<PAGE> 1
As filed with the Securities and Exchange Commission on January 29, 1998
Registration No. 2-79285/811-3567
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x}
POST-EFFECTIVE AMENDMENT NO. 42
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 43
THE ARCH FUND, INC.
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Offices)
Registrant's Telephone Number: (800) 551-3731
W. BRUCE MCCONNEL, III, Esq.
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
Copy to:
Jon W. Bilstrom, Esq.
Mercantile Bank of St. Louis N.A.
One Mercantile Center
8th and Washington Streets
St. Louis, MO 63101
It is proposed that this filing will become effective (check appropriate box)
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Title of Securities Being Registered. . . . Shares of common stock
<PAGE> 2
THIS POST-EFFECTIVE AMENDMENT IS BEING FILED SOLELY WITH RESPECT TO THE GROWTH
EQUITY PORTFOLIO. ACCORDINGLY, THE PROSPECTUSES AND STATEMENTS OR ADDITIONAL
INFORMATION FOR THE TREASURY MONEY MARKET PORTFOLIO, MONEY MARKET PORTFOLIO, TAX
EXEMPT MONEY MARKET PORTFOLIO, U.S. GOVERNMENT SECURITIES PORTFOLIO,
INTERMEDIATE CORPORATE BOND PORTFOLIO, BOND INDEX PORTFOLIO, GOVERNMENT &
CORPORATE BOND PORTFOLIO, SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO, MISSOURI
TAX-EXEMPT BOND PORTFOLIO, NATIONAL MUNICIPAL BOND PORTFOLIO, EQUITY INCOME
PORTFOLIO, EQUITY INDEX PORTFOLIO, GROWTH & INCOME EQUITY PORTFOLIO, SMALL CAP
EQUITY PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO, BALANCED PORTFOLIO, SMALL CAP
EQUITY INDEX PORTFOLIO AND KANSAS TAX-EXEMPT BOND PORTFOLIO ARE NOT INCLUDED IN
THIS FILING.
<PAGE> 3
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
---------------------
(Trust Shares)
The ARCH Growth Equity Portfolio
Form N-1A Part A Item
- ---------------------
Prospectus Caption
------------------
<S> <C> <C>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... Expense Summary
for Trust Shares
3. Condensed Financial
Information................................................. Inapplicable;
Yields and Total
Returns
4. General Description
of Registrant............................................... Highlights;
Investment
Objectives, Policies
and Risk
Considerations;
Other Information
Concerning the Fund
and Its Shares
5. Management of the Fund........................................ Management of the
Fund
5A. Management's Discussion of
Fund Performance............................................ Inapplicable
6. Capital Stock and
Other Securities............................................ How to Purchase and
Redeem Shares;
Dividends
and Distributions;
Taxes; Other
Information
Concerning the Fund
and Its Shares
7. Purchase of Securities
Being Offered............................................... How to Purchase and
Redeem Shares
8. Redemption or Repurchase...................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings..................................... Inapplicable
</TABLE>
<PAGE> 4
THE ARCH FUND(R), INC.
SUPPLEMENT DATED JANUARY 29, 1998 TO THE
PROSPECTUS DATED SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
GROWTH EQUITY PORTFOLIO
TRUST SHARES
THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT
CONTAINED IN THE PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH
THE PROSPECTUS.
-----------------------
(1) The last sentence of the first paragraph on the cover page
(page 1) of the Prospectus is replaced with the following:
Trust Shares are offered to financial institutions acting on their own
behalf or on behalf of discretionary and non-discretionary accounts for which
they may receive account-level asset-based management fees.
(2) The following information replaces the section entitled "Expense
Summary for Trust Shares" on page 5 of the Prospectus:
<TABLE>
<CAPTION>
EXPENSE SUMMARY FOR
TRUST SHARES
GROWTH
EQUITY
PORTFOLIO
----------------
<S> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees.............................. .75%
12b-1 Fees............................................. .00%
Other Expenses (including
administration fees,
administrative services fees
and other expenses) (net
of fee waivers and expense
reimbursements)(1),(2).............................. .25%
---
TOTAL PORTFOLIO OPERATING
EXPENSES (net of fee waivers
and expense reimbursements)(3)...................... 1.00%
====
</TABLE>
<PAGE> 5
- -------------------------
1 Administrative services fees are payable at an annual rate not to exceed
.30%. Without fee waivers, administration fees would be .20%.
2 Without fee waivers and expense reimbursements, Other Expenses would be .65%
and Total Portfolio Operating Expenses would be 1.40%.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
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: $10 $32 $55 $122
<S> <C> <C> <C> <C>
Growth Equity Portfolio................................ $ $ $ $
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN. Information about the actual
performance of the Predecessor Portfolio is contained in the financial
statements included in the Statement of Additional Information.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Trust Shares
will bear directly or indirectly. The table reflects the expenses which the
Portfolio expects to incur during the current fiscal year on its Trust
Shares. For more complete descriptions of the various costs and expenses,
see "Management of the Fund" in this Prospectus and the Statement of
Additional Information. The table and example have not been audited by the
Fund's independent auditors and do not reflect any charges that may be
imposed by financial institutions on their customers.
(3) The first sentence of the first paragraph of the section entitled "How
to Purchase and Redeem Shares -- Purchase of Shares" on page 14 of the
Prospectus is deleted and replaced by the following:
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 discretionary and non-discretionary accounts for
which they may receive account-level asset-based management fees.
(4) The third paragraph of the section entitled "Taxes" on page 19 of the
Prospectus is replaced with the following:
Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders.
The Portfolio will generally have no tax liability with respect to such
gains and the distributions will be taxable to shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the Shares and whether
such dividends are received in cash or reinvested in additional Shares. Such
long-term capital gain will be 20% or 28% rate gain, depending upon the
Portfolio's holding period for the assets the sale of which generated the
capital gain.
(5) The sixth paragraph of the section entitled "Taxes on page 19 of the
Prospectus is replaced with the following:
The Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to backup withholding by the
Internal Revenue Service for prior failure to properly include on their
return payments of prior failure to properly include on their return
payments of taxable interest or dividends, or who have failed to certify to
the Portfolio that they are not subject to backup withholding when required
to do so or that they are "exempt recipients."
(6) The following replaces the section entitled "Management of the Fund--
Investment Adviser" on page 20 of the Prospectus:
<PAGE> 6
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser to
the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1997, MVA had approximately $9.4
billion in assets under investment management, including the Fund's assets,
which were approximately $3.9 billion. MVA also serves as investment adviser to
each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the Portfolio's average daily net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1997 pursuant to the investment advisory agreements then in effect
with MVA (or the predecessor adviser, Mark Twain Bank) at the effective annual
rate of .75% of its average daily net assets after fee waivers. Without fee
waivers, the Predecessor Portfolio would have borne advisory fees at the annual
rate of .75% of its average daily net assets.
The organizational arrangements of MVA require that all investment decisions
with respect to the Growth Equity Portfolio be made by MVA's Equity Committee,
and no one person is responsible for making recommendations to the Committee.
(7) The fourth paragraph of the section entitled "Management of the Funds --
Administrator" on page 21 of the Prospectus is replaced with the following:
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1997 pursuant to the
<PAGE> 7
administrative services agreement then in effect with Federated Administrative
Services, its former administrator, at the effective annual rate of .15% of its
average daily net assets.
(8) The third sentence of the fourth paragraph of the section entitled "Other
Information Concerning the Fund and Its Shares -- Description of Shares" on page
24 of the Prospectus is replaced with the following:
Institutional Shares, which are offered to financial institutions acting on
behalf of discretionary and non-discretionary amounts for which they do not
receive account-level asset-based management fees, are sold without a sales
charge.
(9) The first sentence of the second paragraph of the section entitled "Other
Information Concerning the Fund and Its Shares -- Miscellaneous" on page 25 of
the Prospectus is replaced with the following:
As of December 31, 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.
<PAGE> 8
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
TRUST SHARES
<TABLE>
<S> <C>
For information, write: Or call your investment
P.O. Box 78069 representative or
St. Louis, Missouri 63178 the ARCH Funds' Service Center
at 1-800-452-4015
</TABLE>
The ARCH Fund, Inc. is an open-end management investment company that
currently offers Shares in eighteen investment portfolios. This Prospectus
describes the Trust Shares of the ARCH GROWTH EQUITY PORTFOLIO (the
"Portfolio"). Trust Shares are offered to financial institutions acting on their
own behalf or on behalf of certain qualified accounts.
THE ARCH GROWTH EQUITY PORTFOLIO'S investment objective is capital
appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies selected on the basis of assessment
of earnings and the risk and volatility of each company's business. Other
factors, such as product position or market share, will also be considered.
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolio; Mercantile serves as custodian; BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator; and BISYS
Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolio that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolio, contained in a Statement of Additional
Information dated September 2, 1997 (as revised November 21, 1997), has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. An investor may obtain the
Statement of Additional Information without charge by writing the Fund at P.O.
Box 78069, St. Louis, Missouri 63178 or by calling 1-800-452-4015.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolio involves investment risk, including possible loss of principal.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 9
HIGHLIGHTS
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund offers investment
opportunities in eighteen investment portfolios. This Prospectus relates to one
of those portfolios: the ARCH GROWTH EQUITY PORTFOLIO (the "Portfolio"). In
addition, the Fund offers investment opportunities in the ARCH Treasury Money
Market, Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity, Small Cap
Equity Index, International Equity and Balanced Portfolios, which are described
in separate Prospectuses. The Portfolio represents a separate pool of assets
with a different investment objective and different policies than the Fund's
other portfolios (as described below under "Investment Objective, Policies and
Risk Considerations"). MVA serves as adviser, Mercantile as custodian, BISYS
Fund Services Ohio, Inc. as administrator and BISYS Fund Services as sponsor and
distributor. For information on expenses, fee waivers and services, see "Certain
Financial Information" and "Management of the Fund."
The following information generally describes the Portfolio and its
investment objective. There can be no assurance that the Portfolio will be able
to achieve its investment objective.
The Portfolio is designed for investors who seek capital growth and who are
prepared to accept the risks associated with an investment in equity securities.
See "Investment Objective, Policies and Risk Considerations" below.
Investors should note that the Portfolio may, subject to its investment
policies and limitations, invest in the securities of foreign issuers, enter
into repurchase agreements and reverse repurchase agreements, make securities
loans, invest in put and call options and futures and options on futures, and
make limited investments in illiquid securities and securities issued by other
investment companies. These investment practices involve investment risks of
varying degrees. For example, the securities of a foreign issuer entail certain
inherent risks, such as future political and economic developments and the
adoption of foreign governmental restrictions, that might adversely affect the
payment of dividends or principal and interest. Default by a counterparty to a
repurchase agreement or securities lending transaction could expose the
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by the
Portfolio will decline below the repurchase price which the Portfolio is
obligated to pay. Purchasing options is a specialized investment technique which
entails a substantial risk of loss of amounts paid as premiums to option
writers. There is no assurance that a liquid market will exist for a particular
futures contract at any particular time. The Portfolio may engage in short-term
trading, which may also involve greater risk and increase the Portfolio's
expenses. See "Investment Objective, Policies and Risk Considerations" below and
the Statement of Additional Information under "Investment Objective and
Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Fund also offers the availability of a
family of eighteen mutual funds should your investment goals change.
2
<PAGE> 10
This Prospectus describes the Trust Shares of the Portfolio. For
information on purchasing, exchanging or redeeming Trust Shares of the
Portfolio, please see "How to Purchase and Redeem Shares" below.
3
<PAGE> 11
CERTAIN FINANCIAL INFORMATION
Shares of the Portfolio have been classified into four classes of
Shares -- Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of each class in the Portfolio represent equal, pro rata
interests in the investments held by the Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. See
"Other Information Concerning the Fund and Its Shares," "Management of the
Fund -- Administrative Services Plan" and "Management of the Fund -- Custodian
and Transfer Agent" below. As a result of payments for distribution and/or
shareholder administrative servicing fees and certain other operating expenses
that may be made in differing amounts, the net investment income of Trust
Shares, Institutional Shares, Investor A Shares and Investor B Shares in the
Portfolio can be expected, at any given time, to be different.
The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds, which was organized as a Massachusetts business trust. On November
21, 1997, the Predecessor Portfolio was reorganized as a new portfolio of the
Fund. Prior to the reorganization, the Predecessor Portfolio offered and sold
shares of beneficial interest that were similar to the Fund's Investor A Shares.
4
<PAGE> 12
EXPENSE SUMMARY FOR TRUST SHARES
<TABLE>
<CAPTION>
GROWTH EQUITY
PORTFOLIO
-------------
<S> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees................................................... .75%
12b-1 Fees................................................................. .00%
Other Expenses (including administration fees, administrative services fees
and other expenses) (net of fee waivers and expense
reimbursements)(1,2).................................................... .25%
----
TOTAL PORTFOLIO OPERATING EXPENSES (net of fee waivers and expense
reimbursements)(3)......................................................... 1.00%
====
</TABLE>
- ---------------
(1) Administrative services fees are payable at an annual rate not to exceed
.30%. Without fee waivers, administration fees would be .20%.
(2) Without fee waivers and expense reimbursements, Other Expenses would be .65%
and Total Portfolio Operating Expenses would be 1.40%. Such fee waivers and
expense reimbursements are expected to continue during the current fiscal
year.
EXAMPLE
<TABLE>
<S> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of
each period:
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Growth Equity Portfolio............................................. $ 10 $32
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of the
Predecessor Portfolio is contained in the Arrow Funds' Annual and Semi-Annual
Reports dated September 30, 1996 and March 31, 1997, respectively, which may be
obtained without charge by contacting the Fund at the address or telephone
number provided on page 1 of this Prospectus.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Trust Shares will
bear directly or indirectly. The table reflects the expenses which the Portfolio
expects to incur during the next twelve months on its Trust Shares. For more
complete descriptions of the various costs and expenses, see "Management of the
Fund" in this Prospectus and the Statement of Additional Information. The table
and example have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
5
<PAGE> 13
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of the Portfolio, there can be no assurance that it will be able to do
so. The investment objective of the Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Unless otherwise indicated, the investment policies and limitations set forth
below may be changed without shareholder approval, although shareholders will be
notified before any material change in these policies and limitations become
effective.
The Portfolio's investment objective is capital appreciation. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
companies selected on the basis of assessment of earnings and the risk and
volatility of each company's business. Other factors, such as product position
or market share, will also be considered by the Adviser.
The Portfolio invests primarily in equity securities of companies selected
by the Adviser on the basis of traditional research techniques. The equity
securities in which the Portfolio invests are primarily those of middle to large
capitalization issuers whose shares are listed on the New York and American
Stock Exchanges and Nasdaq. Company earnings are the primary consideration in
selecting portfolio securities. The Portfolio may invest in common stocks,
preferred stocks, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stocks, although normally it will invest
at least 65% of its total assets in common stocks. The lowest rated debt
obligation in which the Portfolio will invest will be rated Baa or better by
Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard &
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch").
Securities rated Baa or BBB have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated securities.
Downgrades will be evaluated on a case by case basis by the Adviser. The Adviser
will determine whether or not the security continues to be an acceptable
investment. If it is determined not to be an acceptable investment, the security
will be sold. The applicable ratings categories are described in Appendix A to
the Statement of Additional Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts. Securities of a foreign issuer may
present greater risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a matter of
practice, the Portfolio will not invest in the securities of a foreign issuer if
any such risk appears to the Adviser to be substantial. The Portfolio may not
invest more than 5% of its total assets in securities of foreign issuers. For
additional information on the risks of foreign securities, see "Risk Factors"
below.
In such proportions as, in the judgment of the Adviser, prevailing market
conditions warrant, the Portfolio may, for temporary defensive purposes, invest
in short-term money market instruments, securities issued and/or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements.
RISK FACTORS
MARKET RISK. The Portfolio invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Portfolio is
subject to market risks. That is, the possibility exists that common stocks will
decline over short or even extended periods of time and both the U.S. and
6
<PAGE> 14
certain foreign equity markets tend to be cyclical, experiencing both periods
when stock prices generally increase and periods when stock prices generally
decrease.
INTEREST RATE RISK. Generally, the market value of fixed income securities
held by the Portfolio can be expected to vary inversely to changes in prevailing
interest rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in the Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and savings and loan
associations and foreign branches of U.S. banks and savings and loan
associations are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks and savings and loan associations.
OTHER APPLICABLE POLICIES
Investment methods described in this Prospectus are among those which the
Portfolio has the power to utilize. Some may be employed on a regular basis;
others may not be used at all. Accordingly, reference to any particular method
or technique carries no implication that it will be utilized or, if it is, that
it will be successful.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary during the period a
shareholder owns Shares of the Portfolio. The U.S. Government securities in
which the
7
<PAGE> 15
Portfolio invests are either guaranteed or issued by the U.S. Government, its
agencies, or instrumentalities. These securities include, but are not limited
to, direct obligations of the U.S. Treasury such as U.S. Treasury bills, notes
and bonds; notes, bonds, and discount notes issued or guaranteed by U.S.
Government agencies and instrumentalities supported by the full faith and credit
of the United States; notes, bonds, and discount notes of U.S. Government
agencies or instrumentalities which receive or have access to federal funding;
and notes, bonds, and discount notes of other U.S. Government instrumentalities
supported only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. Government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by the issuer's right
to borrow an amount limited to a specific line of credit from the U.S. Treasury;
the discretionary authority of the U.S. Government to purchase certain
obligations of an agency or instrumentality; or the credit of the agency or
instrumentality.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above, the
Portfolio may purchase "money market instruments," including commercial paper
and bank obligations.
