82%(g) 4.96% 5.27%(g)
Portfolio turnover** ................ 215% 78.33% 53.76% 93.76%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. 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.
-6-
<PAGE> 8
<TABLE>
<CAPTION>
For a Share outstanding throughout the period
Intermediate Corporate Bond Index Portfolio
Bond Portfolio
February 10, 1997 February 10, 1997
to to
May 31, 1997(a) May 31, 1997(a)
Investor A Investor A
Shares Shares
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net Asset Value,
Beginning of Period...................................... $10.00 $10.00
------ ------
Investment Activities
Net investment income.................................... 0.19 0.18
Net realized and unrealized
(losses) from investments.............................. (0.17) (0.13)
------ ------
Total from Investment Activities....................... 0.02 (0.05)
---- ------
Distributions
Net investment income.................................... (0.19) (0.18)
------ ------
Total Distributions.................................... (0.19) (0.18)
------ ------
Net Asset Value, End of Period............................. $9.83 $9.87
===== =====
Total Return (excludes sales charge) 0.25%(b)*** 0.49%(b)***
Ratios/Supplemental Data:
Net Assets at end of period (000).......................... $66 $46
Ratio of expenses to average net
assets (including waivers)............................... 0.60%(c) 0.52%(c)
Ratio of net investment income to
average net assets (including
waivers)................................................. 9.77%(c) 6.72%(c)
Ratio of expenses to average net
assets (before waivers)*................................. 0.99%(c) 0.93%(c)
Ratio of net investment income to
average net assets (before
waivers)*................................................ 9.38%(c) 6.31%(c)
Portfolio turnover**....................................... 66.10% 40.66%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of each Portfolio as a
whole without distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-7-
<PAGE> 9
<TABLE>
<CAPTION>
Government & Corporate Bond Portfolio
(For a Share(a) outstanding throughout each period)
Investor A Shares
---------------------------------------------------------
Six Months Year Ended November 30,
Ended ---------------------------------------------------------
May 31, 1997 1996 1995 1994(a) 1993
------------ ---- ---- ------- ----
Investor Investor Investor Investor Investor
A Shares A Shares A Shares Shares Shares
-------- -------- -------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income ............. 0.28 0.64 0.61 0.60 0.64
Net realized and unrealized gains
(losses) from investments ........ (0.30) (0.19) 0.89 (0.94) 0.39
---------- ---------- ---------- ---------- ----------
Total from Investment Activities .. (0.02) 0.45 1.50 (0.34) 1.03
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income ............. (0.28) (0.64) (0.61) (0.60) (0.64)
In excess of net investment income -- -- -- (0.07) --
---------- ---------- ---------- ---------- ----------
Total Distributions .............. (0.28) (0.64) (0.61) (0.67) (0.64)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ...... $ 10.04 $ 10.34 $ 10.53 $ 9.64 $ 10.65
========== ========== ========== ========== ==========
Total Return (excludes sales charges) (0.14)%(f) 4.51% 15.98% (3.32)% 10.23%
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 4,607 $ 4,915 $ 5,496 $ 5,167 $ 3,737
Ratio of expenses to average net
assets (including waivers) ........ 0.95%(g) 0.95% 0.95% 0.95% 0.95%
Ratio of net investment income to
average net assets (including
waivers) .......................... 5.64%(g) 6.06% 6.03% 6.00% 6.00%
Ratio of expenses to average net
assets (before waivers)* .......... 1.05%(g) 1.05% 1.05% 1.05% 1.05%
Ratio of net investment income to
average net assets (before
waivers)* ......................... 5.54%(g) 5.96% 5.93% 5.90% 5.90%
Portfolio turnover** ................ 76.99% 149.20% 59.32% 50% 31%
</TABLE>
<TABLE>
<CAPTION>
Investor A Shares
---------------------------------------------------------------------------
Year Ended November 30,
---------------------------------------------------------------------------
1992 1991(a)
---- -------
Investor Investor
Shares Shares 1990 1989
------ ------ ---- ----
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.15 $ 9.71 $ 10.12 $ 9.91
---------- ---------- ---------- ----------
Investment Activities
Net investment income ............. 0.66 0.75 0.84 0.89
Net realized and unrealized gains
(losses) from investments ........ 0.11 0.48 (0.41) 0.22
---------- ---------- ---------- ----------
Total from Investment Activities .. 0.77 1.23 0.43 1.11
---------- ---------- ---------- ----------
Distributions
Net investment income ............. (0.66) (0.79) (0.84) (0.90)
In excess of net investment income -- -- -- --
---------- ---------- ---------- ----------
Total Distributions .............. (0.66) (0.79) (0.84) (0.90)
---------- ---------- ---------- ----------
Net Asset Value, End of Period ...... $ 10.26 $ 10.15 $ 9.71 $ 10.12
========== ========== ========== ==========
Total Return (excludes sales charges) 7.81% 12.79% (4.96)% 11.79%
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 2,490 $ 2,010 $ 11,005 $ 10,327
Ratio of expenses to average net
assets (including waivers) ........ 0.93% 0.59% 0.53% 0.44%
Ratio of net investment income to
average net assets (including
waivers) .......................... 6.45% 7.77% 8.69% 8.97%
Ratio of expenses to average net
assets (before waivers)* .......... 1.06% 1.14% 1.08% 0.99%
Ratio of net investment income to
average net assets (before
waivers)* ......................... 6.32% 7.22% 8.14% 8.42%
Portfolio turnover** ................ 52% 105% 75% 148%
</TABLE>
<TABLE>
<CAPTION>
Investor A
Shares Investor B Shares
---------- Investor B ----------------------------------
June 2, Shares Year
1988 to Six Months Ended March 1, 1995
Nov. 30, Ended Nov. 30, to Nov. 30,
1988(b) May 31, 1997 1996 1995(c)
------- ------------ ---- -------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............... $ 10.00 $ 10.34 $ 10.53 $ 9.92
---------- ---------- ---------- ----------
Investment Activities
Net investment income ............. 0.39 0.25 0.57 0.38
Net realized and unrealized gains
(losses) from investments ........ (0.13) (0.29) (0.19) 0.61
---------- ---------- ---------- ----------
Total from Investment Activities .. 0.26 (0.04) 0.38 0.99
---------- ---------- ---------- ----------
Distributions
Net investment income ............. (0.35) (0.25) (0.57) (0.38)
In excess of net investment income -- -- -- --
---------- ---------- ---------- ----------
Total Distributions .............. (0.35) (0.25) (0.57) (0.38)
---------- ---------- ---------- ----------
Net Asset Value, End of Period ...... $ 9.91 $ 10.05 $ 10.34 $ 10.53
========== ========== ========== ==========
Total Return (excludes sales charges) 2.66%(d),(f) (0.38)%(f) 3.79% 15.27%(f)
Ratios/Supplemental Data:
Net Assets at end of period (000) ... $ 7,483 $ 576 $ 511 $ 106
Ratio of expenses to average net
assets (including waivers) ........ 0.56%(g) 1.65%(g) 1.65% 1.65%(g)
Ratio of net investment income to
average net assets (including
waivers) .......................... 8.47%(g) 4.92%(g) 5.37% 5.19%(g)
Ratio of expenses to average net
assets (before waivers)* .......... 1.17%(g) 1.75%(g) 1.75% 1.75%(g)
Ratio of net investment income to
average net assets (before
waivers)* ......................... 7.86%(g) 4.82%(g) 5.27% 5.09%(g)
Portfolio turnover** ................ 22% 76.99% 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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. 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.
-8-
<PAGE> 10
Short-Intermediate Municipal Portfolio
(For a Share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months Year Ended July 10, 1995 to
Ended November 30, November 30,
May 31, 1997 1996 1995(a)
------------ ------------ -----------
Investor A Investor A Investor A
Shares Shares Shares
------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............................ $10.08 $10.08 $10.00
------ ------ ------
Investment Activities
Net investment income......................................... 0.19 0.40 --
Net realized and unrealized gains
(losses) from investments................................... (0.07) -- 0.08
------- ---- -------
Total from Investment Activities............................ 0.12 0.40 0.08
------ ------ -------
Distributions
Net investment income......................................... (0.19) (0.40) --
------- ------ ---
Total Distributions......................................... (0.19) (0.40) --
------- ------ ---
Net Asset Value, End of Period.................................. $10.01 $ 10.08 $ 10.08
====== ======= =======
Total Return.................................................... 1.20%(b) 4.02% 0.80%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)............................... $31 $51 -- (c)
Ratio of expenses to average net assets......................... 0.61%(d) 0.56% 0.00%(d)
(including waivers)
Ratio of net investment income
to average net assets (including
waivers)...................................................... 3.80%(d) 3.83% 0.00%(d)
Ratio of expenses to average net assets
(before waivers)*............................................. 1.21%(d) 1.26% 0.00%(d)
Ratio of net investment income
to average net assets (before
waivers)*..................................................... 3.20%(d) 3.13% 0.00%(d)
Portfolio turnover**............................................ 0.00% 0.00% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(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.
-9-
<PAGE> 11
<TABLE>
<CAPTION>
Missouri Tax-Exempt Bond Portfolio(a)
(For a Share(b) outstanding throughout each period)
Investor A Shares
--------------------------------------------------------------------------------------------
Six
Six Months Year Months Year Ended
Ended Ended Ended ------------------------------
May 31, Nov. 30 Nov. 30 May 31,
1997 1996 1995(c) 1995(b) 1994
---------- ---------- ---------- ---------- ----------
Investor A Investor A Investor A Investor A Investor
Shares Shares Shares Shares Shares
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........ $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income ...... 0.27 0.55 0.27 0.55 0.55
Net realized and
unrealized gains (losses)
on investments .......... (0.10) (0.05) 0.22 0.40 (0.37)
---------- ---------- ---------- ---------- ----------
Total from Investment
Activities .............. 0.17 0.50 0.49 0.95 0.18
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income ...... (0.27) (0.55) (0.27) (0.55) (0.55)
Net realized gains ......... -- -- -- (0.01) (0.04)
---------- ---------- ---------- ---------- ----------
Total Distributions ..... (0.27) (0.55) (0.27) (0.56) (0.59)
---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of Period .............. $ 11.59 $ 11.69 $ 11.74 $ 11.52 $ 11.13
========== ========== ========== ========== ==========
Total Return (excludes
sales charges) ............. 1.45%(g) 4.41% 4.32%(g) 8.91% 1.53%
Ratios/Supplemental Data:
Net assets at end of
period (000) ............... $ 23,565 $ 25,144 $ 24,726 $ 24,318 $ 27,919
Ratio of expenses to
average net assets
(including waivers) ....... 0.86%(h) 0.85% 0.95%(h) 0.84% 0.65%
Ratio of net investment
income to average net
assets (including
waivers) ................ 4.61%(h) 4.75% 4.64%(h) 5.02% 4.75%
Ratio of expenses to
average net assets
(before waivers)* ....... 0.96%(h) 1.05% 1.18%(h) 1.18% 1.12%
Ratio of net investment
income to average
net assets
(before waivers)* ....... 4.51%(h) 4.55% 4.44%(h) 4.68% 4.28%
Portfolio turnover** ........ 3.77% 3.66% 1.55% -- 20%
</TABLE>
<TABLE>
<CAPTION>
Investor A Shares
--------------------------------------------------------------------------------------------
Year Ended Period
--------------------------------------------------------------------- Ended
May 31, Months
1993 1992 1991(b) 1990 1989(a),(b)
---------- ---------- ---------- ---------- ----------
Investor Investor Investor Portfolio Portfolio
Shares Shares Shares Shares Shares
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........ $ 10.97 $ 10.62 $ 10.35 $ 10.56 $ 10.00
---------- ---------- ---------- ---------- ----------
Investment Activities
Net investment income ...... 0.58 0.63 0.44 0.68 0.58
Net realized and
unrealized gains (losses)
on investments .......... 0.64 0.43 0.36 (0.09) 0.58
---------- ---------- ---------- ---------- ----------
Total from Investment
Activities .............. 1.22 1.06 0.80 0.59 1.16
---------- ---------- ---------- ---------- ----------
Distributions
Net investment income ...... (0.58) (0.63) (0.44) (0.65) (0.60)
Net realized gains ......... (0.07) (0.08) (0.09) -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ..... (0.65) (0.71) (0.53) (0.65) (0.60)
---------- ---------- ---------- ---------- ----------
Net Asset Value,
End of Period .............. $ 11.54 $ 10.97 $ 10.62 $ 10.50 $ 10.56
========== ========== ========== ========== ==========
Total Return (excludes
sales charges) ............. 11.47% 10.24% 8.72% 5.50% 12.08%(g)
Ratios/Supplemental Data:
Net assets at end of
period (000) ............... $ 23,223 $ 12,635 $ 6,211 $ 4,572 $ 4,053
Ratio of expenses to
average net assets
(including waivers) ....... 0.63% 0.85% 0.85% 0.70% 0.81%(h)
Ratio of net investment
income to average net
assets (including
waivers) ................ 5.11% 5.75% 6.12%(3) 6.38% 6.36%(h)
Ratio of expenses to
average net assets
(before waivers)* ....... 1.18% 1.49% 1.63% 1.70% 1.38%(h)
Ratio of net investment
income to average
net assets
(before waivers)* ....... 4.56% 5.11% 5.34% 5.38% 5.79%(h)
Portfolio turnover** ........ 15% 21% 71% 41% 73%
</TABLE>
<TABLE>
<CAPTION>
Investor B Investor B
Shares Shares
---------- --------------------------------------------------
Six Six March 1,
Year Months 1995
Ended Ended Ended to
---------- ---------- ---------- ----------
May 31, Nov. 30, Nov. 30, May 31,
1997 1996 1995(c) 1995(d)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........ $ 11.68 $ 11.74 $ 11.52 $ 11.19
---------- ---------- ---------- ----------
Investment Activities
Net investment income ...... 0.22 0.45 0.22 0.11
Net realized and
unrealized gains (losses)
on investments .......... (0.10) (0.06) 0.22 0.33
---------- ---------- ---------- ----------
Total from Investment
Activities .............. 0.12 0.39 0.44 0.44
---------- ---------- ---------- ----------
Distributions
Net investment income ...... (0.22) (0.45) (0.22) (0.11)
Net realized gains ......... -- -- -- --
---------- ---------- ---------- ----------
Total Distributions ..... (0.22) (0.45) (0.22) (0.11)
---------- ---------- ---------- ----------
Net Asset Value,
End of Period .............. $ 11.58 $ 11.68 $ 11.74 $ 11.52
========== ========== ========== ==========
Total Return (excludes
sales charges) ............. 1.04%(g) 3.48% 3.88%(g) 8.61%(e)
Ratios/Supplemental Data:
Net assets at end of
period (000) ............... $ 924 $ 675 $ 433 $ 94
Ratio of expenses to
average net assets
(including waivers) ....... 1.65%(h) 1.65% 1.77%(h) 1.76%(h)
Ratio of net investment
income to average net
assets (including
waivers) ................ 3.82%(h) 3.96% 3.82%(h) 4.00%(h)
Ratio of expenses to
average net assets
(before waivers)* ....... 1.75%(h) 1.75% 1.87%(h) 1.88%(h)
Ratio of net investment
income to average
net assets
(before waivers)* ....... 3.72%(h) 3.86% 3.72%(h) 3.89%(h)
Portfolio turnover** ........ 3.77% 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.
**Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(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.
-10-
<PAGE> 12
(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.
-11-
<PAGE> 13
National Municipal Bond Portfolio
(For a Share outstanding throughout the period)
<TABLE>
<CAPTION>
Six Months Nov. 18, 1996 Six Months Nov. 18, 1996
Ended through Ended through
May 31, 1997 Nov. 30, 1996(a) May 31, 1997 Nov. 30, 1996(a)
------------ ---------------- ------------ ----------------
Investor A Investor A Investor B Investor B
Shares Shares Shares Shares
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.05 $ 10.00 $ 10.05 $ 10.00
------- ------- ------- -------
Investment Activities
Net investment income ............ 0.27 0.02 0.23 0.02
Net realized and unrealized gains
(losses) from investments ...... (0.10) 0.05 (0.09) 0.05
------- ------- ------- -------
Total from Investment Activities 0.17 0.07 0.14 0.07
------- ------- ------- -------
Distributions
Net investment income ............ (0.27) (0.02) (0.23) (0.02)
------- ------- ------- -------
Total Distributions ............ (0.27) (0.02) (0.23) (0.02)
------- ------- ------- -------
Net Asset Value, End of Period ..... $ 9.95 $ 10.05 $ 9.96 $ 10.05
======= ======= ======= =======
Total Return (excludes sales charge) 1.69%(b) 0.73%(b) 1.41%(b) 0.70%(b)
Ratios/Supplemental Data:
Net assets at end of period (000) .. $ 543 $ 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) ......................... 5.34%(c) 9.08%(c) 4.62%(c) 8.35%(c)
Ratio of expenses to average net
assets (before waivers)* ......... 0.82%(c) 1.07%(c) 1.09%(c) 1.80%(c)
Ratio of net investment income
to average net assets (before
waivers)* ........................ 4.85%(c) 8.38%(c) 4.62%(c) 7.65%(c)
Portfolio turnover** ............... 50.81% 0.00% 50.81% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a
whole without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
-12-
<PAGE> 14
For a Share outstanding throughout each period
<TABLE>
<CAPTION>
Equity Income Portfolio Equity Index Portfolio
----------------------- ----------------------
March 7, 1997 March 7, 1997 May 1, 1997
to to to
May 31, 1997(a) May 31, 1997(a) May 31, 1997(a)
--------------- --------------- ---------------
Investor A Investor B Investor A
Shares Shares Shares
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ........... $ 10.00 $ 10.00 $ 10.00
-------- -------- --------
Investment Activities
Net investment income ......... 0.04 0.03 0.02
Net realized and unrealized
gains from investments ...... 0.12 0.11 0.59
-------- -------- --------
Total from Investment
Activities .................... 0.16 0.14 0.61
-------- -------- --------
Distributions
Net investment income ......... (0.04) (0.02) (0.02)
In excess of net investment
income ...................... (0.01) -- --
-------- -------- --------
Total Distributions ........... (0.05) (0.02) (0.02)
-------- -------- --------
Net Asset Value, End of Period .. $ 10.11 $ 10.12 $ 10.59
========
Total Return (excludes sales
charges) ...................... 1.58%(b)*** 1.43%(b)*** 6.08%(b)***
Ratios/Supplemental Data:
Net Assets at end of period (000) $ 41 $ 7 $ 2
Ratio of expenses to average net
assets (including waivers) .... 0.44%(c) 1.04%(c) 0.69%(c)
Ratio of net investment income to
average net assets (including
waivers) ...................... 2.32%(c) 1.21%(c) 2.39%(c)
Ratio of expenses to average net
assets (before waivers)* ...... 1.26%(c) 1.92%(c) 1.22%(c)
Ratio of net investment income to
average net assets (before
waivers)* ..................... 1.50%(c) 0.34%(c) 1.86%(c)
Portfolio turnover** ............ 26.29% 26.29% 0.20%
Average commission rate
paid (d) ...................... $ 0.0600 $ 0.0600 $ 0.0200
</TABLE>
-13-
<PAGE> 15
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
** Portfolio turnover is calculated on the basis of each Portfolio as a
whole without distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and
sold for which commissions were paid.
-14-
<PAGE> 16
Growth & Income Equity Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Investor A Shares
---------------------------------------------------------------------
Year Ended November 30,
---------------------------------------------------------------------
Six Months
Ended
May 31,
1997 1996 1995 1994(a)
-------- -------- -------- --------
Investor Investor Investor Investor
A Shares A Shares A Shares Shares
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period .............. $ 18.67 $ 16.30 $ 12.70 $ 14.74
------- ------- ------- -------
Investment Activities
Net investment income ............ 0.06 0.20 0.23 0.20
Net realized and
unrealized gains (losses)
from investments .............. 1.72 3.32 3.74 (0.17)
------- ------- ------- -------
Total from Investment
Activities .................... 1.78 3.52 3.97 0.03
------- ------- ------- -------
Distributions
Net investment income ............ (0.06) (0.20) (0.23) (0.21)
In excess of net
investment income ............. (0.04) (0.01) -- --
Net realized gain ............... (1.46) (0.94) (0.14) (0.18)
In excess of net realized
gains ......................... -- -- -- (1.68)
------- ------- ------- -------
Total Distributions ........... (1.56) (1.15) (0.37) (2.07)
------- ------- ------- -------
Net Asset Value,
End of Period .................... $ 18.89 $ 18.67 $ 16.30 $ 12.70
======= ======= ======= =======
Total Return (excludes
sales charges) ................... 10.52%(f) 22.99% 31.95% 0.20%
Ratios/Supplemental Data:
Net assets at end of
period (000) ..................... $41,437 $38,229 $25,082 $18,343
Ratio of expenses to
average net assets
(including waivers) ............. 1.04%(g) 1.05% 1.05% 1.05%
Ratio of net investment
income to average net
assets (including
waivers) ...................... 0.71%(g) 1.20% 1.59% 1.45%
Ratio of expenses to
average net assets
(before waivers)* ............. 1.14%(g) 1.15% 1.15% 1.15%
Ratio of net investment
income to average
net assets
(before waivers)* ............. 0.61%(g) 1.10% 1.49% 1.35%
Portfolio turnover** .............. 32.33% 63.90% 58.50% 65%
Average commission
rate paid(h) .................... $0.0600 $0.0598 -- --
</TABLE>
<TABLE>
<CAPTION>
Investor A Shares
------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------------------------------
1993 1992 1991(a)
Investor Investor Investor
Shares Shares Shares 1990
------ ------ ------ ----
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .............. $ 14.49 $12.33 $11.22 $ 12.41
------- ------ ------ -------
Investment Activities
Net investment income ............ 0.25 0.25 0.39 0.39
Net realized and
unrealized gains (losses)
from investments .............. 1.06 2.24 1.47 (0.56)
------- ------ ------ -------
Total from Investment
Activities .................... 1.31 2.49 1.86 (0.17)
------- ------ ------ -------
Distributions
Net investment income ............ (0.25) (0.26) (0.39) (0.39)
In excess of net
investment income ............. -- -- -- --
Net realized gain ............... (0.81) (0.07) (0.36) (0.63)
In excess of net realized
gains ......................... -- -- -- --
------- ------ ------ -------
Total Distributions ........... (1.06) (0.33) (0.75) (1.02)
------- ------ ------ -------
Net Asset Value,
End of Period .................... $ 14.74 $14.49 $12.33 $ 11.22
======= ====== ====== =======
Total Return (excludes
sales charges) ................... 9.65% 20.59% 17.39% (1.36)%
Ratios/Supplemental Data:
Net assets at end of
period (000) ..................... $11,157 $6,044 $3,254 $20,116
Ratio of expenses to
average net assets
(including waivers) ............. 0.74% 0.71% 0.34% 0.35%
Ratio of net investment
income to average net
assets (including
waivers) ...................... 1.74% 1.94% 3.50% 3.42%
Ratio of expenses to
average net assets
(before waivers)* ............. 0.96% 0.85% 1.05% 1.00%
Ratio of net investment
income to average
net assets
(before waivers)* ............. 1.52% 1.80% 2.79% 2.77%
Portfolio turnover** .............. 41% 79% 78% 227%
Average commission
rate paid(h) .................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Investor B
Investor A Shares
Shares -------------------------------------------------------
------------ March 1,
Year Ended June 2, Six Months Year 1995
November 30, 1988 to Ended Ended to
------------- Nov. 30 May 31, Nov. 30, Nov. 30,
1989 1988(b) 1997 1996 1995(c)
---- ------- ---- ---- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .............. $ 10.25 $ 10.00 $ 18.58 $ 16.23 $13.43
------- ------- ------- ------- ------
Investment Activities
Net investment income ............ 0.41 0.28 0.02 0.11 0.14
Net realized and
unrealized gains (losses)
from investments .............. 2.29 0.06 1.70 3.30 2.81
------- ------- ------- ------- ------
Total from Investment
Activities .................... 2.70 0.34 1.72 3.41 2.95
------- ------- ------- ------- ------
Distributions
Net investment income ............ (0.51) (0.09) (0.02) (0.11) (0.15)
In excess of net
investment income ............. -- -- (0.06) (0.01) --
Net realized gain ............... (0.03) -- (1.46) -- --
In excess of net realized
gains ......................... -- -- -- (0.94) --
------- ------- ------- ------- ------
Total Distributions ........... (0.54) (0.09) (1.54) (1.06) (0.15)
------- ------- ------- ------- ------
Net Asset Value,
End of Period .................... $ 12.41 $ 10.25 $ 18.76 $ 18.58 $16.23
======= ======= ======= ======= ======
Total Return (excludes
sales charges) ................... 27.11% 3.46 10.17%(f) 22.29% 31.20%(d)
Ratios/Supplemental Data:
Net assets at end of
period (000) ..................... $17,892 $10,890 $ 4,926 $ 3,537 $ 781
Ratio of expenses to
average net assets
(including waivers) ............. 0.42% 0.41%(g) 1.74%(g) 1.75% 1.75%(g)
Ratio of net investment
income to average net
assets (including
waivers) ...................... 3.69% 5.62%(g) 0.01%(g) 0.49%(g) 0.87%(g)
Ratio of expenses to
average net assets
(before waivers)* ............. 1.07% 1.24%(g) 1.84%(g) 1.85% 1.85%(g)
Ratio of net investment
income to average
net assets
(before waivers)* ............. 3.04% 4.91%(g) (0.09)%(g) 0.39% 0.77%(g)
Portfolio turnover** .............. 133% 30% 32.33% 63.90% 58.50%(g)
Average commission
rate paid(h) .................... -- -- $0.0600 $0.0598 --
</TABLE>
-15-
<PAGE> 17
* During the period, fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. 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.
-16-
<PAGE> 18
Small Cap Equity Portfolio(a)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
Investor A Shares
-----------------------------------------------------------------------------------
Six Months Year Ended Year Ended Year Ended
Ended Nov. 30, Nov. 30, Nov. 30,
May 31, 1997 1996 1995 1994(b)
------------ -------- -------- ---------
Investor Investor Investor Investor
A Shares A Shares A Shares A Shares
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 13.40 $ 13.44 $ 11.99 $ 13.14
------- ------- ------- -------
Investment Activities
Net investment income (loss) ....... (0.03) (0.01) -- (0.03)
Net realized and unrealized
gains from investments ........... 0.98 1.03 2.36 0.89
------- ------- ------- -------
Total from Investment
Activities ....................... 0.95 1.02 2.36 0.86
------- ------- ------- -------
Distributions
Net investment income .............. -- -- -- --
In excess of net investment
income ........................... -- (0.01) -- --
Net realized gains ................. (0.82) (1.05) (0.91) (1.78)
In excess of net
realized gains ................... -- -- -- (0.23)
------- ------- ------- -------
Total Distributions ................ (0.82) (1.06) (0.91) (2.01)
------- ------- ------- -------
Net Asset Value, End of Period ....... $ 13.53 $ 13.40 $ 13.44 $ 11.99
======= ======= ======= =======
Total Return (excludes
sales charges) ..................... 7.53%(f) 8.36% 21.47% 7.38%
Ratios/Supplemental Data:
Net Assets at end of period (000) .... $13,336 $13,889 $15,056 $10,899
Ratio of expenses to average net
assets (including waivers) ......... 1.25%(g) 1.26% 1.26% 1.25%
Ratio of net investment income to
average net assets (including
waivers) ........................... (0.32)%(g) (0.13)% (0.12)% (0.44)%
Ratio of expenses to average net
assets (before waivers)* ........... 1.35%(g) 1.36% 1.36% 1.36%
Ratio of net investment income to
average net assets (before
waivers)* .......................... (0.42)%(g) (0.23)% (0.22)% (0.55)%
Portfolio turnover** ................. 40.00% 65.85% 83.13% 85%
Average commission rate paid (h) ..... $0.0599 $0.0582 -- --
</TABLE>
<TABLE>
<CAPTION>
Investor A Shares
--------------------------------
Year Ended May 6, 1992
Nov. 30, to Nov. 30,
1993 1992(b)
-------- ----------
Investor Investor
A Shares A Shares
---------- -----------
<S> <C> <C>
Net Asset Value,
Beginning of Period ................ $11.23 $10.10
------ ------
Investment Activities
Net investment income (loss) ....... 0.03 0.02
Net realized and unrealized
gains from investments ........... 2.14 1.13
------ ------
Total from Investment
Activities ....................... 2.17 1.15
------ ------
Distributions
Net investment income .............. (0.05) (0.02)
In excess of net investment
income ........................... -- --
Net realized gains ................. (0.21) --
In excess of net
realized gains ................... -- --
------ ------
Total Distributions ................ (0.26) (0.02)
------ ------
Net Asset Value, End of Period ....... $13.14 $11.23
====== ======
Total Return (excludes
sales charges) ..................... 19.75% 12.55%(f)
Ratios/Supplemental Data:
Net Assets at end of period (000) .... $4,559 $ 753
Ratio of expenses to average net
assets (including waivers) ......... 0.61% 0.30%(g)
Ratio of net investment income to
average net assets (including
waivers) ........................... 0.19% 0.78%(g)
Ratio of expenses to average net
assets (before waivers)* ........... 1.23% 1.12%(g)
Ratio of net investment income to
average net assets (before
waivers)* .......................... (0.43)% (0.04)%(g)
Portfolio turnover** ................. 65% 56%
Average commission rate paid (h) ..... -- --
</TABLE>
<TABLE>
<CAPTION>
Investor B Shares
----------------------------------------------------------
Six Months Year Ended March 1, 1995 to
Ended Nov. 30, Nov. 30
May 31, 1997 1996 1995(d)
------------ -------- ----------------
Investor Investor Investor
B Shares B Shares B Shares
---------- ---------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 13.24 $ 13.37 $11.83
------- ------- ------
Investment Activities
Net investment income (loss) ....... (0.06) (0.07) (0.03)
Net realized and unrealized
gains from investments ........... 0.96 0.99 1.57
------- ------- ------
Total from Investment
Activities ....................... 0.90 0.92 1.54
------- ------- ------
Distributions
Net investment income .............. -- -- --
In excess of net investment
income ........................... -- -- --
Net realized gains ................. (0.82) (1.05) --
In excess of net
realized gains ................... -- -- --
------- ------- ------
Total Distributions ................ (0.82) (1.05) --
------- ------- ------
Net Asset Value, End of Period ....... $ 13.32 $ 13.24 $13.37
======= ======= ======
Total Return (excludes
sales charges) ..................... 7.19%(f) 7.63% 20.83%(e)
Ratios/Supplemental Data:
Net Assets at end of period (000) .... $ 1,370 $ 1,272 $ 603
Ratio of expenses to average net
assets (including waivers) ......... 1.95% 1.96% 1.96%(g)
Ratio of net investment income to
average net assets (including
waivers) ........................... (1.02)%(g) (0.83)% (0.78%)(g)
Ratio of expenses to average net
assets (before waivers)* ........... 2.05%(g) 2.06% 2.06%(g)
Ratio of net investment income to
average net assets (before
waivers)* .......................... (1.12)%(g) (0.93)% (0.88)%(g)
Portfolio turnover** ................. 40.00% 65.85% 83.13%
Average commission rate paid (h) ..... $0.0599 $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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) The Emerging Growth Portfolio changed its name to Small Cap Equity
Portfolio on December 1, 1996.
-17-
<PAGE> 19
(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.
-18-
<PAGE> 20
International Equity Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Investor A Shares
------------------------------------------------------------------------------
Six Months Year Ended Year Ended April 4, 1993
Ended Nov. 30, Nov. 30, to Nov. 30,
May 31, 1997 1996 1995 1994(a)(b)(c)
------------ -------- -------- --------
Investor Investor Investor Investor
A Shares A Shares A Shares A Shares
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 12.05 $ 10.76 $ 9.90 $10.00
------- ------- ------ ------
Investment Activities
Net investment income (loss) ....... 0.01 0.02 0.02 (0.01)
Net realized and unrealized
gains from investments and
foreign currency .................. 0.73 1.27 0.86 (0.09)
------- ------- ------ ------
Total from Investment
Activities ........................ 0.74 1.29 0.88 (0.10)
------- ------- ------ ------
Distributions
Net investment income .............. (0.01) -- -- --
In excess of net investment
income ........................... (0.01) -- -- --
Net realized gains ................. (0.31) -- (0.01) --
Tax return of capital .............. -- -- (0.01) --
------- ------- ------ ------
Total Distributions ............... (0.33) -- (0.02) --
------- ------- ------ ------
Net Asset Value, End of Period ....... $ 12.46 $ 12.05 $10.76 $ 9.90
======= ======= ====== ======
Total Return (excludes
sales charges) ..................... 6.36%(f) 11.99% 8.89% (1.00%)(f)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ....................... $ 2,991 $ 2,573 $1,568 $ 791
Ratio of expenses to average net
assets (including waivers) ......... 1.50%(g) 1.44% 1.45% 1.55%(g)
Ratio of net investment income to
average net assets (including
waivers) ........................... 0.14%(g) 0.19% 0.07% (0.39%)(g)
Ratio of expenses to average net
assets (before waivers)* ........... 1.77%(g) 1.75% 1.76% 1.89%(g)
Ratio of net investment income to
average net assets (before
waivers)* .......................... (0.13)%(g) (0.12)% (0.24)% (0.73%)(g)
Portfolio turnover** ................. 39.39% 77.63% 62.78% 21%
Average commission rate paid (h) ..... $0.0187 $0.0251 -- --
</TABLE>
<TABLE>
<CAPTION>
Investor B
Shares
--------------------------------------------------------------
Six Months
Ended
May 31, 1997
------------ Year Ended March 1, 1995 to
Investor November 30, November 30,
B Shares 1996 1995(d)
-------- ---- -------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 11.90 $ 10.71 $ 9.26
------- ------- ------
Investment Activities
Net investment income (loss) ....... (0.02) (0.04) (0.03)
Net realized and unrealized
gains from investments and
foreign currency .................. 0.70 1.23 1.48
------- ------- ------
Total from Investment
Activities ........................ 0.68 1.19 1.45
------- ------- ------
Distributions
Net investment income .............. -- -- --
In excess of net investment
income ........................... (0.02) -- --
Net realized gains ................. (0.31) -- --
Tax return of capital .............. -- -- --
------- ------- ------
Total Distributions ............... (0.33) -- --
------- ------- ------
Net Asset Value, End of Period ....... $ 12.25 $ 11.90 $10.71
======= ======= ======
Total Return (excludes
sales charges) ..................... 5.88%(f) 11.11% 8.38%(e)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ....................... $ 521 $ 437 $ 102
Ratio of expenses to average net
assets (including waivers) ......... 2.20%(g) 2.14% 2.02%(g)
Ratio of net investment income to
average net assets (including
waivers) ........................... (0.54)%(g) (0.50)% (0.96%)(g)
Ratio of expenses to average net
assets (before waivers)* ........... 2.47%(g) 2.46% 2.44%(g)
Ratio of net investment income to
average net assets (before
waivers)* .......................... (0.81)%(g) (0.82%) (1.38%)(g)
Portfolio turnover** ................. 39.39% 77.63% 62.78%
Average commission rate paid (h) ..... $0.0187 $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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
-19-
<PAGE> 21
(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.
-20-
<PAGE> 22
Balanced Portfolio
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
Investor A Shares
-----------------------------------------------------------------------
Six Months Year Ended Year Ended Year Ended
Ended Nov. 30, Nov. 30, Nov. 30,
May 31, 1997 1996 1995 1994
------------ --------- ---------- ----------
Investor Investor Investor Investor
A Shares A Shares A Shares A Shares
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 12.58 $ 11.65 $ 9.61 $10.22
------- ------- ------ ------
Investment Activities
Net investment income .............. 0.16 0.32 0.32 0.28
Net realized and unrealized
gains from investments ............ 0.49 1.34 2.02 (0.47)
------- ------- ------ ------
Total from Investment
Activities ........................ 0.65 1.66 2.34 (0.19)
------- ------- ------ ------
Distributions
Net investment income .............. (0.16) (0.31) (0.30) (0.29)
In excess of net investment
income ........................... (0.08) -- -- --
Net realized gains ................. (0.49) (0.42) -- --
In excess of net
realized gains .................... (0.22) -- -- (0.13)
------- ------- ------ ------
Total Distributions ............... (0.95) (0.73) (0.30) (0.42)
------- ------- ------ ------
Net Asset Value, End of Period ....... $ 12.28 $ 12.58 $11.65 $ 9.61
======= ======= ====== ======
Total Return (excludes
sales charges) ..................... 5.59%(e) 15.10% 24.85% (1.91%)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ....................... $ 9,707 $ 9,328 $8,348 $7,321
Ratio of expenses to average net
assets (including waivers) ......... 1.27%(f) 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets (including
waivers) ........................... 2.72%(f) 2.79% 2.98% 2.77%
Ratio of expenses to average net
assets (before waivers)* ........... 1.37%(f) 1.37% 1.37% 1.39%
Ratio of net investment income to
average net assets (before
waivers)* .......................... 2.62%(f) 2.69% 2.88% 2.65%
Portfolio turnover** ................. 28.56% 85.16% 58.16% 49%
Average commission rate paid (g) ..... $0.0600 $0.0599 -- --
</TABLE>
<TABLE>
<CAPTION>
Investor B
Investor A Shares Shares
----------------- -------------------------------------------------------
April 1, 1993
to Nov. 30,
1993(b) Six Months
------------- ----------- Year Ended March 1, 1995 to
Investor Ended November 30, November 30,
A Shares May 31, 1997 1996 1995(c)
-------- ------------ ------------ ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $10.00 $ 12.49 $ 11.59 $10.13
------ ------- ------- ------
Investment Activities
Net investment income .............. 0.23 0.13 0.25 0.22
Net realized and unrealized
gains from investments ............ 0.15 0.47 1.33 1.44
------ ------- ------- ------
Total from Investment
Activities ........................ 0.38 0.60 1.58 1.66
------ ------- ------- ------
Distributions
Net investment income .............. (0.16) (0.13) (0.26) (0.20)
In excess of net investment
income ........................... -- (0.07) -- --
Net realized gains ................. -- (0.47) (0.42) --
In excess of net
realized gains .................... -- (0.24) -- --
------ ------- ------- ------
Total Distributions ............... (0.16) (0.91) (0.68) (0.20)
------ ------- ------- ------
Net Asset Value, End of Period ....... $10.22 $ 12.18 $ 12.49 $11.59
====== ======= ======= ======
Total Return (excludes
sales charges) ..................... 3.86%(d) 5.21%(e) 14.35% 23.92%(d)
Ratios/Supplemental Data:
Net Assets at end of
period (000) ....................... $1,978 $ 450 $ 321 $ 36
Ratio of expenses to average net
assets (including waivers) ......... 0.56%(f) 1.97%(f) 1.96% 1.93%(f)
Ratio of net investment income to
average net assets (including
waivers) ........................... 3.42(f) 2.02%(f) 2.09% 2.28%(f)
Ratio of expenses to average net
assets (before waivers)* ........... 1.21%(d) 2.07%(f) 2.06% 2.03%(f)
Ratio of net investment income to
average net assets (before
waivers)* .......................... 2.77%(f) 1.92%(f) 1.99% 2.18%(f)
Portfolio turnover** ................. 26%(f) 28.56% 85.16% 58.16%
Average commission rate paid (g) ..... -- $0.0600 $0.0599 --
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
-21-
<PAGE> 23
(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.