Investment by the Portfolio in commercial paper will consist of issues that
are rated at the time of purchase in the highest rating category assigned by
S&P, Moody's or Fitch or, if unrated, deemed to be of comparable quality by the
Adviser at the time of purchase. Commercial paper may include variable and
floating rate instruments. See "Other Applicable Policies -- Variable and
Floating Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. or foreign banks and savings
and loan associations (collectively, "banks"), if the bank has capital, surplus
and undivided profits at the time of purchase in excess of $100,000,000 or if
the principal amount of the obligation is insured in full by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the Federal Deposit Insurance Corporation. Although the Portfolio may invest
in obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Investments in the obligations of
foreign banks or foreign branches of U.S. banks will not exceed 25% of the
Portfolio's total assets at the time of purchase.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase rated
or unrated variable and floating rate instruments. These instruments may include
variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by the Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however, could make it difficult for the
Portfolio to dispose of an instrument if the issuer were to default on its
payment obligation. The Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments.
8
<PAGE> 16
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to its investment objective and policies, the Portfolio may agree to
purchase U.S. Government securities or other securities from financial
institutions such as banks and broker-dealers, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will enter into repurchase agreements only with
financial institutions such as banks and broker-dealers that the Adviser
believes to be creditworthy. During the term of any repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price (including accrued
interest). Default by a seller could expose the Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although the Portfolio presently does not intend to enter into repurchase
agreements providing for settlement in more than seven days, the Portfolio has
the authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to its investment policies and
limitations, the Portfolio may borrow funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at an agreed upon date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price which
the Portfolio is obligated to pay. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, the Portfolio
may, from time to time, lend portfolio securities on a short-term basis or a
long-term basis, or both, to broker-dealers, banks or institutional borrowers
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash or marketable
securities. The collateral must be valued daily and, should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to the lending Portfolio. By lending its securities, the Portfolio can increase
its income by continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when marketable securities
are used as collateral. In accordance with current Securities and Exchange
Commission ("SEC") policies, the Portfolio is currently limiting its securities
lending to one-third of its total assets. Loans are subject to termination by
the Portfolio or the borrower at any time.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Portfolio holds against decreases in value. The Portfolio
may also write covered call options on all or any portion of its portfolio to
generate income. The Portfolio may only write call options on securities either
held in its portfolio, or which it has the right to obtain without payment of
further consideration, or for which it has segregated cash or liquid securities
in the amount of any additional consideration.
The Portfolio may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Portfolio are not traded on
an exchange. The Portfolio purchases and writes options only with
9
<PAGE> 17
investment dealers and other financial institutions (such as commercial banks or
savings associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Portfolio
will not buy call options or write put options, other than to close out open
option positions, without further notification to shareholders.
When the Portfolio writes a call option, it risks not participating in any
rise in the value of the underlying security. In addition, when the Portfolio
purchases puts on financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in its portfolio. This may cause the futures contract
and its corresponding put to react differently than the portfolio securities to
market changes. In addition, the Adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In such an event, the Portfolio may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options will exist at all
times. Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Portfolio's ability to establish and close out option positions depends on this
secondary market.
FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and sell
futures contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions. Futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract agrees
to make delivery of the type of instrument called for in the contract and the
buyer agrees to take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the differences between the value of the
index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Portfolio may also write options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Portfolio writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Portfolio is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Portfolio may also write put options and purchase call options on
futures contracts as a hedge against rising purchase prices of portfolio
securities. The Portfolio will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels existing
at the time it enters into the transactions. When the Portfolio writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if
10
<PAGE> 18
the option is exercised. As a purchaser of a call option on a futures contract,
the Portfolio is entitled (but not obligated) to purchase a futures contract at
a fixed price at any time during the life of the option.
The Portfolio may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of its total assets. When the Portfolio
purchases futures contracts, an amount of cash and liquid securities, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged. When the Portfolio sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
When the Portfolio uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in its
portfolio. This may cause the futures contract and any related options to react
differently than the portfolio securities to market changes. In addition, the
Adviser could be incorrect in its expectations about the direction or extent of
market factors such as stock price movements. In these events, the Portfolio may
lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Portfolio's ability to establish and close out futures and options positions
depends on this secondary market.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Portfolio may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act, which include, subject to certain exceptions, a prohibition on the
Portfolio investing more than 10% of the value of its total assets in such
securities. Investment companies in which the Portfolio may invest may impose
distribution fees as well as other types of commissions or charges. Such charges
will be payable by the Portfolio and, therefore, will be borne indirectly by its
shareholders. The Portfolio will invest in securities issued by other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio securities. See the Statement of Additional
Information under "Investment Objective and Policies -- Securities of Other
Investment Companies."
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Portfolio purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete these
transactions may cause the Portfolio to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into these
transactions, and the market value of the securities purchased may vary from the
purchase prices.
The Portfolio may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments.
11
<PAGE> 19
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may invest in restricted
securities. Restricted securities are any securities in which the Portfolio may
invest pursuant to its investment objective and policies but which are subject
to restriction on resale under federal securities law. The Portfolio will limit
investments in illiquid securities (including certain restricted securities not
determined by the Fund's Board of Directors to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement more than seven days after notice) to no more than 15% of its net
assets. The Portfolio intends that investments in securities that are not
registered under the Securities Act of 1933, as amended, but may be purchased by
institutional buyers under Rule 144A and for which a liquid trading market
exists, as determined by the Board of Directors of the Fund or the Adviser
(pursuant to guidelines adopted by the Board), will not be subject to the
Portfolio's 15% limitation on illiquid securities. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these restricted securities.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. Section 4(2) commercial paper is restricted as to disposition
under federal securities law, and is generally sold to institutional investors,
such as the Portfolio, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolio believes that Section 4(2)
commercial paper and certain other restricted securities, which meet the
criteria for liquidity established by the Fund's Board of Directors, are quite
liquid. Therefore, the Portfolio intends to treat these securities as liquid and
not subject to the investment limitation applicable to illiquid securities. In
addition, because these securities are liquid, the Portfolio will not subject
such securities to the limitation otherwise applicable to restricted securities.
PORTFOLIO TRANSACTIONS. All orders for transactions in securities or
options on behalf of the Portfolio are placed by the Adviser with broker-dealers
that it selects. To the extent permitted by the 1940 Act and guidelines adopted
by the Fund's Board of Directors, the Portfolio may utilize the Distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and may
be changed only by a vote of a majority of the outstanding Shares of the
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objective and Policies."
1. With respect to 75% of the value of its total assets, the Portfolio
will not purchase securities issued by any one issuer (other than cash,
cash items or securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities and repurchase agreements collateralized by
such securities), if as a result more than 5% of the value of its total
assets would be invested in the
12
<PAGE> 20
securities of that issuer. The Portfolio will not acquire more than 10% of
the outstanding voting securities of any one issuer.
2. The Portfolio will not invest 25% or more of the value of its total
assets in any one industry, provided, however, that the Portfolio may
invest more than 25% of the value of its total assets in cash or certain
money market instruments (including instruments issued by a U.S. branch of
a domestic bank or savings and loan association having capital, surplus and
undivided profits in excess of $100,000,000 at the time of investment),
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by such
securities.
3. The Portfolio will not issue senior securities, except that the
Portfolio may borrow money directly or indirectly through reverse
repurchase agreements in amounts up to one-third the value of its total
assets, including the amount borrowed, and except to the extent that the
Portfolio may enter into futures contracts. The Portfolio will not borrow
money or engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure to
facilitate management of its portfolio by enabling the Portfolio to, for
example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio
will not purchase any securities while any borrowings in excess of 5% of
its total assets are outstanding.
4. The Portfolio will not lend any of its assets except portfolio
securities in an amount up to one-third the value of its total assets. The
Portfolio shall not be prevented from purchasing or holding U.S. Government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions where
permitted by the Portfolio's investment objective, policies and
limitations.
For purposes of Investment Limitation No. 2 above, money market instruments
shall include bankers' acceptances, negotiable certificates of deposit and
negotiable time deposits of U.S. or foreign banks and savings and loan
associations.
Except with respect to the Portfolio's policy regarding the borrowing of
money, if a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting solely from a change in
the value of the Portfolio's securities will not constitute a violation of such
limitation.
PRICING OF SHARES
The Portfolio's net asset value per Share is determined by the
Administrator as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on each weekday,
with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently, one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
13
<PAGE> 21
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Investments in debt securities
with remaining maturities of 60 days or less may be valued based upon the
amortized cost method. For further information about valuation of investments,
see "Net Asset Value" in the Statement of Additional Information.
The public offering price for each class of Shares is based upon net asset
value per Share plus, in the case of Investor A Shares, a front-end sales
charge. A class will calculate its net asset value per Share by adding the value
of the Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of the Portfolio will generally be lower than the net asset
value per Share of Trust, Institutional or Investor A Shares of the Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Trust Shares are sold to financial institutions, such as banks, trust
companies, thrift institutions, mutual funds or other financial institutions
(collectively "financial institutions"), acting on their own behalf or on behalf
of their qualified fiduciary accounts, employee benefit, retirement plan or
other such qualified accounts. Trust Shares are sold to qualified purchasers
without a sales charge imposed by the Fund or the Distributor. Generally,
investors purchase Trust Shares through a financial institution, which is
responsible for transmitting purchase orders directly to the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
Financial institutions placing orders directly or on behalf of their
customers should contact the Fund at 1-800-452-4015. Investors may also call the
Fund for information on how to purchase Shares.
All shareholders of record will receive confirmations of Share purchases,
exchanges and redemptions in the mail. If Shares are held in the name of banks
or other financial institutions, such institution is responsible for
transmitting purchase, exchange and redemption orders to the Fund on a timely
basis, recording all purchase, exchange and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners. Payment for orders which are not received or accepted will be
returned after prompt inquiry to the transmitting financial institution.
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Trust Shares will be priced
according to the net asset value per Share next
14
<PAGE> 22
determined on that day after receipt of the order. Immediately available funds
must be received by the Custodian prior to 4:00 p.m. on the next Business Day
following receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the financial
institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Trust Shares of the
Portfolio for Trust Shares of another portfolio offered by the Fund. Exchanges
for Trust Shares in another portfolio are effected at net asset value without
payment of any exchange or sales charges. In addition, Trust Shares of the
Portfolio may be exchanged for Investor A Shares of the Portfolio in connection
with the distribution of assets held in a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks. Such exchanges will also be effected at net asset value
without payment of any exchange or sales charges. The exchange privilege may be
exercised only in those states where the class of Shares of such other portfolio
may be legally sold.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such exchange
request to the Fund. See "Other Exchange or Redemption Information" below. An
investor should consult the financial institution or the Fund for further
information regarding procedures for exchanging Shares.
In addition to the Growth Equity Portfolio described in this Prospectus,
the Fund currently offers Trust Shares in the following portfolios:
- The ARCH Treasury Money Market Portfolio
- The ARCH Money Market Portfolio
- The ARCH Tax-Exempt Money Market Portfolio
- The ARCH U.S. Government Securities Portfolio
- The ARCH Intermediate Corporate Bond Portfolio
- The ARCH Bond Index Portfolio
- The ARCH Government & Corporate Bond Portfolio
- The ARCH Short-Intermediate Municipal Portfolio
- The ARCH Missouri Tax-Exempt Bond Portfolio
- The ARCH National Municipal Bond Portfolio
- The ARCH Equity Income Portfolio
- The ARCH Equity Index Portfolio
- The ARCH Growth & Income Equity Portfolio
- The ARCH Small Cap Equity Portfolio
- The ARCH Small Cap Equity Index Portfolio
- The ARCH International Equity Portfolio
- The ARCH Balanced Portfolio
For information concerning these portfolios, please call 1-800-452-4015.
Shareholders exercising the exchange privilege with any of the other portfolios
offered by the Fund should request and review the portfolio's prospectus
carefully prior to making an exchange.
15
<PAGE> 23
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at the Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. Proceeds from
redemptions of Trust Shares of the Portfolio with respect to redemption orders
received and accepted by the Fund before 4:00 p.m. (Eastern time) on a Business
Day normally are sent electronically to the financial institution that placed
the redemption order the next Business Day after the Distributor's receipt of
the order in good form. No charge for sending redemption payments electronically
is currently imposed by the Fund, although a charge may be imposed in the
future. The Fund reserves the right to send redemption proceeds electronically
within seven days after receiving a redemption order if, in the judgment of the
Adviser, an earlier payment could adversely affect the Portfolio.
The Transfer Agent may require a signature guarantee by an eligible
guarantor institution. For purposes of this policy, the term "eligible guarantor
institution" shall include banks, brokers, dealers, credit unions, securities
exchanges and associations, clearing agencies and savings associations as those
terms are defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000. The
signature guarantee requirement will be waived if all of the following
conditions apply: (1) the redemption check is payable to the shareholder(s) of
record and (2) the redemption check is mailed to the shareholder(s) at the
address of record or the proceeds are either mailed or sent electronically to a
commercial bank account previously designated on the account application. An
investor with questions or needing assistance should contact the financial
institution servicing his or her account or the Distributor. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
Neither the Fund nor its service contractors will be liable for any loss,
damage, expense or cost arising out of any telephone redemption effected in
accordance with the Fund's telephone redemption procedures, upon instructions
reasonably believed to be genuine. The Fund will employ procedures designed to
provide reasonable assurance that instructions by telephone are genuine; if
these procedures are not followed, the Fund or its service contractors may be
liable for any losses due to unauthorized or fraudulent instructions. If, due to
temporary adverse conditions, investors are unable to effect telephone
transactions, Investors are encouraged to follow the procedures described in
"Other Exchange or Redemption Information" below.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment
16
<PAGE> 24
has been collected for the purchase of such Shares which may take up to 15 days
or more. To avoid delay in payment upon redemption shortly after purchasing
Shares, investors should purchase Shares by certified or bank check or by
electronic transfer. The Fund intends to pay cash for all Shares redeemed, but
under abnormal conditions which make payment in cash unwise, the Fund may make
payment wholly or partly in portfolio securities at their then market value
equal to the redemption price. In such cases, an investor may incur brokerage
costs in converting such securities to cash.
A shareholder may be required to redeem Shares in the Portfolio upon 60
days' written notice if the balance in the shareholder's account drops below
$500. The Fund will not require a shareholder to redeem Portfolio Shares if the
value of the shareholder's account drops below $500 due to fluctuations in net
asset value. Share balances may also be redeemed pursuant to arrangements
between financial institutions and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares of the Portfolio.
YIELD AND TOTAL RETURN FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
the Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
From time to time, performance information such as total return and yield
data for the Portfolio's Trust Shares may be quoted in advertisements or in
communications to shareholders. The yield is computed based on the net income of
such Shares during a 30-day (or one month) period identified in connection with
the particular yield quotation. More specifically, the yield is computed by
dividing the Portfolio's net income per Share during a 30-day (or one month)
period by the net asset value per Share on the last day of the period and
annualizing the result.
The Portfolio's total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to Trust Shares
reflect the average annual percentage change in value of an investment in such
Shares over the particular measuring period. Aggregate total returns reflect the
cumulative percentage change in value over the measuring period. Both methods of
calculating total returns assume that dividends and capital gain distributions
made by the Portfolio during the period are reinvested in the Portfolio's Trust
Shares. When considering average annual total return figures for periods longer
than one year, it is important to note that the Portfolio's annual total return
for any one year in the period might have been more or less than the average for
the entire period.
Performance data of the Portfolio's Trust Shares may be compared to the
performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by S&P, Lehman Brothers, Inc. or any of its affiliates, Ibbotson
Associates, Inc., Lipper Analytical Services, Inc. and Mutual Fund Forecaster.
References may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
American Banker, Institutional Investor, Pensions and Investments, U.S.A. Today,
Fortune, CDA/Weisenberger, Morningstar, Inc. and publications of a local or
regional nature. In addition to performance information, general information
about the Portfolio that appears in a
17
<PAGE> 25
publication such as those mentioned above may be included in advertisements and
in reports to shareholders.
Performance quotations of a class of Shares in the Portfolio represent past
performance and should not be considered as representative of future results.
Any account fees charged by a bank or other financial institution (as described
in "Management of the Fund -- Service Organizations" below) or other
institutions will not be included in the calculations of the Portfolio's yields
and total returns. Such fees, if any, will reduce the investor's net return on
an investment in the Portfolio. Investors may call 1-800-452-4015 to obtain
current yield and total return information.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Portfolio are declared and paid
monthly as a dividend to shareholders of record. Dividends on each Share of the
Portfolio are determined in the same manner and are paid in the same amount,
irrespective of class, except that the Portfolio's Trust Shares and
Institutional Shares bear all expenses of the respective Administrative Services
Plans adopted for such Shares and the Portfolio's Investor A Shares and Investor
B Shares bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, the Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the Fund"
and "Other Information Concerning the Fund and Its Shares" below.
Net realized capital gains of the Portfolio, if any, are distributed at
least annually. All dividends and distributions paid on the Portfolio's Shares
are automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated on the account application, or (ii)
redeemed all the Shares held in the Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Management of the Fund believes that the Predecessor Portfolio qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code") for the taxable year ended September 30, 1997. It is
intended that the Portfolio will qualify as a regulated investment company as
long as such qualification is in the best interests of shareholders. A regulated
investment company generally is exempt from federal income tax on amounts
distributed to shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if any) net of
certain deductions for such year. In general, the Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. It is the policy of the Portfolio to
distribute as dividends substantially all of its investment
18
<PAGE> 26
company taxable income and any net tax-exempt interest income each year. Such
dividends will be taxable as ordinary income to the Portfolio's shareholders who
are not currently exempt from federal income taxes, whether such income is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such dividends will
qualify for the dividends received deduction for corporations to the extent of
the total qualifying dividends received by the Portfolio from domestic
corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. The Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such dividends are received in
cash or reinvested in additional Shares.