(g) 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> 24
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>
DEALERS'
AS A % OF AS A % 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>
DEALERS'
AS A % OF AS A % 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>
-23-
<PAGE> 25
THE ARCH FAMILY
OF MUTUAL FUNDS
INVESTOR A AND INVESTOR B SHARES
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
EQUITY PORTFOLIOS
EQUITY INCOME PORTFOLIO
EQUITY INDEX PORTFOLIO
GROWTH & INCOME EQUITY PORTFOLIO
SMALL CAP EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
BALANCED PORTFOLIO
PROSPECTUS DATED MARCH 31, 1997
<PAGE> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
<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> 35
<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> 36
<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> 37
<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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
Securities" below. In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield to maturity,
anticipated changes in interest rates, and the overall quality of the
investment. The Portfolio seeks to provide a current yield greater than that
generally available from money market instruments.
The Portfolio may purchase debt securities which are rated at the time of
purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated debt securities deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its total assets in debt obligations
rated in one of the three highest rating categories assigned by one or more
Rating Agencies (or unrated debt obligations determined to be of comparable
quality). Securities that are rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of investment
grade quality, and such securities will be purchased (and retained) only if the
Adviser believes that the issuers have an adequate capacity to pay interest and
repay principal. Unrated debt securities will be purchased only if they are
considered by the Adviser to be at least comparable in quality at the time of
purchase to instruments within the rating categories listed above. Debt
securities purchased by the Portfolio whose ratings are subsequently downgraded
below the four highest rating categories of a Rating Agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by the Rating Agencies are described in the Appendix to the Statement of
Additional Information.
The Portfolio reserves the right to hold as a temporary defensive measure
up to 100% of its total assets in cash and short-term obligations (having
remaining maturities of 13 months or less) at such times and in such proportions
as, in the opinion of the Adviser, prevailing market or economic conditions
warrant. Short-term obligations in which the Portfolio may invest include (i)
money market instruments, such as commercial paper, including variable and
floating rate instruments, rated at the time of purchase in one of the two
highest rating categories assigned by a Rating Agency or, if unrated, deemed to
be of comparable quality by the Adviser at the time of purchase, and bank
obligations, including bankers' acceptances, negotiable certificates of deposit
and non-negotiable time deposits of U.S. and foreign banks having total assets
at the time of purchase in excess of $1 billion, (ii) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and (iii)
repurchase agreements. For further information regarding variable and floating
rate instruments, see "The Money Market Portfolio--Commercial Paper and Variable
and Floating Rate Instruments" above. Although the Portfolio will invest in
obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Risk Factors--Risks
Associated with Foreign Securities and Currencies" below. Investments in the
obligations of foreign banks or foreign branches of U.S. banks will not exceed
25% of the Portfolio's total assets at the time of purchase.
The Portfolio's average weighted maturity will be between three and ten
years and will vary in light of current market and economic conditions, the
comparative yields on instruments with different maturities, and other factors.
THE BOND INDEX PORTFOLIO
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Brothers Aggregate Bond Index (the "Lehman
Aggregate").
The Portfolio is not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. Government, mortgage-backed, asset-backed and
28
<PAGE> 55
corporate debt securities, as represented by the Lehman Aggregate, through the
use of sophisticated computer models to determine which securities should be
purchased or sold, while keeping transaction and administrative costs to a
minimum. The Portfolio will invest substantially all of its total assets in
securities listed in the Lehman Aggregate, including without limitation, asset-
backed securities. For further information regarding asset-backed securities see
"Other Applicable Policies--Asset-Backed Securities" below. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio that
is included in the Lehman Aggregate at the time of such purchase. The Portfolio
should exhibit price and yield volatility similar to that of the Lehman
Aggregate. For further information, see "Other Investment Policies--The Indexing
Approach" below and the Statement of Additional Information under "Investment
Objectives and Policies--The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S. Government,
mortgage-backed, asset-backed and nonconvertible corporate debt securities that
meet the following criteria: the securities have at least $100 million par
amount outstanding; the securities are rated investment grade (at least Baa or
BBB) by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P") (if not rated by Moody's); have at least one year until maturity;
and have coupons with fixed rates. The Lehman Aggregate excludes collateralized
mortgage obligations ("CMOs"), adjustable rate mortgages, manufactured homes,
non-agency bonds, buydowns, graduated equity mortgages, project loans and
non-conforming (i.e., "jumbo") mortgages. As of December 31, 1996, over 5,727
issues were included in the Lehman Aggregate, representing approximately $4.5
trillion in market value. U.S. Treasury and agency securities represented
approximately 51.6% of the total market value, asset-backed and mortgage-backed
securities represented approximately 30.6% of the total market value, with
corporate debt securities representing the balance of approximately 17.82%. The
average maturity of the Lehman Aggregate was approximately 8.7 years. The
Adviser believes that the Lehman Aggregate is an appropriate benchmark for the
Portfolio because it is diversified, it is familiar to investors, and it is
widely accepted as a reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate--U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
29
<PAGE> 56
THE GOVERNMENT & CORPORATE BOND PORTFOLIO
The Government & Corporate Bond Portfolio's investment objective is to seek
the highest level of current income consistent with conservation of capital. In
pursuing its investment objective, the Portfolio intends to invest at least 65%
of its assets in fixed-income and related debt securities rated in one of the
three highest rating categories assigned by a Rating Agency at the time of
purchase or in unrated investments deemed by the Adviser to be of comparable
quality pursuant to guidelines approved by the Fund's Board of Directors. Debt
securities may include a broad range of fixed and variable rate bonds,
debentures, notes, and securities convertible into or exchangeable for common
stock; dollar-denominated debt obligations of foreign issuers, including foreign
corporations and governments; and first mortgage loans, income participation
loans, participation certificates in pools of mortgages, including mortgages
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
CMOs and other mortgage-related securities, and other asset-backed securities.
For further information regarding asset-backed securities, see "Other Applicable
Policies--Asset-Backed Securities" below. The Portfolio may invest up to 10% of
its total assets at the time of purchase in dollar-denominated debt obligations
of foreign issuers, either directly or through American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"), and up to 25% of its total
assets at the time of purchase in non-mortgage asset-backed securities,
respectively. See "Other Applicable Policies--Foreign Securities" below and the
Statement of Additional Information under "Investment Objectives and
Policies--ADRs and EDRs."
The Government & Corporate Bond Portfolio may purchase debt securities
which are rated at the time of purchase within the four highest rating
categories assigned by Rating Agencies or unrated debt securities (including
convertible securities) which the Adviser believes present attractive
opportunities and are of at least comparable quality to instruments so rated.
The Portfolio's dollar-weighted average portfolio quality is expected to be at
least "A" or higher. Securities rated in the lowest of the above four rating
categories have speculative characteristics, even though they are of
investment-grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Such
securities will be purchased (and retained) only when the Adviser believes the
issuers have an adequate capacity to pay interest and repay principal. (For a
description of the rating categories of Rating Agencies, see Appendix A to the
Statement of Additional Information.) In making investment decisions, the
Adviser will consider a number of factors including current yield, maturity,
yield to maturity, anticipated changes in interest rates, and the overall
quality of the investment. The Portfolio seeks to provide a current yield
greater than that generally available from money market instruments.
The Government & Corporate Bond Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. Short-term obligations include, but are
not limited to, commercial paper, bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations, repurchase agreements and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Short-Intermediate Municipal Portfolio's investment objective is to
seek as high a level of current income, exempt from regular federal income tax,
as is consistent with preservation of capital. The Portfolio seeks to achieve
its objective by investing substantially all of its assets in investment grade
Municipal Obligations. As a matter of fundamental policy, under normal market
conditions at least 80% of the Portfolio's total assets will be invested in
Municipal Obligations, primarily bonds (at least 65% under normal market
conditions).
30
<PAGE> 57
The Short-Intermediate Municipal Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper, and
variable and floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes they have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. Municipal Obligations
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories of a Rating Agency will be disposed of in an
orderly manner, normally within 30-60 days. The applicable ratings issued by the
Rating Agencies are described in the Appendix to the Statement of Additional
Information.
In addition, the Short-Intermediate Municipal Portfolio may from time to
time during temporary defensive periods, invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a Rating Agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
The Short-Intermediate Municipal Portfolio's average dollar-weighted
maturity will be between two and five years and will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Missouri Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Missouri
Municipal Obligations (which, to the extent possible, are also exempt from
Missouri income tax).
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are derived
from interest attributable to tax-exempt obligations of the State of Missouri
and its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands ("Missouri Municipal
Obligations") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Missouri Tax-Exempt Bond Portfolio's total assets will be invested in
Missouri Municipal Obligations. The Portfolio will seek to maximize the
proportion of its dividends which are exempt from both federal and Missouri
income tax and presently expects to invest substantially all of its total assets
in Missouri Municipal Obligations.
The Missouri Tax-Exempt Bond Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
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purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Missouri Tax-Exempt Bond Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. See "The Tax-Exempt Money Market
Portfolio" above for a description of the types of taxable money market
instruments in which the Portfolio may invest.
The Missouri Tax-Exempt Bond Portfolio's average weighted maturity will
vary in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
THE NATIONAL MUNICIPAL BOND PORTFOLIO
The National Municipal Bond Portfolio's investment objective is to seek as
high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. In pursuing its investment objective,
the Portfolio intends to invest, under normal market and economic conditions,
substantially all of its assets in investment grade Municipal Obligations. As a
matter of fundamental policy, under normal market and economic conditions at
least 80% of the Portfolio's total assets will be invested in Municipal
Obligations, primarily, bonds (at least 65% under normal market conditions).
The Portfolio may purchase Municipal Obligations that are rated at the time
of purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated Municipal Obligations deemed by the Adviser to be
of comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its assets in Municipal Obligations
rated at the time of purchase in one of the three highest rating categories
assigned by one or more Rating Agencies (or unrated Municipal Obligations
determined to be of comparable quality). Securities that are rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Unrated obligations will
be purchased only if they are considered by the Adviser to be at least
comparable in quality at the time of purchase to instruments within the rating
categories listed above. Municipal Obligations purchased by the Portfolio whose
ratings are subsequently downgraded below the four highest rating categories of
a Rating Agency will be disposed of in an orderly manner, normally within 30 to
60 days. The applicable ratings issued by the Rating Agencies are described in
the Appendix to the Statement of Additional Information.
In addition, the Portfolio may from time to time during temporary defensive
periods, invest in taxable obligations in such proportions as, in the opinion of
the Adviser, prevailing market or
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economic conditions warrant. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities and debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the two highest rating categories of a Rating Agency. The
Portfolio does not intend to invest in taxable obligations under normal market
conditions.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Portfolio may also hold
uninvested cash reserves which do not earn income pending investment. There is
no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
The Portfolio's average dollar-weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors.
THE EQUITY INCOME PORTFOLIO
The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation. In
pursuing its investment objective, the Portfolio intends to invest, under normal
market and economic conditions, substantially all of its assets in common stock,
preferred stock, rights, warrants, and securities convertible into common stock.
The Adviser will select stocks based on a number of quantitative factors,
including dividend yield, current and future earnings potential compared to
stock prices, total return potential and other measures of value, such as cash
flow, asset value or book value, if appropriate. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable as compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce an above average level of income
(as measured by the Standard & Poor's 500 Composite Stock Price Index). Under
normal market and economic conditions, at least 65% of the Portfolio's total
assets will be invested in income-producing equity securities.
The Portfolio may indirectly invest in foreign securities through the
purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Other Applicable
Policies-- Foreign Securities" below and the Statement of Additional Information
under "Investment Objectives and Policies--ADRs and EDRs."
The Portfolio reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets in
cash and short-term obligations (having remaining maturities of 13 months or
less) at such times and in such proportions as, in the opinion of the Adviser,
such abnormal market or economic conditions warrant. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.
THE EQUITY INDEX PORTFOLIO
The Equity Index Portfolio, which is expected to commence operations in
1997, seeks to provide investment results that, before deduction of operating
expenses, approximate the price and yield performance of U.S. publicly traded
common stocks with large stock market capitalizations as represented by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Like the Bond Index Portfolio, the Equity Index Portfolio is not managed in
a traditional sense, that is, by making discretionary judgments based on
analysis of economic, financial and market
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conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the S&P 500, through the use of sophisticated
computer models to determine which securities should be purchased or sold, while
keeping transaction and administrative costs to a minimum. The Portfolio will
invest substantially all of its total assets in securities listed in the S&P
500. The Adviser generally selects securities for the Portfolio on the basis of
their weightings in the S&P 500 and will only purchase a security for the
Portfolio that is included in the S&P 500 at the time of such purchase. The
Portfolio should exhibit price volatility similar to that of the S&P 500. For
further information, see "Other Investment Policies--The Indexing Approach"
below and the Statement of Additional Information under "Investment Objectives
and Policies--The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common stocks,
most of which are listed on the New York Stock Exchange. S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 have an average market capitalization of $5.6 trillion and account
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock approximately the same percentage as that stock represents
in the S&P 500. Under certain circumstances, the Portfolio may not hold all 500
stocks in the S&P 500, for example because of changes in the S&P 500, or as a
result of shareholder activity in the Portfolio. The Portfolio will rebalance
its holdings monthly to reflect changes in the S&P 500. "Market capitalization"
for a company is the market price per share of stock multiplied by the number of
shares outstanding. The Adviser believes that the S&P 500 is an appropriate
benchmark for the Portfolio because it is diversified, it is familiar to many
investors and it is widely accepted as a reference for common stock investments.
THE GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income a secondary consideration. In pursuing its
investment objective, the Portfolio normally invests substantially all of its
assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Adviser selects stocks based on a number of
factors, including historical and projected earnings, growth and asset value,
earnings compared to stock prices generally (as measured by the S&P 500, and
consistency of earnings growth and earnings quality. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable compared to the price
and yield of the common stock. The stocks or securities in which the Portfolio
invests may be expected to produce some income but income is not a major
criterion in their selection.
The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 15% of the Portfolio's total assets. For further information, see
"Other Applicable Policies--Foreign Securities" below and the Statement of
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Additional Information under "Investment Objectives and Policies--ADRs and
EDRs." The Portfolio may also invest in Canadian securities listed on a national
securities exchange.
The Growth & Income Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. See "The Government & Corporate Bond
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.
THE SMALL CAP EQUITY PORTFOLIO
The Small Cap Equity Portfolio's investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. In pursuing its investment objective, the Portfolio (which
was formerly known as the Emerging Growth Portfolio) normally invests at least
65% of its total assets in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation. The
market capitalization of the issuers of securities purchased by the Portfolio
will normally range from $100 million to $2 billion at the time of purchase. The
Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Adviser, offer improved
growth possibilities because of rejuvenated management, product changes, or
other developments that might stimulate earnings or asset growth, or in
companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.
The Small Cap Equity Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The securities
of such smaller companies may have limited marketability, may be subject to more
abrupt or erratic market movements than securities of larger companies or the
market averages in general, and may involve greater risk than is customarily
associated with more established companies. To qualify for investment by the
Portfolio, however, a company will be expected to have, in the opinion of the
Adviser, above-average possibilities for capital appreciation (when compared
with the average appreciation of companies whose securities are included in the
S&P 500).
The Small Cap Equity Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth, and
quality of products manufactured and/or services offered. Stocks purchased for
the Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market. The Portfolio
may also invest in initial public offerings of new companies that demonstrate
the potential for price appreciation. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price of the convertible
security is favorable compared to the price of the common stock. In general, the
Portfolio's stocks and other securities will be diversified over a number of
industry groups in an effort to reduce the risks inherent in such investments.
The Small Cap Equity Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. For further information, see
"Other Applicable Policies--Foreign Securities" below, and the Statement of
Additional Information under "Investment Objectives and Policies--ADRs and
EDRs." The Portfolio may also invest in securities issued by Canadian
corporations and Canadian counterparts of U.S.
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corporations, which may or may not be listed on a national securities exchange
or traded in over-the-counter markets.
The Small Cap Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
THE INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to provide
capital growth consistent with reasonable investment risk. The Portfolio seeks
to achieve this objective by investing principally in foreign equity securities,
most of which will be denominated in foreign currencies. During normal market
conditions, the Portfolio will invest substantially all of its assets in
securities of companies which derive more than 50% of their gross revenues from,
or have more than 50% of their assets outside, the United States. Additionally,
under normal market conditions, the Portfolio will invest in equity securities
from at least three different countries (excluding the United States). However,
the Portfolio may invest all its assets in a single country during temporary
defensive periods.
The International Equity Portfolio expects to invest at least half of its
assets in securities of companies located either in developed countries in
Western Europe or in Japan, although it may also purchase securities of
companies located in other developed countries and developing countries. For
further information, see "Risk Factors--Risks Associated with Foreign Securities
and Currencies" below.
By investing in foreign securities, the International Equity Portfolio will
attempt to take advantage of differences between economic trends and the
performance of securities markets in various countries, regions and geographic
areas. The Portfolio will achieve diversification by investing in securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The multinational
character of the Portfolio's investments should reduce the effect that events in
any one country or geographic area will have on its investment holdings. Of
course, negative movement by one of the Portfolio's investments in one foreign
market may offset gains from the Portfolio's investments in another market.
Equity securities in which the International Equity Portfolio may invest
include common stock, preferred stock, rights, warrants and securities
convertible into common stock. A convertible security may be purchased for the
Portfolio when, in the Adviser's or Sub-Adviser's opinion, the price and yield
of the convertible security is favorable compared to the price and yield of the
common stock.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Equity Portfolio may invest up to 100% of its
assets in U.S. Government obligations or debt obligations of companies
incorporated and having their principal business activities in the United
States. The Portfolio does not intend to invest in such securities for the
purpose of meeting its investment objective.
The International Equity Portfolio may also invest, without limitation, in
foreign securities through the purchase of ADRs and EDRs. For further
information, see "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below and the Statement of Additional Information under "Investment
Objectives and Policies--ADRs and EDRs."
The International Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser or Sub-
Adviser, prevailing market or economic conditions warrant. See "The Government &
Corporate
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Bond Portfolio" above for a description of the types of short-term obligations
in which the Portfolio may invest.
Although investing in any mutual fund has certain inherent risks, an
investment in the International Equity Portfolio may have even greater risks
than investments in most other types of mutual funds. The Portfolio is not a
complete investment program, and it may not be appropriate for investors who
cannot financially bear the loss of at least a significant portion of their
investment. The Portfolio's net asset value per Share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Portfolio's
objective. See "Risk Factors--Risks Associated with Foreign Securities and
Currencies" below.
THE BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the statistical impact of the Adviser's
economic outlook upon the future returns of each asset group. The models are
especially sensitive to the forecasts for inflation, interest rates and
long-term corporate earnings growth. Investment returns are normally heavily
impacted by such variables and their expected changes over time. Therefore, the
Adviser's method attempts to take advantage of changing economic conditions by
increasing or decreasing the ratio of stocks to bonds in the Portfolio. For
example, if the Adviser expected more rapid economic growth leading to better
corporate earnings, it would increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed income securities and cash
equivalents.
Under normal market conditions, the Balanced Portfolio's policy is
generally to invest at least 25% of the value of its total assets in fixed
income securities and no more than 75% in equity securities. The actual
percentage of assets invested in equity securities, fixed income securities and
cash equivalents will vary from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
The equity securities in which the Balanced Portfolio normally invests
include common stock, preferred stock, rights, warrants and securities
convertible into common or preferred stock. For further information regarding
these instruments, see "The Equity Income Portfolio" and "The Growth & Income
Equity Portfolio" above.
The fixed income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Adviser to be of
comparable quality pursuant to guidelines approved by the Fund's Board of
Directors. For further information regarding these instruments, see "The
Government & Corporate Bond Portfolio" above.
The Balanced Portfolio may purchase asset-backed securities. For further
information regarding these instruments, see "Other Applicable
Policies--Asset-Backed Securities" below.
The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or
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economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
RISK FACTORS
MARKET RISK. The Equity Income, Equity Index, Growth & Income Equity, Small
Cap Equity and International Equity Portfolios invest primarily, and the
Balanced Portfolio invests to a significant degree, in equity securities. As
with other mutual funds that invest primarily or to a significant degree in
equity securities, these Portfolios are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income securities,
including Municipal Obligations, held by the Treasury Money Market, Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond and Balanced
Portfolios can be expected to vary inversely to changes in prevailing interest
rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in a Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors
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may limit the investment opportunities available to the International Equity
Portfolio and result in a lack of liquidity and a high price volatility with
respect to securities of issuers from developing countries.
Certain countries may also impose restrictions on the International Equity
Portfolio's ability to repatriate investment income or capital. Even when there
is no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of the
International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected to
be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios may be
subject to certain of the risks described above in connection with investment in
foreign securities.
MUNICIPAL OBLIGATIONS. The ability of the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios (collectively, the "Tax-Exempt Portfolios") to achieve their
respective investment objectives are dependent upon the ability of issuers of
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. There are additional risks associated with investment in
the Missouri Tax-Exempt Bond Portfolio because it invests its assets
predominantly in Missouri Municipal Obligations. Investors in the Missouri
Tax-Exempt Bond Portfolio should be aware that certain provisions of, and
amendments to, the Missouri Constitution limit tax increases which could result
in certain adverse consequences affecting Missouri Municipal Obligations. Some
of the significant financial considerations relating to the Missouri Tax-Exempt
Bond Portfolio's investments in Missouri Municipal Obligations are summarized in
the Statement of Additional Information.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt Money
Market, Short-Intermediate Municipal and National Municipal Bond Portfolios may
invest 25% or more of their respective net assets in (i) Municipal Obligations
whose issuers are in the same state, (ii) Municipal Obligations the interest on
which is paid solely from revenues of similar projects, and (iii) private
activity bonds, no Portfolio presently intends to do so unless in the opinion of
the
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Adviser the investment is warranted. Although the Missouri Tax-Exempt Bond
Portfolio does not presently intend to do so on a regular basis, it may invest
more than 25% of its assets in industrial development bonds issued before August
7, 1986, the interest on which is not treated as a specific tax preference item
under the federal alternative minimum tax, and in Municipal Obligations, the
interest on which is paid solely from revenues of similar projects, if such
investments are deemed necessary or appropriate by the Adviser. To the extent
that a Portfolio's assets are invested in Municipal Obligations the issuers of
which are in the same state or that are payable from the revenues of similar
projects or in private activity bonds, a Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions relating to such
projects and bonds to a greater extent that it would be if its assets were not
so invested. See "Investment Objectives and Policies--Municipal Obligations" in
the Statement on Additional Information.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios
is classified as non-diversified under the 1940 Act. Investment return on a
non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a nondiversified portfolio may be more susceptible to
economic, political, and regulatory developments than a diversified investment
portfolio with similar objectives. The value of a Portfolio's securities can be
expected to vary inversely with changes in prevailing interest rates.
Investors in the Missouri Tax-Exempt Bond Portfolio should consider the
risk inherent in such Portfolio's concentrations in Missouri Municipal
Obligations versus the safety that comes with a less geographically concentrated
investment portfolio, and should compare the yields and tax-equivalent yields
available on portfolios of Missouri Municipal Obligations with the yields and
tax-equivalent yields of more diversified portfolios with securities of
comparable quality, including non-Missouri securities, before making an
investment decision.
Municipal Obligations purchased by the Tax-Exempt Portfolios may be backed
by letters of credit or guarantees issued by domestic or foreign banks and other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or a guarantee with
respect to a Municipal Obligation held by a Tax-Exempt Portfolio could have an
adverse effect on the Portfolio's investment portfolio and the value of its
shares. Foreign letters of credit and guarantees involve certain risks in
addition to those of domestic obligations, including less stringent reserve
requirements and different accounting, auditing and recordkeeping requirements.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri Municipal Obligations, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of Municipal Obligations, the
creation of any tax-exempt derivative security, or the bases for such opinions.
OTHER APPLICABLE POLICIES
The investment policies described in this Prospectus are among those which
one or more of the Portfolios have the ability to utilize. Some of these
policies may be employed on a regular basis; others may not be used at all.
Accordingly, reference to any particular policy, method or technique carries no
implication that it will be utilized or, if it is, that it will be successful.
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U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of a Portfolio. Certain U.S. Government securities held
by the Treasury Money Market, Money Market or Tax-Exempt Money Market Portfolios
may have remaining maturities exceeding thirteen months if such securities
provide for adjustments in their interest rates no less frequently than every
thirteen months. Examples of the types of U.S. Government obligations that may
be held by the Portfolios, subject to their respective investment objectives and
policies, include, in addition to U.S. Treasury bonds, notes and bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, GNMA,
FNMA, FHLMC, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Resolution Trust Corporation, and Maritime Administration. Obligations of
certain agencies and instrumentalities of the U.S. Government, such as those of
GNMA, are supported by the full faith and credit of the U.S. Treasury; others,
such as the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. There is
no assurance that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Equity Index Portfolios) may also invest
in "stripped" U.S. Treasury obligations offered under the Separate Trading of
Registered Interest and Principal Securities ("STRIPS") program or Coupon Under
Bank-Entry Safekeeping ("CUBES") program or other stripped securities issued
directly by agencies or instrumentalities of the U.S. Government (and, with
respect to the Treasury Money Market Portfolio only, that are also guaranteed as
to principal and interest by the U.S. Government). STRIPS and CUBES represent
either future interest or principal payments and are direct obligations of the
U.S. Government that clear through the Federal Reserve System. The Money Market,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Growth &
Income Equity, Small Cap Equity and Balanced Portfolios may also purchase U.S.
Treasury and agency securities that are stripped by brokerage firms and
custodian banks and sold under proprietary names. These stripped securities are
resold in custodial receipt programs with a number of different names (such as
TIGRs and CATS) and are not considered U.S. Government securities for purposes
of the 1940 Act.
Stripped securities are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, each Portfolio (except the
National Municipal Bond Portfolio) may agree to purchase U.S. Government
securities from financial institutions such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). A Portfolio will enter into repurchase
agreements only with financial institutions such as banks and broker-dealers
that the Adviser or Sub-Adviser believes to be creditworthy. During the term of
any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller and will require the seller to maintain the
value of the securities subject to the agreement at not less than 102% of the
repurchase price (including
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accrued interest). Default by a seller could expose a Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although no Portfolio presently intends to enter into repurchase agreements
providing for settlement in more than seven days, each Portfolio does have the
authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act. The income on repurchase agreements is taxable. See "Taxes"
below.
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies, each
Portfolio (except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers and agree to
repurchase them at an agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price which the Portfolio is obligated to pay.
Reverse repurchase agreements are considered to be borrowings by a Portfolio
under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, each Portfolio
(except the Treasury Money Market, Money Market, Tax-Exempt Money Market and
Missouri Tax-Exempt Bond Portfolios) may, from time to time, lend its portfolio
securities to broker-dealers, banks or institutional borrowers pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government,
or its agencies or instrumentalities, or an irrevocable letter of credit issued
by a bank that has at least $1.5 billion in total assets, or any combination
thereof. The collateral must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33 1/3% of the
aggregate net assets of such Portfolio. Loans are subject to termination by a
Portfolio or a borrower at any time.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies which determine their net asset value per Share based on the amortized
cost or penny-rounding method and which invest in securities in which the
Portfolio is permitted to invest. Each Portfolio may invest in securities of
other investment companies within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition on a Portfolio investing
more than 10% of the value of its total assets in such securities. Investments
in other investment companies will cause a Portfolio (and, indirectly, the
Portfolio's shareholders) to bear proportionately the cost incurred in
connection with the operations of such other investment companies. In addition,
investment companies in which a Portfolio may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
shares as well as other types of commissions or charges (no sales charge will be
paid by the Missouri Tax-Exempt Bond Portfolios in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. See the Statement of Additional
Information under "Investment Objectives and Policies--Securities of Other
Investment Companies." The income on securities of other investment companies
may be taxable to investors at the state or local level. See "Taxes" below.
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WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate Municipal
and National Municipal Bond Portfolios may purchase or sell securities on a
"delayed settlement" basis. This refers to a transaction in the secondary market
that will settle some time in the future. When issued purchases, forward
commitments and delayed settlement transactions involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date, or
if the value of the security to be sold increases prior to the settlement date.
Each Portfolio expects that these transactions will not exceed 25% of the value
of its total assets (at the time of purchase) under normal market conditions. No
Portfolio intends to engage in such transactions for speculative purposes but
only for the purpose of acquiring portfolio securities.
OPTIONS. Each of the Equity and Bond Portfolios (except the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios) may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation in an amount
not exceeding 10% of its net assets. Such options may relate to particular
securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Such transactions
will be entered into only as a hedge against fluctuations in the value of
securities which a Portfolio holds or intends to purchase.
These Portfolios may also write covered call options. A covered call option
is an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Such options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
The International Equity Portfolio may write covered call options, buy put
options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction"--the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options will not be a primary investment technique of any
Portfolio. For additional information relating to option trading practices,
including particular risks, see the Statement of Additional Information and
Appendix B thereof.
FOREIGN CURRENCY PUT OPTIONS. The International Equity Portfolio may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the
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Portfolio, upon payment of a premium, the right to sell a currency at the
exercise price until the expiration of the option and serves to insure against
adverse currency price movements in the underlying portfolio assets denominated
in that currency.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may purchase
unlisted currency options. A number of major investment firms trade unlisted
options which are more flexible than exchange listed options with respect to
strike price and maturity date. These unlisted options generally are available
on a wider range of currencies. Unlisted foreign currency options are generally
less liquid than listed options and involve the credit risk associated with the
individual issuer. They will be deemed to be illiquid for purposes of the
limitation on investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Equity
Portfolio may buy and sell securities denominated in currencies other than the
U.S. dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolio may from time to time enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolio may enter into currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward currency contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by the International
Equity Portfolio to purchase or sell a specific currency at a future date at a
price set at the time of the contract. In this respect, forward currency
contracts are similar to foreign currency futures contracts described below;
however, unlike futures contracts, which are traded on recognized commodities
exchanges, forward currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Also, forward currency contracts usually involve delivery of
the currency involved instead of cash payment as in the case of futures
contracts.
The International Equity Portfolio may use forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. The use of such forward contracts is limited to
hedging against movements in the value of foreign currencies relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
foreign currency exchange transactions. Transaction and position hedging will
not be limited to an overall percentage of the Portfolio's assets but will be
employed as necessary to correspond to particular transactions or positions. The
Portfolio may not hedge its currency positions to an extent greater than the
aggregate market value (at the time of entering into the forward contract) of
the securities held in its portfolio denominated in, quoted in, or currently
convertible into that particular currency. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities decline, but forward foreign currency exchange
contracts do allow the Portfolio to establish a rate of exchange for a future
point in time.
FUTURES CONTRACTS AND RELATED OPTIONS. The U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Equity
Income, Equity Index, Growth and Income Equity, Small Cap Equity and Balanced
Portfolios may invest in futures contracts and options on futures contracts to
the extent permitted by the Commodity Futures Trading Commission
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("CFTC") and the SEC. The International Equity Portfolio may invest in interest
rate futures contracts, options on futures contracts and other types of
financial futures contracts (such as foreign currency contracts), as well as any
index or foreign market futures which are available in recognized exchanges or
in other established financial markets to the extent permitted by the CFTC and
the SEC. Such transactions, including stock or bond index futures contracts, or
options thereon, act as a hedge to protect a Portfolio from fluctuations in the
value of its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities or, with respect
to the Bond Index and Equity Index Portfolios, can be used to simulate full
investment in the Lehman Aggregate or S&P 500 while retaining a cash balance for
portfolio management purposes. Hedging is a specialized investment technique
that entails skills different from other investment management. The Adviser (or
Sub-Adviser) may also consider such transactions to be economically appropriate
for the reduction of risk inherent in the ongoing management of a Portfolio. A
stock or bond index futures contract is an agreement in which one party agrees
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the index value (which assigns relative values to
the common stock or bonds included in the index) at the close of the last
trading day of the contract and the price at which the agreement is originally
made. No physical delivery of the underlying stock or bond in the index is
contemplated. Similarly, it may be in the best interest of a Portfolio to
purchase or sell interest rate futures contracts, or options thereon, which
provide for the future delivery of specified fixed income securities.
The purchase and sale of futures contracts or related options will not be a
primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. For a more detailed description of
futures contracts and related options, see the Statement of Additional
Information and Appendix B thereof.
ASSET-BACKED SECURITIES. The U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios
may purchase asset-backed securities (i.e., securities backed by mortgages,
installment sale contracts, corporate receivables, credit card receivables or
other assets) that are issued by entities such as GNMA, FNMA and FHLMC and
private issuers such as commercial banks, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks, and investment banks. To the extent that a Portfolio invests in
asset-backed securities issued by companies that are investment companies under
the 1940 Act, such acquisitions will be subject to the percentage limitations
prescribed by the 1940 Act. See "Other Applicable Policies--Securities of Other
Investment Companies" above.
Presently there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and CMOs, which provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
subject to greater volatility and interest-rate risk than other types of
mortgage-backed securities. The average life of asset-backed securities varies
with the underlying instruments or assets and market conditions, which in the
case of mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with
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comparable maturities. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by a Portfolio will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. When interest rates rise, the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.
In general, the collateral supporting non-mortgage asset-backed securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Non-mortgage asset-backed securities involve certain
risks that are not presented by mortgage-backed securities arising primarily
from the nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and the repossession of automobiles and
other personal property upon the default of the debtor may be difficult or
impracticable in some cases.
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the Tax-Exempt Portfolios are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenues securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds issued by or on behalf of
public authorities to finance various privately operated facilities are
considered Municipal Obligations. Interest on private activity bonds, although
free of regular federal income tax, may be an item of tax preference for
purposes of the federal alternative minimum tax.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Also included within the
general category of Municipal Obligations are participation certificates in
leases, installment purchase contracts, or conditional sales contracts ("lease
obligations") entered into by state or political subdivisions to finance the
acquisition or construction of equipment, land, or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, certain lease obligations are backed
by the lessee's covenant to appropriate money to make the lease obligation
payments. However, under certain lease obligations, the lessee has no obligation
to make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing and may
not be as marketable as more conventional securities. To the extent these
securities are illiquid, they are subject to each Portfolio's applicable
limitation on illiquid securities described below.
VARIABLE AND FLOATING RATE MUNICIPAL OBLIGATIONS. Municipal Obligations
purchased by the Tax-Exempt Portfolios may include rated or unrated variable and
floating rate instruments, including
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variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by a Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however, could make it difficult for a
Portfolio to dispose of an instrument if the issuer were to default on its
payment obligation. A Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to Municipal Obligations held by it. Under a
stand-by commitment, a dealer agrees to purchase, at a Portfolio's option,
specified Municipal Obligations at a specified price. The Portfolios will
acquire stand-by commitments solely to facilitate portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes. The Portfolios
expect that stand-by commitments will generally be available without the payment
of any direct or indirect consideration. However, if necessary or advisable, a
Portfolio may pay for a stand-by commitment either separately in cash or by
paying a higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield otherwise available for the same
securities). Stand-by commitments acquired by a Portfolio will be valued at zero
in determining the Portfolio's net asset value.
TAX-EXEMPT DERIVATIVES. Each of the Tax-Exempt Portfolios may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of each Tax-Exempt Portfolio's
assets will be invested in such securities during the current year. See the
Statement of Additional Information under "Investment Objectives and
Policies -- Tax-Exempt Derivatives."
DEPOSITORY RECEIPTS. The Bond Index and Equity Index Portfolios may invest
in receipts issued by banks or brokerage firms that are created by depositing
securities listed in each Portfolio's respective index into a special account at
a custodian bank. The custodian holds such securities for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. The Portfolios may invest in index-based depository receipts in
lieu of investment in the actual securities that are listed in the respective
indexes.
THE INDEXING APPROACH. The Bond Index and Equity Index Portfolios seek to
approximate the investment performance of their respective market segments, as
represented by their respective indexes, i.e. the Lehman Aggregate in the case
of the Bond Index Portfolio and the S&P 500 in the case of the Equity Index
Portfolio. While there can be no guarantee that a Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P or Lehman Brothers, Inc. ("Lehman") calculate their
respective indexes, and the timing of purchases and redemptions. The Adviser
monitors the correlation of the performance of the Portfolios in relation to
their indexes under the supervision of the Board of Directors. In the unlikely
event that a high correlation is not achieved, the Board of Directors will take
appropriate steps to correct the reason for the lower correlation.