An investor considering purchasing Shares of the Portfolio on or just
before the record date of any dividend or capital gains distribution should be
aware that the amount of the forthcoming distribution, although in effect a
return of capital, will be taxable.
Dividends declared by the Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the
Portfolio on December 31 of such year in the event such dividends are actually
paid during January of the following year.
The Portfolio may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by the Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolio and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference
19
<PAGE> 27
to their own tax situation. Shareholders will be advised at least annually as to
the federal income tax consequences of distributions made each year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the Fund's assets,
which were approximately $2.5 billion. MVA also serves as investment adviser to
each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the Portfolio's average daily net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1996 pursuant to the investment advisory agreement then in effect
with Mark Twain Bank, its former adviser, at the effective annual rate of .75%
of its average daily net assets after fee waivers. Without fee waivers, the
Predecessor Portfolio would have borne advisory fees at the annual rate of .75%
of its average daily net assets.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the 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. He managed the Predecessor
Portfolio since October, 1997 and also manages the Fund's Equity Income
Portfolio.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolio's Administrator. The Administrator also serves
as the administrator to each of the Fund's other portfolios.
The Administrator generally assists in all aspects of the Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolio's arrangements with Service
20
<PAGE> 28
Organizations under the Administrative Services Plan described below. For its
services, the Administrator is entitled to receive a fee, computed daily and
payable monthly, at the annual rate of .20% of the Portfolio's average daily net
assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the fees otherwise payable by the Portfolio in order to increase the net
income available for distribution to shareholders.
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1996 pursuant to the administrative services agreement then
in effect with Federated Administrative Services, its former administrator, at
the effective annual rate of .39% of its average daily net assets.
DISTRIBUTOR
Trust Shares of the Portfolio are sold continuously by the Distributor,
BISYS Fund Services ("BISYS"), an affiliate of the Administrator. BISYS is a
registered broker-dealer with principal offices at 3435 Stelzer Road, Columbus,
Ohio 43219. The Distributor also acts as distributor to each of the Fund's other
portfolios.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to the
Trust Shares of the Portfolio. Pursuant to the Administrative Services Plan,
Trust Shares are sold to banks and other financial institutions (which may
include Mercantile or its affiliated or correspondent banks) acting on behalf of
their qualified accounts (such financial institutions collectively, the "Service
Organizations") which agree to provide certain shareholder administrative
services for their clients or account holders (collectively, the "customers")
who are the beneficial owners of such Shares. The holders of Trust Shares bear
their pro rata portion of the fees which may be paid to Service Organizations
for such services at an annual rate of up to .30% of the average daily net
assets of the Portfolio's Trust Shares owned beneficially by a Service
Organization's customers.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(collectively, the "Servicing Agreements") require the Service Organizations
receiving such compensation (which may include Mercantile and its affiliates) to
perform certain services, including providing administrative services with
respect to the beneficial owners of Trust Shares of the Portfolio, such as
establishing and maintaining accounts and records for their customers who invest
in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
21
<PAGE> 29
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by the
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such Service Organizations
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of the Portfolio's assets. BISYS Fund
Services Ohio, Inc. also serves as the Portfolio's transfer agent and dividend
disbursing agent. Its address is 3435 Stelzer Road, Columbus, Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolio. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolio contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal laws expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolio and its shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolio. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by the Portfolio to a financial
intermediary in connection with the investment of
22
<PAGE> 30
fiduciary funds in the Portfolio's Shares. Institutions, including banks
regulated by the Comptroller of the Currency and investment advisers and other
money managers subject to the jurisdiction of the Securities and Exchange
Commission, the Department of Labor or state securities commissions, should
consult legal counsel before entering into Servicing Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all of their own expenses in
connection with the performance of their services, except that the Distributor
is compensated pursuant to the Distribution and Services Plans (as described
below under "Other Information Concerning the Fund and its Shares"). The
Portfolio's expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to the Adviser and Administrator, transfer agency fees,
fees and expenses of officers and directors who are not affiliated with the
Adviser or the Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors' and
officers' liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular portfolio will be allocated among all the Fund's
portfolios by or under the direction of the Board of Directors in a manner the
Board determines to be fair and equitable. Any expenses relating only to a
particular class of Shares within a portfolio will be borne solely by such
class. See "Certain Financial Information" and "Management of the Fund" above
for additional information regarding expenses of the Portfolio.
OTHER INFORMATION CONCERNING
THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolio, which is classified as a diversified company
23
<PAGE> 31
under the 1940 Act: 50 million Trust Shares, 25 million Institutional Shares, 25
million Investor A Shares and 25 million Investor B Shares. Institutional,
Investor A and Investor B Shares of the Portfolio are described in separate
prospectuses which are available from the Distributor at the telephone number on
page 1 of this Prospectus. The Board of Directors has also authorized the
issuance of additional classes of shares representing interests in other
investment portfolios of the Fund, which are likewise described in separate
prospectuses available from the Distributor. Shares in the Portfolio will be
issued without Share certificates.
The Trust Shares of the Portfolio are described in this Prospectus. The
Portfolio also offers Institutional Shares, Investor A Shares and Investor B
Shares. Institutional Shares, which are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion, are
sold without a sales charge. Investor A Shares and Investor B Shares are sold
through selected broker-dealers and other financial intermediaries to individual
or institutional customers. Investor A Shares of the Portfolio are sold with a
maximum 4.5% front-end sales charge and Investor B Shares of the Portfolio are
sold with a maximum 5.0% contingent deferred sales charge. Trust, Institutional,
Investor A and Investor B Shares bear their pro rata portion of all operating
expenses paid by the Portfolio, except that Trust Shares and Institutional
Shares bear all payments under the Portfolio's respective Administrative
Services Plans adopted for such Shares and Investor A Shares and Investor B
Shares bear all payments under the Portfolio's respective Distribution and
Services Plans adopted for such Shares. In addition, Institutional Shares of the
Portfolio bear the expense of certain sub-transfer agency fees.
Payments under the Administrative Services Plan for Institutional Shares
are made to Service Organizations for administrative services provided to the
Service Organizations' clients or account holders who are the beneficial owners
of Institutional Shares. Payments under the Administrative Services Plan may not
exceed .30% (on an annual basis) of the average daily net asset value of the
Portfolio's outstanding Institutional Shares.
Payments under the Distribution and Services Plans for Investor A Shares
and Investor B Shares are made to (i) the Distributor or another person for
providing distribution assistance and assuming certain related expenses, and
(ii) Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of
Investor A Shares or Investor B Shares. Payments under the Distribution and
Services Plan for Investor A Shares may not exceed .30% (on an annual basis) of
the average daily net asset value of Investor A Shares of the Portfolio.
Payments under the Distribution and Services Plan for Investor B Shares may not
exceed 1.00% (on an annual basis) of the average daily net asset value of
outstanding Investor B Shares of the Portfolio. Distribution payments made under
the Distribution and Services Plans are subject to the requirements of Rule
12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares and Investor B Shares of the Portfolio that are not offered in
connection with its Trust Shares or Institutional Shares, including an automatic
investment program and an automatic withdrawal plan. In addition, each class of
Shares offers different exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
portfolios of the Fund will vote together and not by class unless otherwise
required by law or permitted by the Board of Directors. All shareholders of a
particular
24
<PAGE> 32
portfolio will vote together as a single class on matters relating to the
portfolio's investment advisory agreement and investment objective and
fundamental policies. Only holders of Trust Shares, however, will vote on
matters relating to the Administrative Services Plan for Trust Shares and only
holders of Institutional Shares will vote on matters pertaining to the
Administrative Services Plan for Institutional Shares. Similarly, only holders
of Investor A Shares will vote on matters pertaining to the Distribution and
Services Plan for Investor A Shares 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 of shareholders 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 of shareholders to vote on the
question of removal of a director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of the Portfolio means, with respect to the approval of an investment
advisory agreement or a change in an investment objective or fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding Shares of the Portfolio (irrespective of class), or (b) 67% or
more of the Shares of the Portfolio (irrespective of class) present at a meeting
if more than 50% of the outstanding Shares of the Portfolio are represented at
the meeting in person or by proxy.
As of June 3, 1997, Mercantile and its affiliates possessed, of record on
behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolio may be directed to the Fund at
1-800-452-4015.
25
<PAGE> 33
[This Page Intentionally Left Blank]
<PAGE> 34
[This Page Intentionally Left Blank]
<PAGE> 35
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIO'S
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIO, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIO, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights................................ 2
Certain Financial Information............. 4
Expense Summary for Trust Shares.......... 5
Investment Objective, Policies and Risk
Considerations.......................... 6
Investment Limitations.................... 12
Pricing of Shares......................... 13
How to Purchase and Redeem Shares......... 14
Purchase of Shares...................... 14
Exchange Privilege...................... 15
Redemption of Shares.................... 16
Other Exchange or Redemption
Information........................... 16
Yields and Total Returns.................. 17
Dividends and Distributions............... 18
Taxes..................................... 18
Management of the Fund.................... 20
Other Information Concerning the Fund
and Its Shares.......................... 23
Miscellaneous........................... 25
</TABLE>
Investment Adviser:
Mississippi Valley Advisors Inc.
a wholly-owned subsidiary of
Mercantile Bank
National Association
Distributor:
BISYS Fund Services
THE ARCH FUND(R), INC.
GROWTH EQUITY PORTFOLIO
TRUST SHARES
LOGO
PROSPECTUS
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 36
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
---------------------
(Institutional Shares)
The ARCH Growth Equity Portfolio
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... Expense Summary
for Institutional
Shares
3. Condensed Financial
Information................................................. Inapplicable;
Yields and Total
Returns
4. General Description
of Registrant............................................... Highlights;
Investment
Objectives, Policies
and Risk
Considerations;
Other Information
Concerning the Fund
and Its Shares
5. Management of the Fund........................................ Management of the
Fund
5A. Management's Discussion of
Fund Performance............................................ Inapplicable
6. Capital Stock and
Other Securities............................................ How to Purchase and
Redeem Shares;
Dividends
and Distributions;
Taxes; Other
Information
Concerning the Fund
and Its Shares
7. Purchase of Securities
Being Offered............................................... How to Purchase and
Redeem Shares
8. Redemption or Repurchase...................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings..................................... Inapplicable
</TABLE>
<PAGE> 37
THE ARCH FUND(R), INC.
SUPPLEMENT DATED JANUARY 29, 1998 TO THE
PROSPECTUS DATED SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
GROWTH EQUITY PORTFOLIO
INSTITUTIONAL SHARES
THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT
CONTAINED IN THE PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH
THE PROSPECTUS.
-----------------------
(1) The last sentence of the first paragraph of the cover page
(page 1) of the Prospectus is replaced with the following:
Institutional Shares are offered to financial institutions acting on
behalf of discretionary and non-discretionary accounts for which they do not
receive account-level asset-based management fees.
(2) The following information replaces the section entitled "Expense
Summary for Institutional Shares" on page 4 of the Prospectus:
<TABLE>
<CAPTION>
EXPENSE SUMMARY FOR
INSTITUTIONAL SHARES
GROWTH
EQUITY
PORTFOLIO
<S> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees ............................. .75%
12b-1 Fees............................................. .00%
Other Expenses (including
administration fees,
administrative services fees
and other expenses) (net
of fee waivers and expense
reimbursements)(1),(2)............................. .55%
----
TOTAL PORTFOLIO OPERATING
EXPENSES (net of fee waivers
and expense reimbursements)(3)...................... 1.30%
=====
- ---------------
</TABLE>
<PAGE> 38
1 Administrative services fees are payable at an annual rate not to exceed
.30%. Without fee waivers, administration fees would be .20%.
2 Without fee waivers and expense reimbursements, Other Expenses would be .65%
and Total Portfolio Operating Expenses would be 1.40%.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the end of
each period:
Growth Equity Portfolio $ 13 $ 41 $ 71 $157
</TABLE>
- -------------------
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of
the Predecessor Portfolio is contained in the financial statements included in
the Statement of Additional Information.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Institutional
Shares will bear directly or indirectly. The table reflects the expenses which
the Portfolio expects to incur during the current fiscal year on its
Institutional Shares. For more complete descriptions of the various costs and
expenses, see "Management of the Fund" in this Prospectus and the Statement of
Additional Information. The table and example have not been audited by the
Fund's independent auditors and do not reflect any charges that may be imposed
by financial institutions on their customers.
(3) The third paragraph of the section entitled "Taxes" on page 18 of the
Prospectus is replaced with the following:
Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders.
The Portfolio will generally have no tax liability with respect to such
gains and the distributions will be taxable to shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the Shares and whether
such dividends are received in cash or reinvested in additional Shares. Such
long-term capital gain will be 20% or 28% rate gain, depending upon the
Portfolio's holding period for the assets the sale of which generated the
capital gain.
(4) The sixth paragraph of the section entitled "Taxes on page 18 of the
Prospectus is replaced with the following:
The Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to backup withholding by the
Internal Revenue Service for prior failure to properly include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding
when required to do so or that they are "exempt recipients."
(5) The following replaces the section entitled "Management of the Fund --
Investment Adviser" on pages 19-20 of the Prospectus:
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser to
the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1997, MVA had approximately $9.4
billion in assets under investment management, including the
<PAGE> 39
Fund's assets, which were approximately $3.9 billion. MVA also serves as
investment adviser to each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the Portfolio's average daily net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1997 pursuant to the investment advisory agreements then in effect
with MVA (or the predecessor adviser, Mark Twain Bank) at the effective annual
rate of .75% of its average daily net assets after fee waivers. Without fee
waivers, the Predecessor Portfolio would have borne advisory fees at the annual
rate of .75% of its average daily net assets.
The organizational arrangements of MVA require that all investment decisions
with respect to the Growth Equity Portfolio be made by MVA's Equity Committee,
and no one person is responsible for making recommendations to the Committee.
(6) The fourth paragraph of the section entitled "Management of the Fund --
Administrator" on page 20 of the Prospectus is replaced with the following:
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1997 pursuant to the administrative services agreement then
in effect with Federated Administrative Services, its former administrator, at
the effective annual rate of .15% of its average daily net assets.
(7) The third sentence of the fourth paragraph of the section entitled "Other
Information Concerning the Fund and Its Shares --
<PAGE> 40
Description of Shares" on page 23 of the Prospectus is replaced with the
following:
Trust Shares, which are offered to financial institutions acting on behalf
of discretionary and non-discretionary accounts for which they may receive
account-level asset-based management fees, are sold without a sales charge.
(8) The first sentence of the second paragraph of the section entitled "Other
Information Concerning the Fund and Its Shares -- Miscellaneous" on page 25 of
the Prospectus is replaced with the following:
As of December 31, 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.
<PAGE> 41
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
INSTITUTIONAL SHARES
<TABLE>
<S> <C>
For information, write: Or call your investment
P.O. Box 78069 representative or
St. Louis, Missouri 63178 the ARCH Funds' Service Center
at 1-800-452-4015
</TABLE>
The ARCH Fund, Inc. is an open-end management investment company that
currently offers Shares in eighteen investment portfolios. This Prospectus
describes the Institutional Shares of the ARCH GROWTH EQUITY PORTFOLIO (the
"Portfolio"). Institutional Shares are offered to financial institutions acting
on behalf of accounts for which they do not exercise investment discretion.
THE ARCH GROWTH EQUITY PORTFOLIO'S investment objective is capital
appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies selected on the basis of assessment
of earnings and the risk and volatility of each company's business. Other
factors, such as product position or market share, will also be considered.
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolio; Mercantile serves as custodian; BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator; and BISYS
Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolio that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolio, contained in a Statement of Additional
Information dated September 2, 1997 (as revised November 21, 1997), has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. An investor may obtain the
Statement of Additional Information without charge by writing the Fund at P.O.
Box 78069, St. Louis, Missouri 63178 or by calling 1-800-452-4015.
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolio involves investment risk, including possible loss of principal.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 42
HIGHLIGHTS
The Arch Fund, Inc. (the "Fund") is an open-end management investment
company (commonly known as a mutual fund) registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund offers investment
opportunities in eighteen investment portfolios. This Prospectus relates to one
of those portfolios: the ARCH GROWTH EQUITY PORTFOLIO (the "Portfolio"). In
addition, the Fund offers investment opportunities in the ARCH Treasury Money
Market, Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Income, Equity Index, Growth & Income Equity, Small Cap Equity, Small Cap
Equity Index, International Equity and Balanced Portfolios, which are described
in separate Prospectuses. The Portfolio represents a separate pool of assets
with a different investment objective and different policies than the Fund's
other portfolios (as described below under "Investment Objective, Policies and
Risk Considerations"). MVA serves as adviser, Mercantile as custodian, BISYS
Fund Services Ohio, Inc. as administrator, and BISYS Fund Services as sponsor
and distributor. For information on expenses, fee waivers and services, see
"Certain Financial Information" and "Management of the Fund."
The following information generally describes the Portfolio and its
investment objective. There can be no assurance that the Portfolio will be able
to achieve its investment objective.
The Growth Equity Portfolio is designed for investors who seek capital
growth and who are prepared to accept the risks associated with an investment in
equity securities. See "Investment Objective, Policies and Risk Considerations"
below.
Investors should note that the Portfolio may, subject to its investment
policies and limitations, invest in the securities of foreign issuers, enter
into repurchase agreements and reverse repurchase agreements, make securities
loans, invest in put and call options and futures and options on futures and
make limited investments in illiquid securities and securities issued by other
investment companies. These investment practices involve investment risks of
varying degrees. For example, the securities of a foreign issuer entail certain
inherent risks, such as future political and economic developments and the
adoption of foreign government restrictions, that might adversely affect the
payment of dividends or principal and interest. Default by a counterparty to a
repurchase agreement or securities lending transaction could expose the
Portfolio to loss because of adverse market action or possible delay in
disposing of the underlying collateral. Reverse repurchase agreements are
subject to the risk that the market value of the securities sold by the
Portfolio will decline below the repurchase price which the Portfolio is
obligated to pay. Purchasing options is a specialized investment technique which
entails a substantial risk of loss of amounts paid as premiums to option
writers. There is no assurance that a liquid market will exist for a particular
futures contract at any particular time. The Portfolio may engage in short-term
trading, which may also involve greater risk and increase the Portfolio's
expenses. See "Investment Objective, Policies and Risk Considerations" below and
the Statement of Additional Information under "Investment Objective and
Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Fund also offers the availability of a
family of eighteen mutual funds should your investment goals change.
This Prospectus describes the Institutional Shares of the Portfolio. For
information on purchasing, exchanging or redeeming Institutional Shares of the
Portfolio, please see "How to Purchase and Redeem Shares" below.
2
<PAGE> 43
CERTAIN FINANCIAL INFORMATION
Shares of the Portfolio have been classified into four classes of
Shares--Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of each class in the Portfolio represent equal, pro rata
interests in the investments held by the Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. See
"Other Information Concerning the Fund and Its Shares," "Management of the
Fund--Administrative Services Plan" and "Management of the Fund--Custodian,
Transfer Agent and Sub-Transfer Agent" below. As a result of payments for
distribution and/or shareholder administrative servicing fees and certain other
operating expenses that may be made in differing amounts, the net investment
income of Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares in the Portfolio can be expected, at any given time, to be different.
The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds, which was organized as a Massachusetts business trust. On November
21, 1997, the Predecessor Portfolio was reorganized as a new portfolio of the
Fund. Prior to the reorganization, the Predecessor Portfolio offered and sold
shares of beneficial interest that were similar to the Fund's Investor A Shares.
3
<PAGE> 44
EXPENSE SUMMARY FOR INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
GROWTH
EQUITY
PORTFOLIO
---------
<S> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of average net assets)
Investment Advisory Fees........................................................... .75%
12b-1 Fees......................................................................... .00%
Other Expenses (including administration fees, administrative services fees and
other expenses) (net of fee waivers and expense reimbursements)(1,2)............ .55%
---
TOTAL PORTFOLIO OPERATING EXPENSES (net of fee waivers and expense
reimbursements)(3)................................................................. 1.30%
===
</TABLE>
- ---------------
(1) Administrative services fees are payable at an annual rate not to exceed
.30%. Without fee waivers, administration fees would be .20%.
(2) Without fee waivers and expense reimbursements, Other Expenses would be .65%
and Total Portfolio Operating Expenses would be 1.40%. Such fee waivers and
expense reimbursements are expected to continue during the current fiscal
year.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the end of each period:
Growth Equity Portfolio..................................................... $ 13 $41
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of the
Predecessor Portfolio is contained in the Arrow Funds' Annual and Semi-Annual
Reports dated September 30, 1996 and March 31, 1997, respectively, which may be
obtained without charge by contacting the Fund at the address or telephone
number provided on page 1 of this Prospectus.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Institutional
Shares will bear directly or indirectly. The table reflects the expenses which
the Portfolio expects to incur during the next twelve months on its
Institutional Shares. For more complete descriptions of the various costs and
expenses, see "Management of the Fund" in this Prospectus and the Statement of
Additional Information. The table and example have not been audited by the
Fund's independent auditors and do not reflect any charges that may be imposed
by financial institutions on their customers.
4
<PAGE> 45
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of the Portfolio, there can be no assurance that it will be able to do
so. The investment objective of the Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Unless otherwise indicated, the investment policies and limitations set forth
below may be changed without shareholder approval, although shareholders will be
notified before any material change in these policies and limitations becomes
effective.
The Portfolio's investment objective is capital appreciation. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
companies selected on the basis of assessment of earnings and the risk and
volatility of each company's business. Other factors, such as product position
or market share, will also be considered by the Adviser.
The Portfolio invests primarily in equity securities of companies selected
by the Adviser on the basis of traditional research techniques. The equity
securities in which the Portfolio invests are primarily those of middle to large
capitalization issuers whose shares are listed on the New York and American
Stock Exchanges. Company earnings are the primary consideration in selecting
portfolio securities. The Portfolio may invest in common stocks, preferred
stocks, convertible securities, corporate bonds, debentures, notes, warrants,
and put and call options on stocks, although normally it will invest at least
65% of its total assets in common stocks. The lowest rated debt obligation in
which the Portfolio will invest will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"). Securities rated Baa or BBB
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. Downgrades will be evaluated on
a case by case basis by the Adviser. The Adviser will determine whether or not
the security continues to be an acceptable investment. If it is determined not
to be an acceptable investment, the security will be sold. The applicable
ratings categories are described in Appendix A to the Statement of Additional
Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts. Securities of a foreign issuer may
present greater risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a matter of
practice, the Portfolio will not invest in the securities of a foreign issuer if
any such risk appears to the Adviser to be substantial. The Portfolio may not
invest more than 5% of its total assets in securities of foreign issuers. For
additional information on the risks of foreign securities, see "Risk Factors"
below.
In such proportions as, in the judgment of the Adviser, prevailing market
conditions warrant, the Portfolio may, for temporary defensive purposes, invest
in short-term money market instruments, securities issued and/or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements.
RISK FACTORS
MARKET RISK. The Portfolio invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Portfolio is
subject to market risks. That is, the
5
<PAGE> 46
possibility exists that common stocks will decline over short or even extended
periods of time and both the U.S. and certain foreign equity markets tend to be
cyclical, experiencing both periods when stock prices generally increase and
periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income securities
held by the Portfolio can be expected to vary inversely to changes in prevailing
interest rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in the Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and savings and loan
associations and foreign branches of U.S. banks and savings and loan
associations are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks and savings and loan associations.
OTHER APPLICABLE POLICIES
Investment methods described in this Prospectus are among those which the
Portfolio has the power to utilize. Some may be employed on a regular basis;
others may not be used at all. Accordingly, reference to any particular method
or technique carries no implication that it will be utilized or, if it is, that
it will be successful.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary
6
<PAGE> 47
during the period a shareholder owns Shares of the Portfolio. The U.S.
Government securities in which the Portfolio invests are either guaranteed or
issued by the U.S. Government, its agencies, or instrumentalities. These
securities include, but are not limited to, direct obligations of the U.S.
Treasury such as U.S. Treasury bills, notes and bonds; notes, bonds, and
discount notes issued or guaranteed by U.S. Government agencies and
instrumentalities supported by the full faith and credit of the United States;
notes, bonds, and discount notes of U.S. Government agencies or
instrumentalities which receive or have access to federal funding; and notes,
bonds, and discount notes of other U.S. Government instrumentalities supported
only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. Government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by the issuer's right
to borrow an amount limited to a specific line of credit from the U.S. Treasury;
the discretionary authority of the U.S. Government to purchase certain
obligations of an agency or instrumentality; or the credit of the agency or
instrumentality.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above, the
Portfolio may purchase "money market instruments," including commercial paper
and bank obligations.
Investment by the Portfolio in commercial paper will consist of issues that
are rated at the time of purchase in the highest rating category assigned by
S&P, Moody's or Fitch or, if unrated, deemed to be of comparable quality by the
Adviser at the time of purchase. Commercial paper may include variable and
floating rate instruments. See "Other Applicable Policies--Variable and Floating
Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. or foreign banks and savings
and loan associations (collectively, "banks"), if the bank has capital, surplus
and undivided profits at the time of purchase in excess of $100,000,000 or if
the principal amount of the obligation is insured in full by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the Federal Deposit Insurance Corporation. Although the Portfolio may invest
in obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Investments in the obligations of
foreign banks or foreign branches of U.S. banks will not exceed 25% of the
Portfolio's total assets at the time of purchase.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase rated
or unrated variable and floating rate instruments. These instruments may include
variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by the Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however, could make it difficult for the
Portfolio to dispose of an instrument if the issuer were to default on its
7
<PAGE> 48
payment obligation. The Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to its investment objective and policies, the Portfolio may agree to
purchase U.S. Government securities or other securities from financial
institutions such as banks and broker-dealers, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will enter into repurchase agreements only with
financial institutions such as banks and broker-dealers that the Adviser
believes to be creditworthy. During the term of any repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price (including accrued
interest). Default by a seller could expose the Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although the Portfolio presently does not intend to enter into repurchase
agreements providing for settlement in more than seven days, the Portfolio has
the authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to its investment policies and
limitations, the Portfolio may borrow funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at an agreed upon date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price which
the Portfolio is obligated to pay. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, the Portfolio
may, from time to time, lend portfolio securities on a short-term basis or a
long-term basis, or both, to broker-dealers, banks or institutional borrowers
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash or marketable
securities. The collateral must be valued daily and, should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to the lending Portfolio. By lending its securities, the Portfolio can increase
its income by continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when marketable securities
are used as collateral. In accordance with current Securities and Exchange
Commission ("SEC") policies, the Portfolio is currently limiting its securities
lending to one-third of its total assets. Loans are subject to termination by
the Portfolio or the borrower at any time.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Portfolio holds against decreases in value. The Portfolio
may also write covered call options on all or any portion of its portfolio to
generate income. The Portfolio may only write call options on securities either
held in its
8
<PAGE> 49
portfolio, or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or liquid securities in the
amount of any additional consideration.
The Portfolio may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Portfolio are not traded on
an exchange. The Portfolio purchases and writes options only with investment
dealers and other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Portfolio
will not buy call options or write put options, other than to close out open
option positions, without further notification to shareholders.
When the Portfolio writes a call option, it risks not participating in any
rise in the value of the underlying security. In addition, when the Portfolio
purchases puts on financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in its portfolio. This may cause the futures contract
and its corresponding put to react differently than the portfolio securities to
market changes. In addition, the Adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In such an event, the Portfolio may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options will exist at all
times. Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Portfolio's ability to establish and close out option positions depends on this
secondary market.
FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and sell
futures contracts to hedge against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates and market
conditions. Futures contracts call for the delivery of particular debt
instruments at a certain time in the future. The seller of the contract agrees
to make delivery of the type of instrument called for in the contract and the
buyer agrees to take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the differences between the value of the
index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Portfolio may also write options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Portfolio writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Portfolio is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
9
<PAGE> 50
The Portfolio may also write put options and purchase call options on
futures contracts as a hedge against rising purchase prices of portfolio
securities. The Portfolio will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels existing
at the time it enters into the transactions. When the Portfolio writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if the option is
exercised. As a purchaser of a call option on a futures contract, the Portfolio
is entitled (but not obligated) to purchase a futures contract at a fixed price
at any time during the life of the option.
The Portfolio may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of its total assets. When the Portfolio
purchases futures contracts, an amount of cash and liquid securities, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged. When the Portfolio sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
When the Portfolio uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in its
portfolio. This may cause the futures contract and any related options to react
differently than the portfolio securities to market changes. In addition, the
Adviser could be incorrect in its expectations about the direction or extent of
market factors such as stock price movements. In these events, the Portfolio may
lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Portfolio's ability to establish and close out futures and options positions
depends on this secondary market.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Portfolio may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act, which include, subject to certain exceptions, a prohibition on the
Portfolio investing more than 10% of the value of its total assets in such
securities. Investment companies in which the Portfolio may invest may impose
distribution fees as well as other types of commissions or charges. Such charges
will be payable by the Portfolio and, therefore, will be borne indirectly by its
shareholders. The Portfolio will invest in securities issued by other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio securities. See the Statement of Additional
Information under "Investment Objective and Policies--Securities of Other
Investment Companies."
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Portfolio purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete these
transactions may cause the Portfolio to miss a price or yield considered to
10
<PAGE> 51
be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market value of the securities purchased may vary
from the purchase prices.
The Portfolio may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may invest in restricted
securities. Restricted securities are any securities in which the Portfolio may
invest pursuant to its investment objective and policies but which are subject
to restriction on resale under federal securities law. The Portfolio will limit
investments in illiquid securities (including certain restricted securities not
determined by the Fund's Board of Directors to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement more than seven days after notice) to no more than 15% of its net
assets. The Portfolio intends that investments in securities that are not
registered under the Securities Act of 1933, as amended, but may be purchased by
institutional buyers under Rule 144A and for which a liquid trading market
exists, as determined by the Board of Directors of the Fund or the Adviser
(pursuant to guidelines adopted by the Board), will not be subject to the
Portfolio's 15% limitation on illiquid securities. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these restricted securities.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. Section 4(2) commercial paper is restricted as to disposition
under federal securities law, and is generally sold to institutional investors,
such as the Portfolio, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolio believes that Section 4(2)
commercial paper and certain other restricted securities, which meet the
criteria for liquidity established by the Fund's Board of Directors, are quite
liquid. Therefore, the Portfolio intends to treat these securities as liquid and
not subject to the investment limitation applicable to illiquid securities. In
addition, because these securities are liquid, the Portfolio will not subject
such securities to the limitation otherwise applicable to restricted securities.
PORTFOLIO TRANSACTIONS. All orders for transactions in securities or
options on behalf of the Portfolio are placed by the Adviser with broker-dealers
that it selects. To the extent permitted by the 1940 Act and guidelines adopted
by the Fund's Board of Directors, the Portfolio may utilize the Distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
11
<PAGE> 52
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and may
be changed only by a vote of a majority of the outstanding Shares of the
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objective and Policies."
1. With respect to 75% of the value of its total assets, the Portfolio will
not purchase securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements collateralized by such securities),
if as a result more than 5% of the value of its total assets would be invested
in the securities of that issuer. The Portfolio will not acquire more than 10%
of the outstanding voting securities of any one issuer.
2. The Portfolio will not invest 25% or more of the value of its total
assets in any one industry, provided, however, that the Portfolio may invest
more than 25% of the value of its total assets in cash or certain money market
instruments (including instruments issued by a U.S. branch of a domestic bank or
savings and loan association having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment), securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such securities.
3. The Portfolio will not issue senior securities, except that the
Portfolio may borrow money directly or indirectly through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, and except to the extent that the Portfolio may enter into
futures contracts. The Portfolio will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of its portfolio by
enabling the Portfolio to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolio will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
4. The Portfolio will not lend any of its assets except portfolio
securities in an amount up to one-third the value of its total assets. The
Portfolio shall not be prevented from purchasing or holding U.S. Government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions where
permitted by the Portfolio's investment objective, policies and limitations.
For purposes of Investment Limitation No. 2 above, money market instruments
shall include bankers' acceptances, negotiable certificates of deposit and
negotiable time deposits of U.S. or foreign banks and savings and loan
associations.
Except with respect to the Portfolio's policy regarding the borrowing of
money, if a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting solely from a change in
the value of the Portfolio's securities will not constitute a violation of such
limitation.
12
<PAGE> 53
PRICING OF SHARES
The Portfolio's net asset value per Share is determined by the
Administrator as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on each weekday,
with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently, one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Investments in debt securities
with remaining maturities of 60 days or less may be valued based upon the
amortized cost method. For further information about valuation of investments,
see "Net Asset Value" in the Statement of Additional Information.
The public offering price for each class of Shares is based upon net asset
value per Share plus, in the case of Investor A Shares, a front-end sales
charge. A class will calculate its net asset value per Share by adding the value
of the Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of Shares, the net asset value per Share
of Investor B Shares of the Portfolio will generally be lower that the net asset
value per Share of Trust, Institutional or Investor A Shares of the Portfolio
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Institutional Shares are sold to financial institutions, such as banks,
trust companies, thrift institutions, mutual funds or other financial
institutions (collectively "financial institutions") acting on behalf of their
employee benefit, retirement plan or other such accounts for which they do not
have investment discretion. Institutional Shares are sold to qualified
purchasers without a sales charge imposed by the Fund or the Distributor.
Generally, investors purchase Institutional Shares through a financial
institution, which is responsible for transmitting purchase orders directly to
the Fund.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
13
<PAGE> 54
Financial institutions placing orders directly or on behalf of their
clients 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. An investor's Shares are held in the name
of the financial institution that has entered into a servicing agreement with
the Fund, and such financial institution is responsible for transmitting
purchase, exchange and redemption orders to the Fund on a timely basis,
recording all purchase, exchange and redemption transactions, and providing
regular account statements which confirm such transactions to beneficial owners
(or arranging for such services). Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting financial
institution.
If purchase orders are received in good form and accepted by the Fund prior
to 4:00 p.m. (Eastern time) on any Business Day, Institutional Shares will be
priced according to the net asset value per Share next determined on that day
after receipt of the order. Immediately available funds must be received by the
Custodian prior to 4:00 p.m. on the next Business Day following receipt of such
order. If funds are not received by such date, the order will be cancelled, and
notice thereof will be given to the financial institution placing the order.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to exchange Institutional
Shares of the Portfolio for Institutional Shares of another portfolio offered by
the Fund. Exchanges for Institutional Shares in another portfolio are effected
at net asset value without payment of any exchange or sales charges. The
exchange privilege may be exercised only in those states where Institutional
Shares of such other portfolio may be legally sold.