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<PAGE> 74
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in their respective indexes, which may result in a
return that does not correspond with that of the indexes, after taking expenses
into account.
ILLIQUID SECURITIES. A Portfolio will not invest more than 15% (10% for
each of the Money Market Portfolios) of the value of its net assets in illiquid
securities. Repurchase agreements that do not provide for settlement within
seven days, time deposits maturing in more than seven days, and securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but that may be purchased by institutional buyers pursuant to SEC Rule 144A are
subject to the applicable limit (unless the Adviser or Sub-Adviser, pursuant to
guidelines established by the Board of Directors, determines that a liquid
market exists). The purchase of securities which can be sold under Rule 144A
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities.
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Equity and Bond
Portfolios will not normally engage in short-term trading, each Portfolio
(except the Bond Index and Equity Index Portfolios) reserves the right to do so
if the Adviser (or Sub-Adviser) believes that selling a particular security is
appropriate in light of the Portfolio's investment objective. Investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Taxes" in this Prospectus and the
Statement of Additional Information.
Although the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios cannot accurately predict their respective annual
portfolio turnover rates, such rates are not expected to exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the Adviser (or Sub-Adviser) with broker-dealers that
it selects. To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Distributor or one or
more of its affiliates as a broker in connection with the purchase or sale of
securities when the Adviser believes the charge for the transaction does not
exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
Except as otherwise noted, each Portfolio's investment policies discussed
above are not fundamental and may be changed by the Fund's Board of Directors
without shareholder approval. However, each Portfolio also has in place certain
fundamental investment limitations, some of which are set forth below, which may
be changed only by a vote of a majority of the outstanding Shares of
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<PAGE> 75
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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<PAGE> 76
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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<PAGE> 77
bond (in the case of the Missouri Tax-Exempt Bond Portfolio) that is backed
only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain
circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee, except that a
guarantee of a security shall not be deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by the Portfolio, does not exceed 10% of the
Portfolio's total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks, and the Missouri Tax-Exempt Bond Portfolio may enter
into reverse repurchase agreements, for temporary defensive purposes in
amounts not in excess of 10% of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of its total assets at the
time of such borrowing (including any reverse repurchase agreements); or
purchase securities while borrowings exceed 5% of Tax-Exempt Money Market
Portfolio's net assets or 5% of the Missouri Tax-Exempt Bond Portfolio's
total assets. Securities held in escrow or separate accounts in connection
with the Portfolios' investment practices described in this Prospectus or
the Statement of Additional Information are not subject to this limitation.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Portfolio may not:
1. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 1 above with respect to the Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) or guaranteed by the United
States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 25% or more
of the Portfolio's net assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry.
2. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, under normal market conditions or when the Adviser deems that
suitable tax-exempt obligations are available, at least 80% of the Tax-Exempt
Money Market Portfolio's assets must be invested in obligations the interest on
which is exempt from federal income tax and stand-by commitments with respect to
such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph, the
Tax-Exempt Money Market Portfolio may invest in securities of other investment
companies that (a) invest in securities that are substantially similar to those
the Portfolio may acquire, and (b) distribute income that is exempt from regular
federal income tax.
The following additional investment policies with respect to the Tax-Exempt
Money Market and Missouri Tax-Exempt Bond Portfolio are not fundamental and may
be changed by the Board of Directors without shareholder approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities would exceed 15% (10%
with respect to the Tax-Exempt Money Market Portfolio) of the Portfolios'
respective net assets.
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<PAGE> 78
The Tax-Exempt Money Market Portfolio has an operating policy to comply
with the requirements of Rule 2a-7 of the 1940 Act. To the extent that Rule 2a-7
is more restrictive than the Portfolio's fundamental limitations, the Portfolio
will operate in accordance with Rule 2a-7.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
THE MONEY MARKET PORTFOLIOS
The Money Market Portfolios' respective net asset values per Share are
determined by the Administrator as of 12:00 noon (Eastern time) and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time) on each weekday, with the exception of those
holidays on which the New York Stock Exchange or the Federal Reserve Bank of St.
Louis are closed (a "Business Day"). Currently one or both of these institutions
are closed on the customary national business holidays of New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day (observed).
Each Portfolio's assets are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain its net asset value per Share at
$1.00, there can be no assurance that the net asset value per Share will not
vary. See the Statement of Additional Information under "Net Asset Value" for
further information.
THE EQUITY AND BOND PORTFOLIOS
The Equity and Bond Portfolios' respective net asset values per Share are
determined by the Administrator as of the close of regular trading hours on the
Exchange on each Business Day (currently 4:00 p.m. Eastern time).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. For further information about valuation of
investments, see "Net Asset Value" in the Statement of Additional Information.
OTHER INFORMATION
The public offering price for each class of Shares of a Portfolio is based
upon net asset value per Share plus, in the case of Investor A Shares of each
Portfolio except the Money Market Portfolios, a front-end sales charge. A class
will calculate its net asset value per Share by adding the value of a
Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of a Portfolio which declares its net investment income
quarterly will generally be lower than the net asset value per Share of Trust,
Institutional or Investor A Shares of the same Portfolio.
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HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of each Portfolio are sold subject to a front-end sales
charge, except for Investor A Shares of the Money Market Portfolios which are
sold without any sales charge. Investor B Shares of each Portfolio except for
the Treasury Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond,
Bond Index, Short-Intermediate Municipal and Equity Index Portfolios which do
not offer Investor B Shares, are sold subject to a back-end sales charge. This
back-end sales charge declines over time and is known as a "contingent deferred
sales charge." Before choosing between Investor A Shares or Investor B Shares of
a Portfolio, investors should read "Characteristics of Investor A Shares and
Investor B Shares" and "Factors to Consider When Selecting Investor A Shares or
Investor b Shares" below.
Except as provided below with respect to Investor B Shares of the Money
Market Portfolio, Investor A Shares and Investor B Shares are sold through
broker-dealers or other organizations acting on behalf of their customers.
Generally, investors purchase Investor A Shares or Investor B Shares through a
broker-dealer organization which has a sales agreement with the Distributor or
through an organization which has entered into a servicing agreement with the
Fund with respect to Investor A Shares and/or Investor B Shares. The
organization is responsible for transmitting purchase orders directly to the
Fund. Investors purchasing Shares of a Portfolio which offers both Investor A
and Investor B Shares must specify at the time of investment whether they are
purchasing Investor A Shares or Investor B Shares.
Investor B Shares of the Money Market Portfolio are available for purchase
only by those investors participating in the ARCH Asset Adviser Program.
Otherwise, Investor B Shares of the Money Market Portfolio are available only to
the holders of Investor B Shares of another Portfolio who wish to exchange their
Investor B Shares of such other Portfolio for Investor B Shares of the Money
Market Portfolio. For further information on the ARCH Asset Adviser Program,
investors should, contact their investment representatives or the ARCH Funds'
Service Center at 1-800-452-ARCH(2724).
The minimum initial investment in each Portfolio is $1,000 and the minimum
for each subsequent investment is $100, except for investments made through (a)
the Automatic Investment Program, in which case the initial minimum and
subsequent minimum investments are $50, (b) a sweep program available through an
investor's financial institution, in which case there are no minimum
investments, (c) a payroll deduction program, in which case there is no minimum
initial investment and minimum subsequent investments are $25 per month, or (d)
a wrap fee program, in which case there are no minimum investments. The minimum
initial investment to participate in the Automatic Exchange program is $5,000.
See "How to Purchase and Redeem Shares--Exchange Privileges--Automatic Exchange
Program" below for additional requirements.
Purchases may be effected on Business Days when the Adviser, Distributor,
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks. All orders for new IRAs or other retirement plan
accounts placed through the transfer agent must be accompanied by an account
application. Account applications may be obtained from your investment
representative or the Fund at 1-800-452-ARCH(2724).
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-452-ARCH(2724). Investors may also call the
Fund for information on how to purchase Shares.
EFFECTIVE TIME OF PURCHASE. A purchase order for the Money Market
Portfolios received and accepted by the Fund by 12:00 noon (Eastern time) on a
Business Day, is effected at the net asset value per Share next determined after
receipt of the order in good form if the Fund's Custodian has
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received payment in federal funds or other immediately available funds by 4:00
p.m. (Eastern time) on that day. If such funds are not available for investment
by 4:00 p.m. (Eastern time), the order will be cancelled. Purchase orders
received after 12:00 noon (Eastern time) will be placed the following Business
Day.
If purchase orders for the Equity and Bond Portfolios are received in good
form and accepted by the Fund prior to 4:00 p.m. (Eastern time) on any Business
Day, Shares will be priced according to the net asset value per Share next
determined on that day after receipt of the order. Immediately available funds
must be received by the Custodian prior to 4:00 p.m. within three Business Days
following the receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the person or
organization placing the order.
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of a Portfolio by mail, complete an
account application and send it to the Fund along with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, made payable to the appropriate Portfolio. Investors purchasing Shares
of a Portfolio which offers both Investor A Shares and Investor B Shares by mail
must indicate whether they wish to buy Investor A Shares or Investor B Shares.
Subsequent purchases of Shares of a Portfolio may be made at any time in at
least the minimum subsequent purchase amount by mailing a check payable to the
Portfolio.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of an
organization, such organization is responsible for transmitting purchase,
exchange, and redemption orders to the Fund on a timely basis, recording all
purchase, exchange, and redemption transactions, and providing regular account
statements which confirm such transactions to beneficial owners (or arranging
for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a monthly
basis in a minimum amount of $50, on the 20th day (or the next Business Day
after the 20th) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A or Investor B Shares, as appropriate, at the net asset value plus any
applicable front-end sales charge next determined on the day an order is
effected by the transfer agent, BISYS Fund Services Ohio, Inc. (the "Transfer
Agent"). An investor may apply for participation in the AIP through the
organization servicing his or her Fund account and by completing the
supplementary AIP authorization form. The AIP may be modified or terminated by a
shareholder on 30 days' written notice to his or her investment representative
or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging" in
making investments. Dollar Cost Averaging can be useful in investing in
portfolios such as the Equity and Bond Portfolios whose price per Share
fluctuates. Instead of trying to time market performance, a fixed dollar amount
is invested in Portfolio Shares at predetermined intervals. This may help
investors to reduce their average cost per Share because the agreed upon fixed
investment amount allows more Shares to be purchased during periods of lower
Share prices and fewer Shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that Shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market
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trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his or
her Shares at a price which is lower than their purchase price.
APPLICABLE SALES CHARGES -- INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
The public offering price for Investor A Shares of the Equity and Bond
Portfolios is the sum of the net asset value of the Shares being purchased plus
any applicable sales charge. No sales charge is assessed on the reinvestment of
dividends and capital gain distributions. The sales charge is assessed as
follows:
THE ARCH INTERMEDIATE CORPORATE BOND, GOVERNMENT &
CORPORATE BOND, MISSOURI TAX-EXEMPT BOND,
EQUITY INCOME, GROWTH & INCOME EQUITY, SMALL CAP EQUITY,
INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
<TABLE>
<CAPTION>
AS A % OF DEALERS'
OFFERING AS A % OF REALLOWANCE
AMOUNT OF PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
----------- --------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000........................ 4.50% 4.71% 4.00%
$50,000 but less than $100,000........... 3.50 3.63 3.00
$100,000 but less than $250,000.......... 2.50 2.56 2.00
$250,000 but less than $500,000.......... 1.50 1.52 1.00
$500,000 but less than $1,000,000........ 1.00 1.01 0.50
$1,000,000 and over...................... .50 .50 .40
</TABLE>
THE ARCH U.S. GOVERNMENT SECURITIES, BOND INDEX,
SHORT-INTERMEDIATE MUNICIPAL AND EQUITY INDEX PORTFOLIOS
<TABLE>
<CAPTION>
AS A % OF DEALERS'
OFFERING AS A % OF REALLOWANCE
AMOUNT OF PRICE NET ASSET VALUE AS A % OF
TRANSACTION PER SHARE PER SHARE OFFERING PRICE
----------- --------- --------------- --------------
<S> <C> <C> <C>
Less than $250,000....................... 2.50% 2.56% 2.00%
$50,000 but less than $500,000........... 1.50 1.52 1.30
$100,000 but less than $1,000,000........ 1.00 1.01 85
$1,000,000 and over...................... .50 .50 .40
</TABLE>
The Distributor will pay the appropriate Dealers' Reallowance to broker-dealer
organizations which have entered into an agreement with the Distributor. The
Dealers' Reallowance may be changed from time to time. Upon notice to the Fund's
shareholders, the Distributor, at its sole discretion, may reallow up to the
full applicable sales charge as shown on the above schedule during periods
specified in such notice. Dealers who receive 90% or more of a sales load may be
deemed to be "underwriters" under the Securities Act of 1933, as amended.
No sales charge is assessed on purchases of Investor A Shares of the Equity
and Bond Portfolios by: (a) directors and officers of the Fund and the immediate
family members of such individuals; (b) directors, current and retired employees
and participants in employee benefit/retirement plans (future and current
annuitants) of Mercantile Bancorporation Inc. or any of its affiliates or the
Distributor or its affiliates and the immediate family members of such
individuals; (c) brokers, dealers, and agents who have a sales agreement with
the Distributor, and their employees (and the immediate family members of such
individuals); (d) customers who purchase pursuant to a wrap fee program offered
by any broker-dealer or other financial institution or financial planning
organization; (e) individuals who purchase Investor A Shares with the proceeds
of Trust Shares or Institutional Shares redeemed in connection with a rollover
of benefits paid by a qualified
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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> 83
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> 84
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> 85
approximately the amount it would have received if a front-end sales charge had
been charged. The conversion from Investor B Shares to Investor A Shares takes
place at net asset value, as a result of which an investor receives
dollar-for-dollar the same value of Investor A Shares as he or she had of
Investor B Shares. The conversion occurs eight years after the beginning of the
calendar month in which the Shares are purchased. As a result of the conversion,
the converted Shares are relieved of the distribution and service fees borne by
Investor B Shares, although they are subject to the distribution and service
fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates--eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both Investor A Shares
and Investor B Shares, investors should consider whether, during the anticipated
life of their investment in the Portfolio, the accumulated distribution fees and
potential contingent deferred sales charges on Investor B Shares prior to
conversion would be less than the initial sales charge and accumulated
distribution fees on Investor A Shares purchased at the same time (note that
Investor A Shares of the Money Market Portfolio are sold without a sales
charge), and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that there is no sales
charge for Investor A Shares, in the case of the Money Market Portfolio, or the
sales charge for Investor A Shares is waived or reduced by one of the methods
described above, in the case of the Equity and Bond Portfolios, investments in
Investor A Shares become more desirable. The Fund will refuse all purchase
orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares of
the Equity and Bond Portfolios that do not qualify for waivers of or reductions
in the initial sales charge would have less of their purchase price initially
invested in a Portfolio than purchasers of Investor B Shares of the same
Portfolio.
As described above, purchasers of Investor B Shares of the Equity and Bond
Portfolios will have more of their initial purchase price invested. Any positive
investment return on this additional invested amount would partially or wholly
offset the expected higher annual expenses borne by Investor B Shares of those
Portfolios. Because the Portfolios' future returns cannot be predicted, there
can be no assurance that this will be the case. Holders of Investor B Shares
would, however, own Shares that are subject to higher annual expenses and, for a
six-year period, such Shares would be subject to a contingent deferred sales
charge of up to 5.00% upon redemption, depending upon the year of redemption.
Investors expecting to redeem during this six-year period should compare the
cost of the contingent deferred sales charge plus the aggregate annual Investor
B Shares' distribution and service fees to the cost of the initial sales charge
and distribution and service fees on the Investor A Shares (note that Investor A
Shares of the Money Market Portfolio are sold without a sales charge). Over
time, the expense of the annual distribution and service fees on the Investor B
Shares may equal or exceed the initial sales charge, if any, and annual
distribution and service fees applicable to Investor A Shares. For example, if
net asset value remains constant, the aggregate distribution and service fees
with respect to Investor B Shares of the Equity and Bond Portfolios would equal
or exceed the initial sales charge and aggregate distribution fees of Investor
59
<PAGE> 86
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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<PAGE> 87
the procedures described below under "Redemption by Telephone." An investor
should consult his or her investment representative or the Fund for further
information regarding procedures for exchanging Shares.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in a Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another Portfolio. With shareholder authorization, the Fund's Transfer
Agent will withdraw the amount specified (subject to the applicable minimums)
from the shareholder's account and will automatically invest that amount in
Shares of the Portfolio designated by the shareholder on the date of such
deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from their investment representative or
the Fund. To change instructions with respect to the Automatic Exchange Program
or to discontinue this feature, shareholders must send a written request to
their investment representative or to the Fund. The Automatic Exchange Program
may be amended or terminated without notice at any time by the Fund.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. Proceeds from the redemptions of Investor B
Shares will be reduced by the amount of any applicable contingent deferred sales
charge. The organization through which the investor placed the order is
responsible for transmitting redemption orders to the Fund on a timely basis. No
charge for sending redemption payments electronically is currently imposed by
the Fund, although a charge may be imposed in the future. The Fund reserves the
right to send redemption proceeds electronically within seven days after
receiving a redemption order if, in the judgment of the Adviser, an earlier
payment could adversely affect a Portfolio.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
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<PAGE> 88
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on the account application. It is not necessary for shareholders to
confirm telephone redemption requests in writing. If a shareholder did not
originally select the telephone redemption privilege, the shareholder must
provide written instructions to the Transfer Agent to add this feature. Neither
the Fund nor its service contractors will be liable for any loss, damage,
expense or cost arising out of any telephone redemption effected in accordance
with the Fund's telephone redemption procedures, acting upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed the Fund or its service contractors may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and telephone exchange privilege is not available. If, due to
temporary adverse conditions, investors are unable to effect telephone
transactions, investors are encouraged to follow the procedures described in
"Other Exchange or Redemption Information" below.
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the MONEY MARKET PORTFOLIOS with respect to redemption orders received by the
Fund before 12:00 noon (Eastern time) on a Business Day normally will be sent
electronically the same day (or mailed by check the next Business Day) to the
organization that placed the redemption order in good form. Proceeds for
redemption orders that are received after 12:00 noon (Eastern time) or on a non-
business Day normally will be sent electronically on the next Business Day (or
mailed by check on the second Business Day thereafter).
Proceeds from redemptions of Investor A Shares and/or Investor B Shares of
the EQUITY AND BOND PORTFOLIOS with respect to redemption orders received by the
Fund before 4:00 p.m. (Eastern time) on a Business Day normally are sent
electronically or mailed by check to the organization that placed the redemption
order within three Business Days after the Distributor's receipt of the order in
good form.
CHECKWRITING--MONEY MARKET PORTFOLIOS
Checkwriting is available from certain institutions with respect to each of
the Money Market Portfolios. No charge for use of the checkwriting privilege is
currently imposed by the Fund, although a charge may be imposed in the future.
With this service, a shareholder may write up to six checks per month in an
amount per check of $250 or more. To obtain checks, a shareholder must complete
the signature card that accompanies the account application. To establish this
checkwriting service after opening an account in a Money Market Portfolio, the
shareholder must contact his or her investment representative by telephone or
mail to obtain an account application. A signature guarantee may be required. A
SHAREHOLDER WILL RECEIVE THE DAILY DIVIDENDS DECLARED ON THE SHARES TO BE
REDEEMED UP TO THE DAY THAT A CHECK IS PRESENTED TO THE CUSTODIAN FOR PAYMENT.
Upon 30 days' written notice to shareholders, the checkwriting privilege may be
modified or terminated. An investor cannot close an account in a Money Market
Portfolio by writing a check. The checkwriting privilege may be disadvantageous
for holders of Investor B Shares of the Money Market Portfolio due to the effect
of the contingent deferred sales charge.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of any Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be
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<PAGE> 89
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
71
<PAGE> 98
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.
72
<PAGE> 99
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not exceed .75% (annualized) of the
average daily net asset value of a Portfolio's outstanding Investor B Shares and
payments for shareholder administrative servicing expenses may not exceed .25%
(annualized) of the average daily net asset value of a Portfolio's outstanding
Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A Shares or Investor B Shares of a Portfolio,
such as establishing and maintaining accounts and records for their customers
who invest in such Shares, assisting customers in processing purchase, exchange
and redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any subcontractor as it would be for its own acts or omissions. The
fees payable to any sub-contractor are paid by the Service Organization out of
the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such a Service Organization
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of each Portfolio's assets. In addition,
Bankers Trust Company of New York, with principal offices at 16 Wall Street, New
York, New York 10005, serves as the Sub-Custodian for the International Equity
Portfolio. BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent. Its address is 3435 Stelzer Road, Columbus,
Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolios. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer
73
<PAGE> 100
agent, or custodian to such an investment company, or from purchasing Shares of
such a company as agent for and upon the order of customers. Mercantile, MVA,
Service Organizations that are banks or bank affiliates, and broker-dealers that
are bank affiliates are subject to such laws and regulations, but believe they
may perform the services for the Portfolios contemplated by their respective
agreements, this Prospectus and the Statement of Additional Information without
violating applicable banking laws and regulations. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by a Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all expenses in connection with the
performance of their services, except that the Distributor is compensated
pursuant to the Distribution and Services Plans as described under "Distribution
and Services Plans" above. Expenses are deducted from the total income of each
Portfolio before dividends and distributions are paid. These expenses include,
but are not limited to, fees paid to the Adviser and Administrator, transfer
agency fees, fees and expenses of officers and directors who are not affiliated
with the Adviser or the Distributor, taxes, interest, legal fees, custodian
fees, auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying a Portfolio and its Shares for distribution under
Federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular Portfolio will be allocated among all Portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable. Any expenses relating only to a particular
class of Shares within a Portfolio will be borne solely by such class. See
"Certain Financial Information" and "Management of the Fund" above for
additional information regarding expenses of each Portfolio.
74
<PAGE> 101
INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation, and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional Shares of common stock, and to classify and
reclassify any unauthorized and unissued Shares into one or more classes of
Shares. The Board of Directors may similarly classify or reclassify any class of
Shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolios, each of which (except the Tax-Exempt Money Market and Missouri
Tax-Exempt Bond Portfolios) is classified as a diversified company under the
1940 Act: 1 billion Trust Shares, 300 million Institutional Shares and 100
million Investor A Shares, representing interests in the Treasury Money Market
Portfolio; 1.8 billion Trust Shares, 300 million Institutional Shares, 550
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Money Market Portfolio; 300 million Trust Shares and 50 million
Investor A Shares, representing interests in the Tax-Exempt Money Market
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares, representing interests in
the U.S. Government Securities Portfolio; 50 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares, representing interests in
the Intermediate Corporate Bond Portfolio; 25 million Trust Shares, 25 million
Institutional Shares and 25 million Investor A Shares representing interests in
the Bond Index Portfolio; 50 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
representing interests in the Government & Corporate Bond Portfolio; 25 million
Trust Shares and 25 million Investor A Shares, representing interests in the
Short-Intermediate Municipal Portfolio; 25 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Missouri Tax-Exempt Bond Portfolio; 50 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares representing interests in the
National Municipal Bond Portfolio; 50 million Trust Shares, 25 million
Institutional Shares, 25 million Investor A Shares and 25 million Investor B
Shares representing interests in the Equity Income Portfolio; 25 million Trust
Shares, 25 million Institutional Shares and 25 million Investor A Shares
representing interests in the Equity Index Portfolio; 50 million Trust Shares,
20 million Institutional Shares, 5 million Investor A Shares and 50 million
Investor B Shares, representing interests in the Growth & Income Equity
Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5 million
Investor A Shares and 50 million Investor B Shares and 50 million Investor B
Shares, representing interests in the Small Cap Equity Portfolio; 10 million
Trust Shares, 10 million Institutional Shares, 10 million Investor A Shares and
50 million Investor B Shares, representing interests in the International Equity
Portfolio; and 15 million Trust Shares, 20 million Institutional Shares, 5
million Investor A Shares and 50 million Investor B Shares, representing
interests in the Balanced Portfolio. Trust and Institutional Shares of the
Portfolios are described in separate prospectuses which are available from the
Distributor at the telephone number on the cover of this Prospectus. Shares in
the Fund's Portfolios will be issued without Share certificates.
The Investor A Shares and/or Investor B Shares of the Portfolios are
described in this Prospectus. The Portfolios also offer Trust Shares and, in
addition, each Portfolio except the Tax-Exempt Portfolios offers Institutional
Shares. Institutional Shares, which are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion, and
Trust Shares, which are offered to financial institutions acting on their own
behalf or on behalf of certain qualified accounts, are sold without a sales
charge. Trust, Institutional, Investor A and/or Investor B Shares bear their pro
rata portion of all operating expenses paid by a Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective
75
<PAGE> 102
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> 103
------------------------------------
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> 104
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> 105
THE ARCH FUND(R), INC.
(THE "FUND")
TRUST SHARES OF THE
ARCH TREASURY MONEY MARKET, MONEY MARKET
TAX-EXEMPT MONEY MARKET, U.S. GOVERNMENT SECURITIES,
INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE
MUNICIPAL, MISSOURI TAX-EXEMPT BOND,
NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY,
SMALL CAP EQUITY, INTERNATIONAL EQUITY AND
BALANCED PORTFOLIOS
SUPPLEMENT DATED AUGUST 29, 1997
TO PROSPECTUS DATED MARCH 31, 1997
The following Financial Highlights replace those included in the Prospectus
on pages 8 through 18:
FINANCIAL HIGHLIGHTS
The Financial Highlights in the following tables supplement the Fund's
financial statements, which are contained in the Fund's Annual and Semi-Annual
Reports to Shareholders dated November 30, 1996 and May 31, 1997, respectively,
and incorporated by reference into the Statement of Additional Information. The
Financial Highlights set forth certain historic results for Trust Shares of each
Portfolio. The data for the period ended May 31, 1997 for each Portfolio is
unaudited. 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 and Semi-Annual Reports.
Both the Statement of Additional Information and the Annual and Semi-Annual
Reports may be obtained free of charge by contacting the Fund at the address or
telephone number provided on page 2 of this Prospectus.
<PAGE> 106
TREASURY MONEY MARKET PORTFOLIO
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, ----------------------------------------- DECEMBER 2, 1991
1997 1996 1995 1994 1993 TO NOVEMBER 30,
------------- -------- -------- -------- -------- 1992(a,b)
TRUST TRUST TRUST TRUST TRUST -----------------
SHARES SHARES SHARES SHARES SHARES TRUST SHARES
------------- -------- -------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Investment activities
Net investment
income................. 0.023 0.045 0.050 0.033 0.026 0.034
-------- -------- -------- -------- -------- --------
Total from investment
activities........... 0.023 0.045 0.050 0.033 0.026 0.034
-------- -------- -------- -------- -------- --------
Distributions
Net investment income.... (0.023) (0.045) (0.050) (0.033) (0.026) (0.034)
-------- -------- -------- -------- -------- --------
Total distributions.... (0.023) (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 $ 1.00
======== ======== ======== ======== ======== ========
Total return............... 2.31%(c) 4.64% 5.12% 3.38% 2.67% 3.16%(c)
Ratios/Supplemental Data:
Net assets at end of period
(000).................... $ 162,313 $131,322 $252,780 $242,099 $256,503 $ 229,288
Ratio of expenses to
average net assets
(including waivers)...... 0.61%(d) 0.61% 0.60% 0.49% 0.41% 0.28%(d)
Ratio of net investment
income to average net
assets (including
waivers)................. 4.58%(d) 4.55% 5.01% 3.26% 2.64% 3.35%(d)
Ratio of expenses to
average net assets
(before waivers)*........ 0.76%(d) 0.76% 0.75% 0.94% 0.85% 0.72%(d)
Ratio of net investment
income to average net
assets (before
waivers)*................ 4.43%(d) 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.
2
<PAGE> 107
MONEY MARKET PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, ---------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(a)
------- -------- -------- -------- -------- -------- --------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<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................. 0.024 0.049 0.054 0.035 0.026 0.034 0.058
-------- -------- -------- -------- -------- -------- --------
Total from investment
activities............ 0.024 0.049 0.054 0.035 0.026 0.034 0.058
-------- -------- -------- -------- -------- -------- --------
Distributions Net
investment income........ (0.024) (0.049) (0.054) (0.035) (0.026) (0.034) (0.058)
-------- -------- -------- -------- -------- -------- --------
Total distributions.... (0.024) (0.049) (0.054) (0.035) (0.026) (0.034) (0.058)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total return.............. 2.45%(c) 4.99% 5.52% 3.55% 2.72% 3.44% 5.95%(b)
Ratios/Supplemental Data:
Net assets at end of
period (000)............. $806,187 $717,265 $698,131 $544,952 $621,717 $574,941 $700,474
Ratio of expenses to
average net assets
(including waivers)...... 0.65%(d) 0.61% 0.59% 0.61% 0.59% 0.57% 0.59%
Ratio of net investment
income to average net
assets (including
waivers)................. 4.87%(d) 4.88% 5.38% 3.45% 2.70% 3.44% 5.81%
Ratio of expenses to
average net assets
(before waivers)*........ 0.80%(d) 0.76% 0.74% 0.93% 0.80% 0.71% 0.67%
Ratio of net investment
income to average net
assets (before
waivers)*................ 4.72%(d) 4.73% 5.23% 3.13% 2.49% 3.30% 5.73%
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------
1990 1989 1988 1987
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Investment activities
Net investment
income................. 0.078 0.088 0.071 0.062
-------- -------- -------- --------
Total from investment
activities............ 0.078 0.088 0.071 0.062
-------- -------- -------- --------
Distributions Net
investment income........ (0.078) (0.088) (0.071) (0.062)
-------- -------- -------- --------
Total distributions.... (0.078) (0.088) (0.071) (0.062)
-------- -------- -------- --------
Net asset value, end of
period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return.............. 8.08% 9.21% 7.33% 6.40%(b)
Ratios/Supplemental Data:
Net assets at end of
period (000)............. $896,903 $661,145 $289,764 $220,944
Ratio of expenses to
average net assets
(including waivers)...... 0.55% 0.45% 0.45% 0.45%
Ratio of net investment
income to average net
assets (including
waivers)................. 7.77% 8.82% 7.12% 6.22%
Ratio of expenses to
average net assets
(before waivers)*........ 0.60% 0.60% 0.58% 0.68%
Ratio of net investment
income to average net
assets (before
waivers)*................ 7.72% 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.
(c) Not annualized.
(d) Annualized.
3
<PAGE> 108
TAX-EXEMPT MONEY MARKET PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX SIX
MONTHS YEAR MONTHS
ENDED ENDED ENDED
MAY 31, NOV. 30, NOV. 30, YEAR ENDED MAY 31,
-------- ----- ----- -----------------------------------------------------------
1997 1996 1995(f) 1995 1994 1993 1992 1991(b)
-------- ----- ----- ----- ------ ------ ------ ------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- -------- -------- ------- -------- -------- -------- --------
(UNAUDITED)
-----------
<S> <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
-------- ------- ------- ------- -------- -------- -------- --------
Investment activities
Net investment income.... 0.015 0.030 0.016 0.029 0.020 0.021 0.034 0.031
-------- ------- ------- ------- -------- -------- -------- --------
Total from investment
activities............ 0.015 0.030 0.016 0.029 0.020 0.021 0.034 0.031
-------- ------- ------- ------- -------- -------- -------- --------
Distributions
Net investment income.... (0.015) (0.030) (0.016) (0.029) (0.020) (0.021) (0.034) (0.031)
-------- ------- ------- ------- -------- -------- -------- --------
Total distributions.... (0.015) (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 $ 1.00
======== ======= ======= ======= ======== ======== ======== ========
Total return.............. 1.48%(d) 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)............. $ 123,512 $ 95,726 $ 78,031 $85,324 $112,594 $137,602 $126,079 $137,847
Ratio of expenses to
average net assets
(including waivers)...... 0.58%(d) 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)................. 2.93%(d) 3.01% 3.10%(e) 2.87% 1.95% 2.13% 3.38% 4.65%
Ratio of expenses to
average net assets
(before waivers)*........ 0.63%(d) 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)*................ 2.88%(d) 2.96% 3.05%(e) 2.78% 1.61% 2.03% 3.28% 4.55%
<CAPTION>
PERIOD
ENDED
YEAR ENDED MAY 31, 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.
4
<PAGE> 109
U.S. GOVERNMENT SECURITIES PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX
MONTHS YEAR ENDED NOVEMBER 30, JUNE 2,
MAY 31, ------------------------------------------------------------------------- 1988
1997 1996 1995 1994 1993 1992 1991(a) YEAR TO
------- ------- ------- ------- ------- ------- ------- ENDED NOV.
TRUST TRUST TRUST TRUST TRUST TRUST TRUST NOV. 30, 30,
SHARES SHARES SHARES SHARES SHARES SHARES SHARES 1990 1989 1988(b)
------- ------- ------- ------- ------- ------- ------- ------ -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68 $ 10.42 $10.06 $ 9.94 $10.00
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Investment activities
Net investment income... 0.31 0.66 0.67 0.66 0.62 0.66 0.64 0.76 0.85 0.36
Net realized and
unrealized gains
(losses) from
investments........... (0.18) (0.15) 0.80 (0.97) 0.47 0.13 0.26 0.16 0.11 (0.06)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Total from investment
activities.......... 0.13 0.51 1.47 (0.31) 1.09 0.79 0.90 0.92 0.96 0.30
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Distributions
Net investment income... (0.31) (0.66) (0.67) (0.66) (0.62) (0.66) (0.64) (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... (0.31) (0.69) (0.67) (0.84) (0.69) (0.67) (0.64) (0.77) (0.84) (0.36)
------- ------- ------- ------- ------- ------- ------- ------ ------ ------
Net asset value, end of
period.................. $10.49 $ 10.67 $ 10.85 $ 10.05 $ 11.20 $ 10.80 $ 10.68 $10.21 $10.06 $ 9.94
======= ======= ======= ======= ======= ======= ======= ====== ====== ======
Total return............. 1.26%(d) 4.88% 15.00% (2.85)% 10.36% 7.52% 12.62% 9.66% 10.04% 3.05%(c),(d)
Ratios/Supplemental Data:
Net assets at end of
period (000)............$69,406 $60,079 $45,513 $33,166 $35,121 $31,106 $21,484 $6,856 $5,954 $4,335
Ratio of expenses to
average net assets...... 0.66%(e) 0.67% 0.67% 0.66% 0.67% 0.65% 0.56% 0.73% 0.74% 0.79%(e)
Ratio of net investment
income to average net
assets.................. 5.91%(e) 6.10% 6.36% 6.25% 5.57% 6.02% 7.26% 7.80% 8.50% 7.26%(e)
Ratio of expenses to
average net assets
(before waivers)*....... 0.76%(e) 0.77% 0.77% 1.06% 0.91% 0.79% 1.11% 1.28% 1.29% 1.40%(e)
Ratio of net investment
income to average net
assets (before
waivers)*............... 5.81%(e) 6.00% 6.26% 5.85% 5.33% 5.88% 6.71% 7.25% 7.95% 6.65%(e)
Portfolio turnover**..... 78.33% 53.76% 93.76% 50% 24% 74% 36% 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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on 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.
5
<PAGE> 110
For a Share outstanding throughout each period
<TABLE>
<CAPTION>
INTERMEDIATE CORPORATE BOND INDEX
BOND PORTFOLIO PORTFOLIO
FEBRUARY 10, 1997 FEBRUARY 10, 1997
TO TO
MAY 31, 1997(a) MAY 31, 1997(a)
---------------------- -----------------
TRUST TRUST
SHARES SHARES
---------------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period.............. $ 10.00 $ 10.00
Investment activities
Net investment income (loss).................... 0.19 0.19
Net realized and unrealized (losses) from
investments.................................. (0.18) (0.14)
------- --------
Total from investment activities............. 0.01 0.05
------- --------
Distributions
Net investment income........................... (0.19) (0.19)
------- --------
Total distributions.......................... (0.19) (0.19)
------- --------
Net asset value, end of period.................... $ 9.82 $ 9.86
======= ========
Total return...................................... 0.17%(b)*** 0.54%(b)***
Ratios/Supplemental Data:
Net assets at end of period (000)................. $ 38,954 $ 129,939
Ratio of expenses to average net assets (including
waivers)........................................ 0.30%(c) 0.22%(c)
Ratio of net investment income to average net
assets (including waivers)...................... 13.95%(c) 15.79%(c)
Ratio of expenses to average net assets (before
waivers)*....................................... 0.68%(c) 0.31%(c)
Ratio of net investment income to average net
assets (before waivers)*........................ 13.57%(c) 15.70%(c)
Portfolio turnover**.............................. 66.10% 40.66%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of each Portfolio as a whole
without distinguishing between the classes of shares.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
6
<PAGE> 111
GOVERNMENT & CORPORATE BOND PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED NOVEMBER 30,
MAY 31, ------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(a)
------- ------- ------- ------- ------- ------- ------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES 1990
---------- -------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period............ $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15 $ 9.84 $ 10.12
-------- -------- -------- -------- -------- -------- ------- -------
Investment activities
Net investment
income........... 0.30 0.67 0.64 0.63 0.68 0.70 0.64 0.84
Net realized and
unrealized gains
(losses) from
investments...... (0.30) (0.19) 0.89 (0.94) 0.39 0.11 0.31 (0.41)
-------- -------- -------- -------- -------- -------- ------- -------
Total from
investment
activities...... (--) 0.48 1.53 (0.31) 1.07 0.81 0.95 0.43
-------- -------- -------- -------- -------- -------- ------- -------
Distributions
Net investment
income........... (0.30) (0.67) (0.64) (0.63) (0.68) (0.70) (0.64) (0.84)
In excess of
net realized
gains............ -- (--) -- (0.07) -- -- -- --
-------- -------- -------- -------- -------- -------- ------- -------
Total
distributions... (0.30) (0.67) (0.64) (0.70) (0.68) (0.70) (0.64) (0.84)
-------- -------- -------- -------- -------- -------- ------- -------
Net asset value,
end of period.... $ 10.04 $ 10.34 $ 10.53 $ 9.64 $ 10.65 $ 10.26 $ 10.15 $ 9.71
======== ======== ======== ======== ======== ======== ======= =======
Total return....... 0.01%(d) 4.82% 16.31% (3.03%) 10.55% 8.14% 13.04% 4.96%
Ratios/Supplemental
Data:
Net Assets at end
of period (000)... $141,221 $141,440 $127,741 $132,577 $149,674 $135,404 $89,975 $11,005
Ratio of expenses
to average net
assets (including
waivers).......... 0.65%(e) 0.65% 0.65% 0.65% 0.65% 0.63% 0.36% 0.53%
Ratio of net
investment income
to average net
assets (including
waivers).......... 5.93%(e) 6.36% 6.32% 6.25% 6.32% 6.73% 7.51% 8.69%
Ratio of expenses
to average net
assets (before
waivers)*......... 0.75%(e) 0.75% 0.75% 1.05% 0.88% 0.76% 0.91% 1.08%
Ratio of net
investment income
to average net
assets (before
waivers)*......... 5.83%(e) 6.26% 6.22% 5.85% 6.09% 6.60% 6.96% 8.14%
Portfolio
turnover**........ 76.99% 149.20% 59.32% 50% 31% 52% 105% 75%
</TABLE>
<TABLE>
<CAPTION>
YEAR
ENDED JUNE 15,
NOV. 1988 TO
30, NOV. 30,
1989 1988(b)
------- --------
<S> <C> <C>
Net asset value,
beginning of
period............ $ 9.91 $10.00
------- ------
Investment activities
Net investment
income........... 0.89 0.39
Net realized and
unrealized gains
(losses) from
investments...... 0.22 (0.13)
------- ------
Total from
investment
activities...... 1.11 0.26
------- ------
Distributions
Net investment
income........... (0.90) (0.35)
In excess of
net realized
gains............ -- --
------- ------
Total
distributions... (0.90) (0.35)
------- ------
Net asset value,
end of period.... $ 10.12 $ 9.91
======= ======
Total return.......
Ratios/Supplemental 11.79% 2.66%(c),(d)
Data:
Net Assets at end
of period (000)... $10,327 $7,483
Ratio of expenses
to average net
assets (including
waivers).......... 0.44% 0.56%(e)
Ratio of net
investment income
to average net
assets (including
waivers).......... 8.97% 8.47%(e)
Ratio of expenses
to average net
assets (before
waivers)*......... 0.99% 1.17%(e)
Ratio of net
investment income
to average net
assets (before
waivers)*......... 8.42% 7.86%(e)
Portfolio
turnover**........ 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.
** Portfolio turnover is calculated on the basis of the Portfolio as
a whole without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on 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.
7
<PAGE> 112
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED JULY 10, 1995
ENDED NOVEMBER 30, TO NOVEMBER 30,
MAY 31, 1997 1996 1995(a)
------------ ------------ ----------------
TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
Net asset value, beginning of period................. $ 10.07 $ 10.07 $ 10.00
------- ------- -------
Investment activities
Net investment income (loss)....................... 0.20 0.41 0.14
Net realized and unrealized gains (losses)
from investments................................ (0.07) -- 0.07
------- ------- -------
Total from investment activities................ 0.13 0.41 0.21
------- ------- -------
Distributions
Net investment income.............................. (0.20) (0.41) (0.14)
------- ------- -------
Total distributions............................. (0.20) (0.41) (0.14)
------- ------- -------
Net asset value, end of period....................... $ 10.00 $ 10.07 $ 10.07
======= ======= =======
Total return......................................... 1.32%(b) 4.15% 2.15%(b)
Ratios/Supplemental Data:
Net assets at end of period (000).................... $ 28,067 $ 29,472 $ 23,754
Ratio of expenses to average net assets
(including waivers)................................ 0.36%(c) 0.31% 0.47%(c)
Ratio of net investment income to average net assets
(including waivers)................................ 4.04%(c) 4.07% 3.81%
Ratio of expenses to average net assets
(before waivers)*.................................. 1.01%(c) 0.96% 1.12%(c)
Ratio of net investment income to average net assets
(before waivers)*.................................. 3.39%(c) 3.42% 3.16%(c)
Portfolio turnover**................................. 0.00% 0.00% 0.00%
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
8
<PAGE> 113
MISSOURI TAX-EXEMPT BOND PORTFOLIO(A)
(For a Share(b) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX SIX
MONTHS YEAR MONTHS
ENDED ENDED ENDED YEAR ENDED MAY 31,
MAY 31, NOVEMBER 30, NOVEMBER 30, -----------------------------
1997 1996 1995(c) 1995 1994 1993
----- --------- --------- ----- ----- -----
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES
----------- ------------ ------------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54 $ 10.97
------- ------- ------- ------- ------- -------
Investment activities:
Net investment income.......................... 0.28 0.57 0.28 0.57 0.58 0.60
Net realized and unrealized gains (losses) on
investments.................................. (0.10) (0.05) 0.22 0.40 (0.37) 0.64
------- ------- ------- ------- ------- -------
Total from investment activities............. 0.18 0.52 0.50 0.97 0.21 1.24
------- ------- ------- ------- ------- -------
Distributions
Net investment income.......................... (0.28) (0.57) (0.28) (0.57) (0.58) (0.60)
Net realized gains............................. -- -- -- (0.01) (0.04) (0.07)
------- ------- ------- ------- ------- -------
Total distributions.......................... (0.28) (0.57) (0.28) (0.58) (0.62) (0.67)
------- ------- ------- ------- ------- -------
Net asset value, end of period.................. $ 11.59 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
======= ======= ======= ======= ======= =======
Total return.................................... 1.55%(d) 4.62% 4.41%(d) 9.12% 1.73% 11.70%
Ratios/Supplemental Data:
Net assets at end of period (000)............... $66,763 $ 55,905 $ 47,773 $44,336 $47,743 $32,777
Ratio of expenses to average net assets
(including waivers)............................ 0.66%(e) 0.65% 0.78%(e) 0.64% 0.45% 0.43%
Ratio of net investment income to average net
assets (including waivers)..................... 4.82%(e) 4.95% 4.83%(e) 5.22% 4.96% 5.30%
Ratio of expenses to average net assets (before
waivers)*...................................... 0.76%(e) 0.75% 0.88%(e) 1.16% 1.13% 0.98%
Ratio of net investment income to average net
assets (before waivers)*....................... 4.72%(e) 4.85% 4.73%(e) 4.70% 4.28% 4.75%
Portfolio turnover rate**....................... 3.77% 3.66% 1.55% -- 20% 15%
<CAPTION>
PERIOD
YEAR ENDED MAY 31, ENDED
--------------------------------- MAY 31,
1992 1991(b) 1990(b) 1989(a),(b)
---- ----- ----- ------
TRUST PORTFOLIO PORTFOLIO PORTFOLIO
SHARES SHARES SHARES SHARES
------ --------- --------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............ $10.62 $ 10.50 $ 10.56 $10.00
------ ------ ------ ------
Investment activities:
Net investment income.......................... 0.64 0.67 0.68 0.58
Net realized and unrealized gains (losses) on
investments.................................. 0.43 0.24 (0.09) 0.58
------ ------ ------ ------
Total from investment activities............. 1.07 0.91 0.59 1.16
------ ------ ------ ------
Distributions
Net investment income.......................... (0.64) (0.70) (0.65) (0.60)
Net realized gains............................. (0.08) (0.09) 0.00 0.00
------ ------ ------ ------
Total distributions.......................... (0.72) (0.79) (0.65) 0.00
------ ------ ------ ------
Net asset value, end of period.................. $10.97 $ 10.62 $ 10.50 $10.56
====== ====== ====== ======
Total return.................................... 10.37% 9.08% 5.50% 12.08%(d)
Ratios/Supplemental Data:
Net assets at end of period (000)............... $6,609 $ 4,735 $ 4,568 $4,053
Ratio of expenses to average net assets
(including waivers)............................ 0.73% 0.70%(e) 0.70% 0.81%(e)
Ratio of net investment income to average net
assets (including waivers)..................... 5.87% 6.37%(e) 6.38% 6.36%(e)
Ratio of expenses to average net assets (before
waivers)*...................................... 1.38% 1.66% 1.70% 1.38%(e)
Ratio of net investment income to average net
assets (before waivers)*....................... 5.22% 5.41% 5.38% 5.79%(e)
Portfolio turnover rate**....................... 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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(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.
9
<PAGE> 114
NATIONAL MUNICIPAL BOND PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
NOVEMBER 18, 1996
SIX MONTHS ENDED TO
MAY 31, 1997 NOVEMBER 30, 1996(a)
TRUST SHARES TRUST SHARES
---------------- --------------------
(UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period.................... $ 10.05 $ 10.00
-------- --------
Investment activities
Net investment income................................. 0.28 0.02
Net realized and unrealized gains (losses) from
investments........................................ (0.09) 0.05
-------- --------
Total from investment activities................. 0.19 0.07
-------- --------
Distributions
Net investment income................................. (0.28) (0.02)
-------- --------
Total distributions.............................. (0.28) (0.02)
-------- --------
Net asset value, end of period.......................... $ 9.96 $ 10.05
======== ========
Total return............................................ 1.91%(b) 0.74%(b)
Ratios/Supplemental Data:
Net assets at end of period (000)....................... $325,884 $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)................................... 5.61%(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)*..................................... 5.01%(c) 5.07%(c)
Portfolio turnover**.................................... 50.81% 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.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares issued.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
10
<PAGE> 115
For a Share outstanding throughout each period
<TABLE>
<CAPTION>
EQUITY INCOME EQUITY INDEX
PORTFOLIO PORTFOLIO
MARCH 7, 1997 MAY 1, 1997
TO TO
MAY 31, 1997(a) MAY 31, 1997(a)
--------------- ---------------
TRUST TRUST
SHARES SHARES
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net asset value, beginning of period........................... $ 10.00 $ 10.00
-------- -------
Investment activities
Net investment income........................................ 0.05 0.02
Net realized and unrealized gains from investments........... 0.11 0.59
-------- -------
Total from investment activities........................ 0.16 0.61
-------- -------
Distributions
Net investment income........................................ (0.05) (0.02)
-------- -------
Total distributions..................................... (0.05) (0.02)
-------- -------
Net asset value, end of period................................. $ 10.11 $ 10.59
======== =======
Total return................................................... 1.61%(b)*** 6.10%(b)***
Ratios/Supplemental Data:
Net assets at end of period (000).............................. $ 119,885 $26,637
Ratio of expenses to average net assets (including waivers).... 0.14%(c) 0.33%(c)
Ratio of net investment income to average net assets (including
waivers)..................................................... 2.20%(c) 2.77%(c)
Ratio of expenses to average net assets (before waivers)*...... 0.67%(c) 0.43%(c)
Ratio of net investment income to average net assets (before
waivers)*.................................................... 1.67%(c) 2.67%(c)
Portfolio turnover**........................................... 26.29% 0.20%
Average commission rate paid(d)................................ $ 0.0600 $0.0200
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of each Portfolio as a whole
without distinguishing between the classes of shares issued.
*** Aggregate since inception.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions divided by total number of portfolio shares purchased and sold
for which commissions were charged.
11
<PAGE> 116
GROWTH & INCOME EQUITY PORTFOLIO
(For a Share(a) outstanding throughout each period)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991(a)
-------- ------- ------- ------- ------- ------- -------
TRUST TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES SHARES
----------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.............................. $ 18.71 $ 16.32 $ 12.72 $ 14.74 $ 14.49 $ 12.33 $ 12.24
-------- -------- -------- -------- -------- -------- --------
Investment activities
Net investment income.............. 0.10 0.24 0.27 0.22 0.25 0.24 0.22
Net realized and unrealized gains
(losses) from investments........ 1.72 3.34 3.74 (0.17) 1.06 2.25 0.03
-------- -------- -------- -------- -------- -------- --------
Total from investment
activities..................... 1.82 3.58 4.01 0.05 1.31 2.49 0.25
-------- -------- -------- -------- -------- -------- --------
Distributions
Net investment income.............. (0.10) (0.24) (0.27) (0.21) (0.25) (0.26) (0.16)
In excess of net investment
income........................... (0.02) (0.01) -- -- -- -- --
Net realized gains................. (1.46) (0.94) (0.14) (0.18) (0.81) (0.07) --
In excess of net realized gains.... -- -- -- (1.68) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions.............. (1.58) (1.19) (0.41) (2.07) (1.06) (0.33) (0.16)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period...... $ 18.95 $ 18.71 $ 16.32 $ 12.72 $ 14.74 $ 14.49 $ 12.33
======== ======== ======== ======== ======== ======== ========
Total return........................ 10.71%(d) 23.45% 32.27% 0.36% 9.65% 20.59% 17.39%
Ratios/Supplemental Data:
Net assets at end of period (000)... $ 305,342 $348,183 $286,546 $235,955 $238,771 $232,967 $139,021
Ratio of expenses to average net
assets............................. 0.74%(e) 0.75% 0.75% 0.75% 0.74% 0.71% 0.27%
Ratio of net investment income to
average net assets................. 1.01%(e) 1.50% 1.89% 1.72% 1.74% 1.94% 2.56%
Ratio of expenses to average net
assets (before waivers)*........... 0.84%(e) 0.85% 0.85% 1.15% 0.96% 0.85% 0.91%
Ratio of net investment income to
average net assets (before
waivers)*.......................... 0.91%(e) 1.40% 1.79% 1.32% 1.52% 1.80% 1.92%
Portfolio turnover**................ 32.33% 63.90% 58.50% 65% 41% 79% 78%
Average commission rate paid(f)..... $ 0.0600 $ 0.0598 -- -- -- -- --
<CAPTION>
JUNE 2,
YEAR ENDED 1988
NOVEMBER 30, TO
----------------- NOV. 30,
1990 1989 1988(b)
------- ------- --------
<S> <C> <C> <C>
Net asset value, beginning of
period.............................. $ 12.41 $ 10.25 $ 10.00
------- ------- -------
Investment activities
Net investment income.............. 0.39 0.41 0.28
Net realized and unrealized gains
(losses) from investments........ (0.56) 2.29 0.06
------- ------- -------
Total from investment
activities..................... (0.17) 2.70 0.34
------- ------- -------
Distributions
Net investment income.............. (0.39) (0.51) (0.09)
In excess of net investment
income........................... -- -- --
Net realized gains................. (0.63) (0.03) --
In excess of net realized gains.... -- -- --
------- ------- -------
Total Distributions.............. (1.02) (0.54) (0.09)
------- ------- -------
Net asset value, end of period...... $ 11.22 $ 12.41 $ 10.25
======= ======= =======
Total return........................ (1.36)% 27.11% 3.45%(c),(d)
Ratios/Supplemental Data:
Net assets at end of period (000)... $20,116 $17,892 $ 10,890
Ratio of expenses to average net
assets............................. 0.35% 0.42% 0.41%(e)
Ratio of net investment income to
average net assets................. 3.42% 3.69% 5.62%(e)
Ratio of expenses to average net
assets (before waivers)*........... 1.00% 1.07% 1.12%(e)
Ratio of net investment income to
average net assets (before
waivers)*.......................... 2.77% 3.04% 4.91%(e)
Portfolio turnover**................ 227% 133% 30%
Average commission rate paid(f)..... -- -- --
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as
a whole without distinguishing between the classes of shares issued.
(a) As of December 1, 1990, the Portfolio designated the existing series of
Shares as "Investor" Shares. In addition, on 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.
12
<PAGE> 117
For a Share outstanding throughout each period
<TABLE>
<CAPTION>
SMALL CAP EQUITY PORTFOLIO(a)
----------------------------------------------------------------------------
SIX MAY 1,
MONTHS YEAR YEAR YEAR YEAR 1992
ENDED ENDED ENDED ENDED ENDED TO
MAY 31, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1997 1996 1995 1994 1993 1992(b)
-------- ------ ------ ----- ----- -----
TRUST TRUST TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES SHARES SHARES
----------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period............. $ 13.49 $ 13.49 $ 12.01 $ 13.14 $ 11.23 $ 10.00
-------- -------- -------- ------- ------- -------
Investment activities
Net investment income (loss).................... -- 0.02 0.03 (0.01) 0.03 0.04
Net realized and unrealized gains (losses) from
investments and foreign currency.............. 0.98 1.05 2.36 0.89 2.14 1.21
-------- -------- -------- ------- ------- -------
Total from investment activities.............. 0.98 1.07 2.39 0.88 2.17 1.25
-------- -------- -------- ------- ------- -------
Distributions
Net investment income........................... -- (0.02) -- -- (0.05) (0.02)
In excess of net investment income.............. (0.01) -- -- -- -- --
Net realized gains.............................. (0.82) (1.05) (0.91) (1.78) (0.21) --
In excess of realized gains..................... -- -- -- (0.23) -- --
-------- -------- -------- ------- ------- -------
Total distributions........................... (0.83) (1.07) (0.91) (2.01) (0.26) (0.02)
-------- -------- -------- ------- ------- -------
Net asset value, end of period................... $ 13.64 $ 13.49 $ 13.49 $ 12.01 $ 13.14 $ 11.23
======== ======== ======== ======= ======= =======
Total return..................................... 7.68%(c) 8.72% 21.70% 7.56% 19.75% 12.55%(c)
Ratios/Supplemental Data:
Net assets at end of period (000)................ $ 181,715 $171,295 $139,681 $ 77,690 $ 47,473 $ 26,829
Ratio of expenses to average net assets
(including waivers)............................. 0.95%(d) 0.96% 0.96% 0.95% 0.61% 0.30%(d)
Ratio of net investment income to average net
assets (including waivers)...................... (0.02)%(d) 0.17% 0.18% (0.16)% 0.19% 0.78%(d)
Ratio of expenses to average net assets (before
waivers)*....................................... 1.05%(d) 1.06% 1.06% 1.36% 1.23% 1.12%(d)
Ratio of net investment income to average net
assets (before waivers)*........................ (0.12)%(d) 0.07% 0.08% (0.56)% (0.43)% (0.04)%(d)
Portfolio turnover**............................. 40.00% 65.85% 83.13% 85% 65% 56%
Average commission rate paid(e).................. $ 0.0599 $ 0.0582 -- -- -- --
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO
--------------------------------------------------
SIX APRIL 4,
MONTHS YEAR YEAR 1994
ENDED ENDED ENDED TO
MAY 31, NOV. 30, NOV. 30, NOV. 30,
1997 1996 1995 1994(b)
-------- ----- ----- -----
TRUST TRUST TRUST TRUST
SHARES SHARES SHARES SHARES
----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net asset value, beginning of period............. $ 12.12 $ 10.79 $ 9.92 $ 10.00
------- ------- ------- -------
Investment activities
Net investment income (loss).................... 0.02 0.06 0.03 0.01
Net realized and unrealized gains (losses) from
investments and foreign currency.............. 0.75 1.27 0.86 (0.09)
------- ------- ------- -------
Total from investment activities.............. 0.77 1.33 0.89 (0.08)
------- ------- ------- -------
Distributions
Net investment income........................... (0.02) -- -- --
In excess of net investment income.............. -- -- -- --
Net realized gains.............................. (0.31) -- (0.01) --
In excess of realized gains..................... -- -- (0.01) --
------- ------- ------- -------
Total distributions........................... (0.33) -- (0.02) --
------- ------- ------- -------
Net asset value, end of period................... $ 12.56 $ 12.12 $ 10.79 $ 9.92
======= ======= ======= =======
Total return..................................... 6.59%(c) 12.33% 8.97% (0.80)%(c)
Ratios/Supplemental Data:
Net assets at end of period (000)................ $54,908 $ 52,181 $ 36,096 $ 23,746
Ratio of expenses to average net assets
(including waivers)............................. 1.20%(d) 1.14% 1.16% 1.23%(d)
Ratio of net investment income to average net
assets (including waivers)...................... 0.41%(d) 0.51% 0.39% 0.23%(d)
Ratio of expenses to average net assets (before
waivers)*....................................... 1.46%(d) 1.45% 1.46% 1.95%(d)
Ratio of net investment income to average net
assets (before waivers)*........................ 0.15%(d) 0.20% 0.09% (0.49)%(d)
Portfolio turnover**............................. 39.39% 77.63% 62.78% 21%
Average commission rate paid(e).................. $0.0187 $ 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.
** Portfolio turnover is calculated on the basis of each Portfolio as a whole
without distinguishing between the classes of shares issued.
(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.
13
<PAGE> 118
BALANCED PORTFOLIO
(For a Share outstanding throughout each period)
<TABLE>
<CAPTION>
APRIL 1, 1993
SIX MONTHS TO
ENDED YEAR ENDED YEAR ENDED YEAR ENDED NOV. 30,
MAY 31, 1997 NOV. 30, 1996 NOV. 30, 1995 NOV. 30, 1994 1993(a)
----------- ----------- ----------- ------------- ------------
TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES TRUST SHARES
------------ ------------- ------------- ---------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 12.58 $ 11.64 $ 9.62 $ 10.22 $ 10.00
------- ------- ------- ------- -------
Investment activities
Net investment income (loss)................... 0.21 0.37 0.34 0.29 0.23
Net realized and unrealized gains (losses) from
investments.................................. 0.46 1.34 2.02 (0.47) 0.15
------- ------- ------- ------- -------
Total from investment activities......... 0.67 1.71 2.36 (0.18) 0.38
------- ------- ------- ------- -------
Distributions
Net investment income.......................... (0.21) (0.35) (0.34) (0.29) (0.16)
In excess of net investment income............. (0.05) -- -- -- --
Net realized gains............................. (0.46) (0.42) -- -- --
In excess of realized gains.................... (0.25) -- -- (0.13) --
------- ------- ------- ------- -------
Total distributions...................... (0.97) (0.77) (0.34) (0.42) (0.16)
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 12.28 $ 12.58 $ 11.64 $ 9.62 $ 10.22
======= ======= ======= ======= =======
Total return.................................... 5.74%(b) 15.56% 24.97% (1.81)% (3.86)%(b)
Ratios/Supplemental Data:
Net assets at end of period (000).............. $ 46,138 $61,821 $72,669 $ 65,288 $ 69,720
Ratio of expenses to average net assets
(including waivers).......................... 0.97%(c) 0.97% 0.98% 0.97% 0.56%(c)
Ratio of net investment income to average net
assets (including waivers)................... 3.03%(c) 3.08% 3.29% 3.04% 3.42%(c)
Ratio of expenses to average net assets (before
waivers)*.................................... 1.07%(c) 1.07% 1.08% 1.39% 1.21%(c)
Ratio of net investment income to average net
assets (before waivers)*..................... 2.93%(c) 2.98% 3.19% 2.63% 2.77%(c)
Portfolio turnover**........................... 28.56% 85.16% 58.16% 49% 26%
Average commission rate paid(d)................ $ 0.0600 $0.0599 -- -- --
</TABLE>
- ------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the Portfolio as a whole
without distinguishing between the classes of shares.
(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.
14
<PAGE> 119
THE ARCH FAMILY
OF MUTUAL FUNDS
TRUST SHARES
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
EQUITY PORTFOLIOS
EQUITY INCOME PORTFOLIO
EQUITY INDEX PORTFOLIO
GROWTH & INCOME EQUITY PORTFOLIO
SMALL CAP EQUITY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
BALANCED PORTFOLIO
PROSPECTUS DATED MARCH 31, 1997
<PAGE> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
<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> 127
<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> 128
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> 129
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>
YEAR ENDED NOVEMBER 30,
--------------------------------
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> 130
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
YEAR ENDED MAY 31, 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> 131
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>
YEAR ENDED JUNE 2,
NOVEMBER 30, 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> 132
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>
YEAR ENDED JUNE 15,
NOVEMBER 30, 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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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
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<PAGE> 140
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> 141
guidelines approved by the Board of Directors. See "The Money Market Portfolio"
above for a description of "First Tier Eligible Securities."
Dividends paid by the Tax-Exempt Money Market Portfolio that are derived
from interest attributable to tax-exempt obligations of a particular state and
its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands may be exempt from federal
and state income tax. Dividends derived from interest on obligations of other
governmental issuers are exempt from federal income tax but may be subject to
state income tax.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Tax-Exempt Money Market Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Tax-Exempt Money Market Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. Such instruments may include obligations
of the U.S. Government, its agencies or instrumentalities; debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the highest rating category by a Rating Agency;
certificates of deposit or bankers' acceptances of domestic branches of U.S.
banks with total assets at the time of purchase of $1 billion or more; or
repurchase agreements with respect to such obligations.
THE U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio's investment objective is to seek
a high rate of current income that is consistent with relative stability of
principal. In pursuing its investment objective, the Portfolio invests in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities normally having remaining maturities of 1 to 30 years and
repurchase agreements relating to such obligations. (For further information,
see "Other Applicable Policies -- U.S. Government Obligations" below.)
Consistent with its investment policies, the U.S. Government Securities
Portfolio may invest in mortgage-backed securities, including those representing
an undivided ownership interest in a pool of mortgage loans, such as
certificates issued by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") and collateralized mortgage obligations ("CMOs").
For further information regarding these instruments, see "Other Applicable
Policies -- Asset-Backed Securities" below.
THE INTERMEDIATE CORPORATE BOND PORTFOLIO
The Intermediate Corporate Bond Portfolio's investment objective is to seek
as high a level of current income as is consistent with preservation of capital.
In pursuing its investment objective, the Portfolio will invest, under normal
market and economic conditions, at least 65% of its total assets in
non-convertible corporate debt obligations, which shall mean obligations of (i)
domestic or foreign business corporations, or (ii) agencies, instrumentalities
or authorities which are organized in corporate form by one or more states or
political subdivisions in the United States or one or more foreign governments.
The Portfolio may also invest in obligations issued or guaranteed by the U.S. or
foreign governments, their agencies or instrumentalities, and asset-backed
securities, including various collateralized mortgage obligations and other
mortgage-related securities. For further information regarding these
instruments, see "Other Applicable Policies -- Asset-Backed
21
<PAGE> 142
Securities" below. In making investment decisions, the Adviser will consider a
number of factors including current yield, maturity, yield to maturity,
anticipated changes in interest rates, and the overall quality of the
investment. The Portfolio seeks to provide a current yield greater than that
generally available from money market instruments.
The Portfolio may purchase debt securities which are rated at the time of
purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated debt securities deemed by the Adviser to be of
comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its total assets in debt obligations
rated in one of the three highest rating categories assigned by one or more
Rating Agencies (or unrated debt obligations determined to be of comparable
quality). Securities that are rated in the lowest of the four highest rating
categories have speculative characteristics, even though they are of investment
grade quality, and such securities will be purchased (and retained) only if the
Adviser believes that the issuers have an adequate capacity to pay interest and
repay principal. Unrated debt securities will be purchased only if they are
considered by the Adviser to be at least comparable in quality at the time of
purchase to instruments within the rating categories listed above. Debt
securities purchased by the Portfolio whose ratings are subsequently downgraded
below the four highest rating categories of a Rating Agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by the Rating Agencies are described in the Appendix to the Statement of
Additional Information.
The Portfolio reserves the right to hold as a temporary defensive measure
up to 100% of its total assets in cash and short-term obligations (having
remaining maturities of 13 months or less) at such times and in such proportions
as, in the opinion of the Adviser, prevailing market or economic conditions
warrant. Short-term obligations in which the Portfolio may invest include (i)
money market instruments, such as commercial paper, including variable and
floating rate instruments, rated at the time of purchase in one of the two
highest rating categories assigned by a Rating Agency or, if unrated, deemed to
be of comparable quality by the Adviser at the time of purchase, and bank
obligations, including bankers' acceptances, negotiable certificates of deposit
and non-negotiable time deposits of U.S. and foreign banks having total assets
at the time of purchase in excess of $1 billion, (ii) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and (iii)
repurchase agreements. For further information regarding variable and floating
rate instruments, see "The Money Market Portfolio -- Commercial Paper and
Variable and Floating Rate Instruments" above. Although the Portfolio will
invest in obligations of foreign banks or foreign branches of U.S. banks only
when the Adviser determines that the instrument presents minimal credit risks,
such investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Risk Factors -- Risks
Associated with Foreign Securities and Currencies" below. Investments in the
obligations of foreign banks or foreign branches of U.S. banks will not exceed
25% of the Portfolio's total assets at the time of purchase.
The Portfolio's average weighted maturity will be between three and ten
years and will vary in light of current market and economic conditions, the
comparative yields on instruments with different maturities, and other factors.
THE BOND INDEX PORTFOLIO
The Bond Index Portfolio seeks to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed and corporate debt securities as
represented by the Lehman Brothers Aggregate Bond Index (the "Lehman
Aggregate").
The Portfolio is not managed in a traditional sense, that is, by making
discretionary judgments based on analysis of economic, financial and market
conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. Government, mortgage-backed, asset-backed and
22
<PAGE> 143
corporate debt securities, as represented by the Lehman Aggregate, through the
use of sophisticated computer models to determine which securities should be
purchased or sold, while keeping transaction and administrative costs to a
minimum. The Portfolio will invest substantially all of its total assets in
securities listed in the Lehman Aggregate, including without limitation, asset-
backed securities. For further information regarding asset-backed securities see
"Other Applicable Policies -- Asset-Backed Securities" below. The Adviser
generally selects securities for the Portfolio on the basis of their weightings
in the Lehman Aggregate and will only purchase a security for the Portfolio that
is included in the Lehman Aggregate at the time of such purchase. The Portfolio
should exhibit price and yield volatility similar to that of the Lehman
Aggregate. For further information, see "Other Investment Policies -- The
Indexing Approach" below and the Statement of Additional Information under
"Investment Objectives and Policies -- The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S. Government,
mortgage-backed, asset-backed and non-convertible corporate debt securities that
meet the following criteria: the securities have at least $100 million par
amount outstanding; the securities are rated investment grade (at least Baa or
BBB) by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P") (if not rated by Moody's); have at least one year until maturity;
and have coupons with fixed rates. The Lehman Aggregate excludes collateralized
mortgage obligations ("CMOs"), adjustable rate mortgages, manufactured homes,
non-agency bonds, buydowns, graduated equity mortgages, project loans and
non-conforming (i.e., "jumbo") mortgages. As of December 31, 1996, over 5,727
issues were included in the Lehman Aggregate, representing approximately $4.5
trillion in market value. U.S. Treasury and agency securities represented
approximately 51.6% of the total market value, asset-backed and mortgage-backed
securities represented approximately 30.6% of the total market value, with
corporate debt securities representing the balance of approximately 17.82%. The
average maturity of the Lehman Aggregate was approximately 8.7 years. The
Adviser believes that the Lehman Aggregate is an appropriate benchmark for the
Portfolio because it is diversified, it is familiar to investors, and it is
widely accepted as a reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman Aggregate, the
Portfolio cannot invest in all such issues. Instead, the Portfolio will hold a
representative sample of approximately 100 of the securities in the Lehman
Aggregate, selecting one or two issues to represent an entire "class" or type of
securities in the Lehman Aggregate. At a minimum, the Portfolio seeks to hold
securities which reflect the major asset classes in the Lehman Aggregate -- U.S.
Treasury and agency issues, mortgage-backed securities, asset-backed securities
and non-convertible corporate debt securities. As the Portfolio's assets
increase, these classes will be further delineated along the lines of sector,
term-to-maturity, coupon and credit ratings. This sampling technique is expected
to be an effective means of substantially duplicating the price and performance
provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities.
23
<PAGE> 144
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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<PAGE> 145
The Short-Intermediate Municipal Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper, and
variable and floating rate demand obligations that are rated at the time of
purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes they have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. Municipal Obligations
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories of a Rating Agency will be disposed of in an
orderly manner, normally within 30-60 days. The applicable ratings issued by the
Rating Agencies are described in the Appendix to the Statement of Additional
Information.
In addition, the Short-Intermediate Municipal Portfolio may from time to
time during temporary defensive periods, invest in taxable obligations in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Such instruments may include obligations of the U.S.
Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a Rating Agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
The Short-Intermediate Municipal Portfolio's average dollar-weighted
maturity will be between two and five years and will vary in light of current
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Missouri Tax-Exempt Bond Portfolio's investment objective is to seek as
high a level of interest income exempt from federal income tax as is consistent
with conservation of capital. In pursuing its investment objective, the
Portfolio invests substantially all of its assets in investment-grade Missouri
Municipal Obligations (which, to the extent possible, are also exempt from
Missouri income tax).
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are derived
from interest attributable to tax-exempt obligations of the State of Missouri
and its political subdivisions as well as of certain other governmental issuers
including Puerto Rico, Guam and the Virgin Islands ("Missouri Municipal
Obligations") are exempt from federal and Missouri income tax. Dividends derived
from interest on obligations of other governmental issuers are exempt from
federal income tax but may be subject to Missouri income tax.
As a matter of fundamental policy, under normal market conditions, at least
65% of the Missouri Tax-Exempt Bond Portfolio's total assets will be invested in
Missouri Municipal Obligations. The Portfolio will seek to maximize the
proportion of its dividends which are exempt from both federal and Missouri
income tax and presently expects to invest substantially all of its total assets
in Missouri Municipal Obligations.
The Missouri Tax-Exempt Bond Portfolio invests in Municipal Obligations
that are rated at the time of purchase within the four highest rating categories
assigned by a Rating Agency. The Portfolio may also invest in short-term
Municipal Obligations such as municipal notes, tax-exempt commercial paper and
variable or floating rate demand obligations that are rated at the time of
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purchase within the two highest rating categories assigned by a Rating Agency.
Municipal Obligations rated in the lowest of the four highest rating categories
for bonds are considered to have speculative characteristics, even though they
are of investment grade quality. Such bonds will be purchased only if the
Adviser believes the issuers have an adequate capacity to pay interest and repay
principal. Unrated obligations will be purchased only if they are considered by
the Adviser to be at least comparable in quality at the time of purchase to
instruments within the rating categories listed above. The applicable Municipal
Obligation ratings are described in the Appendix to the Statement of Additional
Information.
As a matter of fundamental policy, under normal market conditions or when
the Adviser deems suitable tax-exempt Municipal Obligations to be available, at
least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets will be
invested in Municipal Obligations. The Portfolio may hold uninvested cash
reserves pending investment during temporary defensive periods or if, in the
opinion of the Adviser, suitable Municipal Obligations are unavailable. There is
no percentage limitation on the amount of assets which may be held uninvested
during temporary defensive periods.
In addition, during temporary defensive periods or if, in the opinion of
the Adviser, suitable Municipal Obligations are unavailable and subject to the
quality standards described above, the Missouri Tax-Exempt Bond Portfolio may
invest up to 20% of its assets in money market instruments, the income from
which is subject to federal income tax. See "The Tax-Exempt Money Market
Portfolio" above for a description of the types of taxable money market
instruments in which the Portfolio may invest.
The Missouri Tax-Exempt Bond Portfolio's average weighted maturity will
vary in light of market and economic conditions, the comparative yields on
instruments with different maturities, and other factors.
THE NATIONAL MUNICIPAL BOND PORTFOLIO
The National Municipal Bond Portfolio's investment objective is to seek as
high a level of current income exempt from regular federal income tax as is
consistent with conservation of capital. In pursuing its investment objective,
the Portfolio intends to invest, under normal market and economic conditions,
substantially all of its assets in investment grade Municipal Obligations. As a
matter of fundamental policy, under normal market and economic conditions at
least 80% of the Portfolio's total assets will be invested in Municipal
Obligations, primarily, bonds (at least 65% under normal market conditions).
The Portfolio may purchase Municipal Obligations that are rated at the time
of purchase in one of the four highest rating categories assigned by one or more
Rating Agencies or in unrated Municipal Obligations deemed by the Adviser to be
of comparable quality. Under normal market and economic conditions, however, the
Portfolio intends to invest at least 65% of its assets in Municipal Obligations
rated at the time of purchase in one of the three highest rating categories
assigned by one or more Rating Agencies (or unrated Municipal Obligations
determined to be of comparable quality). Securities that are rated in the lowest
of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Unrated obligations will
be purchased only if they are considered by the Adviser to be at least
comparable in quality at the time of purchase to instruments within the rating
categories listed above. Municipal Obligations purchased by the Portfolio whose
ratings are subsequently downgraded below the four highest rating categories of
a Rating Agency will be disposed of in an orderly manner, normally within 30 to
60 days. The applicable ratings issued by the Rating Agencies are described in
the Appendix to the Statement of Additional Information.
In addition, the Portfolio may from time to time during temporary defensive
periods, invest in taxable obligations in such proportions as, in the opinion of
the Adviser, prevailing market or
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economic conditions warrant. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities and debt securities
(including commercial paper) of issuers having, at the time of purchase, a
quality rating within the two highest rating categories of a Rating Agency. The
Portfolio does not intend to invest in taxable obligations under normal market
conditions.
During temporary defensive periods or if, in the opinion of the Adviser,
suitable tax-exempt obligations are unavailable, the Portfolio may also hold
uninvested cash reserves which do not earn income pending investment. There is
no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
The Portfolio's average dollar-weighted maturity will vary in light of
current market and economic conditions, the comparative yields on instruments
with different maturities, and other factors.
THE EQUITY INCOME PORTFOLIO
The Equity Income Portfolio's investment objective is to seek to provide an
above-average level of income consistent with long-term capital appreciation. In
pursuing its investment objective, the Portfolio intends to invest, under normal
market and economic conditions, substantially all of its assets in common stock,
preferred stock, rights, warrants, and securities convertible into common stock.
The Adviser will select stocks based on a number of quantitative factors,
including dividend yield, current and future earnings potential compared to
stock prices, total return potential and other measures of value, such as cash
flow, asset value or book value, if appropriate. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable as compared to the
price and yield of the common stock. The stocks or securities in which the
Portfolio invests may be expected to produce an above average level of income
(as measured by the Standard & Poor's 500 Composite Stock Price Index). Under
normal market and economic conditions, at least 65% of the Portfolio's total
assets will be invested in income-producing equity securities.