The Fund reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders. An investor may telephone an exchange request by calling his or
her financial institution, which is responsible for transmitting such request to
the Fund. See "Other Exchange or Redemption Information" below. An investor
should consult the financial institution or the Fund for further information
regarding procedures for exchanging Shares.
In addition to the Growth Equity Portfolio described in this Prospectus,
the Fund currently offers Institutional Shares in the following portfolios:
- The ARCH Treasury Money Market Portfolio
- The ARCH 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 Equity Income Portfolio
- The ARCH Equity Index Portfolio
- The ARCH Growth & Income Equity Portfolio
14
<PAGE> 55
- The ARCH Small Cap Equity Portfolio
- The ARCH Small Cap Equity Index Portfolio
- The ARCH International Equity Portfolio
- The ARCH Balanced Portfolio
For information concerning these portfolios, please call 1-800-452-4015.
Shareholders exercising the exchange privilege with any of the other portfolios
in the Fund should request and review the portfolio's prospectus carefully prior
to making an exchange.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same financial
institution that placed the original purchase order. Redemption orders are
effected at the Portfolio's net asset value per Share next determined after
receipt of the order by the Fund. The financial institution is responsible for
transmitting redemption orders to the Fund on a timely basis. Proceeds from
redemptions of Institutional Shares of the Portfolio with respect to redemption
orders received and accepted by the Fund before 4:00 p.m. (Eastern time) on a
Business Day normally are sent electronically to the financial institution that
placed the redemption order the next Business Day after the Distributor's
receipt of the order in good form. A charge for sending redemption payments
electronically may be imposed by the Fund. The Fund reserves the right to send
redemption proceeds electronically within seven days after receiving a
redemption order if, in the judgment of the Adviser, an earlier payment could
adversely affect the Portfolio.
A written request for redemption must be received by the Fund in order to
honor the request. The Transfer Agent may require a signature guarantee by an
eligible guarantor institution. For purposes of this policy, the term "eligible
guarantor institution" shall include banks, brokers, dealers, credit unions,
securities exchanges and associations, clearing agencies and savings
associations as those terms are defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended. The Transfer Agent reserves the right to
reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000. The signature guarantee requirement will be waived
if all of the following conditions apply: (1) the redemption check is payable to
the shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact the financial institution servicing his or her account or the
Distributor. Additional documentation may be required if the redemption is
requested by a corporation, partnership, trust, fiduciary, executor, or
administrator.
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, due to
temporary adverse conditions, investors are
15
<PAGE> 56
unable to effect telephone transactions, investors are encouraged to follow the
procedures described in "Other Exchange or Redemption Information" below.
OTHER EXCHANGE OR REDEMPTION INFORMATION
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
financial institution through which the original Shares were purchased or
directly to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in the Portfolio upon 60
days' written notice if the balance in the shareholder's account drops below
$500. The Fund will not require a shareholder to redeem Portfolio Shares if the
value of the shareholder's account drops below $500 due to fluctuations in net
asset value.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares of the Portfolio.
YIELD AND TOTAL RETURN FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
the Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
From time to time, performance information such as total return and yield
data for the Portfolio's Institutional Shares may be quoted in advertisements or
in communications to shareholders. The yield is computed based on the net income
of such Shares during a 30-day (or one month) period identified in connection
with the particular yield quotation. More specifically, the yield is computed by
dividing the Portfolio's net income per Share during a 30-day (or one month)
period by the net asset value per Share on the last day of the period and
analyzing the result.
The Portfolio's total returns may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to Institutional
Shares reflect the average annual percentage change in value of an investment in
such Shares over the particular measuring period. Aggregate total returns
reflect the cumulative percentage change in value over the measuring period.
Both methods of calculating total returns assume that dividends and capital gain
distributions made by the Portfolio during the period are reinvested in the
Portfolio's Institutional Shares. When considering average annual total
16
<PAGE> 57
return figures for periods longer than one year, it is important to note that
the Portfolio's annual total return for any one year in the period might have
been more or less than the average for the entire period.
Performance data of the Portfolio's Institutional Shares may be compared to
the performance of other mutual funds with comparable investment objectives and
policies through various mutual fund or market indices and data such as that
provided by S&P, Lehman Brothers, Inc. or any of its affiliates, Ibbotson
Associates, Inc., Lipper Analytical Services, Inc. and Mutual Fund Forecaster.
References may also be made to indices or data published in Money Magazine,
Forbes, Barron's, The Wall Street Journal, The New York Times, Business Week,
American Banker, Institutional Investor, Pensions and Investments, U.S.A. Today,
Fortune, CDA/Weisenberger, Morningstar, Inc. and publications of a local or
regional nature. In addition to performance information, general information
about the Portfolio that appears in a publication such as those mentioned above
may be included in advertisements and in reports to shareholders.
Performance quotations of a class of Shares in the Portfolio represent past
performance and should not be considered as representative of future results.
Any account fees charged by Service Organizations (as described under
"Management of the Fund--Service Organizations") or other institutions will not
be included in the calculations of the Portfolio's yields and total returns.
Such fees, if any, will reduce the investor's net return on an investment in the
Portfolio. Investors may call 1-800-452-4015 to obtain current yield and total
return information.
DIVIDENDS AND DISTRIBUTIONS
Net investment income of the Portfolio is declared and paid monthly as a
dividend to shareholders of record. Dividends on each Share of the Portfolio are
determined in the same manner and are paid in the same amount, irrespective of
class, except that the Portfolio's Trust Shares and Institutional Shares bear
all expenses of the respective Administrative Services Plans adopted for such
Shares and the Portfolio's Investor A Shares and Investor B Shares bear all
expenses of the respective Distribution and Services Plans adopted for such
Shares. In addition, the Portfolio's Institutional Shares bear the expense of
certain sub-transfer agency fees. See "Management of the Fund" and "Other
Information Concerning the Fund and Its Shares" below.
Net realized capital gains of the Portfolio, if any, are distributed at
least annually. All dividends and distributions paid on the Portfolio's Shares
are automatically reinvested in additional Shares of the same class unless the
investor has (i) otherwise indicated on the account application, or (ii)
redeemed all the Shares held in the Portfolio, in which case a distribution will
be paid in cash. Reinvested dividends and distributions will be taxed in the
same manner as those paid in cash.
TAXES
FEDERAL TAXES
Management of the Fund believes that the Predecessor Portfolio qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), for the taxable year ended September 30, 1997. It is
intended that the Portfolio will qualify as a regulated
17
<PAGE> 58
investment company as long as such qualification is in the best interests of
shareholders. A regulated investment company generally is exempt from federal
income tax on amounts distributed to shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if any) net of
certain deductions for such year. In general, the Portfolio's investment company
taxable income will be its taxable income, including dividends, interest and
short-term capital gains (the excess of net short-term capital gain over net
long-term capital loss), subject to certain adjustments and excluding the excess
of any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. It is the policy of the Portfolio to
distribute as dividends substantially all of its investment company taxable
income and any net tax-exempt interest income each year. Such dividends will be
taxable as ordinary income to the Portfolio's shareholders who are not currently
exempt from federal income taxes, whether such income is received in cash or
reinvested in additional Shares. (Federal income taxes for distributions to an
IRA are deferred under the Code.) In the case of the Portfolio, such dividends
will qualify for the dividends received deduction for corporations to the extent
of the total qualifying dividends received by the Portfolio from domestic
corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. The Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such dividends are received in
cash or reinvested in additional Shares.
An investor considering purchasing Shares of the Portfolio on or just
before the record date of any dividend or capital gains distribution should be
aware that the amount of the forthcoming distribution, although in effect a
return of capital, will be taxable.
Dividends declared by the Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the
Portfolio on December 31 of such year in the event such dividends are actually
paid during January of the following year.
The Portfolio may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
18
<PAGE> 59
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by the Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolio and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the Fund's assets,
which were approximately $2.5 billion. MVA also serves as investment adviser to
each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the Portfolio's average daily net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1996 pursuant to the investment advisory agreement then in effect
with Mark Twain Bank, its former adviser, at the effective annual rate of .75%
of its average daily net assets after fee waivers. Without
19
<PAGE> 60
fee waivers, the Predecessor Portfolio would have borne advisory fees at the
annual rate of .75% of its average daily net assets.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the 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 Mercantile common funds. He managed the Predecessor Portfolio
since October, 1997 and also manages the Fund's Equity Income Portfolio.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolio's Administrator. The Administrator also serves
as the administrator to each of the Fund's other portfolios.
The Administrator generally assists in all aspects of each Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolio's arrangements with Service Organizations under the
Administrative Services Plan described below. For its services, the
Administrator is entitled to receive a fee, computed daily and payable monthly,
at the annual rate of .20% of the Portfolio's average daily net assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the fees otherwise payable by the Portfolio in order to increase the net
income available for distribution to shareholders.
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1996 pursuant to the administrative services agreement then
in effect with Federated Administrative Services, its former administrator, at
the effective annual rate of .39% of its average daily net assets.
DISTRIBUTOR
Institutional Shares of the Portfolio are sold continuously by the
Distributor, BISYS Fund Services ("BISYS"), an affiliate of the Administrator.
BISYS is a registered broker-dealer with principal offices at 3435 Stelzer Road,
Columbus, Ohio 43219. The Distributor also acts as distributor to each of the
Fund's other portfolios.
ADMINISTRATIVE SERVICES PLAN
The Fund has adopted an Administrative Services Plan with respect to
Institutional Shares of the Portfolio. Pursuant to the Administrative Services
Plan, Institutional Shares are sold to banks and other financial institutions
(which may include Mercantile or its affiliated or correspondent banks) on
behalf of their qualified accounts (such financial institutions collectively,
the "Service Organizations"), which agree to provide certain shareholder
administrative services for their clients or account holders (collectively, the
"customers") who are the beneficial owners of such Shares. The holders of
Institutional Shares bear separately their pro rata portion of the fees which
may be paid to Service Organizations for such services at an annual rate of up
to .30% of the average daily net assets of the Portfolio's Institutional Shares
owned beneficially by a Service Organization's customers.
20
<PAGE> 61
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Administrative Services Plan
(collectively, the "Servicing Agreements") require the Service Organizations
receiving such compensation (which may include Mercantile and its affiliates) to
perform certain services, including providing administrative services with
respect to the beneficial owners of Institutional Shares of the Portfolio, such
as establishing and maintaining accounts and records for their customers who
invest in such Shares, assisting customers in processing purchase, exchange and
redemption requests, and responding to customer inquiries concerning their
investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreements with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any sub-contractor as it would be for its own acts or omissions.
The fees payable to any sub-contractor are paid by the Service Organization out
of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by the
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such Service Organizations
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN, TRANSFER AGENT AND SUB-TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of the Portfolio's assets. BISYS Fund
Services Ohio, Inc. also serves as the Portfolio's transfer agent and dividend
disbursing agent. Its address is 3435 Stelzer Road, Columbus, Ohio 43219.
Pursuant to an agreement with BISYS Fund Services Ohio, Inc. and in
connection with the Institutional Shares offered to its customers, a financial
institution (which may include Mercantile or its affiliated or correspondent
banks) may serve as sub-transfer agent with respect to the underlying beneficial
owners of Institutional Shares. For the account maintenance services provided, a
sub-transfer agent is entitled to receive an annual fee of $30 with respect to
each beneficial owner's holding in Institutional Shares (irrespective of the
number of portfolios of the Fund in which such Institutional Shares are held).
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 distribut-
21
<PAGE> 62
ing securities such as Shares of the Portfolio. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolio contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal laws expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolio and its shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolio. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by the Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in the
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the Securities and Exchange Commission, the Department of Labor
or state securities commissions, should consult legal counsel before entering
into Servicing Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all of their own expenses in
connection with the performance of their services, except that the Distributor
is compensated pursuant to the Distribution and Services Plans (as described
below under "Other Information Concerning the Fund and Its Shares"). The
Portfolio's expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to the Adviser and Administrator, transfer agency fees,
fees and expenses of officers and directors who are not affiliated with the
Adviser or the Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying the Portfolio and its Shares for distribution under
federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors' and
officers' liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
22
<PAGE> 63
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular portfolio will be allocated among all the Fund's
portfolios by or under the direction of the Board of Directors in a manner the
Board determines to be fair and equitable. Any expenses relating only to a
particular class of Shares within a portfolio will be borne solely by such
class. See "Certain Financial Information" and "Management of the Fund" above
for additional information regarding expenses of the Portfolio.
OTHER INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional shares of common stock, and to classify and
reclassify any unauthorized and unissued shares into one or more classes of
shares. The Board of Directors may similarly classify or reclassify any class of
shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolio, which is classified as a diversified company under the 1940 Act: 50
million Trust Shares, 25 million Institutional Shares, 25 million Investor A
Shares and 25 million Investor B Shares. Investor A Shares, Investor B Shares
and Trust Shares of the Portfolio are described in separate prospectuses which
are available from the Distributor at the telephone number on page 1 of this
Prospectus. The Board of Directors has also authorized the issuance of
additional classes of shares representing interests in other investment
portfolios of the Fund, which are likewise described in separate prospectuses
available from the Distributor. Shares in the Portfolio will be issued without
Share certificates.
The Institutional Shares of the Portfolio are described in this Prospectus.
The Portfolio also offers Trust Shares, Investor A Shares and Investor B Shares.
Trust Shares, which are offered to financial institutions acting on their own
behalf or on behalf of certain qualified accounts, are sold without a sales
charge. Investor A Shares and Investor B Shares are sold through selected
broker-dealers and other financial intermediaries to individual or institutional
customers. Investor A Shares of the Portfolio are sold with a maximum 4.5%
front-end sales charge and Investor B Shares of the Portfolio are sold with a
maximum 5.0% contingent deferred sales charge. Trust Shares, Institutional
Shares, Investor A Shares and Investor B Shares bear their pro rata portion of
all operating expenses paid by the Portfolio, except that Trust Shares and
Institutional Shares bear all payments under the Portfolio's respective
Administrative Services Plans adopted for such Shares and Investor A Shares,
Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of the Portfolio bear the expense of certain sub-transfer
agency fees.
23
<PAGE> 64
Payments under the Administrative Services Plan for Trust Shares are made
to Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of Trust
Shares. Payments under the Administrative Services Plan may not exceed .30% (on
an annual basis) of the average daily net asset value of the Portfolio's
outstanding Trust Shares.
Payments under the Distribution and Services Plans for Investor A Shares
and Investor B Shares are made to (i) the Distributor or another person for
providing distribution assistance and assuming certain related expenses, and
(ii) Service Organizations for administrative services provided to the Service
Organizations' clients or account holders who are the beneficial owners of
Investor A Shares or Investor B Shares. Payments under the Distribution and
Services Plan for Investor A Shares may not exceed .30% (on an annual basis) of
the average daily net asset value of the outstanding Investor A Shares of the
Portfolio. Payments under the Distribution and Services Plan for Investor B
Shares may not exceed 1.00% (on an annual basis) of the average daily net asset
value of outstanding Investor B Shares of the Portfolio. Distribution payments
made under the Distribution and Services Plans are subject to the requirements
of Rule 12b-1 under the 1940 Act.
The Fund offers various services and privileges in connection with Investor
A Shares and Investor B Shares of the Portfolio that are not offered in
connection with its Trust Shares or Institutional Shares, including an automatic
investment program and an automatic withdrawal plan. In addition, each class of
Shares offers different exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
portfolios of the Fund will vote together and not by class unless otherwise
required by law or permitted by the Board of Directors. All shareholders of a
particular portfolio will vote together as a single class on matters relating to
the portfolio's investment advisory agreement and 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 of shareholders 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 of shareholders to vote on the
question of removal of a director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
24
<PAGE> 65
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of the Portfolio means, with respect to the approval of an investment
advisory agreement or a change in an investment objective or fundamental
investment policy, the affirmative vote of the lesser of (a) more than 50% of
the outstanding Shares of the Portfolio (irrespective of class), or (b) 67% or
more of the Shares of the Portfolio (irrespective of class) present at a meeting
if more than 50% of the outstanding Shares of the Portfolio are represented at
the meeting in person or by proxy.
As of June 3, 1997, Mercantile and its affiliates possessed, of record on
behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolio may be directed to the Fund at
1-800-452-4015.
25
<PAGE> 66
[This Page Intentionally Left Blank]
<PAGE> 67
[This Page Intentionally Left Blank]
<PAGE> 68
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIO'S
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIO, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIO, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights................................ 2
Certain Financial Information............. 3
Expense Summary for Institutional
Shares.................................. 4
Investment Objective, Policies and Risk
Considerations.......................... 5
Pricing of Shares......................... 13
How to Purchase and Redeem Shares......... 13
Exchange Privilege...................... 14
Redemption of Shares.................... 15
Other Exchange or Redemption
Information........................... 16
Yields and Total Returns.................. 16
Dividends and Distributions............... 17
Taxes..................................... 17
Management of the Fund.................... 19
Other Information Concerning the
Fund and its Shares..................... 23
Miscellaneous............................. 25
</TABLE>
Investment Adviser:
Mississippi Valley Advisors Inc.
a wholly-owned subsidiary of
Mercantile Bank
National Association
Distributor:
BISYS Fund Services
THE ARCH FUND(R), INC.