The Portfolio may indirectly invest in foreign securities through the
purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Other Applicable
Policies -- Foreign Securities" below and the Statement of Additional
Information under "Investment Objectives and Policies -- ADRs and EDRs."
The Portfolio reserves the right to hold as a temporary defensive measure
during abnormal market or economic conditions up to 100% of its total assets in
cash and short-term obligations (having remaining maturities of 13 months or
less) at such times and in such proportions as, in the opinion of the Adviser,
such abnormal market or economic conditions warrant. See "The Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.
THE EQUITY INDEX PORTFOLIO
The Equity Index Portfolio, which is expected to commence operations in
1997, seeks to provide investment results that, before deduction of operating
expenses, approximate the price and yield performance of U.S. publicly traded
common stocks with large stock market capitalizations as represented by the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Like the Bond Index Portfolio, the Equity Index Portfolio is not managed in
a traditional sense, that is, by making discretionary judgments based on
analysis of economic, financial and market
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conditions. Instead, the Portfolio uses an investment strategy called "indexing"
whereby it seeks to approximate the investment performance of the market segment
comprised of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the S&P 500, through the use of sophisticated
computer models to determine which securities should be purchased or sold, while
keeping transaction and administrative costs to a minimum. The Portfolio will
invest substantially all of its total assets in securities listed in the S&P
500. The Adviser generally selects securities for the Portfolio on the basis of
their weightings in the S&P 500 and will only purchase a security for the
Portfolio that is included in the S&P 500 at the time of such purchase. The
Portfolio should exhibit price volatility similar to that of the S&P 500. For
further information, see "Other Investment Policies -- The Indexing Approach"
below and the Statement of Additional Information under "Investment Objectives
and Policies -- The Indexing Approach."
With respect to the remaining portion of its total assets, the Portfolio
has the ability to hold temporary cash balances which may be invested in U.S.
Government obligations and money market instruments. See "The Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common stocks,
most of which are listed on the New York Stock Exchange. S&P chooses the stocks
for the S&P 500 on a statistical basis. As of December 31, 1996 the stocks in
the S&P 500 have an average market capitalization of $5.6 trillion and account
for approximately 69% of the total market value of all U.S. common stocks.
Normally, the Equity Index Portfolio will hold all 500 stocks in the S&P 500 and
will hold each stock approximately the same percentage as that stock represents
in the S&P 500. Under certain circumstances, the Portfolio may not hold all 500
stocks in the S&P 500, for example because of changes in the S&P 500, or as a
result of shareholder activity in the Portfolio. The Portfolio will rebalance
its holdings monthly to reflect changes in the S&P 500. "Market capitalization"
for a company is the market price per share of stock multiplied by the number of
shares outstanding. The Adviser believes that the S&P 500 is an appropriate
benchmark for the Portfolio because it is diversified, it is familiar to many
investors and it is widely accepted as a reference for common stock investments.
THE GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio's investment objective is to provide
long-term capital growth, with income a secondary consideration. In pursuing its
investment objective, the Portfolio normally invests substantially all of its
assets in common stock, preferred stock, rights, warrants and securities
convertible into common stock. The Adviser selects stocks based on a number of
factors, including historical and projected earnings, growth and asset value,
earnings compared to stock prices generally (as measured by the S&P 500, and
consistency of earnings growth and earnings quality. Stocks purchased for the
Portfolio generally will be listed on a national securities exchange or will be
unlisted securities with an established over-the-counter market. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price and yield of the convertible security is favorable compared to the price
and yield of the common stock. The stocks or securities in which the Portfolio
invests may be expected to produce some income but income is not a major
criterion in their selection.
The Growth & Income Equity Portfolio may indirectly invest in foreign
securities through the purchase of ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 15% of the Portfolio's total assets. For further information, see
"Other Applicable Policies -- Foreign Securities" below and the Statement of
Additional Information under "Investment Objectives and Policies -- ADRs and
EDRs." The Portfolio may also invest in Canadian securities listed on a national
securities exchange.
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The Growth & Income Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser, prevailing
market or economic conditions warrant. See "The Government & Corporate Bond
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.
THE SMALL CAP EQUITY PORTFOLIO
The Small Cap Equity Portfolio's investment objective is capital
appreciation. Current income is an incidental consideration in the selection of
portfolio securities. In pursuing its investment objective, the Portfolio (which
was formerly known as the Emerging Growth Portfolio) normally invests at least
65% of its total assets in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation. The
market capitalization of the issuers of securities purchased by the Portfolio
will normally range from $100 million to $2 billion at the time of purchase. The
Portfolio may invest in preferred stock, rights, warrants, and securities
convertible into common stock. It may invest a portion of its assets in
established larger companies that, in the opinion of the Adviser, offer improved
growth possibilities because of rejuvenated management, product changes, or
other developments that might stimulate earnings or asset growth, or in
companies that seem undervalued relative to their underlying assets. The
Portfolio does not intend to invest more than 5% of the value of its total
assets in the securities of unseasoned companies, that is, companies (or their
predecessors) with less than three years' continuous operation.
The Small Cap Equity Portfolio may also invest a portion of its assets in
smaller companies that have limited specialized-product lines, markets or
financial resources, or are dependent upon one-person management. The securities
of such smaller companies may have limited marketability, may be subject to more
abrupt or erratic market movements than securities of larger companies or the
market averages in general, and may involve greater risk than is customarily
associated with more established companies. To qualify for investment by the
Portfolio, however, a company will be expected to have, in the opinion of the
Adviser, above-average possibilities for capital appreciation (when compared
with the average appreciation of companies whose securities are included in the
S&P 500).
The Small Cap Equity Portfolio uses a research intensive approach and
valuation techniques that emphasize earnings and asset growth. The Adviser
selects stocks based on a number of factors, including historical and projected
earnings, asset value, potential for price appreciation and earnings growth, and
quality of products manufactured and/or services offered. Stocks purchased for
the Portfolio may be listed on a national securities exchange or may be unlisted
securities with or without an established over-the-counter market. The Portfolio
may also invest in initial public offerings of new companies that demonstrate
the potential for price appreciation. A convertible security may be purchased
for the Portfolio when, in the Adviser's opinion, the price of the convertible
security is favorable compared to the price of the common stock. In general, the
Portfolio's stocks and other securities will be diversified over a number of
industry groups in an effort to reduce the risks inherent in such investments.
The Small Cap Equity Portfolio may indirectly invest in foreign securities
through the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. For further information, see
"Other Applicable Policies -- Foreign Securities" below, and the Statement of
Additional Information under "Investment Objectives and Policies -- ADRs and
EDRs." The Portfolio may also invest in securities issued by Canadian
corporations and Canadian counterparts of U.S. corporations, which may or may
not be listed on a national securities exchange or traded in over-the-counter
markets.
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The Small Cap Equity Portfolio reserves the right to hold as a temporary
defensive measure up to 100% of its total assets in cash and short-term
obligations (having remaining maturities of 12 months or less) at such times and
in such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. See "The Government & Corporate Bond Portfolio"
above for a description of the types of short-term obligations in which the
Portfolio may invest.
THE INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio's investment objective is to provide
capital growth consistent with reasonable investment risk. The Portfolio seeks
to achieve this objective by investing principally in foreign equity securities,
most of which will be denominated in foreign currencies. During normal market
conditions, the Portfolio will invest substantially all of its assets in
securities of companies which derive more than 50% of their gross revenues from,
or have more than 50% of their assets outside, the United States. Additionally,
under normal market conditions, the Portfolio will invest in equity securities
from at least three different countries (excluding the United States). However,
the Portfolio may invest all its assets in a single country during temporary
defensive periods.
The International Equity Portfolio expects to invest at least half of its
assets in securities of companies located either in developed countries in
Western Europe or in Japan, although it may also purchase securities of
companies located in other developed countries and developing countries. For
further information, see "Risk Factors -- Risks Associated with Foreign
Securities and Currencies" below.
By investing in foreign securities, the International Equity Portfolio will
attempt to take advantage of differences between economic trends and the
performance of securities markets in various countries, regions and geographic
areas. The Portfolio will achieve diversification by investing in securities
from various countries and geographic areas that offer different investment
opportunities and are affected by different economic trends. The multinational
character of the Portfolio's investments should reduce the effect that events in
any one country or geographic area will have on its investment holdings. Of
course, negative movement by one of the Portfolio's investments in one foreign
market may offset gains from the Portfolio's investments in another market.
Equity securities in which the International Equity Portfolio may invest
include common stock, preferred stock, rights, warrants and securities
convertible into common stock. A convertible security may be purchased for the
Portfolio when, in the Adviser's or Sub-Adviser's opinion, the price and yield
of the convertible security is favorable compared to the price and yield of the
common stock.
During temporary defensive periods, when deemed necessary by the Adviser or
Sub-Adviser, the International Equity Portfolio may invest up to 100% of its
assets in U.S. Government obligations or debt obligations of companies
incorporated and having their principal business activities in the United
States. The Portfolio does not intend to invest in such securities for the
purpose of meeting its investment objective.
The International Equity Portfolio may also invest, without limitation, in
foreign securities through the purchase of ADRs and EDRs. For further
information, see "Risk Factors -- Risks Associated with Foreign Securities and
Currencies" below and the Statement of Additional Information under "Investment
Objectives and Policies -- ADRs and EDRs."
The International Equity Portfolio reserves the right to hold as a
temporary defensive measure up to 100% of its total assets in cash and
short-term obligations (having remaining maturities of 12 months or less) at
such times and in such proportions as, in the opinion of the Adviser or Sub-
Adviser, prevailing market or economic conditions warrant. See "The Government &
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest.
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Although investing in any mutual fund has certain inherent risks, an
investment in the International Equity Portfolio may have even greater risks
than investments in most other types of mutual funds. The Portfolio is not a
complete investment program, and it may not be appropriate for investors who
cannot financially bear the loss of at least a significant portion of their
investment. The Portfolio's net asset value per Share is subject to rapid and
substantial changes because greater risk is assumed in seeking the Portfolio's
objective. See "Risk Factors -- Risks Associated with Foreign Securities and
Currencies" below.
THE BALANCED PORTFOLIO
The Balanced Portfolio's investment objective is to maximize total return
through a combination of growth of capital and current income consistent with
the preservation of capital. The Portfolio seeks to achieve its objective by
using a disciplined approach of allocating assets primarily among three major
asset groups, i.e. equity securities, fixed income securities and cash
equivalents. In pursuing the Portfolio's investment objective, the Adviser
allocates the Portfolio's assets based upon its evaluation of the relative
attractiveness of the major asset groups. In an effort to better quantify the
relative attractiveness of the major asset groups over a one- to three-year
period of time, the Adviser has incorporated into its asset allocation
decision-making process several dynamic computer models which it has created.
The purpose of these models is to show the statistical impact of the Adviser's
economic outlook upon the future returns of each asset group. The models are
especially sensitive to the forecasts for inflation, interest rates and
long-term corporate earnings growth. Investment returns are normally heavily
impacted by such variables and their expected changes over time. Therefore, the
Adviser's method attempts to take advantage of changing economic conditions by
increasing or decreasing the ratio of stocks to bonds in the Portfolio. For
example, if the Adviser expected more rapid economic growth leading to better
corporate earnings, it would increase the Portfolio's holdings of equity
securities and reduce its holdings of fixed income securities and cash
equivalents.
Under normal market conditions, the Balanced Portfolio's policy is
generally to invest at least 25% of the value of its total assets in fixed
income securities and no more than 75% in equity securities. The actual
percentage of assets invested in equity securities, fixed income securities and
cash equivalents will vary from time to time, depending on the judgment of the
Adviser as to general market and economic conditions, trends and yields,
interest rates and fiscal and monetary developments.
The equity securities in which the Balanced Portfolio normally invests
include common stock, preferred stock, rights, warrants and securities
convertible into common or preferred stock. For further information regarding
these instruments, see "The Equity Income Portfolio" and "The Growth & Income
Equity Portfolio" above.
The fixed income securities in which the Balanced Portfolio invests include
U.S. Government securities or other fixed income and related debt securities
rated in one of the four highest rating categories assigned by a Rating Agency
at the time of purchase or in unrated investments deemed by the Adviser to be of
comparable quality pursuant to guidelines approved by the Fund's Board of
Directors. For further information regarding these instruments, see "The
Government & Corporate Bond Portfolio" above.
The Balanced Portfolio may purchase asset-backed securities. For further
information regarding these instruments, see "Other Applicable
Policies -- Asset-Backed Securities" below.
The Balanced Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 12 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. See "The Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.
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RISK FACTORS
MARKET RISK. The Equity Income, Equity Index, Growth & Income Equity,
Small Cap Equity and International Equity Portfolios invest primarily, and the
Balanced Portfolio invests to a significant degree, in equity securities. As
with other mutual funds that invest primarily or to a significant degree in
equity securities, these Portfolios are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities, including Municipal Obligations, held by the Treasury Money Market,
Money Market, Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond and Balanced
Portfolios can be expected to vary inversely to changes in prevailing interest
rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in a Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES. Investments in
securities of foreign issuers, whether made directly or indirectly, carry
certain risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include future political and economic developments,
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors may limit the
investment opportunities available to the International Equity Portfolio and
result in a lack of liquidity and a high price volatility with respect to
securities of issuers from developing countries.
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Certain countries may also impose restrictions on the International Equity
Portfolio's ability to repatriate investment income or capital. Even when there
is no outright restriction on repatriation of investment income or capital, the
mechanics of repatriation may affect certain aspects of the operations of the
International Equity Portfolio.
Governments of many developing countries exercise substantial influence
over many aspects of the private sector. In some countries, the government may
own or control many companies, including the largest company or companies. As
such, government actions in the future could have a significant effect on
economic conditions in these countries, affecting private sector companies, the
International Equity Portfolio and the value of its portfolio securities.
Since the International Equity Portfolio will invest substantially in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates will affect the value of securities
in the International Equity Portfolio and the unrealized appreciation or
depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be expected to
be higher than that of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such as
the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of transactions
involving foreign securities.
Interest and dividends payable on the International Equity Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under U.S. federal income tax provisions, they may reduce the net return to the
Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other Portfolios may be
subject to certain of the risks described above in connection with investment in
foreign securities.
MUNICIPAL OBLIGATIONS. The ability of the Tax-Exempt Money Market,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios (collectively, the "Tax-Exempt Portfolios") to achieve their
respective investment objectives are dependent upon the ability of issuers of
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. There are additional risks associated with investment in
the Missouri Tax-Exempt Bond Portfolio because it invests its assets
predominantly in Missouri Municipal Obligations. Investors in the Missouri
Tax-Exempt Bond Portfolio should be aware that certain provisions of, and
amendments to, the Missouri Constitution limit tax increases which could result
in certain adverse consequences affecting Missouri Municipal Obligations. Some
of the significant financial considerations relating to the Missouri Tax-Exempt
Bond Portfolio's investments in Missouri Municipal Obligations are summarized in
the Statement of Additional Information.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the Tax-Exempt Money
Market, Short-Intermediate Municipal and National Municipal Bond Portfolios may
invest 25% or more of their respective net assets in (i) Municipal Obligations
whose issuers are in the same state, (ii) Municipal Obligations the interest on
which is paid solely from revenues of similar projects, and (iii) private
activity bonds, no Portfolio presently intends to do so unless in the opinion of
the Adviser the investment is warranted. Although the Missouri Tax-Exempt Bond
Portfolio does not presently intend to do so on a regular basis, it may invest
more than 25% of its assets in industrial development bonds issued before August
7, 1986, the interest on which is not treated as a specific tax preference item
under the federal alternative minimum tax, and in Municipal Obligations, the
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interest on which is paid solely from revenues of similar projects, if such
investments are deemed necessary or appropriate by the Adviser. To the extent
that a Portfolio's assets are invested in Municipal Obligations the issuers of
which are in the same state or that are payable from the revenues of similar
projects or in private activity bonds, a Portfolio will be subject to the
peculiar risks presented by the laws and economic conditions relating to such
projects and bonds to a greater extent that it would be if its assets were not
so invested. See "Investment Objectives and Policies -- Municipal Obligations"
in the Statement on Additional Information.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond Portfolios
is classified as non-diversified under the 1940 Act. Investment return on a
non-diversified portfolio typically is dependent upon the performance of a
smaller number of securities relative to the number held in a diversified
portfolio. Consequently, the change in value of any one security may affect the
overall value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a non-diversified portfolio may be more susceptible to
economic, political, and regulatory developments than a diversified investment
portfolio with similar objectives. The value of a Portfolio's securities can be
expected to vary inversely with changes in prevailing interest rates.
Investors in the Missouri Tax-Exempt Bond Portfolio should consider the
risk inherent in such Portfolio's concentrations in Missouri Municipal
Obligations versus the safety that comes with a less geographically concentrated
investment portfolio, and should compare the yields and tax-equivalent yields
available on portfolios of Missouri Municipal Obligations with the yields and
tax-equivalent yields of more diversified portfolios with securities of
comparable quality, including non-Missouri securities, before making an
investment decision.
Municipal Obligations purchased by the Tax-Exempt Portfolios may be backed
by letters of credit or guarantees issued by domestic or foreign banks and other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or a guarantee with
respect to a Municipal Obligation held by a Tax-Exempt Portfolio could have an
adverse effect on the Portfolio's investment portfolio and the value of its
shares. Foreign letters of credit and guarantees involve certain risks in
addition to those of domestic obligations, including less stringent reserve
requirements and different accounting, auditing and recordkeeping requirements.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and, with respect to
Missouri Municipal Obligations, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of Municipal Obligations, the
creation of any tax-exempt derivative security, or the bases for such opinions.
OTHER APPLICABLE POLICIES
The investment policies described in this Prospectus are among those which
one or more of the Portfolios have the ability to utilize. Some of these
policies may be employed on a regular basis; others may not be used at all.
Accordingly, reference to any particular policy, method or technique carries no
implication that it will be utilized or, if it is, that it will be successful.
U.S. GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of a Portfolio. Certain U.S. Government securities held
by the Treasury Money Market, Money Market or Tax-Exempt Money Market Portfolios
may have remaining maturities exceeding thirteen months if such securities
provide for adjustments in their
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interest rates no less frequently than every thirteen months. Examples of the
types of U.S. Government obligations that may be held by the Portfolios, subject
to their respective investment objectives and policies, include, in addition to
U.S. Treasury bonds, notes and bills, the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, GNMA, FNMA, FHLMC, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Resolution Trust Corporation,
and Maritime Administration. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of GNMA, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of FNMA, are supported
by the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. There is
no assurance that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with their
respective investment policies, each Portfolio may invest in bills, notes and
bonds (including zero coupon bonds) issued by the U.S. Treasury. In addition,
each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and Equity Index Portfolios) may also invest
in "stripped" U.S. Treasury obligations offered under the Separate Trading of
Registered Interest and Principal Securities ("STRIPS") program or Coupon Under
Bank-Entry Safekeeping ("CUBES") program or other stripped securities issued
directly by agencies or instrumentalities of the U.S. Government (and, with
respect to the Treasury Money Market Portfolio only, that are also guaranteed as
to principal and interest by the U.S. Government). STRIPS and CUBES represent
either future interest or principal payments and are direct obligations of the
U.S. Government that clear through the Federal Reserve System. The Money Market,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Growth &
Income Equity, Small Cap Equity and Balanced Portfolios may also purchase U.S.
Treasury and agency securities that are stripped by brokerage firms and
custodian banks and sold under proprietary names. These stripped securities are
resold in custodial receipt programs with a number of different names (such as
TIGRs and CATS) and are not considered U.S. Government securities for purposes
of the 1940 Act.
Stripped securities are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. The
Adviser will consider the liquidity needs of a Portfolio when any investments in
zero coupon obligations or other principal-only obligations are made.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to their respective investment policies, each Portfolio (except the
National Municipal Bond Portfolio) may agree to purchase U.S. Government
securities from financial institutions such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at a mutually agreed-upon date and
price ("repurchase agreements"). A Portfolio will enter into repurchase
agreements only with financial institutions such as banks and broker-dealers
that the Adviser or Sub-Adviser believes to be creditworthy. During the term of
any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller and will require the seller to maintain the
value of the securities subject to the agreement at not less than 102% of the
repurchase price (including accrued interest). Default by a seller could expose
a Portfolio to possible loss because of adverse market action or possible delay
in disposing of the underlying obligations. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although no Portfolio presently intends to enter into
repurchase agreements providing for settlement in more than seven days, each
Portfolio does have the authority to do so subject to its limitation on the
purchase of illiquid securities described below. Repurchase agreements are
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considered to be loans under the 1940 Act. The income on repurchase agreements
is taxable. See "Taxes" below.
REVERSE REPURCHASE AGREEMENTS. Subject to their investment policies, each
Portfolio (except the Treasury Money Market Portfolio and the Tax-Exempt
Portfolios) may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with their respective investment limitations
below. Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker-dealers and agree to
repurchase them at an agreed upon date and price. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price which the Portfolio is obligated to pay.
Reverse repurchase agreements are considered to be borrowings by a Portfolio
under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, each Portfolio
(except the Treasury Money Market, Money Market, Tax-Exempt Money Market and
Missouri Tax-Exempt Bond Portfolios) may, from time to time, lend its portfolio
securities to broker-dealers, banks or institutional borrowers pursuant to
agreements requiring that the loans be continuously secured by collateral equal
at all times in value to at least the market value of the securities loaned.
Collateral for such loans may include cash, securities of the U.S. Government,
or its agencies or instrumentalities, or an irrevocable letter of credit issued
by a bank that has at least $1.5 billion in total assets, or any combination
thereof. The collateral must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33 1/3% of the
aggregate net assets of such Portfolio. Loans are subject to termination by a
Portfolio or a borrower at any time.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain circumstances
described above and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies which determine their net asset value per Share based on the amortized
cost or penny-rounding method and which invest in securities in which the
Portfolio is permitted to invest. Each Portfolio may invest in securities of
other investment companies within the limits prescribed by the 1940 Act, which
include, subject to certain exceptions, a prohibition on a Portfolio investing
more than 10% of the value of its total assets in such securities. Investments
in other investment companies will cause a Portfolio (and, indirectly, the
Portfolio's shareholders) to bear proportionately the cost incurred in
connection with the operations of such other investment companies. In addition,
investment companies in which a Portfolio may invest may impose a sales or
distribution charge in connection with the purchase or redemption of their
shares as well as other types of commissions or charges (no sales charge will be
paid by the Missouri Tax-Exempt Bond Portfolios in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. See the Statement of Additional
Information under "Investment Objectives and Policies -- Securities of Other
Investment Companies." The income on securities of other investment companies
may be taxable to investors at the state or local level. See "Taxes" below.
WHEN-ISSUED PURCHASES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. Each
Portfolio may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate Municipal
and National Municipal Bond Portfolios may purchase or sell securities on a
"delayed settlement" basis. This refers to a transaction in the secondary market
that will settle some time in the future. When issued purchases,
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forward commitments and delayed settlement transactions involve a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, or if the value of the security to be sold increases prior to the
settlement date. Each Portfolio expects that these transactions will not exceed
25% of the value of its total assets (at the time of purchase) under normal
market conditions. No Portfolio intends to engage in such transactions for
speculative purposes but only for the purpose of acquiring portfolio securities.
OPTIONS. Each of the Equity and Bond Portfolios (except the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios) may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation in an amount
not exceeding 10% of its net assets. Such options may relate to particular
securities or to various stock or bond indices. Purchasing options is a
specialized investment technique which entails a substantial risk of a complete
loss of the amounts paid as premiums to the option writer. Such transactions
will be entered into only as a hedge against fluctuations in the value of
securities which a Portfolio holds or intends to purchase.
These Portfolios may also write covered call options. A covered call option
is an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Such options will be listed on a national
securities exchange and issued by the Options Clearing Corporation.
The International Equity Portfolio may write covered call options, buy put
options, buy call options and write secured put options for hedging (or
cross-hedging) purposes or for the purpose of earning additional income. Such
options may relate to particular securities, foreign or domestic stock or bond
indices, financial instruments or foreign currencies; may or may not be listed
on a domestic or foreign securities exchange; and may or may not be issued by
the Options Clearing Corporation. The International Equity Portfolio will invest
and trade in unlisted over-the-counter options only with firms deemed
creditworthy by the Adviser or Sub-Adviser. However, unlisted options are not
subject to the protections afforded purchasers of listed options by the Options
Clearing Corporation, which performs the obligations of its members which fail
to perform them in connection with the purchase or sale of options. The
International Equity Portfolio will not purchase put and call options in an
amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call options
written by a Portfolio will not exceed 25% of the value of its net assets. In
order to close out an option position, a Portfolio may enter into a "closing
purchase transaction" -- the purchase of a covered call option on the same
security with the same exercise price and expiration date as the option which
the Portfolio previously wrote. By writing a covered call option, a Portfolio
forgoes the opportunity to profit from an increase in the market price of the
underlying security above the exercise price except insofar as the premium
represents such a profit and it is not able to sell the underlying security
until the option expires, is exercised, or the Portfolio effects a closing
purchase transaction by purchasing an option of the same series. The use of
covered call options will not be a primary investment technique of any
Portfolio. For additional information relating to option trading practices,
including particular risks, see the Statement of Additional Information and
Appendix B thereof.
FOREIGN CURRENCY PUT OPTIONS. The International Equity Portfolio may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the Portfolio, upon payment of a premium, the right
to sell a currency at the exercise price until the expiration of the option and
serves to insure against adverse currency price movements in the underlying
portfolio assets denominated in that currency.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may purchase
unlisted currency options. A number of major investment firms trade unlisted
options which are more flexible than exchange listed options with respect to
strike price and maturity date. These unlisted options generally are available
on a wider range of currencies. Unlisted foreign currency options are generally
less liquid than listed options and involve the credit risk associated with the
individual
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issuer. They will be deemed to be illiquid for purposes of the limitation on
investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by the
International Equity Portfolio gives the purchaser, upon payment of a premium,
the right to purchase from the International Equity Fund a currency at the
exercise price until the expiration of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Equity
Portfolio may buy and sell securities denominated in currencies other than the
U.S. dollar, and receive interest, dividends and sale proceeds in currencies
other than the U.S. dollar, the Portfolio may from time to time enter into
foreign currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar. The
Portfolio may enter into currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
use forward currency contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by the International
Equity Portfolio to purchase or sell a specific currency at a future date at a
price set at the time of the contract. In this respect, forward currency
contracts are similar to foreign currency futures contracts described below;
however, unlike futures contracts, which are traded on recognized commodities
exchanges, forward currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Also, forward currency contracts usually involve delivery of
the currency involved instead of cash payment as in the case of futures
contracts.
The International Equity Portfolio may use forward foreign currency
exchange contracts in order to protect against uncertainty in the level of
future foreign exchange rates. The use of such forward contracts is limited to
hedging against movements in the value of foreign currencies relative to the
U.S. dollar in connection with specific portfolio transactions or with respect
to portfolio positions. The purpose of transaction hedging is to "lock in" the
U.S. dollar equivalent price of such specific securities. Position hedging is
the sale of foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
foreign currency exchange transactions. Transaction and position hedging will
not be limited to an overall percentage of the Portfolio's assets but will be
employed as necessary to correspond to particular transactions or positions. The
Portfolio may not hedge its currency positions to an extent greater than the
aggregate market value (at the time of entering into the forward contract) of
the securities held in its portfolio denominated in, quoted in, or currently
convertible into that particular currency. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of the
Portfolio's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities decline, but forward foreign currency exchange
contracts do allow the Portfolio to establish a rate of exchange for a future
point in time.
FUTURES CONTRACTS AND RELATED OPTIONS. The U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Equity
Income, Equity Index, Growth and Income Equity, Small Cap Equity and Balanced
Portfolios may invest in futures contracts and options on futures contracts to
the extent permitted by the Commodity Futures Trading Commission ("CFTC") and
the SEC. The International Equity Portfolio may invest in interest rate futures
contracts, options on futures contracts and other types of financial futures
contracts (such as foreign currency contracts), as well as any index or foreign
market futures which are available in recognized exchanges or in other
established financial markets to the extent permitted by the CFTC and the SEC.
Such transactions, including stock or bond index futures contracts, or options
thereon, act as a hedge to protect a Portfolio from fluctuations in the value of
its securities caused by anticipated changes in interest rate or market
conditions without necessarily buying or selling the securities or, with respect
to the Bond Index and Equity Index Portfolios, can be used to simulate full
investment in the Lehman Aggregate or S&P 500 while retaining a cash balance for
portfolio
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management purposes. Hedging is a specialized investment technique that entails
skills different from other investment management. The Adviser (or Sub-Adviser)
may also consider such transactions to be economically appropriate for the
reduction of risk inherent in the ongoing management of a Portfolio. A stock or
bond index futures contract is an agreement in which one party agrees to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value (which assigns relative values to the common
stock or bonds included in the index) at the close of the last trading day of
the contract and the price at which the agreement is originally made. No
physical delivery of the underlying stock or bond in the index is contemplated.
Similarly, it may be in the best interest of a Portfolio to purchase or sell
interest rate futures contracts, or options thereon, which provide for the
future delivery of specified fixed income securities.
The purchase and sale of futures contracts or related options will not be a
primary investment technique of any Portfolio. None of the Portfolios will
purchase or sell futures contracts (or related options thereon) for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by a Portfolio on its open futures and options positions
exceeds 5% of the liquidation value of the Portfolio, after taking into account
any unrealized profits and unrealized losses on any such futures or related
options contracts into which it has entered. For a more detailed description of
futures contracts and related options, see the Statement of Additional
Information and Appendix B thereof.
ASSET-BACKED SECURITIES. The U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios
may purchase asset-backed securities (i.e., securities backed by mortgages,
installment sale contracts, corporate receivables, credit card receivables or
other assets) that are issued by entities such as GNMA, FNMA and FHLMC and
private issuers such as commercial banks, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks, and investment banks. To the extent that a Portfolio invests in
asset-backed securities issued by companies that are investment companies under
the 1940 Act, such acquisitions will be subject to the percentage limitations
prescribed by the 1940 Act. See "Other Applicable Policies -- Securities of
Other Investment Companies" above.
Presently there are several types of mortgage-backed securities, including
guaranteed mortgage pass-through certificates, which provide the holder with a
pro rata interest in the underlying mortgages, and CMOs, which provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
subject to greater volatility and interest-rate risk than other types of
mortgage-backed securities. The average life of asset-backed securities varies
with the underlying instruments or assets and market conditions, which in the
case of mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with comparable maturities. In addition, in periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Portfolio will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. When interest rates rise, the value of an asset-backed
security generally will decline; however, when interest rates decline, the value
of an assetbacked security with prepayment features may not increase as much as
that of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict precisely.
In general, the collateral supporting non-mortgage assetbacked securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Nonmortgage asset-
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backed securities involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). For example, credit card receivables are generally unsecured
and the repossession of automobiles and other personal property upon the default
of the debtor may be difficult or impracticable in some cases.
TYPES OF MUNICIPAL OBLIGATIONS. The two principal classifications of
Municipal Obligations that may be held by the Tax-Exempt Portfolios are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenues securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds issued by or on behalf of
public authorities to finance various privately operated facilities are
considered Municipal Obligations. Interest on private activity bonds, although
free of regular federal income tax, may be an item of tax preference for
purposes of the federal alternative minimum tax.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Also included within the
general category of Municipal Obligations are participation certificates in
leases, installment purchase contracts, or conditional sales contracts ("lease
obligations") entered into by state or political subdivisions to finance the
acquisition or construction of equipment, land, or facilities. Although lease
obligations do not constitute general obligations of the issuer for which the
lessee's unlimited taxing power is pledged, certain lease obligations are backed
by the lessee's covenant to appropriate money to make the lease obligation
payments. However, under certain lease obligations, the lessee has no obligation
to make these payments in future years unless money is appropriated on a yearly
basis. Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing and may
not be as marketable as more conventional securities. To the extent these
securities are illiquid, they are subject to each Portfolio's applicable
limitation on illiquid securities described below.
VARIABLE AND FLOATING RATE MUNICIPAL OBLIGATIONS. Municipal Obligations
purchased by the Tax-Exempt Portfolios may include rated or unrated variable and
floating rate instruments, including variable rate master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. Unrated instruments purchased by a Portfolio
will be determined by the Adviser to be of comparable quality at the time of
purchase to rated instruments that may be purchased. The absence of an active
secondary market for a particular variable or floating rate instrument, however,
could make it difficult for a Portfolio to dispose of an instrument if the
issuer were to default on its payment obligation. A Portfolio could, for these
or other reasons, suffer a loss with respect to such instruments.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may acquire
"stand-by commitments" with respect to Municipal Obligations held by it. Under a
stand-by commitment, a
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dealer agrees to purchase, at a Portfolio's option, specified Municipal
Obligations at a specified price. The Portfolios will acquire stand-by
commitments solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes. The Portfolios expect
that stand-by commitments will generally be available without the payment of any
direct or indirect consideration. However, if necessary or advisable, a
Portfolio may pay for a stand-by commitment either separately in cash or by
paying a higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield otherwise available for the same
securities). Stand-by commitments acquired by a Portfolio will be valued at zero
in determining the Portfolio's net asset value.
TAX-EXEMPT DERIVATIVES. Each of the Tax-Exempt Portfolios may hold
tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. The Adviser expects that less than 5% of each Tax-Exempt Portfolio's
assets will be invested in such securities during the current year. See the
Statement of Additional Information under "Investment Objectives and
Policies -- Tax-Exempt Derivatives."
DEPOSITORY RECEIPTS. The Bond Index and Equity Index Portfolios may invest
in receipts issued by banks or brokerage firms that are created by depositing
securities listed in each Portfolio's respective index into a special account at
a custodian bank. The custodian holds such securities for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. The Portfolios may invest in index-based depository receipts in
lieu of investment in the actual securities that are listed in the respective
indexes.
THE INDEXING APPROACH. The Bond Index and Equity Index Portfolios seek to
approximate the investment performance of their respective market segments, as
represented by their respective indexes, i.e. the Lehman Aggregate in the case
of the Bond Index Portfolio and the S&P 500 in the case of the Equity Index
Portfolio. While there can be no guarantee that a Portfolio's investment results
will precisely match the results of its corresponding index, the Adviser
believes that, before deduction of operating expenses, there will be a very high
correlation between the returns generated by the Portfolios and their respective
indexes. Each Portfolio will attempt to achieve a correlation between its
performance and its respective index of at least 0.95 before deduction of
operating expenses. A correlation of 1.00 would indicate a perfect correlation,
which would be achieved when a Portfolio's net asset value, including the value
of its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P or Lehman Brothers, Inc. ("Lehman") calculate their
respective indexes, and the timing of purchases and redemptions. The Adviser
monitors the correlation of the performance of the Portfolios in relation to
their indexes under the supervision of the Board of Directors. In the unlikely
event that a high correlation is not achieved, the Board of Directors will take
appropriate steps to correct the reason for the lower correlation.
THE INCLUSION OF A SECURITY IN EITHER OF THE PORTFOLIOS' INDEXES IN NO WAY
IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN INVESTMENT.
S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH, THE
PORTFOLIOS.
The Adviser believes that the indexing approach should involve less
portfolio turnover, and thus lower brokerage costs, transfer taxes and operating
expenses, than in more traditionally managed funds, although there is no
assurance that this will be the case. Ordinarily, a Portfolio will buy or sell
securities only to reflect changes in an index (including mergers or changes in
the composition of an index) or to accommodate cash flows into and out of the
Portfolio. The costs and other expenses incurred in securities transactions,
apart from any difference between the investment results of a Portfolio and that
of its respective index, may cause the return of a Portfolio to be lower than
the return of its respective index. The Portfolios may invest in less than all
of the securities included in
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their respective indexes, which may result in a return that does not correspond
with that of the indexes, after taking expenses into account.
ILLIQUID SECURITIES. A Portfolio will not invest more than 15% (10% for
each of the Money Market Portfolios) of the value of its net assets in illiquid
securities. Repurchase agreements that do not provide for settlement within
seven days, time deposits maturing in more than seven days, and securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but that may be purchased by institutional buyers pursuant to SEC Rule 144A are
subject to the applicable limit (unless the Adviser or Sub-Adviser, pursuant to
guidelines established by the Board of Directors, determines that a liquid
market exists). The purchase of securities which can be sold under Rule 144A
could have the effect of increasing the level of illiquidity in the Portfolios
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these restricted securities.
PORTFOLIO TURNOVER AND TRANSACTIONS. Although the Equity and Bond
Portfolios will not normally engage in short-term trading, each Portfolio
(except the Bond Index and Equity Index Portfolios) reserves the right to do so
if the Adviser (or Sub-Adviser) believes that selling a particular security is
appropriate in light of the Portfolio's investment objective. Investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Taxes" in this Prospectus and the
Statement of Additional Information.
Although the Intermediate Corporate Bond, Bond Index, Equity Income and
Equity Index Portfolios cannot accurately predict their respective annual
portfolio turnover rates, such rates are not expected to exceed 100%.
All orders for transactions in securities or options on behalf of the
Portfolios are placed by the Adviser (or Sub-Adviser) with broker-dealers that
it selects. To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Distributor or one or
more of its affiliates as a broker in connection with the purchase or sale of
securities when the Adviser believes the charge for the transaction does not
exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
Except as otherwise noted, each Portfolio's investment policies discussed
above are not fundamental and may be changed by the Fund's Board of Directors
without shareholder approval. However, each Portfolio also has in place certain
fundamental investment limitations, some of which are set forth below, which may
be changed only by a vote of a majority of the outstanding Shares of a
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objectives and Policies."
THE TREASURY MONEY MARKET AND MONEY MARKET PORTFOLIOS
A Portfolio may not:
1. Make loans, except that a Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies and
may enter into repurchase agreements with respect to securities (together
with any cash collateral) that are consistent with the Portfolio's
permitted investments and that equal at all times at least 100% of the
value of the repurchase price.
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2. Borrow money or issue senior securities, except that a Portfolio
may borrow from banks and the Money Markert Portfolio may enter into
reverse repurchase agreements, for temporary purposes in amounts up to 10%
of the value of its total assets at the time of such borrowing; or
mortgage, pledge or hypothecate any assets, except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of a Portfolio's total assets at the
time of such borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are outstanding.
3. With respect to the Treasury Money Market Portfolio, purchase
securities other than obligations of the U.S. Government, its agencies and
instrumentalities, some of which may be subject to repurchase agreements,
except that the Portfolio may purchase securities of other investment
companies that seek to maintain a constant net asset value per Share and
that are permitted themselves only to invest in securities which may be
acquired by the Portfolio.
4. With respect to the Money Market Portfolio, purchase any securities
which would cause 25% or more of the value of the Portfolio's total assets
at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by domestic bank instruments
or obligations of the U.S. Government, its agencies or instrumentalities;
(b) wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric
and gas, electric and telephone will each be considered a separate
industry.
In accordance with current regulations of the SEC, the Money Market
Portfolio intends to limit investments in the securities of any single issuer
(other than securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities) to not more than 5% of the Portfolio's total assets at the
time of purchase, provided that the Portfolio may invest up to 25% of its total
assets in the securities of any one issuer for a period of up to three business
days. This intention is not, however, a fundamental policy of the Money Market
Portfolio. The Portfolio would have the ability to invest more than five percent
of its assets in any one issuer in accordance with its fundamental policy only
in the event that Rule 2a-7 of the 1940 Act is amended in the future.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND INDEX,
GOVERNMENT & CORPORATE BOND, SHORT-INTERMEDIATE MUNICIPAL, NATIONAL MUNICIPAL
BOND, EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY,
INTERNATIONAL EQUITY AND BALANCED PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after and as a result of such
investments, more than 5% of the Portfolio's total assets would be invested
in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio or the Fund,
except that up to 25% of the Portfolio's total assets may be invested
without regard to such limitations.
2. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided however, that (a) with respect to
each Portfolio except the Short-Intermediate Municipal and National
Municipal Bond Portfolios, (i) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements secured by obligations of the
U.S. Government or its agencies or instrumentalities; (ii) wholly-owned
finance companies will be considered to be in the industries of their
parents if their activities are
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primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services (for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry); and (b) with respect to the Short-
Intermediate Municipal and National Municipal Bond Portfolios, there is no
limitation with respect to obligations issued or guaranteed by the U.S.
Government, any state, territory or possession of the U.S. Government, the
District of Columbia, or any of their authorities, agencies,
instrumentalities or political subdivisions.
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and each Portfolio other than the National Municipal
Bond Portfolio may enter into reverse repurchase agreements for temporary
defensive purposes in amounts not in excess of 10% of the Portfolio's total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets, except in connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts borrowed or 10% of the
Portfolio's total assets at the time of such borrowing; or purchase
securities while its borrowings exceed 5% of its total assets. A
Portfolio's transactions in futures and related options (including the
margin posted by a Portfolio in connection with such transactions), and
securities held in escrow or separate accounts in connection with a
Portfolio's investment practices described in this Prospectus or the
Statement of Additional Information are not subject to this limitation.
4. Make loans, except that (a) each Portfolio may purchase or hold
debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and (b) each
Portfolio except the National Municipal Bond Portfolio may enter into
repurchase agreements.
5. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall
not apply to a Portfolio's transactions in options, and futures contracts
and related options, and (b) a Portfolio may obtain short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities.
THE TAX-EXEMPT MONEY MARKET AND MISSOURI TAX-EXEMPT BOND PORTFOLIOS
A Portfolio may not:
1. Purchase securities of any one issuer if, immediately after and as
a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to
50% of the Portfolio's total assets may be invested without regard to this
5% limitation provided that no more than 25% of the Portfolio's total
assets are invested in the securities of any one issuer and (b) this 5%
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. For purposes of this
limitation, a security is considered to be issued by the governmental
entity (or entities) whose assets and revenues back the security, or, with
respect to an industrial development bond (in the case of the Tax-Exempt
Money Market Portfolio) or a private activity bond (in the case of the
Missouri Tax-Exempt Bond Portfolio) that is backed only by the assets and
revenues of a non-governmental user, a security is considered to be issued
by such non-governmental user. In certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection
with such guarantee, except that a guarantee of a security shall not be
deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the Portfolio's total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks, and the Missouri Tax-Exempt Bond Portfolio may enter
into reverse repurchase agreements, for temporary defensive purposes in
amounts not in excess of 10% of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar
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amounts borrowed or 10% of its total assets at the time of such borrowing
(including any reverse repurchase agreements); or purchase securities while
borrowings exceed 5% of Tax-Exempt Money Market Portfolio's net assets or
5% of the Missouri Tax-Exempt Bond Portfolio's total assets. Securities
held in escrow or separate accounts in connection with the Portfolios'
investment practices described in this Prospectus or the Statement of
Additional Information are not subject to this limitation.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Portfolio may not:
1. Purchase any securities, except securities issued (as defined in
Investment Limitation No. 1 above with respect to the Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) or guaranteed by the United
States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 25% or more
of the Portfolio's net assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry.
2. Make loans except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
In addition, under normal market conditions or when the Adviser deems that
suitable tax-exempt obligations are available, at least 80% of the Tax-Exempt
Money Market Portfolio's assets must be invested in obligations the interest on
which is exempt from federal income tax and stand-by commitments with respect to
such obligations.
Notwithstanding the Investment Limitation in the preceding paragraph, the
Tax-Exempt Money Market Portfolio may invest in securities of other investment
companies that (a) invest in securities that are substantially similar to those
the Portfolio may acquire, and (b) distribute income that is exempt from regular
federal income tax.
The following additional investment policies with respect to the Tax-Exempt
Money Market and Missouri Tax-Exempt Bond Portfolio are not fundamental and may
be changed by the Board of Directors without shareholder approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities would exceed 15% (10%
with respect to the Tax-Exempt Money Market Portfolio) of the Portfolios'
respective net assets.
The Tax-Exempt Money Market Portfolio has an operating policy to comply
with the requirements of Rule 2a-7 of the 1940 Act. To the extent that Rule 2a-7
is more restrictive than the Portfolio's fundamental limitations, the Portfolio
will operate in accordance with Rule 2a-7.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
THE MONEY MARKET PORTFOLIOS
The Money Market Portfolios' respective net asset values per Share are
determined by the Administrator as of 12:00 noon (Eastern time) and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently, 4:00 p.m. Eastern time) on each weekday,
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with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Each Portfolio's assets are valued based upon the amortized cost method.
Although each Portfolio seeks to maintain its net asset value per Share at
$1.00, there can be no assurance that the net asset value per Share will not
vary. See the Statement of Additional Information under "Net Asset Value" for
further information.
THE EQUITY AND BOND PORTFOLIOS
The Equity and Bond Portfolios' respective net asset values per Share are
determined by the Administrator as of the close of regular trading hours on the
Exchange on each Business Day (currently 4:00 p.m. Eastern time).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser (or
Sub-Adviser) under the supervision of the Board of Directors. Investments in
debt securities with remaining maturities of 60 days or less may be valued based
upon the amortized cost method. For further information about valuation of
investments, see "Net Asset Value" in the Statement of Additional Information.
OTHER INFORMATION
The public offering price for each class of Shares of a Portfolio is based
upon net asset value per Share plus, in the case of Investor A Shares of each
Portfolio except the Money Market Portfolios, a front-end sales charge. A class
will calculate its net asset value per Share by adding the value of a
Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of a Portfolio which declares its net investment income
quarterly will generally be lower than the net asset value per Share of Trust,
Institutional or Investor A Shares of the same Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or other financial institutions
(collectively "financial institutions"), acting on their own behalf or on behalf
of their qualified fiduciary accounts, employee benefit, retirement plan, or
other such qualified accounts. Trust Shares are sold to qualified purchasers
without a sales charge imposed by the Fund or the Distributor. Generally,
investors purchase Trust Shares through a financial institution, which is
responsible for transmitting purchase orders directly to the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
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Financial institutions placing orders directly or on behalf of their
customers should contact the Fund at 1-800-452-4015. Investors may also call the
Fund for information on how to purchase Shares.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of banks
or other financial institutions, such institution is responsible for
transmitting purchase, exchange, and redemption orders to the Fund on a timely
basis, recording all purchase, exchange, and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
PURCHASE OF SHARES -- THE MONEY MARKET PORTFOLIOS
A purchase order received and accepted by the Fund by 12:00 noon (Eastern
time) on a Business Day is effected at the net asset value per Share next
determined after receipt of the order in good form if the Fund's Custodian has
received payment in federal funds by 4:00 p.m. (Eastern time) that day. If such
funds are not available for investment by 4:00 p.m. (Eastern time), the order
will be cancelled. Purchase orders received after 12:00 noon (Eastern time) will
be placed the following business day.
PURCHASE OF SHARES -- THE EQUITY AND BOND PORTFOLIOS
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Trust Shares will be priced
according to the net asset value per Share next determined on that day after
receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGES
The exchange privilege enables shareholders to exchange Trust Shares of a
Portfolio for Trust Shares of another Portfolio offered by the Fund. Exchanges
for Trust Shares in another Portfolio are effected without payment of any
exchange or sales charges. In addition, Trust Shares of a Portfolio may also be
exchanged for Investor A Shares of the same Portfolio in connection with the
distribution of assets held in a qualified trust, agency or custodian account
with the trust department of Mercantile or any of its affiliated or
correspondent banks. Such exchanges will also be effected without payment of any
exchange or sales charges. The exchange privilege may be exercised only in those
states where the class of shares of such other Portfolios may be legally sold.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such request to
the Distributor. See "Other Exchange or Redemption Information" below. An
investor should consult the financial institution or the Distributor for further
information regarding procedures for exchanging Shares.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at a Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. No charge for
sending redemption payments electronically is currently imposed by the Fund,
although a charge may be imposed in the future. The Fund reserves the right to
send redemption proceeds electronically within seven days
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after receiving a redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect a Portfolio.
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject
any signature guarantee if (1) it has reason to believe that the signature is
not genuine, (2) it has reason to believe that the transaction would otherwise
be improper, or (3) the guarantor institution is a broker or dealer that is
neither a member of a clearing corporation nor maintains net capital of at least
$100,000. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption check is payable to the
shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact the financial institution servicing his or her account or the
Distributor. Additional documentation may be required if the redemption is
requested by a corporation, partnership, trust, fiduciary, executor, or
administrator. If, due to temporary adverse conditions, investors are unable to
effect telephone transactions, investors are encouraged to follow the procedures
described in "Other Exchange or Redemption Information" below.
Neither the Fund nor its service providers will be liable for any loss,
damage, expense or cost arising out of any telephone redemption effected in
accordance with the Fund's telephone redemption procedures, upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed, the Fund or its service providers may be
liable for any losses due to unauthorized or fraudulent instructions. If Share
certificates are outstanding with respect to an account, the telephone
redemption and exchange privilege is not available.
Proceeds from redemptions of Shares of the MONEY MARKET PORTFOLIOS with
respect to redemption orders received by the Fund before 12:00 noon (Eastern
time) on a Business Day normally are sent electronically the same day to the
financial institution that placed the redemption order in good form. Proceeds
for redemption orders that are received after 12:00 noon (Eastern time) or on a
non-Business Day normally are wired to the financial institution on the next
Business Day.
Proceeds from redemptions of Shares of the EQUITY AND BOND PORTFOLIOS with
respect to redemption orders received by the Fund before 4:00 p.m. (Eastern
time) on a Business Day normally are sent electronically to the financial
institution that placed the redemption order the next Business Day after the
Distributor's receipt of the order in good form.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund
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may make payment wholly or partly in portfolio securities at their then market
value equal to the redemption price. In such cases, an investor may incur
brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in a Portfolio upon 60 days'
written notice if the balance in the shareholder's account drops below $500. The
Fund will not require a shareholder to redeem Portfolio Shares if the value of
the shareholder's account drops below $500 due to fluctuations in net asset
value. Share balances may also be redeemed pursuant to arrangements between
financial institutions and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and/or Investor B Shares of a Portfolio.
TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
each Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as total return, "yield"
and "effective yield" for the Money Market Portfolios' Trust Shares may be
quoted in advertisements or in communications to shareholders. The "yield"
quoted in advertisements refers to the income generated by an investment in such
Shares of a Portfolio over a specified period (such as a seven-day period)
identified in connection with the particular yield quotation. This income is
then "annualized." That is, the amount of income generated by the investment
during that period is assumed to be generated for each such period over a
52-week or one-year period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in such Shares of a Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
In addition, the Treasury Money Market Portfolio's "state tax-equivalent
yield" may also be quoted. The "state tax-equivalent yield" shows the level of
taxable yield needed to produce an after-tax yield that is equivalent to a
particular state's tax-exempt yield achieved by the Portfolio. The "state
tax-equivalent yield" refers to the portion of income that is derived from
interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities that qualifies for exemption from state income tax. The yield
calculation assumes that 100% of the interest income is exempt from state income
tax. The "state tax-equivalent yield" is computed by dividing the tax-exempt
portion of the Portfolio's yield by a denominator consisting of one minus a
stated income tax rate.
The Tax-Exempt Money Market Portfolio may also quote its "tax-equivalent
yield" and "tax-equivalent effective yield", which demonstrate the level of
taxable yield needed to produce an after-tax yield that is equivalent to the
Portfolio's yield and effective yield. Each are calculated by increasing the
Portfolio's yield and effective yield by the amount necessary to reflect the
payment of federal (and/or state) tax at a stated tax rate. The "tax equivalent
yield" and "tax-equivalent effective yield" will always be higher than the
Portfolio's yield and effective yield, respectively. The Tax-Exempt Money Market
Portfolio may also compute its "tax-equivalent yield" and "taxequivalent
effective yield" with respect to certain states, which shows the level of
taxable yield and effective yield, respectively, needed to produce an after-tax
equivalent to the federal and state tax-exempt yield of the Portfolio's
particular class of Shares, assuming payment of federal income tax and state
personal income tax each at a stated rate and based upon a specified percentage
of the Portfolio's income which is exempt from state income tax as well as
federal income tax.
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THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return and yield
data for the Equity and Bond Portfolios' Trust Shares may be quoted in
advertisements or in communications to shareholders. The yield is computed based
on the net income of such Shares in the particular Portfolio during a 30-day (or
one-month) period identified in connection with the particular yield quotation.
More specifically, the yield is computed by dividing the Portfolio's net income
per Share during a 30-day (or one-month) period by the net asset value per Share
on the last day of the period and annualizing the result. The Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' "tax
equivalent" yields, which show the level of taxable yield needed to produce an
after-tax equivalent to each Portfolio's tax-free yield may also be quoted from
time to time. This is done by increasing a Portfolio's yield (calculated as
above) by the amount necessary to reflect the payment of federal income tax at a
stated tax rate. The Missouri Tax-Exempt Bond Portfolio may also compute its
"Missouri tax-equivalent" yield which shows the level of taxable yield needed to
produce an after-tax equivalent to the federal and Missouri tax-exempt yield of
the Portfolio's Shares, assuming payment of federal income tax and Missouri
income tax each at a stated rate.
The Portfolios' total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to Trust Shares
reflect the average annual percentage change in value of an investment in such
Shares of the particular Portfolio over the particular measuring period.
Aggregate total returns reflect the cumulative percentage change in value over
the measuring period. Both methods of calculating total returns assume that
dividends and capital gain distributions made by a Portfolio during the period
are reinvested in the Portfolio's Trust Shares. When considering average annual
total return figures for periods longer than one year, it is important to note
that a Portfolio's annual total return for any one year in the period might have
been more or less than the average for the entire period.
INFORMATION APPLICABLE TO ALL PORTFOLIOS
Performance data of the Portfolios' Trust Shares may be compared to the
performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by Lehman Brothers, Inc., or any of its affiliates, Ibbotson
Associates, Inc., Lipper Analytical Services, Inc., Mutual Fund Forecaster and
IBC/Donoghue's MONEY FUND REPORT(R) published by IBC/Donoghue. References may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The New York Times, Business Week, American Banker,
Institutional Investor, Pensions and Investments, U.S.A. Today, Fortune,
CDA/Weisenberger, Morningstar, Inc. and publications of a local or regional
nature. In addition to performance information, general information about the
Portfolios that appears in a publication such as those mentioned above may be
included in advertisements and in reports to shareholders.
Performance quotations of a class of Shares in a Portfolio represent that
Portfolio's past performance and should not be considered as representative of
future results. Any account fees charged by a bank or other financial
institution (as described in "Management of The Fund -- Service Organizations"
below) or other institutions will not be included in the calculations of a
Portfolio's yields and total returns. Such fees, if any, will reduce the
investor's net return on an investment in a Portfolio. Investors may call
1-800-452-4015 to obtain current yield and total return information.
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DIVIDENDS AND DISTRIBUTIONS
THE TREASURY MONEY MARKET, MONEY MARKET, TAX-EXEMPT MONEY MARKET, U.S.
GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND INDEX, GOVERNMENT &
CORPORATE BOND, SHORT-INTERMEDIATE MUNICIPAL, MISSOURI TAX-EXEMPT BOND AND
NATIONAL MUNICIPAL BOND PORTFOLIOS
Dividends from net investment income of the Treasury Money Market, Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios are
declared daily and paid monthly not later than five Business Days after the end
of each month. Trust Shares of the Treasury Money Market, Money Market and
Tax-Exempt Money Market Portfolios earn dividends from the day the purchase
order is received by the Transfer Agent through the day before the redemption
order for such Shares is received. Trust Shares of the U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios earn dividends from the day after the purchase order
is received by the Transfer Agent through the day the redemption order for such
Shares is received. Dividends on each Share of such Portfolios are determined in
the same manner and are paid in the same amounts irrespective of class, except
that a Portfolio's Trust Shares and Institutional Shares (other than the
Tax-Exempt Portfolios which do not offer Institutional Shares) bear all expenses
of the respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares (other than the Treasury
Money Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index
and Short-Intermediate Municipal Portfolios which do not offer Investor B
Shares) bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, a Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the
Fund -- Administrative Services Plan" and "Other Information Concerning the Fund
and Its Shares" below.
THE EQUITY INCOME, EQUITY INDEX, GROWTH & INCOME EQUITY AND BALANCED PORTFOLIOS
Net investment income for the Equity Income, Equity Index, Growth & Income
Equity and Balanced Portfolios is declared and paid monthly as a dividend to
shareholders of record. Dividends on each Share of each of these Portfolios are
determined in the same manner and are paid in the same amount, irrespective of
class, except that a Portfolio's Trust Shares and Institutional Shares bear all
expenses of the respective Administrative Services Plans adopted for such Shares
and a Portfolio's Investor A Shares and Investor B Shares (other than the Equity
Index Portfolio which does not offer Investor B Shares) bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain sub-transfer
agency fees. See "Management of the Fund -- Administrative Services Plan" and
"Other Information Concerning the Fund and Its Shares" below.
THE SMALL CAP EQUITY AND INTERNATIONAL EQUITY PORTFOLIOS
Net investment income for the Small Cap Equity and International Equity
Portfolios is declared and paid quarterly as a dividend to shareholders of
record. Dividends on each Share of each of these Portfolios are determined in
the same manner and are paid in the same amount, irrespective of class, except
that a Portfolio's Trust Shares and Institutional Shares bear all expenses of
the respective Administrative Services Plans adopted for such Shares and a
Portfolio's Investor A Shares and Investor B Shares bear all expenses of the
respective Distribution and Services Plans adopted for such Shares. In addition,
a Portfolio's Institutional Shares bear the expense of certain subtransfer
agency fees. See "Management of the Fund -Administrative Services Plan" and
"Other Information Concerning the Fund and Its Shares" below.
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OTHER DIVIDEND AND DISTRIBUTION INFORMATION
The Money Market Portfolios do not expect to realize capital gains. Net
realized capital gains of a Portfolio, if any, are distributed at least
annually. All dividends and distributions paid on a Portfolio's Shares are
automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated in the account application, or (ii)
redeemed all the Shares held in a Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Each Portfolio of the Fund intends to qualify as a "regulated investment
company" for the current taxable year. It is intended that each Portfolio will
continue to so qualify as long as such qualification is in the best interests of
shareholders. A regulated investment company is generally exempt from federal
income tax on amounts distributed to shareholders.
Qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"), for a taxable year requires, among other
things, that each Portfolio distribute to its shareholders an amount equal to at
least the sum of 90% of its investment company taxable income and 90% of its net
exempt-interest income (if any). In general, a Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain over net short-term capital loss, if any, for
such taxable year. The Treasury Money Market, Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios intend to distribute as dividends
substantially all of their respective investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to a Portfolio's shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or reinvested in
additional Shares. (Federal income taxes for distributions to an IRA are
deferred under the Code.) In the case of the Equity Income, Equity Index, Growth
& Income Equity, Small Cap Equity, International Equity and Balanced Portfolios,
such dividends will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
Portfolios from domestic corporations for the taxable year. Because all of the
Treasury Money Market, Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index and Government & Corporate Bond Portfolios' net
investment income is expected to be derived from earned interest, it is not
expected that any distributions from such Portfolios will be eligible for the
dividends received deduction.
It is the policy of each Tax-Exempt Portfolio to distribute as dividends
substantially all of its net tax-exempt interest income and any investment
company taxable income each year. Dividends derived from interest on Municipal
Obligations (known as exempt-interest dividends) may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code, unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. See the Statement of Additional
Information under "Additional Information Concerning Taxes." Distributions of
net income may be taxable to investors under state or local law as dividend
income even though a substantial portion of such distributions may be derived
from interest on tax-exempt obligations which, if realized directly, would be
exempt from such income tax.
If a Tax-Exempt Portfolio should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the
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Portfolio that is attributable to interest on such bonds in their federal
alternative minimum taxable income for purposes of determining liability (if
any) for the 26-28% alternative minimum tax applicable to individuals and the
20% alternative minimum tax and the environmental tax applicable to
corporations. Corporate shareholders also must take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum and environmental tax purposes. The environmental tax
applicable to corporations is imposed at the rate of .12% on the excess of the
corporation's modified federal alternative minimum taxable income over
$2,000,000.
Substantially all of each Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. A Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such gains are received in cash or
reinvested in additional Shares.
To the extent dividends paid to shareholders of a Tax-Exempt Portfolio are
derived from taxable income or from long-term or short-term capital gains, such
dividends will be subject to federal income tax, whether such dividends are paid
in the form of cash or additional Shares.
An investor considering purchasing Shares of a Money Market Portfolio on or
just before the record date of any capital gains distribution (or in the case of
the Equity and Bond Portfolios, the record date of any dividend or capital gains
distribution) should be aware that the amount of the forthcoming distribution,
although in effect a return of capital, will be taxable.
Dividends declared by a Portfolio in October, November, or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by the Fund on December
31 of such year, if such dividends are actually paid during January of the
following year.
Each Portfolio may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares of the Equity and Bond Portfolios, depending upon
the tax basis of such Shares and their price at the time of redemption, transfer
or exchange. If an investor holds Shares for six months or less and during that
time receives an exempt-interest dividend on those Shares, any loss realized on
the sale or exchange of those Shares will be disallowed to the extent of the
exempt-interest dividend.
Certain interest income and dividends earned by the International Equity
Portfolio from foreign securities is expected to be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it, including
generally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio may make this election. As a consequence, the amount
of these foreign taxes paid by the Portfolio will be included in its
shareholders' taxable income pro rata (in addition to taxable distributions
actually received by them), and each shareholder may elect either (a) to credit
his proportionate amount of such taxes against his U.S. federal income tax
liabilities (subject to certain limitations), or (b) if he itemizes his
deductions, to deduct such proportionate amounts from his U.S. taxable income.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio qualifies
as a regulated investment company for federal income tax purposes, shareholders
of such Portfolio who are Missouri resident individuals, trusts or estates
resident in Missouri, or corporations subject to
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Missouri taxing jurisdiction (collectively, "Missouri Taxpayers") will not be
subject to Missouri income taxation on dividends distributed to them to the
extent that such dividends (a) qualify as exempt-interest dividends of a
regulated investment company under Code section 852(b)(5), (b) are the subject
of the written notice to shareholders required by 12 C.S.R. section 10-2.155(2),
(c) are attributable to interest on (1) obligations issued by the State of
Missouri or any of its political subdivisions or authorities, or (2) certain
obligations of the United States, any territory or possession of the United
States, or any authority, commission, or instrumentality of the United Sates, to
the extent exempted from Missouri income tax under Federal Law, and (d) are
properly reported on the Missouri income tax returns of the shareholder in the
respective Portfolio. In connection with these exclusions from Missouri taxable
income, the State also denies any deduction for interest on debt incurred to
carry the obligations or securities and any expenses incurred in the production
of the excluded interest or dividend income.
To the extent possible, the Missouri Tax-Exempt Bond Portfolio intends to
invest in obligations which will permit distributions attributable to interest
to be excludable by Missouri Taxpayers. Despite this intention, Missouri
Taxpayers generally will be subject to Missouri income tax on other types of
distributions received from the Missouri Tax-Exempt Bond Portfolio, including
distributions of interest on obligations of other issuers and all long-term and
short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distribution were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to shareholders
that are subject to the Missouri bank tax or other comparable forms of
specialized Missouri taxation.
All shareholders of the Portfolios should consult with their tax advisors
with respect to the state and local tax consequences of the purchase, ownership,
and disposition of Shares in the Portfolios, the receipt of distributions from
the Portfolios, and the proper method in which to report Portfolio-related items
on a shareholder's Missouri tax returns.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may be taxable
to investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide investors, to
the extent permissible by federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Shareholders should note
that many, but not all, states permit all or a portion of a regulated investment
company's dividends which are derived from interest on U.S. Treasury obligations
(and obligations of certain U.S. Government agencies)("Treasury Obligations") to
be exempt or excluded from state and local taxation. In addition, only certain
states allow dividends of a regulated investment company that are derived from
dividends of other regulated investment companies investing directly in Treasury
Obligations to be exempt or excluded from state and local taxation. Some states
reduce a shareholder's allowable deductions by interest on debt incurred to
carry obligations producing state tax-exempt interest and by other expenses
related to such obligations. Income earned by the Portfolio from repurchase
agreements generally is not exempt from state or local income tax. Shareholders
should consult their own tax advisors about the status of distributions from the
Treasury Money Market Portfolio under state and local law.
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MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolios and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolios should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal and, for the Treasury Money Market Portfolio, the
state income tax consequences, and for the Missouri Tax-Exempt Bond Portfolio,
the Missouri state income tax consequences, of distributions made each year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER AND SUB-ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to each Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the Funds' assets,
which were approximately $2.5 billion.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolios,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolios' securities and other investments, and directs the
maintenance of each Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, with respect to the Treasury Money Market and Money Market Portfolios,
at the annual rates of .40% of the first $1.5 billion of each such Portfolio's
average daily net assets, .35% of the next $1.0 billion of net assets and .25%
of net assets in excess of $2.5 billion, and with respect to the Tax-Exempt
Money Market, U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond, Short-Intermediate Municipal, Missouri
Tax-Exempt Bond, National Municipal Bond, Equity Income, Equity Index, Growth &
Income Equity, Small Cap Equity, International Equity and Balanced Portfolios,
at the annual rates of .40%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%,
.30%, .55%, .75%, 1.00% and .75%, respectively, of the average daily net assets
of each Portfolio, respectively. For the fiscal year ended November 30, 1996,
MVA received advisory fees (net of waivers) at the effective annual rates of
.35%, .35%, .35%, .45%, .45%, .00%, .45%, .00%, .55%, .75%, .75%, 1.00% and .75%
of the respective average daily net assets of the Treasury Money Market, Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Government &
Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National
Municipal Bond, Growth & Income Equity, Small Cap Equity, International Equity
and Balanced Portfolios. The Intermediate Corporate Bond, Bond Index, Equity
Income and Equity Index Portfolios had not commenced operations as of November
30, 1996.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of one or more Portfolios available for
distributions as dividends. The voluntary fee reduction will cause the return of
any such Portfolio to be higher than it would otherwise be in the absence of
such reduction.
David A. Bethke, CFA, is the person primarily responsible for the
day-to-day management of the U.S. Government Securities, Intermediate Corporate
Bond and Government & Corporate Bond Portfolios and has managed each of these
Portfolios since inception. Mr. Bethke, Senior Associate, joined MVA in 1987 and
has seven years of prior investment experience.
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Peter Merzian, is the person primarily responsible for the day-to-day
management of the Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond and Balanced Portfolios. Mr. Merzian, a Senior Associate
of MVA, has been with MVA since 1993 and prior thereto was employed as a
portfolio manager of another financial institution. Mr. Merzian has served as
portfolio manager of the Short-Intermediate Municipal and National Municipal
Bond Portfolios since their respective dates of inception and of the Balanced
Portfolio since May 1996. Mr. Merzian has served as portfolio manager of the
Missouri Tax-Exempt Bond Portfolio (including the Predecessor Missouri
Tax-Exempt Bond Portfolio) since 1993.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the Equity Income Portfolio. Mr. Glidden, Senior Associate, has
been with MVA since 1983. For the past 13 years, he has served as a stock
analyst and has managed several of Mercantile's common funds. Mr. Glidden has
managed the Equity Income Portfolio since its inception.
Timothy S. Engelbrecht, is the person primarily responsible for the
day-to-day management of the Growth & Income Equity Portfolio. Mr. Engelbrecht,
a Senior Associate, has been employed by MVA for the past sixteen years and has
had portfolio management and other responsibilities for MVA for the past fifteen
years. Mr. Engelbrecht has managed the Growth & Income Equity Portfolio since
May 1996.
Robert J. Anthony is the person primarily responsible for the day-to-day
management of the Small Cap Equity Portfolio. Mr. Anthony, Senior Associate, has
been with MVA for 21 years and has managed the Small Cap Equity Portfolio since
its inception.
MVA has entered into a sub-advisory agreement with Clay Finlay Inc.
Pursuant to the terms of such sub-investment advisory agreement, Clay Finlay has
been retained by MVA to manage the investment and reinvestment of the assets of
the International Equity Portfolio and to provide analytical and investment
research services to it, subject to the supervision of MVA and to the direction
and control of the Fund's Board of Directors.
Under this arrangement, Clay Finlay is responsible for the day-to-day
management of the International Equity Portfolio's assets. MVA reviews
investment performance policies and guidelines, maintains certain books and
records, is responsible for selecting and monitoring the performance of Clay
Finlay, and for reporting the activities of Clay Finlay in managing the
Portfolio to the Fund's Board of Directors.
Clay Finlay is registered as an investment adviser with the SEC and is a
wholly-owned subsidiary of United Asset Management Corporation, a financial
services holding company. Clay Finlay's principal office is located at 200 Park
Avenue, 56th Floor, New York, New York 10166. Clay Finlay, founded in 1982, has
extensive experience in international investments and as of December 31, 1996
had approximately $6.5 billion in assets under management.
Frances Dakers is the person primarily responsible for the day-to-day
management of the International Equity Portfolio's investments. Ms. Dakers, a
Principal and Senior Portfolio Manager of Clay Finlay, has been associated with
Clay Finlay since January, 1982 and has managed the International Equity
Portfolio since its inception.
For the services provided and expenses assumed pursuant to its sub-advisory
agreement with MVA, Clay Finlay receives from MVA a fee, computed daily and
payable monthly, at the annual rate of .75% of the first $50 million of the
International Equity Portfolio's average daily net assets, plus .50% of the next
$50 million of average daily net assets, plus .25% of average daily net assets
in excess of $100 million. Prior to August 29, 1996, Clay Finlay received from
MVA a fee, computed daily and paid monthly, at the annual rate of .75% of the
International Equity Portfolio's average daily net assets. For the fiscal year
ended November 30, 1996, Clay Finlay received sub-advisory fees at the effective
annual rate of .75% of the International Equity Portfolio's average daily net
assets. Clay Finlay bears all expenses incurred by it in connection with its
services under the sub-advisory agreement.
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ADMINISTRATOR
BISYS Fund Services Ohio, Inc. located at 3435 Stelzer Road, Columbus, Ohio
43219, acts as the Portfolios' Administrator.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Fund's arrangements under the Administrative Services Plan
described below. For its services, the Administrator is entitled to receive a
fee, computed daily and payable monthly, at the annual rate of .20% (.10% for
the Tax-Exempt Money Market Portfolio) of each Portfolio's average daily net
assets. For the fiscal year ended November 30, 1996, the Administrator received
administration fees (net of waivers) at the effective annual rate of .10% (.05%
with respect to the National Municipal Bond Portfolio) of the average daily net
assets of each Portfolio other than the Intermediate Corporate Bond, Bond Index,
Equity Income and Equity Index Portfolios which had not commenced operations as
of November 30, 1996. From time to time, the Administrator may voluntarily waive
all or a portion of the administration fees otherwise payable by a Portfolio in
order to increase the net income available for distribution to shareholders.
DISTRIBUTOR
Trust Shares in each Portfolio are sold continuously by the Distributor,
BISYS Fund Services, an affiliate of the Administrator. The Distributor is a
registered broker-dealer with principal offices at 3435 Stelzer Road, Columbus,
Ohio 43219.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to the
Trust Shares of the Portfolios. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .25%, for the Money Market
Portfolios, and up to .30%, for the Equity and Bond Portfolios, respectively, of
the average daily net assets of a Portfolio's Trust Shares owned beneficially by
a Service Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Trust Shares of a Portfolio, such as establishing and
maintaining accounts and records for their customers who invest in such Shares,
assisting customers in processing purchase, exchange and redemption requests,
and responding to customer inquiries concerning their investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in
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addition to any amounts which may be received by such Service Organization under
its Servicing Agreement with the Fund. The Fund's Servicing Agreements require a
Service Organization to disclose to its customers any compensation payable to
the Service Organization by a Portfolio and any other compensation payable by
its customers in connection with their investment in such Shares. Customers of
such Service Organizations receiving servicing fees should read this Prospectus
in light of the terms governing their accounts with their Service Organization.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of each Portfolio's assets. In addition,
Bankers Trust Company of New York, with principal offices at 16 Wall Street, New
York, New York 10005, serves as Sub-Custodian for the International Equity
Portfolio. BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent. Its address is 3435 Stelzer Road, Columbus,
Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the Shares of a registered,
open-end investment company continuously engaged in the issuance of its Shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolios. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing Shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolios contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal laws expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolios and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing Shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolios. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by the Portfolios to a financial
intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
58
<PAGE> 179
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,
59
<PAGE> 180
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
60
<PAGE> 181
basis) of the average daily net asset value of outstanding Investor B Shares of
a Portfolio. Distribution payments made under the Distribution and Services
Plans are subject to the requirements of Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares and Investor B Shares of a Portfolio that are not offered in connection
with the Portfolio's Trust or Institutional Shares, including an automatic
investment program and an automatic withdrawal plan. Each class of shares also
offers different exchange privileges. Investor B Shares convert automatically
into Investor A Shares eight years after the beginning of the calendar month in
which the Shares were purchased.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
Portfolios will vote together and not by class unless otherwise required by law
or permitted by the Board of Directors. All shareholders of a particular
Portfolio will vote together as a single class on matters relating to the
Portfolio's investment advisory (or sub-advisory) agreement and investment
objective and fundamental policies. Only holders of Trust Shares, however, will
vote on matters relating to the Administrative Services Plan for Trust Shares
and only holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares and only holders of Investor B Shares will
vote on matters pertaining to the Distribution and Services Plan for Investor B
Shares.
The Fund is not required, and currently does not intend, to hold annual
meetings except as required by the 1940 Act or other applicable law. Upon the
written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and, accordingly,
the holders of more than 50% of the Fund's outstanding Shares (irrespective of
Portfolio or class) may elect all of the Directors. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in this Prospectus, Shares
will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of a Portfolio means, with respect to the approval of an investment
advisory or sub-advisory agreement or a change in an investment objective or
fundamental investment policy, the affirmative vote of the lesser of (a) more
than 50% of the outstanding Shares of such Portfolio (irrespective of class), or
(b) 67% or more of the Shares of such Portfolio (irrespective of class) present
at a meeting if more than 50% of the outstanding Shares of such Portfolio are
represented at the meeting in person or by proxy.
As of January 1, 1997, Mercantile and its affiliates possessed, of record
on behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolios may be directed to the Fund at
1-800-452-4015.
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIOS'
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIOS, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIOS, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
61
<PAGE> 1
EXHIBIT 17(f)
THE ARCH FUND(R), INC.
THE ARCH TREASURY MONEY MARKET PORTFOLIO
THE ARCH MONEY MARKET PORTFOLIO
THE ARCH TAX-EXEMPT MONEY MARKET PORTFOLIO
THE ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO
THE ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO
THE ARCH BOND INDEX PORTFOLIO
THE ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO
THE ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
THE ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO
THE ARCH NATIONAL MUNICIPAL BOND PORTFOLIO
THE ARCH EQUITY INCOME PORTFOLIO
THE ARCH EQUITY INDEX PORTFOLIO
THE ARCH GROWTH & INCOME EQUITY PORTFOLIO
THE ARCH SMALL CAP EQUITY PORTFOLIO
THE ARCH INTERNATIONAL EQUITY PORTFOLIO
THE ARCH BALANCED PORTFOLIO
Statement of Additional Information
Part B
March 31, 1997
(as revised August 29, 1997)
<PAGE> 2
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Treasury Money Market Portfolio
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
March 31, 1997
(as revised August 29, 1997)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE FUND..................................................... 1
INVESTMENT OBJECTIVES AND POLICIES........................... 1
NET ASSET VALUE.............................................. 39
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............... 42
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION................ 44
DESCRIPTION OF SHARES........................................ 60
ADDITIONAL INFORMATION CONCERNING TAXES...................... 62
MANAGEMENT OF THE FUND....................................... 69
INDEPENDENT AUDITORS......................................... 88
COUNSEL...................................................... 88
MISCELLANEOUS................................................ 89
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 supplemented August
29, 1997) and is incorporated by reference in its entirety into the
Prospectuses. No investment in shares of any Portfolio should be made without
reading the applicable Prospectus. A copy of the applicable Prospectus may be
obtained by writing the Fund at P.O. Box 78069, St. Louis Missouri 63178 or by
calling 1-800-452-ARCH(2724). Capitalized terms used but not defined herein have
the same meanings as in each Prospectus.