GROWTH EQUITY PORTFOLIO
INSTITUTIONAL SHARES
PROSPECTUS
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 69
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
---------------------
(Investor A and B Shares)
The ARCH Growth Equity Portfolio
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... Expense Summary
for Investor A and
Investor B Shares
3. Condensed Financial
Information................................................. Certain Financial
Information;
Financial
Highlights; Yields
and Total
Returns
4. General Description
of Registrant............................................... Highlights;
Investment
Objectives, Policies
and Risk
Considerations;
Other Information
Concerning the Fund
and Its Shares
5. Management of the Fund........................................ Management of the
............................................................. Fund
5A. Management's Discussion of
Fund Performance............................................ Inapplicable
6. Capital Stock and
Other Securities............................................ How to Purchase and
Redeem Shares;
Dividends
and Distributions;
Taxes; Other
Information
Concerning the Fund
and Its Shares
7. Purchase of Securities
Being Offered............................................... How to Purchase and
Redeem Shares
8. Redemption or Repurchase...................................... How to Purchase and
Redeem Shares
9. Pending Legal Proceedings..................................... Inapplicable
</TABLE>
<PAGE> 70
THE ARCH FUND(R), INC.
SUPPLEMENT DATED JANUARY 29, 1998 TO THE
PROSPECTUS DATED SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
GROWTH EQUITY PORTFOLIO
INVESTOR A AND INVESTOR B SHARES
THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT
CONTAINED IN THE PROSPECTUS AND SHOULD BE RETAINED AND READ IN CONJUNCTION WITH
THE PROSPECTUS.
--------------------------------
(1) The following information replaces the section entitled "Expense Summary for
Investor A and Investor B Shares" on pages 4 and 5 of the Prospectus:
<TABLE>
<CAPTION>
EXPENSE SUMMARY FOR
INVESTOR A AND INVESTOR B SHARES
GROWTH EQUITY
PORTFOLIO
---------------------
INVESTOR A INVESTOR B
---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on
Purchases (as a percentage of
offering price) 4.5%(1) NONE
Deferred Sales Charge
(as a percentage of offering
price) NONE 5.0%(2)
ANNUAL PORTFOLIO OPERATING
EXPENSES
(as a percentage of average
net assets)
Investment Advisory Fees .75% .75%
12b-1 Fees, including distribution
and service fees .30% 1.00%
Other Expenses (including
administration fees
and other expenses)
(net of fee waivers and
expense reimbursements)(3),(4) .25% .25%
--- ---
Total Portfolio Operating
Expenses (net of fee waivers
and expense reimbursements)(5) 1.30% 2.00%
---- ----
</TABLE>
<PAGE> 71
- ------------------------------------------------
1 Reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges -- Investor A Shares."
2 This amount applies to redemptions during the first year. The deferred
sales charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for
redemptions made during the second through sixth years, respectively.
No deferred sales charge is charged after the sixth year. See "How to
Purchase and Redeem Shares -- Applicable Sales Charge -- Investor B
Shares."
3 Without fee waivers, administration fees would be .20%.
4 Without fee waivers and/or expense reimbursements, Other Expenses and
Total Portfolio Operating Expenses would be .35% and 1.40%,
respectively, for Investor A Shares and .35% and 2.10%, respectively,
for Investor B Shares.
<TABLE>
<CAPTION>
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) a 5%
annual return and (2) redemption at
the end of each period:
Growth Equity Portfolio
Investor A Shares(1) $ 58 $ 84 $117 $202
Investor B Shares
Assuming complete redemption
at end of period(2) $ 70 $ 93 $131 $222
Assuming no redemption $ 20 $ 63 $111 $222
- ----------------------
<FN>
1 Assumes deduction at time of purchase of maximum applicable front-end
sales charge.
2 Assumes deduction of maximum applicable contingent deferred sales
charge.
</FN>
</TABLE>
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of
the Predecessor Portfolio is contained in the financial statements included in
the Statement of Additional Information.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Investor A Shares
or Investor B Shares will bear directly or indirectly. The information contained
in the table with respect to Investor A Shares reflects the expenses which the
<PAGE> 72
Predecessor Portfolio incurred during the last fiscal year restated to reflect
the expenses which the Portfolio expects to incur during the current fiscal year
on its Investor A Shares. The information contained in the table with respect to
Investor B Shares reflects the expenses which the Portfolio expects to incur
during the current fiscal year on its Investor B Shares. For more complete
descriptions of the various costs and expenses, see "Management of the Fund" in
this Prospectus and the Statement of Additional Information. The table and
example have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
Because of the payments for distribution services (12b-1 fees) under
the Distribution and Services Plans as shown in the above table, long-term
shareholders of Investor A Shares and Investor B Shares of the Portfolio may pay
more than the economic equivalent of the maximum front-end sales load permitted
by the National Association of Securities Dealers, Inc.
(2) The following Financial Highlights replace those included on page 6 of the
Prospectus:
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following table supplements the
Predecessor Portfolio's financial statements which are included in the Statement
of Additional Information, and sets forth certain historical results for shares
of beneficial interest of the Predecessor Portfolio which were similar to
Investor A Shares of the Fund. The financial statements and the data reported in
the Financial Highlights for the fiscal years ended September 30, 1997, 1996,
1995 and 1994 and for the fiscal period ended September 30, 1993 were audited by
KPMG Peat Marwick LLP, independent accountants for the Predecessor Portfolio,
whose report thereon is included in the Statement of Additional Information.
<PAGE> 73
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
(FOR A SHARE OUTSTANDING THROUGH EACH PERIOD)
Year Ended September 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993(a)
----- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 15.06 $ 13.80 $ 9.74 $ 10.02 $ 10.00
Income from investment operations
Net investment income 0.08 0.12 0.10 0.07 0.04
Net realized and unrealized
gain (loss) on investments 4.75 1.32 4.05 (0.25) 0.02
------- ------- ------- ------- -------
Total from investment operations 4.83 1.44 4.15 (0.18) 0.06
------- ------- ------- ------- -------
Less distributions
Distributions from net
investment income (0.09) (0.11) (0.09) (0.07) (0.04)
Distributions from net
realized gain on
investments (1.05) (0.07) -- (0.03) --
------- ------- ------- ------- -------
Total distributions (1.14) (0.18) (0.09) (0.10) (0.04)
------- ------- ------- ------- -------
Net asset value, end of period $ 18.75 $ 15.06 $ 13.80 $ 9.74 $ 10.02
======= ======= ======= ======= =======
Total return(b) 33.85% 10.48% 42.90% (1.84%) 0.60%
Ratios to average net assets
Expenses 1.14% 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.44% 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c) 0.25% 0.28% 0.30% 0.28% 0.30%*
Supplemental data
Net assets, end of period
(000 omitted) $68,965 $55,573 $43,708 $30,282 $31,159
Average commission rate paid(d) $0.0815 $0.0756 -- -- --
Portfolio turnover 42% 45% 45% 127% 54%
- -----------------
<FN>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or contingent deferred sales charge, if
applicable.
(c) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on
which commissions were charged. This disclosure is required for fiscal years beginning on or after September 1,
1995.
</FN>
</TABLE>
(3) The third paragraph of the section entitled "Taxes" on page 29 of the
Prospectus is replaced with the following:
Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders.
The Portfolio will generally have no tax liability with respect to such
gains and the distributions will be taxable to shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the Shares and whether
such dividends are received in cash or reinvested in additional Shares. Such
long-term capital gain will be 20% or 28% rate gain, depending upon the
Portfolio's holding period for the assets the sale of which generated the
capital gain.
(4) The sixth paragraph of the section entitled "Taxes on page 29 of the
Prospectus is replaced with the following:
The Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to backup withholding by the
Internal Revenue Service for prior failure to properly include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding
when required to do so or that they are "exempt recipients."
(5) The following replaces the section entitled "Management of the Fund --
Investment Adviser" on page 30 of the Prospectus:
<PAGE> 74
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment
adviser to the Portfolio. MVA's principal office is located at One Mercantile
Center, Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a
wholly-owned subsidiary of Mercantile. As of December 31, 1997, MVA had
approximately $9.4 billion in assets under investment management, including the
Fund's assets, which were approximately $3.9 billion. MVA also serves as
investment adviser to each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and
in accordance with the Fund's investment policies, MVA manages the Portfolio,
makes investment decisions with respect to and places orders for all purchases
and sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the
investment advisory agreement, MVA is entitled to receive fees, computed daily
and payable monthly, at the annual rate of .75% of the Portfolio's average daily
net assets.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year
September 30, 1997 pursuant to the investment advisory agreements then in effect
with MVA (or the predecessor adviser, Mark Twain Bank) at the effective annual
rate of .75% of its average daily net assets after fee waivers. Without fee
waivers, the Predecessor Portfolio would have borne advisory fees at the annual
rate of .75% of its average daily net assets.
The organizational arrangements of MVA require that all investment
decisions with respect to the Growth Equity Portfolio be made by MVA's Equity
Committee, and no one person is responsible for making recommendations to the
Committee.
(6) The fourth paragraph of the section entitled "Management of the Fund --
Administrator" on page 31 of the Prospectus is replaced with the following:
The Predecessor Portfolio bore administrative fees during the fiscal
year ended September 30, 1997 pursuant to the
<PAGE> 75
administrative services agreement then in effect with Federated Administrative
Services, its former administrator, at the effective annual rate of .15% of its
average daily net assets.
(7) The third sentence of the fourth paragraph of the section entitled "Other
Information Concerning the Fund and Its Shares -- Description of Shares" is
replaced with the following:
Trust Shares, which are offered to financial institutions acting on their
own behalf or on behalf of discretionary and non-discretionary accounts for
which they may receive account-level asset-based management fees, and
Institutional Shares, which are offered to financial institutions acting on
behalf of discretionary and non- discretionary accounts for which they do not
receive account-level asset-based management fees, are sold without a sales
charge.
(8) The first sentence of the second paragraph of the section "Other Information
Concerning the Fund and Its Shares -- Miscellaneous" on page 36 of the
Prospectus is replaced with the following:
As of December 31, 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.
<PAGE> 76
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
INVESTOR A SHARES AND INVESTOR B SHARES
<TABLE>
<S> <C>
For information, write: Or call your investment
P.O. Box 78069 representative or
St. Louis, Missouri 63178 the ARCH Funds' Service Center
at 1-800-452-2724
</TABLE>
The ARCH Fund, Inc. (the "Fund") is an open-end management investment
company that currently offers Shares in eighteen investment portfolios. This
Prospectus describes the Investor A Shares and the Investor B Shares in the ARCH
GROWTH EQUITY PORTFOLIO (the "Portfolio"). Investor A Shares and Investor B
Shares are sold through selected broker-dealers and other financial
intermediaries to individual or institutional customers. Investor A Shares are
sold with a front-end sales charge. Investor B Shares are sold with a contingent
deferred sales charge.
THE ARCH GROWTH EQUITY PORTFOLIO'S investment objective is capital
appreciation. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies selected on the basis of assessment
of earnings and the risk and volatility of each company's business. Other
factors, such as product position or market share, will also be considered.
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser"), a wholly-owned
subsidiary of Mercantile Bank National Association ("Mercantile"), acts as
investment adviser for the Portfolio; Mercantile serves as custodian; BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator; and BISYS
Fund Services (the "Distributor") serves as sponsor and distributor.
This Prospectus sets forth concisely certain information about the
Portfolio that prospective investors should know before investing. Investors
should read this Prospectus and retain it for future reference. Additional
information about the Portfolio, contained in a Statement of Additional
Information dated September 2, 1997 (as revised November 21, 1997), has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. An investor may obtain the
Statement of Additional Information without charge by writing the Fund at P.O.
Box 78069, St. Louis, Missouri 63178 or by calling 1-800-452-ARCH (2724).
Portfolio Shares are not bank deposits, are not federally insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other governmental agency, and are not the
obligations of or guaranteed or otherwise supported by any bank. An investment
in the Portfolio involves investment risk, including possible loss of principal.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 77
HIGHLIGHTS
The Fund is an open-end, management investment company (commonly known as a
mutual fund) registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund offers investment opportunities in eighteen
investment portfolios. This Prospectus relates to one of those Portfolios: the
ARCH GROWTH EQUITY PORTFOLIO. In addition, the Fund offers investment
opportunities in the ARCH Treasury Money Market, Money Market, Tax-Exempt Money
Market, U.S. Government Securities, Intermediate Corporate Bond, Bond Index,
Government & Corporate Bond, Short-Intermediate Municipal, Missouri Tax-Exempt
Bond, National Municipal Bond, Equity Income, Equity Index, Growth & Income
Equity, Small Cap Equity, Small Cap Equity Index, International Equity and
Balanced Portfolios, which are described in separate Prospectuses. The Portfolio
represents a separate pool of assets with a different investment objective and
different policies than the Fund's other portfolios (as described below under
"Investment Objective, Policies and Risk Considerations"). MVA serves as
adviser, Mercantile as custodian, BISYS Fund Services Ohio, Inc. as
administrator and BISYS Fund Services as sponsor and distributor. For
information on expenses, fee waivers, and services, see "Certain Financial
Information," "Financial Highlights" and "Management of the Fund."
The following information generally describes the Portfolio and its
investment objective. There can be no assurance that the Portfolio will be able
to achieve its investment objective.
The Portfolio is designed for investors who seek capital appreciation and
who are prepared to accept the risks associated with an investment in equity
securities. See "Investment Objective, Policies and Risk Considerations" below.
Investors should note that the Portfolio may, subject to its investment
policies and limitations, invest in the securities of foreign issuers, enter
into repurchase agreements and reverse repurchase agreements, make securities
loans, invest in put and call options and futures and options on futures, and
make limited investments in illiquid securities and securities issued by other
investment companies. These investment practices involve investment risks of
varying degrees. For example, the securities of a foreign issuer entail certain
inherent risks, such as future political and economic developments and the
adoption of foreign government restrictions, that might adversely affect the
payment of dividends or principal and interest. Default by a counterparty to a
repurchase agreement or securities lending transaction could expose a Portfolio
to loss because of adverse market action or possible delay in disposing of the
underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by the Portfolio will decline below
the repurchase price which the Portfolio is obligated to pay. Purchasing options
is a specialized investment technique which entails a substantial risk of loss
of amounts paid as premiums to option writers. There is no assurance that a
liquid market will exist for a particular futures contract at any particular
time. The Portfolio may engage in short-term trading, which may also involve
greater risk and increase the Portfolio's expenses. See "Investment Objective,
Policies and Risk Considerations" below and the Statement of Additional
Information under "Investment Objective and Policies."
The Fund offers investors the opportunity to invest in a variety of
professionally managed investments without having to become involved with
detailed management, accounting and safekeeping procedures normally related to
direct investments in securities. The Portfolio also
2
<PAGE> 78
offers the economic advantages of block trading in securities and the
availability of a family of eighteen mutual funds should an investor's
investment goals change.
This Prospectus describes the Investor A Shares and the Investor B Shares
of the Portfolio. Investor A Shares of the Portfolio are sold with a front-end
sales charge. Investor B Shares are sold with a contingent deferred sales
charge. For information on purchasing, exchanging or redeeming Investor A Shares
and Investor B Shares of the Portfolio, please see "How to Purchase and Redeem
Shares" below. For a discussion comparing Investor A Shares and Investor B
Shares, please see "Characteristics of Investor A Shares and Investor B Shares,"
and "Factors to Consider When Selecting Investor A Shares or Investor B Shares"
on pages 21 and 22, respectively.
3
<PAGE> 79
CERTAIN FINANCIAL INFORMATION
Shares of the Portfolio have been classified into four classes of
Shares -- Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares. Shares of each class in the Portfolio represent equal, pro rata
interests in the investments held by the Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. See
"Other Information Concerning the Fund and Its Shares," "Management of the
Fund -- Distribution and Services Plans," and "Management of the
Fund -- Custodian and Transfer Agent" below. As a result of payments for
distribution and/or shareholder administrative servicing fees and certain other
operating expenses that may be made in differing amounts, the net investment
income of Trust Shares, Institutional Shares, Investor A Shares and Investor B
Shares in the Portfolio can be expected, at any given time, to be different.
The Portfolio commenced operations on January 4, 1993 as the Arrow Equity
Portfolio, a separate investment portfolio (the "Predecessor Portfolio") of
Arrow Funds, which was organized as a Massachusetts business trust. On November
21, 1997, the Predecessor Portfolio was reorganized as a new portfolio of the
Fund. Prior to the reorganization, the Predecessor Portfolio offered and sold
shares of beneficial interests that were similar to the Fund's Investor A
Shares.
EXPENSE SUMMARY FOR
INVESTOR A AND INVESTOR B SHARES
<TABLE>
<CAPTION>
GROWTH EQUITY PORTFOLIO
------------------------
INVESTOR A INVESTOR B
---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Front-End Sales Load Imposed on Purchases
(as a percentage of offering price)........................................ 4.5%(1) NONE
Deferred Sales Charge (as a percentage of offering price).................... NONE 5.0%(2)
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees..................................................... .75% .75%
12b-1 Fees, including distribution and service fees.......................... .30% 1.00%
Other Expenses (including administration fees and other expenses)
(net of fee waivers and expense reimbursements)(3,4)....................... .25% .25%
---------- ----------
TOTAL PORTFOLIO OPERATING EXPENSES
(net of fee waivers and expense reimbursements)(5)......................... 1.30% 2.00%
======== ========
</TABLE>
- ---------------
(1) Reduced sales charge may be available. See "How to Purchase and Redeem
Shares -- Reduced Sales Charges -- Investor A Shares."
(2) This amount applies to redemptions during the first year. The deferred sales
charge decreases to 4.0%, 3.0%, 3.0%, 2.0% and 1.0% for redemptions made
during the second through sixth years, respectively. No deferred sales
charge is charged after the sixth year. See "How to Purchase and Redeem
Shares -- Applicable Sales Charge -- Investor B Shares."
(3) Without fee waivers, administration fees would be .20%.
(4) Without fee waivers and/or expense reimbursements, Other Expenses and Total
Portfolio Operating Expenses would be .35% and 1.40%, respectively, for
Investor A Shares and .35% and 2.10%, respectively, for Investor B Shares.