-i-
<PAGE> 3
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end investment
company currently offering fifty-four classes of shares in sixteen investment
portfolios.
The Fund was organized on September 9, 1982 as a Maryland
corporation. The ARCH Tax-Exempt Money Market Portfolio (the "Predecessor
Tax-Exempt Money Market Portfolio") and the ARCH Missouri Tax Exempt Bond
Portfolio (the "Predecessor Missouri Tax-Exempt Bond Portfolio") commenced
operations on July 10, 1986 and July 15, 1988, respectively, as separate
investment portfolios of The ARCH Tax-Exempt Trust, which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of beneficial interest that
were similar to the Fund's Trust Shares, Investor A Shares and Investor B
Shares.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the description of the
investment objectives and policies of the Treasury Money Market, Money Market
and Tax-Exempt Money Market Portfolios (the "Money Market Portfolios") and the
U.S. Government Securities, Intermediate Corporate Bond, Bond Index, Government
& Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond, Equity Income, Equity Index, Growth & Income Equity,
Small Cap Equity (formerly Emerging Growth), International Equity and Balanced
Portfolios (the "Bond and Equity Portfolios") described in the Prospectuses.
TREASURY MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Treasury Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
STATE EXEMPTIONS AND U.S. GOVERNMENT OBLIGATIONS. As stated in
the Prospectuses, the Treasury Money Market Portfolio invests primarily in
selected U.S. Government (and certain agency and instrumentality) obligations,
the income from which is generally exempt from state income tax. In addition,
investments in certain of these obligations are, or may be, exempt from your
state's income tax. For a current list of the types of investments that are and
are not exempt from your state's income tax, please consult your tax adviser or
write to your state's Department of Revenue.
<PAGE> 4
MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Money Market Portfolio in accordance with the SEC's rules and regulations for
money market funds.
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF
DEPOSIT AND TIME DEPOSITS. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
As stated in the Prospectuses, the Money Market Portfolio may
invest a portion of its assets in the obligations of foreign banks and foreign
branches of domestic banks. Such obligations may include Eurodollar Certificates
of Deposit ("ECDs") which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs") which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs") which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs") which are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the United States; and
Yankee Bankers' Acceptances ("Yankee BAs") which are U.S. dollar-denominated
bankers' acceptances issued by a U.S. branch of a foreign bank and held in the
United States.
TAX-EXEMPT MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Tax-Exempt Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
-2-
<PAGE> 5
U.S. GOVERNMENT SECURITIES PORTFOLIO
The U.S. Government Securities Portfolio may invest in
certificates issued by government-backed trusts. Such certificates represent an
undivided fractional interest in the respective government-backed trust's
assets. The assets of each government-backed trust consist of (i) a promissory
note issued by a foreign government (the "Note"), (ii) a guaranty by the U.S.
Government, acting through the Defense Security Assistance Agency of the
Department of Defense, of the due and punctual payment of 90% of all principal
and interest due on such Note, and (iii) a beneficial interest in a government
securities trust holding U.S. Treasury bills, notes and other direct obligations
of the U.S. Treasury sufficient to provide the Portfolio with funds in an amount
equal to at least 10% of all principal and interest payments due on the Note.
INTERMEDIATE CORPORATE BOND PORTFOLIO
An increase in interest rates will generally reduce the value
of the investments in the Intermediate Corporate Bond Portfolio, and a decline
in interest rates will generally increase the value of those investments.
Depending upon the prevailing market conditions, the Adviser may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at a premium over
face value, the yield will be lower than the coupon rate. In response to
changing conditions in fixed-income markets, the Portfolio may make modest
shifts in terms of anticipated interest rate and sector spread changes.
BOND INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the
Bond Index Portfolio is to seek to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. Government, mortgage-backed, asset-backed, and corporate securities, as
represented by the Lehman Brothers Aggregate Bond Index.
THE INDEXING APPROACH. In using sophisticated computer models
to select securities, each of the Bond Index and Equity Index Portfolios will
only purchase a security that is included in its respective index at the time of
such purchase. Each Portfolio may, however, temporarily continue to hold a
security that has been deleted from its respective index pending the rebalancing
of the Portfolio's holdings.
The value of the fixed income investments of the Bond Index
Portfolio is generally sensitive to changes in interest rates. (See "Investment
Objectives and Policies -- Intermediate
-3-
<PAGE> 6
Corporate Bond Portfolio" above for a discussion of the effects of interest rate
changes).
GOVERNMENT & CORPORATE BOND PORTFOLIO
The value of the fixed income investments of the Government
and Corporate Bond Portfolio is generally sensitive to changes in interest
rates. (See "Investment Objectives and Policies -- Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes).
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
The Municipal Obligations in which the Short-Intermediate
Municipal Portfolio may invest are rated "investment grade" (e.g., fixed income
securities rated at the time of purchase in the four highest categories by
Rating Agencies or deemed comparable). The value of the Municipal Obligations
held by the Portfolio is generally sensitive to changes in interest rates. (See
"Investment Objectives and Policies -- Intermediate Corporate Bond Portfolio"
above for a discussion of the effects of interest rate changes.)
MISSOURI TAX-EXEMPT BOND PORTFOLIO
The Municipal Obligations in which the Missouri Tax-Exempt
Bond Portfolio may invest are rated "investment grade." (See "Investment
Objectives and Policies -- Short-Intermediate Municipal Portfolio" above for a
description of investment grade securities.) The value of the Municipal
Obligations held by the Portfolio is generally sensitive to changes in interest
rates. (See "Investment Objectives and Policies -- Intermediate Corporate Bond
Portfolio" above for a discussion of the effects of interest rate changes.)
NATIONAL MUNICIPAL BOND PORTFOLIO
The Municipal Obligations in which the National Municipal Bond
Portfolio may invest are rated "investment grade." (See "Investment Objectives
and Policies - Short-Intermediate Municipal Portfolio" above for a description
of investment grade securities.) The value of the Portfolio's securities is
generally sensitive to changes in interest rates. (See "Investment Objectives
and Policies - Intermediate Corporate Bond Portfolio" above for a discussion of
the effects of interest rate changes.)
-4-
<PAGE> 7
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of less
than three years of continuous operations.
EQUITY INDEX PORTFOLIO
As stated in the Prospectuses, the investment objective of the
Equity Index Portfolio is to seek to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance of
U.S. publicly traded common stocks with large stock market capitalizations as
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500"). (See "Investment Objectives and Policies - Bond Index Portfolio" above
for a description of index investing.)
GROWTH & INCOME EQUITY PORTFOLIO
The Growth & Income Equity Portfolio will not normally invest
in securities of issuers having a record, together with their predecessors, of
less than three years of continuous operations.
As stated in the Prospectuses, the Portfolio may participate
in rights offerings and purchase warrants. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants.
SMALL CAP EQUITY PORTFOLIO
As stated in the Prospectuses, the Small Cap Equity Portfolio
may participate in rights offerings and purchase warrants. The Portfolio will
not invest more than 5% of its net assets, taken at market value, in warrants.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of less
than three years of continuous operations.
As stated in the Prospectuses, the Portfolio may participate
in rights offerings and purchase warrants. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants. Warrants acquired
by the Portfolio in units or attached to other securities are not subject to
this restriction.
-5-
<PAGE> 8
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
-6-
<PAGE> 9
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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instruments are issued in anticipation of the receipt of tax funds, the proceeds
of bond placements, or other revenues.
Certain types of Municipal Obligations (private activity
bonds) have been or are issued to obtain funds to provide, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain local facilities for water supply, gas, electricity or sewage or solid
waste disposal. Private activity bonds are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. The principal and interest on these obligations
may be payable from the general revenues of the users of such facilities.
Furthermore, payment of principal and interest on Municipal Obligations of
certain projects may be secured by mortgages or deeds of trust. In the event of
a default, enforcement of the mortgages or deeds of trust will be subject to
statutory enforcement procedures and limitations, including rights of redemption
and limitations on obtaining deficiency judgments. In the event of a
foreclosure, collection of the proceeds of the foreclosure may be delayed, and
the amount of proceeds from the foreclosure may not be sufficient to pay the
principal of and accrued interest on the defaulted Municipal Obligations.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. For example, the Tax Reform Act
of 1986 (the "Act"), adopted in October 1986, substantially revised provisions
of prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. The Act made a new definition of private activity bonds applicable
to many types of bonds, including those which were industrial development bonds
under prior law. Interest on private activity bonds is exempt from regular
federal income tax only if the bonds fall within and meet the requirements of
certain defined categories of qualified private activity bonds. The Act also
extended to all Municipal Obligations issued after August 16, 1986 (August 31,
1986 in the case of certain bonds) certain rules formerly applicable only to
industrial development bonds. If the issuer fails to observe such rules, the
interest on the Municipal Obligations may become taxable retroactive to the date
of issue. In addition, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See the applicable Prospectus under "Taxes
- - Federal Taxes.") Moreover, with
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respect to Missouri Obligations, the Fund cannot predict what legislation, if
any, may be proposed in the Missouri Legislature relating to the status of the
Missouri income tax on interest on such obligations, or which proposals, if any,
might be enacted. Such proposals, while pending or if enacted, might adversely
affect the availability of Municipal Obligations generally, or Missouri
Obligations specifically, for investment by a Portfolio and the liquidity and
value of a Portfolio's assets. In such an event, each Portfolio would reevaluate
its investment objective and policies and consider possible changes in its
structure or possible dissolution.
As stated in the Prospectuses and subject to its investment
policies, the Money Market Portfolio may also invest in Municipal Obligations.
Dividends paid by the Money Market Portfolio that are derived from interest on
Municipal Obligations would be taxable to its shareholders for federal income
tax purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their
respective investment limitations, each Portfolio may purchase variable and
floating rate obligations as described in the Prospectuses. The Adviser will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such obligations and, for obligations subject to a demand
feature, will monitor their financial status to meet payment on demand. The
Money Market Portfolios and the International Equity Portfolio will invest in
such instruments only when the Adviser believes that any risk of loss due to
issuer default is minimal. In determining average weighted portfolio maturity, a
variable or floating rate instrument issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, or a variable or floating rate
instrument scheduled on its face to be paid in 397 days or less, will be deemed
to have a maturity equal to the period remaining until the obligation's next
interest rate adjustment. Other variable or floating rate notes will be deemed
to have a maturity equal to the longer of the period remaining to the next
interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
Variable or floating rate obligations held by the Money Market
Portfolios may have maturities of more than 397 days provided that: (i) the
Portfolio is entitled to payment of principal at any time upon not more than 30
days' notice or at specified intervals not exceeding 397 days (upon not more
than 30 days' notice); (ii) the rate of interest on a variable rate instrument
is adjusted automatically on set dates not exceeding 397 days, and the
instrument, upon adjustment, can reasonably be expected to have a market value
that approximates its par value; and (iii) the rate of interest on a floating
rate instrument is
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adjusted automatically whenever a specified interest rate changes and the
instrument, at any time, can reasonably be expected to have a market value that
approximates its par value.
The variable and floating rate demand instruments that the
Tax-Exempt Portfolios may purchase include participations in Municipal
Obligations purchased from and owned by financial institutions, primarily banks.
Participation interests provide a Portfolio with a specified undivided interest
(up to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Portfolio. The bank typically retains fees
out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
RESTRICTED SECURITIES. The SEC has adopted Rule 144A which
allows for a broader institutional trading market for securities otherwise
subject to restrictions on resale to the general public. The International
Equity Portfolio will not invest more than 10% of its total assets in the
securities of issuers which are restricted as to disposition, other than
restricted securities eligible for resale pursuant to Rule 144A.
The Adviser or Sub-Adviser monitors the liquidity of
restricted securities in the Fund's Portfolios under the supervision of the
Board of Directors. In reaching liquidity decisions, the Adviser and Sub-Adviser
may consider the following factors, although such factors may not necessarily be
determinative: (1) the unregistered nature of a security; (2) the frequency of
trades and quotes for the security; (3) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (4)
the trading markets for the security; (5) dealer undertakings to make a market
in the security; and (6) the nature of the security and the nature of the
marketplace trades (including the time needed to dispose of the security,
methods of soliciting offers, and mechanics of transfer).
CONVERTIBLE SECURITIES. As stated in their Prospectuses and
subject to their respective investment limitations, the Equity and Bond
Portfolios (other than the Short-Intermediate Municipal, Missouri Tax-Exempt
Bond and National Municipal Bond Portfolios) may purchase convertible
securities. Convertible securities entitle the holder to receive interest paid
or accrued on debt until the convertible securities
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<PAGE> 13
mature or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities for a Portfolio, the
Adviser (or Sub-Adviser) will consider, among other factors, its evaluation of
the creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the benefits of sinking funds or other
protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Ratings Agencies and, if so, the ratings
assigned.
The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion value
of convertible securities is determined by the market price of the underlying
stock. If the conversion value is low relative to the investment value, the
price of the convertible securities is governed principally by their investment
value. To the extent the market price of the underlying stock approaches or
exceeds the conversion price, the price of the convertible securities will be
increasingly influenced by their conversion value. In addition, convertible
securities generally sell at a premium over their conversion value determined by
the extent to which investors place value on the right to acquire the underlying
stock while holding fixed income securities.
RIGHTS AND WARRANTS. As stated in the Prospectuses, the Equity
Income, Equity Index, Growth & Income Equity, Small Cap Equity, International
Equity and Balanced Portfolios (the "Equity Portfolios") may participate in
rights offerings and purchase warrants, which are privileges issued by
corporations
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<PAGE> 14
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that the Portfolios could lose the
purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' or warrants' expiration. Also, the
purchase of rights or warrants involves the risk that the effective price paid
for the right or warrant added to the subscription price of the related security
may exceed the value of the subscribed security's market price such as when
there is no movement in the level of the underlying security. The Portfolios
will not invest more than 5% of their respective net assets, taken at market
value, in warrants, or more than 2% of their respective net assets, taken at
market value, in warrants not listed on the New York, American or Canadian Stock
Exchanges. Warrants acquired by the Portfolios in units or attached to other
securities are not subject to this restriction.
STAND-BY COMMITMENTS. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may acquire "stand-by commitments" with respect to Municipal Obligations held by
a Portfolio. Under a stand-by commitment, a dealer or bank agrees to purchase
from a Portfolio, at the Portfolio's option, specified Municipal Obligations at
their amortized cost value to the Portfolio plus accrued interest, if any.
Standby commitments acquired by a Portfolio must meet the quality standards
described in the Prospectuses (be rated in the two highest categories as
determined by a Rating Agency, or, if not rated, must be of comparable quality
as determined by the Adviser pursuant to guidelines approved by the Fund's Board
of Directors). Stand-by commitments are exercisable by a Portfolio at any time
before the maturity of the underlying Municipal Obligations and may be sold,
transferred or assigned by the Portfolio only with the underlying instruments.
The Missouri Tax-Exempt Bond Portfolio expects that its investments in stand-by
commitments will not exceed 5% of the value of its total assets under normal
market conditions.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Tax-Exempt Portfolio may pay for a stand-by
commitment either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the commitment (thus reducing the yield
to maturity otherwise available for the same securities).
The Tax-Exempt Portfolios intend to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in
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<PAGE> 15
the Adviser's opinion, present minimal credit risks. A Portfolio's reliance upon
the credit of these dealers, banks and broker-dealers will be secured by the
value of the underlying Municipal Obligations that are subject to the
commitment. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. Stand-by commitments acquired by a
Portfolio would be valued at zero in determining net asset value. The
acquisition of a "stand-by commitment" by the Tax-Exempt Money Market Portfolio
would thus not affect the valuation or assumed maturity of the underlying
Municipal Obligations, which would continue to be valued in accordance with the
amortized cost method. Where a Portfolio paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. If a stand-by commitment is exercised, its cost will reduce the
amount realized on the sale of the Municipal Obligations for purposes of
determining the amount of gain or loss. If a stand-by commitment expires
unexercised, its cost is added to the basis of the security to which it relates
in those instances where the stand-by commitment was acquired on the same day as
the bond, and in other cases will be treated as a capital loss at the time of
expiration. Stand-by commitments would not affect the average weighted maturity
of a Portfolio.
TAX-EXEMPT DERIVATIVES. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may hold tax-exempt derivatives which may be in the form of tender option bonds,
participations, beneficial interests in a trust, partnership interests or other
forms. A number of different structures have been used. For example, interests
in long-term fixed-rate Municipal Obligations, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the
tax-exempt derivatives are created. Together, these features entitle the holder
of the interest to tender (or put), the underlying Municipal Obligation to a
third party at periodic intervals and to receive the principal amount thereof.
In some cases, Municipal Obligations are represented by custodial receipts
evidencing rights to receive specific future interest payments, principal
payments, or both, on the underlying municipal securities held by the custodian.
Under such arrangements, the holder of the custodial receipt has the option to
tender the underlying Municipal Obligation at its face value to the sponsor
(usually a bank or broker dealer or other
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<PAGE> 16
financial institution), which is paid periodic fees equal to the difference
between the bond's fixed coupon rate and the rate that would cause the bond,
coupled with the tender option, to trade at par on the date of a rate
adjustment. The Portfolios may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for Municipal Obligations which
give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinion of counsel
to the sponsors of such derivative securities. Neither the Fund nor the Adviser
will review the proceedings related to the creation of any tax-exempt
derivatives or the basis for such opinions.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be held by the Portfolios, subject to their
respective investment policies, include, in addition to U.S. Treasury bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Mortgage Corporation, Federal
Intermediate Credit Banks, Maritime Administration, Resolution Trust
Corporation, and International Bank for Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the
U.S. Government, such as the Government National Mortgage Association, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
STRIPPED U.S. GOVERNMENT OBLIGATIONS. As described in the
Prospectuses and subject to their respective investment policies, each
Portfolio, except the Tax-Exempt Money Market, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and Equity Index Portfolios, may hold stripped U.S.
Treasury securities, including (1) coupons that have been stripped from U.S.
Treasury bonds, which are held through the Federal Reserve Bank's book-
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entry system called "Separate Trading of Registered Interest and Principal of
Securities" ("STRIPS") or (2) through a program entitled "Coupon Under
Book-Entry Safekeeping" ("CUBES"). Each Portfolio (except the Treasury Money
Market, Tax-Exempt Money Market, U.S. Government Securities, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Equity Income,
Equity Index and International Equity Portfolios) may also acquire U.S.
Government obligations and their unmatured interest coupons that have been
stripped by a custodian bank or investment brokerage firm. Having separated the
interest coupons from the underlying principal of the U.S. Government
obligations, the holder will resell the stripped securities in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificates of Accrual on Treasury Securities"
("CATS"). Such securities may not be as liquid as STRIPS and CUBES and are not
viewed by the staff of the SEC as U.S. Government securities for purposes of the
1940 Act.
The stripped coupons are sold separately from the underlying
principal, which is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. Purchasers of stripped
principal-only securities acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury
Department sells itself. In the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder), the underlying
U.S. Treasury bonds and notes themselves are held in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities, such as the Portfolios, most likely will
be deemed the beneficial holders of the underlying U.S. Government obligations
for federal tax and security purposes.
The U.S. Government does not issue stripped Treasury
securities directly. The STRIPS program, which is ongoing, is designed to
facilitate the secondary market in the stripping of selected U.S. Treasury notes
and bonds into separate interest and principal components. Under the program,
the U.S. Treasury continues to sell its notes and bonds through its customary
auction process. A purchaser of those specified notes and bonds who has access
to a book-entry account at a Federal Reserve bank, however, may separate the
Treasury notes and bonds into interest and principal components. The selected
Treasury securities thereafter may be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and ownership of the interest and principal payments.
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<PAGE> 18
For custodial receipts, the underlying debt obligations are
held separate from the general assets of the custodian and nominal holder of
such securities, and are not subject to any right, charge, security interest,
lien or claim of any kind in favor of or against the custodian or any person
claiming through the custodian. The custodian is also responsible for applying
all payments received on those underlying debt obligations to the related
receipts or certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
SECURITIES LENDING. As described in the Prospectuses, each
Portfolio (except the Treasury Money Market, Money Market, Tax-Exempt Money
Market and Missouri Tax-Exempt Bond Portfolios) may lend its portfolio
securities to broker-dealers, banks or institutional borrowers. While these
Portfolios would not have the right to vote securities on loan, each Portfolio
intends to terminate the loan and regain the right to vote should this be
considered important with respect to the investment. When the Portfolios lend
their securities, they continue to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral which will be invested in readily marketable, high quality,
short-term obligations. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Securities lending arrangements with broker/dealers require
that the loans be secured by the collateral equal in value to at least the
market value of the securities loaned. During the term of such arrangements, the
Portfolios will maintain such value by the daily marking-to-market of the
collateral.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the
applicable Prospectuses, the Portfolios intend to limit investments in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Portfolio currently intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more
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<PAGE> 19
than 5% of the value of its total assets will be invested in the securities of
any one investment company; (b) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Portfolio; and (d) not more than 10% of
the outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
ASSET-BACKED SECURITIES. Subject to their respective
investment policies, the U.S. Government Securities, Intermediate Corporate
Bond, Bond Index, Government & Corporate Bond and Balanced Portfolios may
purchase asset-backed securities, as described in the Prospectuses. Asset-backed
securities represent interests in "pools" of assets in which payments of both
interest and principal on the securities are made monthly, thus in effect
"passing through" monthly payments made by the individual borrowers on the
assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and for this and other
reasons, an asset-backed security's stated maturity may be shortened, and the
security's total return may be difficult to predict precisely.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-backed
securities and among the securities that they issue. Mortgage-backed securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation with the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the FNMA
include FNMA Guaranteed Mortgage Pass-through Certificates (also known as
"Fannie Maes") which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States
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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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<PAGE> 25
credit. The amount of the deferred credit is subsequently marked-to-market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, it will
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the net premium received when the option is sold) and the deferred credit
related to such option will be eliminated. Any gain on a covered call option may
be offset by a decline in the market price of the underlying security during the
option period. If a covered call option is exercised, the Portfolio may deliver
the underlying security held by it or purchase the underlying security in the
open market. In either event, the proceeds of the sale will be increased by the
net premium originally received, and the Portfolio will realize a gain or loss.
Premiums from expired options written by a Portfolio and net gains from closing
purchase transactions are treated as short-term capital gains for federal income
tax purposes, and losses on closing purchase transactions are short-term capital
losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an Exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a well-
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<PAGE> 26
conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The International
Equity Portfolio may purchase foreign currency put options on U.S. exchanges or
U.S. over-the-counter markets. (See "Other Applicable Investment Policies --
Options Trading" above for a discussion of options trading). A put option gives
the Portfolio, upon payment of a premium, the right to sell a currency at the
exercise price until the expiration of the option and serves to insure against
adverse currency price movements in the underlying portfolio assets denominated
in that currency. Exchange listed options markets in the United States include
seven major currencies, and trading may be thin and illiquid. The seven major
currencies are Australian dollars, British pounds, Canadian dollars, German
marks, French francs, Japanese yen and Swiss francs.
FUTURES CONTRACTS. As discussed in the Prospectuses, the
Equity Portfolios and the U.S. Government Securities, Intermediate Corporate
Bond, Bond Index and Government & Corporate Bond Portfolios may invest in
futures contracts (and with respect to the International Equity Portfolio --
interest rate, foreign currency and other types of financial futures contracts)
and options thereon (stock or bond index futures contracts or interest rate
futures or options) to hedge or manage risks associated with a Portfolio's
securities investments.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited in
a segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged. Positions in futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. However, there
can be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio had insufficient cash, it might have
to sell portfolio securities to meet daily margin requirements at a time when it
would be disadvantageous to do so. In addition, a Portfolio might be required to
make delivery of the instruments underlying futures contracts that it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to hedge effectively.
Successful use of futures by a Portfolio is also subject to
the Adviser's or Sub-Adviser's ability to predict
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<PAGE> 27
movements correctly in the direction of the market. There is an imperfect
correlation between movements in the price of futures and movements in the price
of the securities which are the subject of the hedge. In addition, the price of
futures may not correlate perfectly with movement in the cash market due to
certain market distortions. Due to the possibility of price distortion in the
futures market and because of the imperfect correlation between the movements in
the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser or Sub- Adviser
may still not result in a successful hedging transaction over a short time
frame.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves
the risk of loss by the Portfolio of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond the limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
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<PAGE> 28
The trading of futures contracts is also subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
ADRs AND EDRs. The Intermediate Corporate Bond, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Small Cap Equity,
International Equity and Balanced Portfolios may invest their assets in
securities such as ADRs and EDRs, which are receipts issued by a U.S. bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs and EDRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR and EDR prices are denominated in U.S.
dollars, even though the underlying security may be denominated in a foreign
currency. The underlying security may be subject to foreign government taxes
which would reduce the yield on such securities. Investments in such instruments
involve risks similar to those of investing directly in foreign securities. Such
risks include political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries.
MONEY MARKET INSTRUMENTS. As stated in the Prospectuses and
subject to their respective investment policies, the Equity and Bond Portfolios
may invest in the following taxable investments for temporary defensive or other
purposes: commercial paper, bankers' acceptances, certificates of deposit, time
deposits and floating rate notes. (See "Investment Objectives and Policies --
Money Market Portfolio" above for a discussion of cash equivalents and
"Investment Objectives and Policies -- Other Applicable Investment Policies --
Variable and Floating Rate Instruments" above for a discussion of variable and
floating rate instruments.)
The International Equity Portfolio may invest a portion of its
assets in the obligations of foreign banks and foreign branches of domestic
banks. Such obligations may include ECDs;
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ETDs; CTDs; Schedule Bs, which are obligations issued by Canadian branches of
foreign or domestic banks; Yankee CDs; and Yankee BAs. (See "Investment
Objectives and Policies -- Money Market Portfolio" above for a description of
certain of these obligations.)
REPURCHASE AGREEMENTS. Under the terms of a repurchase
agreement, a Portfolio purchases securities from financial institutions such as
banks and broker-dealers that are deemed to be creditworthy by the Adviser under
guidelines approved by the Board of Directors, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price. Securities subject
to repurchase agreements are held by the Portfolios' Custodian or in the Federal
Reserve/Treasury book-entry system. During the term of any repurchase agreement,
the Adviser will continue to monitor the creditworthiness of the seller. The
repurchase price generally equals 102% of the price paid by the Portfolio plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio securities). Under a
repurchase agreement, the seller is required to maintain the value of the
securities subject to the agreement at not less than the repurchase price, and
securities subject to repurchase agreements are maintained by the Portfolios'
Custodian in segregated accounts in accordance with the 1940 Act. Default by the
seller could, however, expose the Portfolio to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
securities. Repurchase agreements are considered to be loans by the Portfolio
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, the Portfolios (except the Treasury Money Market and the
Tax-Exempt Portfolios) may enter into reverse repurchase agreements. At the time
a Portfolio enters into such an arrangement, it will place, in a segregated
custodial account, liquid assets having a value at least equal to the repurchase
price (including accrued interest) and will subsequently monitor the account to
ensure that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the price of the
securities that it is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Each Portfolio intends to limit
its borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of
Directors, the Adviser (and with respect to the International
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<PAGE> 30
Equity Portfolio, the Sub-Adviser) is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities for the Portfolios.
In the case of the Equity and Bond Portfolios, portfolio
turnover may vary greatly from year to year as well as within a particular year.
Portfolio turnover may also be affected by cash requirements for redemptions of
shares and by requirements which enable a Portfolio to receive certain favorable
tax treatment. Portfolio turnover will not be a limiting factor in making
investment decisions.
The Fund did not acquire any securities of its "regular
brokers or dealers" or their parents during its most recent fiscal year.
Transactions on United States stock exchanges involve the
payment of negotiated brokerage commissions. On the exchanges on which
commissions are negotiated, the cost of the transactions may vary among
different brokers. During the fiscal years ended November 30, 1996, 1995 and
1994, the Growth & Income Equity Portfolio paid $708,924, $461,078 and $504,330,
respectively, in brokerage commissions. During the fiscal years ended November
30, 1996, 1995 and 1994, the Small Cap Equity Portfolio paid $352,745, $307,607
and $174,206, respectively, in brokerage commissions. During the fiscal years
ended November 30, 1996 and 1995 and the period April 4, 1994 (commencement of
operations) through November 30, 1994, the International Equity Portfolio paid
$235,230, $129,568 and $98,911 respectively, in brokerage commissions. During
the fiscal years ended November 30, 1996, 1995 and 1994, the Balanced Portfolio
paid $144,448, $96,090 and $115,913 in brokerage commissions. No commissions
were paid by the Fund to any "affiliated" persons (as defined in the 1940 Act)
of the Fund. The Equity Income and Equity Index Portfolios had not commenced
operations as of November 30, 1996.
Securities purchased and sold by the Portfolios which are
traded in the over-the-counter market are generally done so on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price of those securities includes an undisclosed commission or mark-up. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower
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<PAGE> 31
purchase price available to members of a bidding group. The Portfolios will
engage in this practice, however, only when the Adviser (or Sub-Adviser in the
case of the International Equity Portfolio), in its sole discretion, believes
such practice to be otherwise in a Portfolio's interests.
While the Adviser (or Sub-Adviser in the case of the
International Equity Portfolio) generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser or Sub-Adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is prompt
execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide
supplemental investment research to the Adviser (or Sub-Adviser) may receive
orders for transactions by a Portfolio. Information so received is in addition
to and not in lieu of services required to be performed by the Adviser (or
Sub-Adviser) and does not reduce the advisory fees payable to it by a Portfolio.
Such information may be useful to the Adviser (or Sub-Adviser) in serving both
the Portfolios and other clients, and conversely, supplemental information
obtained by the placement of business of other clients may be useful to the
Adviser (or Sub-Adviser) in carrying out its obligations to the Portfolios.
Portfolio securities will not be purchased from or sold to the Adviser, the
Sub-Adviser, the Distributor, the Administrator or any "affiliated person" (as
such term is defined under the 1940 Act) or any of them acting as principal,
except to the extent permitted by the SEC. In addition, the Portfolios will not
give preference to the Adviser's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements and reverse
repurchase agreements.
Investment decisions for the Portfolios are made independently
from those for other investment companies and accounts advised or managed by the
Adviser (or Sub-Adviser). Such other investment companies and accounts may also
invest in the same securities as the Portfolios. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Portfolio
and another investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser (or Sub-Adviser) believes to be equitable to the Portfolio and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Portfolio or
the size of the position obtained by the Portfolio. To the extent permitted by
law, the Adviser (or
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<PAGE> 32
Sub-Adviser) may aggregate the securities to be sold or purchased for the
Portfolios with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI
OBLIGATIONS
The following highlights some of the more important economic
and financial trends and considerations and is based on information from
official statements, prospectuses and other publicly available documents
relating to securities offerings of the State of Missouri, its agencies and
instrumentalities, as available on the date of this Statement of Additional
Information. The Fund has not independently verified any of the information
contained in such statements or other documents.
Missouri's population was 5,117,073 according to the 1990
decennial census of the United States Bureau of Census, which represented an
increase of 4.1% from the 1980 decennial census of 4,916,686 inhabitants. Based
on July, 1992 U.S. Census Bureau estimates, St. Louis and the surrounding
metropolitan area constituted the 17th largest Metropolitan Statistical Area
("MSA") in the nation with approximately 2.52 million inhabitants, of which 1.92
million are Missouri residents. St. Louis is located on the eastern boundary of
the state on the Mississippi River and is a distribution center and an important
site for banking and manufacturing activity, Anchoring the western boundary is
Kansas City, which is Missouri's second largest metropolitan area. Based on
July, 1992 U.S. Census Bureau estimates, Kansas City was the 25th largest MSA
nationally with approximately 1.62 million inhabitants, nearly one million of
which were Missouri residents. Kansas City is a major agri- business center for
the United States and is an important center for finance and industry.
Springfield, St. Joseph, Joplin and Columbia are also important population and
industrial centers in the State. [Source: U.S. Department of Commerce, Bureau of
the Census.] Per capita personal income in Missouri grew 3.1% between 1992 and
1993 while during the same period per capita personal income nationally grew
3.2%. [Source: U.S. Department of Commerce, Bureau of Economic Analysis.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the State's economy contributing between $15 billion and $17
billion annually. Although the concentration in farming remains above the
national average, with increasing urbanization, significant income-generating
activity has shifted from agriculture to the manufacturing and services sectors.
Earnings and employment are distributed among the manufacturing, trade and
service sectors in
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<PAGE> 33
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1990, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and manufacturing ranking third. In 1990, these
three economic sectors accounted for 66% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 15.4% of employment,
is concentrated in defense, transportation equipment and other durable goods.
Defense-related business plays an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards. Over
the past decade, Missouri has annually ranked among the top six states in total
military contract awards. Although declining defense appropriations by the U.S.
Congress have had and will continue to have an impact on the State, Missouri's
defense related industries have rebounded and shown significant strength over
the past year. Nonetheless, McDonnell-Douglas remains the state's largest
employer with over 29,000 employees and analysts expect the long term effects of
federal downsizing in defense to be negligible. [Source: Missouri's Economic
Forecast: 1994; Mo. Dept. of Economic Development].
Limitations on State debt and bond issues are contained in
Article III, Section 37 of the Constitution of Missouri. Pursuant to this
section, the General Assembly may issue general obligation bonds solely (1) to
refund outstanding bonds (provided that the refunding bonds must mature within
25 years of issuance) or (2) upon the recommendation of the Governor, to incur a
temporary liability by reason of unforeseen emergency or of deficiency in
revenue, in an amount not to exceed $1,000,000 for any one year and to be paid
in not more than five years. When the liability exceeds $1,000,000, the General
Assembly, or the people by initiative, may submit the proposition to incur
indebtedness to the voters of the State, and the bonds may be issued if approved
by a majority of those voting. Such bonds must be retired serially and by
installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the payment
of principal and interest and may provide for an annual tax on all taxable
property in an amount sufficient for that purpose. Certain water pollution bonds
and state building bonds are also authorized pursuant to Sections 37(b)-(e),
inclusive, of Article III.
In 1971, Missouri voters approved a constitutional amendment
providing for the issuance of $150,000,000 of general obligation bonds for the
protection of the environment through
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<PAGE> 34
the control of water pollution. The bonds were subsequently issued over a period
of years. In 1979, voters approved a constitutional amendment authorizing an
additional $200,000,000 State Water Pollution Control Bonds. In 1982 State
voters approved a constitutional amendment authorizing the issuance of
$600,000,000 Third State Building Bonds. Proceeds from the Third State Building
Bonds are used to provide funds for improvement of State buildings and property,
including education, mental health, parks, corrections and other State
facilities, and for water, sewer, transportation, soil conservation and other
economic development projects. In 1988, Missouri voters approved a
constitutional amendment authorizing the issuance of bonds in the aggregate sum
of $275,000,000 for controlling water pollution and making improvements to
drinking water systems.
Article III, Section 36 of the Constitution of Missouri
requires that the General Assembly appropriate the annual principal and interest
requirements for outstanding general obligation bonds before any other
appropriations are made. Such amounts must be transferred from the General
Revenue Fund to bond interest and sinking funds. Authorization for these
transfers, as well as the actual payments of principal and interest, are
provided in the first appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri
legislature has established numerous entities as bodies corporate and politic
which are authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the
"Tax Limitation Amendment"), imposes a limit on the amount of taxes and other
revenue enhancement charges such as user fees which may be imposed by the State
or a political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit for any fiscal
year equals the product of the ratio of total state revenues in fiscal year
1980- 1981 divided by the aggregate personal income received by persons in
Missouri from all sources ("Personal Income of Missouri") in calendar year 1979
multiplied by the Personal Income of Missouri in either the calendar year prior
to the calendar year in which appropriations for the fiscal year for which the
calculation is being made, or the average of Personal Income of Missouri in the
previous three calendar years, whichever is greater. If the revenue limit is
exceeded by 1% or more in any fiscal year, a refund of the excess revenues
collected by the State is required. If the excess revenues collected are less
than 1%, then they are not refunded but are transferred to the General Revenue
Fund.
-32-
<PAGE> 35
Since passage of the legislation, no refund to taxpayers has ever occurred.
The details of the Tax Limitation Amendment are complex. The
revenue limit can be exceeded only if the General Assembly approves by a
two-thirds vote of each house an emergency declaration as requested by the
Governor. As previously noted, however, Article III, Section 36 of the
Constitution of Missouri requires the General Assembly to appropriate the annual
principal and interest requirements for outstanding general obligation bonds
before any other appropriations are made. The revenue limitation also does not
apply to taxes imposed for payment of principal and interest on bonds that have
been approved by the voters, as authorized by the Missouri Constitution. The Tax
Limitation Amendment could adversely affect the repayment capabilities of
certain non-general obligation issues if payment is dependent upon increases in
taxes or appropriations by the State's General Assembly.
In the spring of 1993, the Missouri legislature passed into
law a $310,000,000 tax increase, with most of the increase being allocated for
state-wide education needs. This tax increase was approved by the citizens of
the state in November, 1994.
Revenue collections for the fiscal year ended June 30, 1996
("Fiscal Year 1996") were $5,778 million, excluding $33.6 million from the state
lottery and other transfers, representing an increase of 7.2 percent over
revenue collections from the fiscal year ended June 30, 1995. These revenues
supplement a carry-over balance from the previous year of $383.4 million.