4
<PAGE> 80
EXAMPLE
<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:
Growth Equity Portfolio
Investor A Shares(1)........................................ $ 58 $ 84 $ 117 $202
Investor B Shares
Assuming complete redemption at end of period(2).......... $ 70 $ 93 $ 131 $222
Assuming no redemption.................................... $ 20 $ 63 $ 111 $222
</TABLE>
- ---------------
(1) Assumes deduction at time of purchase of maximum applicable front-end sales
charge.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
MORE OR LESS THAN THOSE SHOWN. Information about the actual performance of the
Predecessor Portfolio is contained in the Arrow Funds' Annual and Semi-Annual
Reports dated September 30, 1996 and March 31, 1997, respectively, which may be
obtained without charge by contacting the Fund at the address or telephone
number provided on page 1 of this Prospectus.
The purpose of the foregoing table is to assist in understanding the
various costs and expenses that an investor in the Portfolio's Investor A Shares
or Investor B Shares will bear directly or indirectly. The information contained
in the table reflects the expenses the Portfolio expects to incur during the
next twelve months on its Investor A and Investor B Shares. For more complete
descriptions of the various costs and expenses, see "Management of the Fund" in
this Prospectus and the Statement of Additional Information. The table and
example have not been audited by the Fund's independent auditors and do not
reflect any charges that may be imposed by financial institutions on their
customers.
Because of the payments for distribution services (12b-1 fees) under the
Distribution and Services Plans as shown in the above table, long-term
shareholders of Investor A Shares and Investor B Shares of the Portfolio may pay
more than the economic equivalent of the maximum front-end sales load permitted
by the National Association of Securities Dealers, Inc.
FINANCIAL HIGHLIGHTS
The "Financial Highlights" in the following table supplements the
Predecessor Portfolio's financial statements, which are contained in the Arrow
Funds' Annual and Semi-Annual Reports dated September 30, 1996 and March 31,
1997, respectively, and incorporated by reference into the Statement of
Additional Information, and sets forth certain historical results for shares of
beneficial interest of the Predecessor Portfolio which were similar to Investor
A Shares of the Fund. The financial statements and the data reported in the
Financial Highlights for the fiscal years ended September 30, 1996, 1995 and
1994 and for the fiscal period ended September 30, 1993 were audited by KPMG
Peat Marwick LLP, independent accountants for the Predecessor Portfolio, whose
report thereon is incorporated by reference into the Statement of Additional
Information. The financial statements and the data reported in the Financial
Highlights for the six-month period ended March 31, 1997 is unaudited.
5
<PAGE> 81
Further information about the performance of the Predecessor Portfolio is
contained in the Arrow Funds' Annual and Semi-Annual Reports dated September 30,
1996 and March 31, 1997, respectively, which may be obtained without charge by
contacting the Funds at the address or telephone number on page 1 of this
Prospectus.
PREDECESSOR GROWTH EQUITY FUND
(FOR A SHARE OUTSTANDING THROUGH EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------------------------
1997 1996 1995 1994 1993(a)
----------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 15.06 $ 13.80 $ 9.74 $ 10.02 $ 10.00
Income from investment operations
Net investment income.................. 0.06 0.12 0.10 0.07 0.04
Net realized and unrealized gain (loss)
on investments....................... 1.14 1.32 4.05 (0.25) 0.02
------- ------- ------- ------- -------
Total from investment operations....... 1.20 1.44 4.15 (0.18) 0.06
------- ------- ------- ------- -------
Less distributions
Distributions from net investment
income............................... (0.05) (0.11) (0.09) (0.07) (0.04)
Distributions from net realized gain on
investments.......................... (1.05) (0.07) -- (0.03) --
------- ------- ------- ------- -------
Total distributions.................... (1.10) (0.18) (0.09) (0.10) (0.04)
------- ------- ------- ------- -------
Net asset value, end of period........... $ 15.16 $ 15.06 $ 13.80 $ 9.74 $ 10.02
======= ======= ======= ======= =======
Total return(b).......................... 7.98% 10.48% 42.90% (1.84%) 0.60%
Ratios to average net assets
Expenses............................... 1.14%* 1.17% 1.28% 1.36% 1.32%*
Net investment income.................. 0.50%* 0.86% 0.90% 0.74% 0.62%*
Expense waiver/reimbursement(c)........ 0.25%* 0.28% 0.30% 0.28% 0.30%*
Supplemental data
Net assets, end of period (000
omitted)............................. $58,555 $55,573 $43,708 $30,282 $31,159
Average commission rate paid(d)........ $0.0905 $0.0757 -- -- --
Portfolio turnover..................... 25% 45% 45% 127% 54%
</TABLE>
- ---------------
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
6
<PAGE> 82
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Although management will use its best efforts to achieve the investment
objective of the Portfolio, there can be no assurance that it will be able to do
so. The investment objective of the Portfolio may not be changed without the
affirmative vote of a majority of the outstanding Shares of the Portfolio.
Unless otherwise indicated, the investment policies and limitations set forth
below may be changed without shareholder approval, although shareholders will be
notified before any material change in these policies and limitations becomes
effective.
The Portfolio's investment objective is capital appreciation. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
companies selected on the basis of assessment of earnings and the risk and
volatility of each company's business. Other factors, such as product position
or market share, will also be considered by the Adviser.
The Portfolio invests primarily in equity securities of companies selected
by the Adviser on the basis of traditional research techniques. The equity
securities in which the Portfolio invests are primarily those of middle to large
capitalization issuers whose shares are listed on the New York and American
Stock Exchanges. Company earnings are the primary consideration in selecting
portfolio securities. The Portfolio may invest in common stocks, preferred
stocks, convertible securities, corporate bonds, debentures, notes, warrants,
and put and call options on stocks, although normally it will invest at least
65% of its total assets in common stocks. The lowest rated debt obligation in
which the Portfolio will invest will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Ratings Group
("S&P") or Fitch Investors Service, Inc. ("Fitch"). Securities rated Baa or BBB
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. Downgrades will be evaluated on
a case by case basis by the Adviser. The Adviser will determine whether or not
the security continues to be an acceptable investment. If it is determined not
to be an acceptable investment, the security will be sold. The applicable
ratings categories are described in Appendix A to the Statement of Additional
Information.
The Portfolio may invest in the securities of foreign issuers which are
freely traded on United States securities exchanges or in the over-the-counter
market in the form of depository receipts. Securities of a foreign issuer may
present greater risks in the form of nationalization, confiscation, domestic
marketability, or other national or international restrictions. As a matter of
practice, the Portfolio will not invest in the securities of a foreign issuer if
any such risk appears to the Adviser to be substantial. The Portfolio may not
invest more than 5% of its total assets in securities of foreign issuers. For
additional information on the risks of foreign securities, see "Risk Factors"
below.
In such proportions as, in the judgment of the Adviser, prevailing market
conditions warrant, the Portfolio may, for temporary defensive purposes, invest
in short-term money market instruments, securities issued and/or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements.
RISK FACTORS
MARKET RISK. The Portfolio invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Portfolio is
subject to market risks. That is, the possibility
7
<PAGE> 83
exists that common stocks will decline over short or even extended periods of
time and both the U.S. and certain foreign equity markets tend to be cyclical,
experiencing both periods when stock prices generally increase and periods when
stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income securities
held by the Portfolio can be expected to vary inversely to changes in prevailing
interest rates. During periods of declining interest rates, the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and during periods of rising interest rates, the market value will
tend to decrease. Fixed income securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also offset the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
offset cash income from such securities but will be reflected in the Portfolio's
net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. Investments in securities of
foreign issuers, whether made directly or indirectly, carry certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, with respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and savings and loan
associations and foreign branches of U.S. banks and savings and loan
associations are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks and savings and loan associations.
OTHER APPLICABLE POLICIES
Investment methods described in this Prospectus are among those which the
Portfolio has the power to utilize. Some may be employed on a regular basis;
others may not be used at all. Accordingly, reference to any particular method,
or technique carries no implication that it will be utilized or, if it is, that
it be will successful.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities have historically involved little
risk of loss of principal if held to maturity. However, due to fluctuations in
interest rates, the market value of such securities may vary
8
<PAGE> 84
during the period a shareholder owns Shares of the Portfolio. The U.S.
Government securities in which the Portfolio invests are either guaranteed or
issued by the U.S. Government, its agencies, or instrumentalities. These
securities include, but are not limited to, direct obligations of the U.S.
Treasury such as U.S. Treasury bills, notes and bonds; notes, bonds, and
discount notes issued or guaranteed by U.S. Government agencies and
instrumentalities supported by the full faith and credit of the United States;
notes, bonds, and discount notes of U.S. Government agencies or
instrumentalities which receive or have access to federal funding; and notes,
bonds, and discount notes of other U.S. Government instrumentalities supported
only by the credit of the instrumentalities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. Government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These instrumentalities are supported by the issuer's right
to borrow an amount limited to a specific line of credit from the U.S. Treasury;
the discretionary authority of the U.S. Government to purchase certain
obligations of an agency or instrumentality; or the credit of the agency or
instrumentality.
MONEY MARKET INSTRUMENTS. Under certain circumstances described above, the
Portfolio may purchase "money market instruments," including commercial paper
and bank obligations.
Investment by the Portfolio in commercial paper will consist of issues that
are rated at the time of purchase in the highest rating category assigned by
S&P, Moody's or Fitch or, if unrated, deemed to be of comparable quality by the
Adviser at the time of purchase. Commercial paper may include variable and
floating rate instruments. See "Other Applicable Policies -- Variable and
Floating Rate Instruments" below.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. or foreign banks and savings
and loan associations (collectively, "banks"), if the bank has capital, surplus
and undivided profits at the time of purchase in excess of $100,000,000 or if
the principal amount of the obligation is insured in full by the Bank Insurance
Fund or the Savings Association Insurance Fund, both of which are administered
by the Federal Deposit Insurance Corporation. Although the Portfolio may invest
in obligations of foreign banks or foreign branches of U.S. banks only when the
Adviser determines that the instrument presents minimal credit risks, such
investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. Foreign banks and foreign
branches of U.S. banks are subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. Investments in the obligations of
foreign banks or foreign branches of U.S. banks will not exceed 25% of the
Portfolio's total assets at the time of purchase.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolio may purchase rated or
unrated variable and floating rate instruments. These instruments may include
variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by the Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however,
9
<PAGE> 85
could make it difficult for the Portfolio to dispose of an instrument if the
issuer were to default on its payment obligation. The Portfolio could, for these
or other reasons, suffer a loss with respect to such instruments.
REPURCHASE AGREEMENTS. Under certain circumstances described above and
subject to its investment objective and policies, the Portfolio may agree to
purchase U.S. Government securities or other securities from financial
institutions such as banks and broker-dealers, subject to the seller's agreement
to repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will enter into repurchase agreements only with
financial institutions such as banks and broker-dealers that the Adviser
believes to be creditworthy. During the term of any repurchase agreement, the
Adviser will continue to monitor the creditworthiness of the seller and will
require the seller to maintain the value of the securities subject to the
agreement at not less than 102% of the repurchase price (including accrued
interest). Default by a seller could expose the Portfolio to possible loss
because of adverse market action or possible delay in disposing of the
underlying obligations. Because of the seller's repurchase obligations, the
securities subject to repurchase agreements do not have maturity limitations.
Although the Portfolio presently does not intend to enter into repurchase
agreements providing for settlement in more than seven days, the Portfolio has
the authority to do so subject to its limitation on the purchase of illiquid
securities described below. Repurchase agreements are considered to be loans
under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Subject to its investment policies and
limitations, the Portfolio may borrow funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements, the Portfolio
would sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at an agreed upon date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price which
the Portfolio is obligated to pay. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
SECURITIES LENDING. To increase return or offset expenses, the Portfolio
may, from time to time, lend portfolio securities on a short-term basis or a
long-term basis, or both, to broker-dealers, banks or institutional borrowers
pursuant to agreements requiring that the loans be continuously secured by
collateral equal at all times in value to at least the market value of the
securities loaned. Collateral for such loans may include cash or marketable
securities. The collateral must be valued daily and, should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to the lending Portfolio. By lending its securities, the Portfolio can increase
its income by continuing to receive interest on the loaned securities as well as
by either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when marketable securities
are used as collateral. In accordance with current Securities and Exchange
Commission ("SEC") policies, the Portfolio is currently limiting its securities
lending to one-third of its total assets. Loans are subject to termination by
the Portfolio or the borrower at any time.
PUT AND CALL OPTIONS. The Portfolio may purchase put options on portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Portfolio holds against decreases in value. The Portfolio
may also write covered call options on all or any portion of its portfolio to
generate income. The Portfolio may only write call options on securities either
held in its
10
<PAGE> 86
portfolio, or which it has the right to obtain without payment of further
consideration, or for which it has segregated cash or liquid securities in the
amount of any additional consideration.
The Portfolio may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
when options on the portfolio securities held by the Portfolio are not traded on
an exchange. The Portfolio purchases and writes options only with investment
dealers and other financial institutions (such as commercial banks or savings
associations) deemed creditworthy by the Adviser.
Over-the-counter options are two-party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not. The Portfolio
will not buy call options or write put options, other than to close out open
option positions, without further notification to shareholders.
When the Portfolio writes a call option, it risks not participating in any
rise in the value of the underlying security. In addition, when the Portfolio
purchases puts on financial futures contracts to protect against declines in
prices of portfolio securities, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly with the
prices of the securities in its portfolio. This may cause the futures contract
and its corresponding put to react differently than the portfolio securities to
market changes. In addition, the Adviser could be incorrect in its expectations
about the direction or extent of market factors such as interest rate movements.
In such an event, the Portfolio may lose the purchase price of the put option.
Finally, it is not certain that a secondary market for options will exist at all
times. Although the Adviser will consider liquidity before entering into option
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option or at any particular time. The
Portfolio's ability to establish and close out option positions depends on this
secondary market.
FUTURES AND OPTIONS ON FUTURES. The Portfolio may purchase and sell futures
contracts to hedge against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and market conditions.
Futures contracts call for the delivery of particular debt instruments at a
certain time in the future. The seller of the contract agrees to make delivery
of the type of instrument called for in the contract and the buyer agrees to
take delivery of the instrument at the specified future time.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the differences between the value of the
index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
The Portfolio may also write options and purchase put options on futures
contracts as a hedge to attempt to protect its portfolio securities against
decreases in value. When the Portfolio writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Portfolio is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
11
<PAGE> 87
The Portfolio may also write put options and purchase call options on
futures contracts as a hedge against rising purchase prices of portfolio
securities. The Portfolio will use these transactions to attempt to protect its
ability to purchase portfolio securities in the future at price levels existing
at the time it enters into the transactions. When the Portfolio writes a put
option on a futures contract, it is undertaking to buy a particular futures
contract at a fixed price at any time during a specified period if the option is
exercised. As a purchaser of a call option on a futures contract, the Portfolio
is entitled (but not obligated) to purchase a futures contract at a fixed price
at any time during the life of the option.
The Portfolio may not purchase or sell futures contracts or related options
if immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of its total assets. When the Portfolio
purchases futures contracts, an amount of cash and liquid securities, equal to
the underlying commodity value of the futures contracts (less any related margin
deposits), will be deposited in a segregated account with the custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged. When the Portfolio sells
futures contracts, it will either own or have the right to receive the
underlying future or security, or will make deposits to collateralize the
position as discussed above.
When the Portfolio uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities in its
portfolio. This may cause the futures contract and any related options to react
differently than the portfolio securities to market changes. In addition, the
Adviser could be incorrect in its expectations about the direction or extent of
market factors such as stock price movements. In these events, the Portfolio may
lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Adviser will
consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. The
Portfolio's ability to establish and close out futures and options positions
depends on this secondary market.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Portfolio may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act, which include, subject to certain exceptions, a prohibition on the
Portfolio investing more than 10% of the value of its total assets in such
securities. Investment companies in which the Portfolio may invest may impose
distribution fees as well as other types of commissions or charges. Such charges
will be payable by the Portfolio and, therefore, will be borne indirectly by its
shareholders. The Portfolio will invest in securities issued by other investment
companies primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio securities. See the Statement of Additional
Information under "Investment Objective and Policies -- Securities of Other
Investment Companies."
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. These transactions are
arrangements in which the Portfolio purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete these
transactions may cause the Portfolio to miss a price or yield considered to be
12
<PAGE> 88
advantageous. Settlement dates may be a month or more after entering into these
transactions, and the market value of the securities purchased may vary from the
purchase prices.
The Portfolio may dispose of a commitment prior to settlement if the
Adviser deems it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may invest in restricted
securities. Restricted securities are any securities in which the Portfolio may
invest pursuant to its investment objective and policies but which are subject
to restriction on resale under federal securities law. The Portfolio will limit
investments in illiquid securities (including certain restricted securities not
determined by the Fund's Board of Directors to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement more than seven days after notice) to no more than 15% of its net
assets. The Portfolio intends that investments in securities that are not
registered under the Securities Act of 1933, as amended, but may be purchased by
institutional buyers under Rule 144A and for which a liquid trading market
exists, as determined by the Board of Directors of the Fund or the Adviser
(pursuant to guidelines adopted by the Board), will not be subject to the
Portfolio's 15% limitation on illiquid securities. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified institutional buyers become, for a time, uninterested
in purchasing these restricted securities.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. Section 4(2) commercial paper is restricted as to disposition
under federal securities law, and is generally sold to institutional investors,
such as the Portfolio, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolio believes that Section 4(2)
commercial paper and certain other restricted securities, which meet the
criteria for liquidity established by the Fund's Board of Directors, are quite
liquid. Therefore, the Portfolio intends to treat these securities as liquid and
not subject to the investment limitation applicable to illiquid securities. In
addition, because these securities are liquid, the Portfolio will not subject
such securities to the limitation otherwise applicable to restricted securities.