Expenditures for Fiscal Year 1996 are estimated at $5,822 million including
$153.7 million and $140.5 million, respectively, for the St. Louis and Kansas
City school desegregation cases.
For the fiscal year ending June 30, 1997 ("Fiscal Year 1997")
revenues are projected to be $6,000.3 million. This projection does not include
an estimated $98.3 million in proceeds from other transfers or a carry-over
balance of approximately $328.8 million. Expenditures are projected at $6,263.9
million, including $151.7 million and $110.3 million respectively for the St.
Louis and Kansas City desegregation cases. Projected expenditures also include
$80 million for supplemental appropriations for Fiscal Year 1997.
INVESTMENT LIMITATIONS
The following investment limitations may be changed with
respect to a particular Portfolio only by an affirmative vote of a majority of
the outstanding shares of that Portfolio (as defined under "Other Information
Concerning the Fund and Its
-33-
<PAGE> 36
Shares -- Miscellaneous" in the Portfolios' Prospectuses). These investment
limitations supplement those that appear in the Prospectuses.
THE TREASURY MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
2. Borrow money except from banks for temporary purposes and
then in an amount not exceeding 10% of the value of the Portfolio's total
assets, or mortgage, pledge or hypothecate its assets except in connection with
any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Portfolio's total assets at the time
of such borrowing. (This borrowing provision is not for investment leverage, but
solely to facilitate management of the Portfolio by enabling the Fund to meet
redemption requests where the liquidation of portfolio securities is deemed to
be inconvenient or disadvantageous).
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or hold
debt obligations in accordance with its investment objective and policies and,
under the certain circumstances described in the Prospectuses, may enter into
repurchase agreements for U.S. Treasury securities that equal at all times at
least 100% of the value of the repurchase price.
5. Purchase or sell real estate.
6. Purchase or sell commodities or commodity contracts or
invest in oil, gas, or other mineral exploration programs.
THE MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets, or where otherwise permitted by the 1940 Act.
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
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<PAGE> 37
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.
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.
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<PAGE> 38
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
-36-
<PAGE> 39
further that, as described in the Prospectuses, (a) the Government & 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 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.
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<PAGE> 40
THE INTERNATIONAL EQUITY PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
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.
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<PAGE> 41
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.
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
-39-
<PAGE> 42
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.
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.
-40-
<PAGE> 43
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 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.
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<PAGE> 44
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 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 attributable to Investor A Shares and
the number of outstanding Investor A Shares on May 31, 1997 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:
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<PAGE> 45
<TABLE>
<CAPTION>
Missouri National
Intermediate Government & Tax-Exempt Municipal
Corporate Bond Corporate Bond Bond Bond Equity Income
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets $ 65,587 $ 4,606,807 $ 23,564,899 $ 542,574 $ 41,053
Outstanding Shares 6,674 458,760 2,032,871 54,515 4,061
Net Asset Value
Per Share $ 9.83 $ 10.04 $ 11.59 $ 9.95 $ 10.11
Sales Charge, 4.50%
of offering price
(4.70% of net asset
value per share) $ .46 $ .47 $ .55 $ .47 $ .48
-------------- -------------- -------------- -------------- --------------
Offering Price
to Public $ 10.29 $ 10.51 $ 12.14 $ 10.42 $ 10.59
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Growth & Income Small Cap International
Equity Equity Equity Balanced
Portfolio Portfolio Portfolio Portfolio
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Assets $ 41,436,697 $ 13,336,491 $ 2,990,598 $ 9,706,620
Outstanding Shares 2,192,999 985,531 240,025 790,401
Net Asset Value
Per Share $ 18.89 $ 13.53 $ 12.46 $ 12.28
Sales Charge, 4.50%
of offering price
(4.70% of net
asset value per
share) $ .89 $ .64 $ .59 $ .58
------------ ------------ ------------ ------------
Offering Price
to Public $ 19.78 $ 14.17 $ 13.05 $ 12.86
============ ============ ============ ============
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate Equity
Securities Bond Index Municipal Index
Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Assets $ 5,349,197 $ 45,985 $ 31,280 $ 2,118
Outstanding Shares 510,176 4,658 3,126 200
Net Asset Value $ 10.49 $ 9.87 $ 10.01 $ 10.59
Per Share
Sales Charge, 2.50%
of offering price
(2.60% of net
asset value per
share) $ .27 $ .25 $ .26 $ .27
----------- ----------- ----------- -----------
Offering Price
to Public $ 10.76 $ 10.12 $ 10.27 $ 10.86
=========== =========== =========== ===========
</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
-44-
<PAGE> 47
separately for Trust Shares, Institutional Shares, Investor A 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 period ended May 31, 1997 ,
the 7-day yields, 7-day effective yields and the 30-day yields were as follows:
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<PAGE> 48
<TABLE>
<CAPTION>
7-DAY EFFECTIVE
PORTFOLIO 7-DAY YIELD YIELD 30-DAY YIELD
--------- ----------- ----- ------------
<S> <C> <C> <C>
Treasury Money Market
Trust Shares 3.41% 3.47% 3.34%
Institutional Shares 4.47% 4.57% 4.50%
Investor A Shares 4.47% 4.57% 4.50%
Money Market
Trust Shares 5.02% 5.15% 5.01%
Institutional Shares 4.89% 5.01% 4.88%
Investor A Shares 4.89% 5.01% 4.88%
Investor B Shares 4.14% 4.22% 4.12%
Tax-Exempt Money Market
Trust Shares 4.64% 4.74% 4.67%
Investor A Shares 3.21% 3.27% 3.14%
</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
PORTFOLIO EQUIVALENT YIELD EFFECTIVE YIELD YIELD
--------- ---------------- --------------- -----
<S> <C> <C> <C>
Tax-Exempt Money Market
Trust Shares 5.65% 5.75% 5.53%
Investor A Shares 5.31% 5.41% 5.20%
</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,
-46-
<PAGE> 49
Institutional Shares, Investor A Shares and/or Investor B Shares of a Portfolio
by dividing the Portfolio's net investment income per share earned during a
30-day period by the maximum offering price per share (the "maximum offering
price") with respect to Investor A Shares and the net asset value per share with
respect to Trust shares, 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
-47-
<PAGE> 50
maturity of an obligation with a call provision is the next call date on which
the obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of such debt obligations.
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> 51
if any, of the Portfolio's yield that is not exempt from federal or state income
tax.
The Fund currently calculates 30-day yields for its Bond
Portfolios but not for its Equity Portfolios. For the 30- day period ended May
31, 1997, the yields on the Bond Portfolios were as follows:
<TABLE>
<CAPTION>
PORTFOLIO 30-DAY YIELD
--------- ------------
<S> <C>
U.S. Government Securities
Trust Shares 5.74%
Institutional Shares 5.44%
Investor A Shares 5.44%
Investor B Shares 4.74%
Intermediate Corporate Bond
Trust Shares 6.64%
Institutional Shares 6.43%
Investor A Shares 6.49%
Bond Index
Trust Shares 6.56%
Institutional Shares 6.46%
Investor A Shares 6.25%
Government & Corporate Bond
Trust Shares 5.96%
Institutional Shares 5.66%
Investor A Shares 5.66%
Investor B Shares 4.95%
Short-Intermediate Municipal
Trust Shares 6.90%
Investor A Shares 3.90%
Missouri Tax Exempt Bond
Trust Shares 6.64%
Investor A Shares 3.81%
Investor B Shares 3.02%
National Municipal Bond
Trust Shares 8.36%
Investor A Shares 4.85%
Investor B Shares 3.94%
Balanced
Trust Shares 2.86%
Institutional Shares 2.56%
Investor A Shares 2.56%
Investor B Shares 1.87%
</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
-49-
<PAGE> 52
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:
<TABLE>
<CAPTION>
30-DAY TAX- 30-DAY MISSOURI
PORTFOLIO EQUIVALENT YIELD TAX-EQUIVALENT YIELD
--------- ---------------- --------------------
<S> <C> <C>
Short-Intermediate Municipal
Trust Shares 6.90% 7.34%
Investor A Shares 6.46% 6.87%
Missouri Tax-Exempt Bond
Trust Shares 6.64% 7.06%
Investor A Shares 6.31% 6.41%
Investor B Shares 5.00% 5.32%
National Municipal Bond
Trust Shares 8.36% 8.89%
Investor A Shares 8.03% 8.54%
Investor B Shares 6.52% 6.94%
</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
-50-
<PAGE> 53
A Portfolio computes its aggregate total returns separately
for each series by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a 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 one-year period ended May 31, 1997 (where applicable), the
average annual total returns for the 5-year period ended May 31, 1997 (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 1 FOR THE 5 SINCE
YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 5/31/97 OF OPERATIONS
--------- ----- ------- -------------
5/31/97
-------
<S> <C> <C> <C>
U.S. Government Securities
Trust Shares(1) 6.52% 6.30% 7.83%
Institutional Shares(7) 6.10% 5.89% 7.56%
Investor A Shares(1) 1.45% 5.00% 7.06%
Investor B Shares(4) 1.47% 5.26% 7.29%
Intermediate Corporate Bond(24)
Trust Shares N/A N/A 0.17%
Institutional Shares N/A N/A 0.24%
Investor A Shares N/A N/A 0.25%
</TABLE>
-51-
<PAGE> 54
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 1 FOR THE 5 SINCE
YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 5/31/97 OF OPERATIONS
--------- ----- ------- -------------
5/31/97
-------
<S> <C> <C> <C>
Bond Index(24)
Trust Shares N/A N/A 0.54%
Institutional Shares N/A N/A 0.58%
Investor A Shares N/A N/A (2.05%)
Government & Corporate Bond
Trust Shares(5) 7.06% 6.33% 7.57%
Institutional Shares(2) 6.74% 6.02% 7.35%
Investor A Shares(5) 1.93% 5.05% 6.80%
Investor B Shares(4) 2.11% 5.53% 7.17%
Short-Intermediate Municipal
Trust Shares(17) 5.37% N/A 4.03%
Investor A Shares(18) 2.52% N/A 1.79%
Missouri Tax-Exempt Bond(19)
Trust Shares(20) 7.37% 6.58% 7.86%
Investor A Shares(21) 2.37% 5.39% 7.13%
Investor B Shares(4) 2.20% 5.79% 7.38%
National Municipal Bond(23)
Trust Shares N/A N/A 2.66%
Investor A Shares N/A N/A (2.17%)
Investor B Shares N/A N/A (2.87%)
Equity Income(25)
Trust Shares N/A N/A 1.61%
Institutional Shares N/A N/A 1.61%
Investor A Shares N/A N/A (2.98%)
Investor B Shares N/A N/A (3.57%)
Equity Index(26)
Trust Shares N/A N/A 6.10%
Institutional Shares N/A N/A 6.10%
Investor A Shares N/A N/A 3.39%
Growth & Income Equity
Trust Shares(1) 23.33% 16.06% 15.48%
Institutional Shares(2) 23.05% 15.85% 15.36%
Investor A Shares(1) 17.41% 14.78% 14.77%
Investor B Shares(4) 18.16% 15.39% 15.17%
Small Cap Equity
Trust Shares(9)
Institutional Shares(2) 8.49% 15.23% 15.12%
Investor A Shares(10) 3.49% 14.23% 14.14%
Investor B Shares(4) 3.68% 14.82% 14.72%
International Equity
Trust Shares(14) 10.70% N/A 8.50%
Institutional Shares(14) 10.31% N/A 8.17%
Investor A Shares(15) 5.31% N/A 6.67%
Investor B Shares(4) 5.47% N/A 6.83%
</TABLE>
-52-
<PAGE> 55
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 1 FOR THE 5 SINCE
YEAR YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 5/31/97 OF OPERATIONS
--------- ----- ------- -------------
5/31/97
-------
<S> <C> <C> <C>
Balanced
Trust Shares(12) 15.69% N/A 11.21%
Institutional Shares(12) 15.41% N/A 10.97%
Investor A Shares(12) 10.16% N/A 9.80%
Investor B Shares(4) 10.55% N/A 10.19%
</TABLE>
- ------------------------------
(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.
(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.
-53-
<PAGE> 56
(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.
(24) Commenced operations on February 10, 1997.
(25) Commenced operations on March 7, 1997.
(26) Commenced operations on May 1, 1997.
Based on the foregoing calculations, the aggregate total
returns for the Equity and Bond Portfolios from their respective dates of
commencement of operations through May 31, 1997 were as follows:
-54-
<PAGE> 57
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
----------------------
<S> <C>
U.S. Government Securities
Trust Shares 97.14%
Institutional Shares(1) 92.69%
Investor A Shares (3.02%)
Investor B Shares(2) 7.29%
Intermediate Corporate Bond
Trust Shares 0.17%
Institutional Shares 0.24%
Investor A Shares (2.29%)
Bond Index
Trust Shares 0.54%
Institutional Shares 0.58%
Investor A Shares (2.05%)
Government & Corporate Bond
Trust Shares 92.47%
Institutional Shares(1) 88.94%
Investor A Shares (3.53%)
Investor B Shares(2) (4.11%)
Short-Intermediate Municipal
Trust Shares 7.77%
Investor A Shares (1.28%)
Missouri Tax-Exempt Bond
Trust Shares 95.80%
Investor A Shares (2.77%)
Investor B Shares(2) 7.38%
National Municipal Bond
Trust Shares 2.66%
Investor A Shares (2.56%)
Investor B Shares (2.87%)
Equity Income
Trust Shares 1.61%
Institutional Shares 1.61%
Investor A Shares (2.98%)
Investor B Shares (3.57%)
Equity Index
Trust Shares 6.10%
Institutional Shares 6.10%
Investor A Shares 3.33%
Growth & Income Equity
Trust Shares 265.28%
Institutional Shares(1) 262.09%
Investor A Shares 6.93%
Investor B Shares(2) 6.74%
Small Cap Equity
Trust Shares 106.54%
Institutional Shares(1) 104.34%
Investor A Shares 2.81%
Investor B Shares(2) 2.33%
</TABLE>
-55-
<PAGE> 58
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
PORTFOLIO SINCE COMMENCEMENT
--------- OF OPERATIONS
----------------------
<S> <C>
International Equity
Trust Shares 28.42%
Institutional Shares(1) 28.20%
Investor A Shares 2.00%
Investor B Shares(2) 1.15%
Balanced
Trust Shares 55.73%
Institutional Shares(1) 54.33%
Investor A Shares 1.80%
Investor B Shares(2) 1.48%
</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 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
-56-
<PAGE> 59
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 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.
-57-
<PAGE> 60
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND NATIONAL MUNICIPAL
BOND PORTFOLIOS
<TABLE>
<CAPTION>
SINGLE RETURN
Sample Taxable Federal --------Tax-Exempt Yields---------
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6.50% 7 .00%
<S> <C> <C> <C> <C> <C> <C>
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% 6.94% 7.64% 9.03% 9.72%
FROM
$58,150 TO
$121,300 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
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>
-58-
<PAGE> 61
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL AND NATIONAL MUNICIPAL
BOND PORTFOLIOS
<TABLE>
<CAPTION>
MARRIED FILING
JOINTLY
Sample Taxable Federal ----------Tax-Exempt Yields-----------
Income Marginal
(1997) Tax Rate 4.50% 5.00% 5.50% 6 .50% 7.00%
<S> <C> <C> <C> <C> <C> <C>
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>
-59-
<PAGE> 62
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<TABLE>
<CAPTION>
SINGLE RETURN Combined
Federal and
Sample Taxable Federal Missouri 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
Sample Taxable Federal Missouri 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
$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.
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<PAGE> 63
Since performance will fluctuate, performance data for the Portfolios
cannot necessarily be used to compare an investment in the Portfolios' shares
with bank deposits, savings accounts, and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. The current yield and performance of
the Portfolios may be obtained by calling the Fund at: INVESTOR A 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
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<PAGE> 64
Plans for Investor A Shares and Investor B Shares, shares of the Portfolios bear
the same types of ongoing expenses with respect 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
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<PAGE> 65
the matter to be voted upon affects only the interests of the shareholders of a
particular Portfolio or class of shares. Rule 18f-2 under the 1940 Act provides
that any matter required to be submitted to the holders of the outstanding
voting securities of a "series" investment company such as the Fund shall not be
deemed to have been effectively acted upon unless approved by the holders of a
majority of the outstanding shares of each series (Portfolio) affected by the
matter. A Portfolio is considered to be affected by a matter unless it is clear
that the interests of each Portfolio in the matter are identical or that the
matter does not affect any interest of the 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
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<PAGE> 66
income (including, but not limited to, gains from options, futures, or forward
contracts) derived with respect to the Portfolio's business of investing in such
stock, securities or currencies (the "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
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<PAGE> 67
securities of other issuers (as to which a Portfolio has not invested more than
5% of the value of its total assets in securities of such issuer and as to which
that Portfolio does not hold more than 10% of the outstanding voting securities
of such issuer) and no more than 25% of the value of such Portfolio's total
assets may be invested in the securities of any one issuer (other than U.S.
government securities and securities of other regulated investment companies),
or in two or more issuers which the Portfolio controls and which are engaged in
the same or similar trades or businesses.
Each Portfolio will designate any distribution of the excess
of net long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the shareholder has held these
shares. Shareholders should note that, upon the sale or exchange of Portfolio
shares, if the shareholder has not held such shares for more than six months,
any loss on the sale or exchange of those shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the shares.
Ordinary income to individuals is taxable at a maximum
marginal rate of 39.6%, but because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An individual's
long-term capital gains are taxable at a maximum rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35%.
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). Each Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions would be taxable as ordinary income to
shareholders, to the extent of the Portfolio's current and
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<PAGE> 68
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> 69
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> 70
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> 71
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> 72
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
Council of Bridge, Structural and
3544 Watson Road Ornamental Iron Workers
St. Louis, MO 63139 (International Labor Union),
Age: 54 January 1994 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> 73
<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
Corporation (manufacturer of paperboard and
8182 Maryland Avenue packaging materials), April
St. Louis, MO 63105 1989 to present; President,
Age: 60 Smurfit Pension & Insurance Services
Company, November 1982 to December
1992.
Ronald D. Winney* Director and Treasurer, Ralston
Ralston Purina Company Treasurer Purina Company
Checkerboard Square Since 1985.
St. Louis, MO 63164
Age: 54
W. Bruce McConnel, III* Secretary Partner of the law
Suite 1100 firm of Drinker Biddle
1345 Chestnut Street & Reath LLP, Philadelphia,
Philadelphia, PA 19107 Pennsylvania Since 1977.
Age: 54
Walter B. Grimm* Vice President From June, 1992 to present,
** 1 3435 Stelzer Road and Assistant employee of BISYS Fund
* 2 moved from here; text not shown
Columbus, OH 43219 Treasurer Services; From 1989 to June, 1992
Age: 51 President of Leigh
Investments Consulting/
Investments (investment
firm).
David Bunstine* Assistant From December, 1987 to present,
* 1 moved from here; text not shown
** 2 3435 Stelzer Road Secretary employee of BISYS Fund
Columbus, OH 43219 Services.
Age: 31
</TABLE>
- ------------------------
* Messrs. Grimm, Winney, McConnel and Bunstine 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 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,
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<PAGE> 74
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
RETIREMENT TOTAL
AGGREGATE BENEFITS ACCRUED COMPENSATION
COMPENSATION AS PART OF FUND FROM THE FUND AND
NAME OF DIRECTOR FROM THE FUND EXPENSE FUND COMPLEX*
---------------- ------------- ------- -------------
<S> <C> <C> <C>
Jerry V. Woodham $15,000.00 N/A $15,000.00
Robert M. Cox, Jr. $10,166.35 N/A $10,166.35
Joseph J. Hunt $10,000.00 N/A $10,000.00
James C. Jacobsen $10,266.60 N/A $10,266.60
Donald E. Kiernan** $10,101.55 N/A $10,101.55
Lyle L. Meyer $10,287.60 N/A $10,287.60
Ronald D. Winney $10,260.60 N/A $10,260.60
</TABLE>
* The "Fund Complex" consists solely of the Fund.
** Mr. Kiernan resigned as a director of the Fund on April 3, 1997.
INVESTMENT ADVISORY, 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> 75
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:
-73-
<PAGE> 76
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Treasury Money Market Portfolio $ 822,177 $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(19) $147,782
The ARCH Missouri Tax-Exempt Bond
Portfolio $ 327,773 $ 0
The ARCH National Municipal Bond Portfolio $ 0(7) $ 70,262
The ARCH Growth & Income Equity Portfolio $2,231,228 $ 0
The ARCH Small Cap Equity Portfolio $1,556,817 $ 0
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 $ 208,179 $ 0
Portfolio
The ARCH Government & Corporate Bond $ 660,877 $ 0
Portfolio
The ARCH Short-Intermediate Municipal $ 0 $ 38,167
Portfolio(2)
The ARCH Missouri Tax-Exempt Bond(1) $ 156,100 $ 0
Portfolio
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
</TABLE>
-74-
<PAGE> 77
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Balanced Portfolio $775,992 $0
</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, 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 $ 200,493 $ 209
Portfolio
The ARCH Government & Corporate Bond $ 668,999 $ 2,128
Portfolio
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 $ 230,777 $ 91,762
Portfolio
</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>
-75-
<PAGE> 78
For the fiscal year or period ended November 30, 1996, the
Administrator was paid administration fees, after waivers, as follows:
-76-
<PAGE> 79
<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 $629,330 $629,432
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) $ 34,688 $ 34,808
</TABLE>
-77-
<PAGE> 80
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
The ARCH Growth & Income Equity
Portfolio $315,753 $316,168
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
---------- --------------- -------
<S> <C> <C>
</TABLE>
-78-
<PAGE> 81
<TABLE>
<CAPTION>
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
The Predecessor Tax-Exempt Money
Market Portfolios $105,189 $146,756 $ 0 $ 0
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
-79-
<PAGE> 82
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 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 &
-80-
<PAGE> 83
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 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
-81-
<PAGE> 84
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 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 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Bond
</TABLE>
-82-
<PAGE> 85
<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>
Growth & Income $1850.34 $729.33 $1,850.34 $2,343.00
Income Equity
Small Cap Equity $ 192.00 $ 73.77 $ 192.00 $1,453.00
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
-83-
<PAGE> 86
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
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
-84-
<PAGE> 87
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)
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 $ 57,505
</TABLE>
-85-
<PAGE> 88
<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>
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 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:
-86-
<PAGE> 89
DISTRIBUTION AND SERVICES PLAN - INVESTOR B SHARES
<TABLE>
<CAPTION>
AMOUNT PAID AMOUNT PAID
TOTAL TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Treasury Money Market $ 0 $0 $0 $ 0
Money Market $ 928 $0 $0 $ 928
Tax-Exempt Money Market $ 0 $0 $0 $ 0
U.S. Government $ 2,321 $0 $0 $ 2,321
Securities
Government & Corporate $ 3,184 $0 $0 $ 3,184
Bond
Short-Intermediate $ 0 $0 $0 $ 0
Municipal
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>
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
TO THE AMOUNT PAID 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
</TABLE>
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<TABLE>
<CAPTION>
AMOUNT PAID
AMOUNT PAID TO
TO THE AMOUNT PAID AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
- ---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
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 $ 0 $0 $0 $ 0
Small Cap Equity $ 0 $0 $0 $ 0
International Equity $ 0 $0 $0 $ 0
Balanced $ 0 $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
TO THE AMOUNT PAID AFFILIATES
PORTFOLIOS TOTAL CHARGED ADMINISTRATOR TO MVA OF MVA
- ---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Treasury Money Market $ 1,103 $0 $0 $ 13,166
Money Market $ 49,165 $0 $0 $ 49,165
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 $133,969 $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
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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 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
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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.
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.
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MISCELLANEOUS
As of August 2, 1997, Mercantile held of record 99.997% and
35.798% of the outstanding Institutional and Trust shares, respectively, in the
Treasury Money Market Portfolio; 99.999% and 35.408% of the outstanding
Institutional and Trust shares, respectively, in the Money Market Portfolio;
77.446% of the outstanding Trust shares in the Tax-Exempt Money Market
Portfolio; 96.518% and 94.911% of the outstanding Institutional and Trust
shares, respectively, in the U.S. Government Securities Portfolio; 95.031% of
the outstanding Trust shares in the Intermediate Corporate Bond Portfolio;
99.999% and 98.899% of the outstanding Institutional and Trust shares,
respectively, in the Government & Corporate Bond Portfolio; 96.475% of the
outstanding Trust shares in the Short-Intermediate Municipal Portfolio; 97.841%
of the outstanding Trust shares in the Missouri Tax-Exempt Bond Portfolio;
99.882% of the outstanding Trust shares in the National Municipal Bond
Portfolio; 99.999% and 96.039% of the outstanding Institutional and Trust
shares, respectively, in the Growth & Income Equity Portfolio; 99.999% and
48.640% of the outstanding Institutional and Trust shares, respectively, in the
Small Cap Equity Portfolio; 96.429% and 99.799% of the outstanding Institutional
and Trust shares, respectively, in the International Equity Portfolio; 98.071%
of the outstanding Trust shares in the Equity Income Portfolio; 98.863% of the
outstanding Trust shares in the Bond Index Portfolio; 99.544% of the outstanding
Trust shares in the Equity Index Portfolio and 99.999% and 99.844% 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
(7.831%); BISYS Fund Services, Att: Linda Zerbe, First and Market Building,
Suite 300, Pittsburgh, PA 15222 (45.159%); Investor A Shares - National
Financial Services Corp., 1 World Financial Center, 200 Liberty St., 5th Floor,
New York, NY 10281 (61.519%); Mercantile Bank of St. Louis, NA Custodian Richard
E. Crippa, Rollover IRA, 2948 Castleford Dr., Florissant, MO 63033- 0000
(7.536%); St. Louis Regional Medical Center, Attn: Sharon Edison, 5535 Delmar
Blvd., St. Louis, MO 63112 (24.461%).
As of the same date, the following institutions also owned of
record 5% or more of the Money Market Portfolio's
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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 (9.943%); BISYS Fund Services, Att: Linda Zerbe, First
and Market Building, Suite 300, Pittsburgh, PA 15222 (32.181%); Investor A
Shares - National Financial Services Corp., 1 World Financial Center, 200
Liberty St., 5th Floor, New York, NY 10281 (93.148%); Investor B Shares -
Mercantile Bank of St. Louis, NA Custodian Pheba A. Steinmeyer, IRA, HC 3 Box
1266, Rocky Mt., MO 65072-9042 (5.626%); Alberta Buenemann and Ernie W.
Buenemann Trust, Alberta Buenemann Revocable Living Trust, 1649 Sand Run Road,
Troy, MO 63379 (7.560%); Mercantile Bank of St. Louis, NA Custodian Wayne D.
Matheis, Rollover IRA, RR 2 Box 142, Russellville, MO 65074 (12.275%); Merlin R.
Burke and Mary Alice Burke, 2516 Highland, Sedalia, MO 65301 (5.267%);
Mercantile Bank of St. Louis, NA Custodian Edwin C. Hogrebe, IRA, 5537 Goethe,
St. Louis, MO 63109 (5.066%); Homer R. Turner and Edna M. Turner Trust, Edna M.
Turner Trust, 33409 E. Pink Hill Rd., Grain Valley, MO 64029 (8.033%).
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 (5.737%); BISYS
Fund Services, Att: Linda Zerbe, First and Market Building, Suite 300,
Pittsburgh, PA 15222 (8.411%); Investor A Shares - National Financial Services
Corp., 1 World Financial Center, 200 Liberty St., 5th Floor, New York, NY 10281
(98.114%).
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 -
Mercantile Bank of St. Louis, NA Custodian Edmund C. Albrecht, Jr., IRA, 236
Carlyle Lake Dr., St. Louis, MO 63141 (6.212%); Mercantile Bank of St. Louis, NA
Custodian William J. Gaffney, IRA Rollover, 1424 Bopp Rd., St. Louis, MO 63131
(5.172%); Investor B Shares - BHC Securities Inc., FAO 24269197, Attn: Mutual
Funds Dept., 1 Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA
19103 (12.597%); NFSC, FEBO M22-050270, IRA, Patricia J. Vonder, 4022 Ave. F.,
St. Louis, MO 63123 (5.584%); NFSC, FEBO M22-109274, Esther E. Cantley, Rt. 3,
Box 692, Cabool, MO 65689 (6.943%); NFSC, FEBO M26-042811, Glenda Kay Atkins,
508 Grand Ave., Forest City, MO 64451 (10.790%).
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
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<PAGE> 95
Inc., Attn: Admin. & Regulatory Services, 3435 Stelzer Rd., Columbus, OH 43219
(100.00%); Investor A Shares - Gary E. Timmons, P.O. Box 3149, Laredo, TX 78044
(9.775%); Jill Larson, 27165 Pinario, Mission Viejo, CA 92692-3204 (9.775%);
George Gregory Timmons, 1332 E. Desert Ct., Phoenix, AZ 85020 (9.775%); Betty
Jane Eckhart, Trust Betty Jane Eckhart, 28265 Beech Rd., Sarcoxie, MO 64862
(32.809%); Lynn C. Prescott, c/o Paine Webber Inc., 102 S. Tejon Ste. 900,
Colorado Springs, CO 80903 (32.574%).
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 Helen Schaeffer, 5801
Quantrell Ave., No. L3, Alexandria, VA 22312 (12.815%); Thomas Young, Trust
Beatrice Young, 9204 Roger Lee Ln., St. Louis, MO 63126 (53.328%); Thomas Young,
Trust Henry Young, 9204 Roger Lee Ln., St. Louis, MO 63126 (30.186%).
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 -
Mercantile Bank of St. Louis, NA Custodian Eugene F. Tucker, IRA Rollover, 70
Berkshire, St. Louis, MO 63117 (6.072%); Investor B Shares - Mercantile Bank of
St. Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(5.580%); Mercantile Bank of St. Louis, NA Custodian Wayne D. Matheis, Rollover
IRA, RR 2 Box 142, Russelville, MO 65074 (7.180%); NFSC, FEBO M22-038792, Alvia
Borgard, Michael A. Borgard, 1502 Tapping Rd., Town and Country, MO 63131
(10.632%); NFSC, FEBO M22-050563, Carl S. Jackson, Steven J. Jackson, 3016
Sunset Dr., Apt. B, Carbondale, IL 62901 (5.819%); NFSC, FEBO M26-040169, Lewis
D. Kelly, Leola F. Kelly, 527 N. Ellsworth Ave., Marshall, MO 65340 (5.021%).
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 - Lane P. Baker and Madelynn A. Baker, P.O. Box 979, Essex, CT
06426-0000 (93.409%); James Sutten, P.O. Box 2465, Inverness, FL 34451 (6.525%).
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 B Shares - Corelink
Financial, Inc., P.O. Box 4054, Concord, CA 94524 (45.133%); NFSC, FEBO
M22-036374, Laura May Young, 427 Cliffside Dr., St. Louis, MO
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<PAGE> 96
63122 (8.793%); NFSC, FEBO M22-093050, Susan J. Wells, Robert S. Souza, 7820
Gannon Ave., St. Louis, MO 63130 (5.289%).
As of the same date, the following institutions also owned of
record 5% or more of the National Municipal Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Investor A Shares - Lane P.
Baker and Madelynn A. Baker, P.O. Box 979, Essex, CT 06426-0000 (8.675%); Gail
P. Ruga, 207 Aintree Rd., Rolla, MO 65401 (19.674%); Kim P. Wheeler, Stifel
Nicolaus & Co., Inc., 500 North Broadway, St. Louis, MO 63102 (19.674%); Merrill
Lynch Pierce, Fenner & Smith, James M. Jenkins, Att: Stock Powers, 4800 Deer
Lake Dr. East, 2nd Floor, Jacksonville, FL 32246 (18.802%); NFSC FEBO
M27-045063, Eleanor R. Strain, 33 Log Cabin Dr., St. Louis, MO 63124 (9.529%);
NFSC, FEBO M22-119300, Elisabeth M. Goelz, 5 Gerald Ln., Belleville, MO 63223
(13.123%); Investor B Shares - Corelink Financial Inc., P.O. Box 4054, Concord,
CA 94524 (45.072%); NFSC, FEBO M22-988642, Ronald E. Ryan, Marian H. Ryan, 875
Glen Elm Dr., St. Louis, MO (53.506%).
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 - Betty Jane Eckhart, Trust
Betty Jane Eckhart, 28265 Beech Rd., Sarcoxie, MO 64862 (28.236%); Lynn C.
Prescott, c/o Paine Webber, Inc., 102 S. Tejon Ste. 900, Colorado Springs, CO
80903 (28.200%); Thomas Young, Trust Beatrice Young, 9204 Roger Lee Ln., St.
Louis, MO 63126 (21.081%); Thomas Young, Trust Thomas Young, 9204 Roger Lee Ln.,
St. Louis, MO 63126 (13.012%); 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 - NFSC, FEBO M22-108910, Daniel J. Pierron,
1531 Washington 3F, St. Louis, MO 63013 (49.620%); NFSC, FEBO M22-026204, Robert
L. Nussbaumer, IRA, 9021 Rock Forest Dr., St. Louis, MO 63123 (20.836%); NFSC,
FEBO M23-999598, Randy R. Hamill, Carol K. Hamill, 9333 W. MacArthur, Wichita,
KS 67215 (7.126%); NFSC, FEBO M22-042951, Louis P. Vetere, 6317 Southwood 3W,
St. Louis, MO 63105 (15.905%).
As of the same date, the following institutions also owned of
record 5% or more of the Small Cap Equity Portfolio's
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outstanding shares as fiduciary or agent on behalf of their customers: Trust
Shares - State Street Bank & Trust Co., Trust Pioneer Hi-Bred International
Savings Plan Trust, 1 Enterprise Dr., Mail Stop D13, North Quincy, MA 02171
(17.518%); American Bar Endowment, 750 N. Lake Shore Dr., Chicago, IL 60611
(7.043%); The Northern Trust Co., Trust Carpenters Pension Trust Fund, Att:
Mutual Fund, P.O. Box 92956, Chicago, IL 60675 (7.552%).
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: Investor A Shares - Frances
Dakers, 200 E. 89th St. 28D, New York, NY 10128 (12.314%).
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 - Mercantile Bank of St.
Louis, NA Custodian Robert W. Davis, Rollover IRA, 818 Broadway, Elsberry, MO
63343 (5.602%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian
Edmund Frances Codr, Rollover IRA, 2820 S. 42nd St., St. Joseph, MO 64503
(5.582%); Mercantile Bank of St. Louis, NA Custodian Richard Dell Woods, SEP
IRA, 3114 Pickett Rd., St. Joseph, MO 64503 (7.099%); Mercantile Bank of St.
Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(5.868%); NFSC, FEBO M22-030490, Loren D. Salmons, 7 Ranchero Dr., St. Charles,
MO 63303 (6.203%); NFSC, FEBO M24-023507, Louis Stortenbecker Sr., RR 3, Box
158, Council Bluffs, IA 51503 (10.496%).
On the basis of information received from these institutions,
the Fund believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
FINANCIAL STATEMENTS
The Fund's Semi-Annual Report to Shareholders for the period
ended May 31, 1997 has been filed with the Securities and Exchange Commission.
The financial statements in such Semi-Annual Report, which are unaudited, are
incorporated herein by reference.
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
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Financial Statements included in such Annual Report have been audited by the
Fund's independent accountants, KPMG Peat Marwick LLP, whose report thereon also
appears in such Annual Report and is incorporated herein by reference. The
Financial Statements in such Annual Report have been incorporated herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE> 100
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk
A-2
<PAGE> 101
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
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interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment, although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
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"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating
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category is also used for debt subordinated to senior debt that is assigned an
actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The "CCC" rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes
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probable credit stature upon completion of construction or elimination of basis
of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
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"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of
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principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited
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incremental risk compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable
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Moody's Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following summarizes the
ratings by Moody's Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly regarded
as required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
The U.S. Government Securities, Intermediate Corporate Bond,
Bond Index, Government & Corporate Bond, Equity Income, Equity Index, Growth &
Income Equity, Small Cap Equity, International Equity and Balanced Portfolios
may enter into futures contracts and options for hedging purposes in furtherance
of their respective investment objectives as stated in the Prospectuses. Such
transactions are described further in this Appendix.
I. Interest Rate Futures Contracts.
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to
that which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term bonds
and investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts. A Portfolio would engage in an interest rate futures
contract sale to maintain the income advantage from continued holding of a
long-term bond while endeavoring to avoid part or all of the loss in market
value that would otherwise accompany a decline in long-term securities prices. A
Portfolio would engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous interim
investments, for example,
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shorter-term securities whose yields are greater than those available on
long-term bonds.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by the Portfolio, as
seller, to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future time
at a specific price. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term United States Treasury Bonds
and Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
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II. Stock Index Futures Contracts.
A stock index assigns relative values to the stocks included
in the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order
to offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. The Portfolio may do so either to hedge
the value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio will purchase such securities upon termination of
the long futures position, but a long futures position may be terminated without
a corresponding purchase of securities.
In addition, the Portfolio may utilize stock index futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that the Portfolio expects to narrow the
range of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on a
more restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of the portfolio will decline
prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange
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rates between the U.S. dollar and other currencies arising from multi-national
transactions.
IV. Margin Payments.
Unlike when a Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be required to deposit with the
broker or in a segregated account with the Fund's custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Portfolio has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
the adviser may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Other Hedging Transactions.
Although noted above, none of the Portfolios presently intend
to use interest rate futures contracts and stock index and foreign currency
futures contracts (and related options) in connection with their hedging
activities. Nevertheless, each of these Portfolios is authorized to enter into
hedging transactions in any other futures or options
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contracts which are currently traded or which may subsequently become available
for trading. Such instruments may be employed in connection with the Portfolios'
hedging strategies if, in the judgment of the adviser, transactions therein are
necessary or advisable.
VI. Accounting Treatment.
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
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