PORTFOLIO TRANSACTIONS. All orders for transactions in securities or
options on behalf of the Portfolio are placed by the Adviser with broker-dealers
that it selects. To the extent permitted by the 1940 Act and guidelines adopted
by the Fund's Board of Directors, the Portfolio may utilize the Distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
13
<PAGE> 89
INVESTMENT LIMITATIONS
The investment limitations set forth below are fundamental policies and may
be changed only by a vote of a majority of the outstanding Shares of the
Portfolio. Other investment limitations that also cannot be changed without a
vote of shareholders are contained in the Statement of Additional Information
under "Investment Objective and Policies."
1. With respect to 75% of the value of its total assets, the Portfolio will
not purchase securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and repurchase agreements collateralized by such securities),
if as a result more than 5% of the value of its total assets would be invested
in the securities of that issuer. The Portfolio will not acquire more than 10%
of the outstanding voting securities of any one issuer.
2. The Portfolio will not invest 25% or more of the value of its total
assets in any one industry, provided, however, that the Portfolio may invest
more than 25% of the value of its total assets in cash or certain money market
instruments (including instruments issued by a U.S. branch of a domestic bank or
savings and loan association having capital, surplus and undivided profits in
excess of $100,000,000 at the time of investment), securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements collateralized by such securities.
3. The Portfolio will not issue senior securities, except that the
Portfolio may borrow money directly or indirectly through reverse repurchase
agreements in amounts up to one-third the value of its total assets, including
the amount borrowed, and except to the extent that the Portfolio may enter into
futures contracts. The Portfolio will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of its portfolio by
enabling the Portfolio to, for example, meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Portfolio will not purchase any securities while any
borrowings in excess of 5% of its total assets are outstanding.
4. The Portfolio will not lend any of its assets except portfolio
securities in an amount up to one-third the value of its total assets. The
Portfolio shall not be prevented from purchasing or holding U.S. Government
obligations, money market instruments, variable rate demand notes, bonds,
debentures, notes, certificates of indebtedness or other debt securities,
entering into repurchase agreements or engaging in other transactions where
permitted by the Portfolio's investment objective, policies and limitations.
For purposes of Investment Limitation No. 2 above, money market instruments
shall include bankers' acceptances, negotiable certificates of deposit and
negotiable time deposits of U.S. or foreign banks and savings and loan
associations.
Except with respect to the Portfolio's policy regarding the borrowing of
money, if a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting solely from a change in
the value of the Portfolio's securities will not constitute a violation of such
limitation.
14
<PAGE> 90
PRICING OF SHARES
The Portfolio's net asset value per Share is determined by the
Administrator as of the close of regular trading hours on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m. Eastern time) on each weekday
with the exception of those holidays on which the Exchange or the Federal
Reserve Bank of St. Louis are closed (a "Business Day"). Currently one or both
of these institutions are closed on the customary national business holidays of
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day (observed), Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day (observed).
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at the last sale price on the national securities market.
Securities traded on only over-the-counter markets are valued on the basis of
market values when available. Securities for which there are no transactions are
valued at the average of the current bid and asked prices. Other securities,
including restricted and other securities for which market quotations are not
readily available, and other assets are valued at fair value by the Adviser
under the supervision of the Board of Directors. Investments in debt securities
with remaining maturities of 60 days or less may be valued based upon the
amortized cost method. For further information about valuation of investments,
see "Net Asset Value" in the Statement of Additional Information.
The public offering price for each class of Shares is based upon net asset
value per Share plus, in the case of Investor A Shares, a front-end sales
charge. A class will calculate its net asset value per Share by adding the value
of the Portfolio's investments, cash and other assets attributable to the class,
subtracting the Portfolio's liabilities attributable to that class, and then
dividing the result by the total number of Shares in the class that are
outstanding. Because the operating expenses of Investor B Shares are higher than
those associated with the other classes of shares, the net asset value per Share
of Investor B Shares of the Portfolio will generally be lower than the net asset
value per Share of Trust, Institutional or Investor A Shares of the Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
PURCHASE OF SHARES
Investor A Shares of the Portfolio are sold subject to a front-end sales
charge. Investor B Shares of the Portfolio are sold subject to a back-end sales
charge. This back-end sales charge declines over time and is known as a
"contingent deferred sales charge." Before choosing between Investor A Shares or
Investor B Shares of the Portfolio, investors should read "Characteristics of
Investor A Shares and Investor B Shares" and "Factors to Consider When Selecting
Investor A Shares or Investor B Shares" below.
Investor A Shares and Investor B Shares are sold through broker-dealers or
other organizations acting on behalf of their customers. Generally, investors
purchase Investor A Shares or Investor B Shares through a broker-dealer
organization which has a sales agreement with the Distributor or through an
organization which has entered into a servicing agreement with the Fund with
respect to Investor A Shares and/or Investor B Shares. The organization is
responsible for
15
<PAGE> 91
transmitting purchase orders directly to the Fund. Investors purchasing Shares
of the Portfolio must specify at the time of investment whether they are
purchasing Investor A Shares or Investor B Shares.
The minimum initial investment in the Portfolio is $1,000 and the minimum
for each subsequent investment is $100, except for investments made through (a)
the Automatic Investment Program, in which case the initial minimum and
subsequent minimum investments are $50, (b) a sweep program available through an
investor's financial institution, in which case there are no minimum
investments, (c) a payroll deduction program, in which case there is no minimum
initial investment and minimum subsequent investments are $25 per month, or (d)
a wrap fee program, in which case there are no minimum investments. The minimum
initial investment to participate in the Automatic Exchange Program is $5,000.
See "How to Purchase and Redeem Shares -- Exchange Privileges -- Automatic
Exchange Program" below for additional requirements.
Purchases may be effected on Business Days when the Adviser, Distributor
and Mercantile (the Custodian) are open for business. The Fund reserves the
right to reject any purchase order, including purchases made with foreign and
third party drafts or checks.
All orders for new IRAs or other retirement plan accounts placed through
BISYS Fund Services Ohio, Inc. (the "Transfer Agent") must be accompanied by an
account application. Account applications may be obtained from your investment
representative or the Fund at 1-800-452-ARCH (2724).
Organizations placing orders directly or on behalf of their customers
should contact the Fund at 1-800-452-ARCH (2724). Investors may also call the
Fund for information on how to purchase Shares.
EFFECTIVE TIME OF PURCHASE. If purchase orders are received in good form
and accepted by the Fund prior to 4:00 p.m. (Eastern time) on any Business Day,
Shares will be priced according to the net asset value per Share next determined
on that day after receipt of the order. Immediately available funds must be
received by the Custodian prior to 4:00 p.m. within three Business Days
following the receipt of such order. If funds are not received by such date, the
order will be cancelled, and notice thereof will be given to the person or
organization placing the order.
In the case of an order for the purchase of Shares placed through a
broker-dealer, it is the responsibility of the broker-dealer to promptly
transmit the order to the Distributor. If the broker-dealer fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the broker-dealer. Payment for orders which are not received or
accepted will be returned after prompt inquiry to the transmitting organization.
PURCHASES BY MAIL. To purchase Shares of the Portfolio by mail, complete an
account application and send it to the Fund along with a check (or other
negotiable bank draft or money order) in at least the minimum initial purchase
amount, made payable to the Portfolio. Investors purchasing Shares by mail must
indicate whether they wish to buy Investor A Shares or Investor B Shares.
Subsequent purchases of Shares of the Portfolio may be made at any time in at
least the minimum subsequent purchase amount by mailing a check payable to the
Portfolio.
All shareholders of record will receive confirmations of Share purchases,
exchanges, and redemptions in the mail. If Shares are held in the name of an
organization, such organization is
16
<PAGE> 92
responsible for transmitting purchase, exchange and redemption orders to the
Fund on a timely basis, recording all purchase, exchange and redemption
transactions, and providing regular account statements which confirm such
transactions to beneficial owners (or arranging for such services).
AUTOMATIC INVESTMENT PROGRAM (AIP)
Shareholders may open an account or add to their investment on a monthly
basis in a minimum amount of $50, on the 20th day (or the next Business Day
after the 20th) of each month. Under the AIP, funds may be automatically
withdrawn from the shareholder's checking account (as long as the shareholder's
bank is a member of the Automated Clearing House). Such funds are invested in
Investor A or Investor B Shares, as appropriate, at the net asset value plus any
applicable front-end sales charge next determined on the day an order is
effected by the Transfer Agent. An investor may apply for participation in the
AIP through the organization servicing his or her Fund account and by completing
the supplementary AIP authorization form. The AIP may be modified or terminated
by a shareholder on 30 days' written notice to his or her investment
representative or to the Fund, or by the Fund at any time.
The AIP is one means by which investors may use "Dollar Cost Averaging" in
making investments. Dollar Cost Averaging can be useful in investing in
portfolios such as the Portfolio whose price per Share fluctuates. Instead of
trying to time market performance, a fixed dollar amount is invested in
Portfolio Shares at predetermined intervals. This may help investors to reduce
their average cost per Share because the agreed upon fixed investment amount
allows more Shares to be purchased during periods of lower Share prices and
fewer Shares during periods of higher prices. In order to be effective, Dollar
Cost Averaging should usually be followed on a sustained, consistent basis.
Investors should be aware, however, that Shares bought using Dollar Cost
Averaging are made without regard to their price on the day of investment or to
market trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his or
her Shares at a price which is lower than their purchase price.
APPLICABLE SALES CHARGES -- INVESTOR A SHARES
The public offering price for Investor A Shares of the Portfolio is the sum
of the net asset value of the Shares being purchased plus any applicable sales
charge. No sales charge is assessed on the reinvestment of dividends and capital
gain distributions. The sales charge is assessed as follows:
<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..................................... 0.50 0.50 0.40
</TABLE>
17
<PAGE> 93
The Distributor will pay the appropriate Dealers' Reallowance to
broker-dealer organizations which have entered into an agreement with the
Distributor. The Dealers' Reallowance may be changed from time to time. Upon
notice to the Fund's shareholders, the Distributor, at its sole discretion, may
reallow up to the full applicable sales charge as shown on the above schedule
during periods specified in such notice. Dealers who receive 90% or more of a
sales load may be deemed to be "underwriters" under the Securities Act of 1933,
as amended.
No sales charge is assessed on purchases of Investor A Shares of the
Portfolio by: (a) directors and officers of the Fund and the immediate family
members of such individuals; (b) directors, current and retired employees and
participants in employee benefit/retirement plans (future and current
annuitants) of Mercantile Bancorporation Inc. or any of its affiliates or the
Distributor or its affiliates and the immediate family members of such
individuals; (c) brokers, dealers, and agents who have a sales agreement with
the Distributor, and their employees (and the immediate family members of such
individuals); (d) customers who purchase pursuant to a wrap fee program offered
by any broker-dealer or other financial institution or financial planning
organization; (e) individuals who purchase Investor A Shares with the proceeds
of Trust Shares or Institutional Shares redeemed in connection with a rollover
of benefits paid by a qualified retirement or employee benefit plan or
distribution on behalf of any other qualified account administered by Mercantile
or its affiliates or correspondent banks, within 60 days of receipt of such
payment; (f) investors who purchase Investor A Shares through a payroll
deduction program; (g) employees of any sub-adviser to the Fund; (h) former
holders of Southwestern Bell Visa cards that had been issued by Mercantile Bank
of Illinois, N.A. and who participated in the Automatic Investment Program
(credit cards may not be used for the purchase of Fund Shares); (i) investors
exchanging Trust Shares of a Portfolio received from the distribution of assets
held in a qualified trust, agency or custodian account with the trust department
of Mercantile or any of its affiliated or correspondent banks; or (j) other
investment companies distributed by the Distributor or its affiliates. Investors
who believe that they may qualify under any of the exemptions listed above
should contact the Fund at 1-800-452-ARCH (2724) prior to making a purchase.
REDUCED SALES CHARGES -- INVESTOR A SHARES
The sales charge on purchases of Investor A Shares of the Portfolio may be
reduced through:
- rights of accumulation
- quantity discounts
- letter of intent
- reinvestment privilege
To qualify for a reduced sales load, an investor must so notify his or her
investment representative, who in turn will notify the Distributor at the time
of purchase.
RIGHTS OF ACCUMULATION -- INVESTOR A SHARES. An investor who has previously
purchased Investor A Shares of the Portfolio and has paid a sales charge
("load") may be eligible for reduced sales charges when purchasing additional
Investor A Shares of the Portfolio or any other portfolio of the Fund sold with
a sales charge. An investor's aggregate investment in Shares of such load
portfolios is the total value (based on the higher of current net asset value or
the public offering price originally paid) of: (a) current purchases, and (b)
Shares that are already beneficially owned
18
<PAGE> 94
by the investor on which a sales charge has already been paid. If, for example,
an investor beneficially owns Investor A Shares of the Portfolio having an
aggregate current value of $240,000 and subsequently purchases additional
Investor A Shares of another portfolio with a maximum 4.50% sales load having a
current value of $10,000, the sales charge applicable to the subsequent purchase
would be reduced to 1.50% of the offering price.
QUANTITY DISCOUNTS -- INVESTOR A SHARES. As shown in the table under
"Applicable Sales Charges -- Investor A Shares," larger purchases reduce the
sales charge paid. The Fund will combine purchases made in the Portfolio on the
same day by the investor and immediate family members when calculating the
applicable sales charge.
LETTER OF INTENT -- INVESTOR A SHARES. By checking the Letter of Intent box
on the account application, a shareholder becomes eligible for reduced sales
charges applicable to the total amount invested in Investor A Shares in the
Portfolio over a 13-month period (beginning up to 90 days prior to the date
indicated on the account application). The Transfer Agent will hold in escrow 5%
of the amount indicated for payment of a higher sales load if a shareholder does
not purchase the full amount indicated on the account application. Upon
completion of the total minimum investment specified on the account application,
the escrow will be released, and an adjustment will be made to reflect any
reduced sales charge applicable to Shares purchased during the 90-day period
prior to submission of the account application. Additionally, if total purchases
within the 13-month period exceed the amount specified, an adjustment will be
made to reflect further reduced sales charges applicable to such purchases. All
such adjustments will be made at the conclusion of the 13-month period and in
the form of additional Shares credited to the shareholder's account at the then
current public offering price applicable to a single purchase of the total
amount of the total purchases. If total purchases are less than the amount
specified, escrowed Shares may be involuntarily redeemed to pay the additional
sales charge. Checking a Letter of Intent box does not bind an investor to
purchase, or the Fund to sell, the full amount indicated at the sales load in
effect at the time of signing, but an investor must complete the intended
purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE -- INVESTOR A SHARES. Upon redemption of Investor A
Shares on which a sales charge was paid, a shareholder has a one-time right, to
be exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
MISCELLANEOUS -- INVESTOR A SHARES. Reduced sales charges may be modified
or terminated at any time and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, an investor should
contact his or her investment representative or the Distributor.
APPLICABLE SALES CHARGES -- INVESTOR B SHARES
Investor B Shares of the Portfolio are sold at their net asset value next
determined after a purchase order is received in good form by the Fund's
Distributor. Although investors pay no front-end sales charge on purchases of
Investor B Shares, such Shares are subject to a contingent deferred sales charge
at the rates set forth in the chart below if they are redeemed within six years
19
<PAGE> 95
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 contingent 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
NUMBER OF YEARS OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
---------------------------------------------------------- ----------------------
<S> <C>
One or less............................................... 5.0%
More than one, but less than two.......................... 4.0%
Two, but less than three.................................. 3.0%
Three, but less than four................................. 3.0%
Four, but less than five.................................. 2.0%
Five, and up to and including six......................... 1.0%
After six years........................................... None
</TABLE>
When an investor redeems his or her Investor B Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge that
will be charged. Investor B Shares are redeemed first from those Investor B
Shares that are not subject to the deferred sales load (i.e., Investor B Shares
that were acquired through reinvestment of dividends or capital gain
distributions) and after that from the Investor B Shares that have been held the
longest.
For example, assume an investor purchased 100 Investor B Shares at $10 a
Share (for a total cost of $1,000), three years later the Shares have a net
asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value 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
20
<PAGE> 96
redemption go to the Distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to Investor B Shares, enables those Shares
to be purchased without the imposition of a front-end sales charge.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The following types
of redemptions qualify for an exemption from the contingent deferred sales
charge: (i) exchanges described under "Exchange Privileges" below; (ii)
redemptions in connection with required (or, in some cases, discretionary)
distributions to participants or beneficiaries of an employee pension,
profit-sharing or other trust or qualified retirement or Keogh plan, individual
retirement account or custodial account maintained pursuant to Section 403(b)(7)
of the Internal Revenue Code due to death, disability or the attainment of a
specified age; (iii) redemptions effected pursuant to a Portfolio's right to
liquidate a shareholder's account if the aggregate net asset value of Shares
held in the account is less than the minimum account size; (iv) redemptions in
connection with the death or disability of a shareholder; or (v) redemptions
resulting from a tax-free return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Internal Revenue Code.
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B Shares lies
in their sales charge structures and distribution arrangements. An investor
should understand that the purpose and function of the sales charge structures
and distribution arrangements for both Investor A Shares and Investor B Shares
are the same.
Investor A Shares are sold at their net asset value plus a front-end sales
charge of up to 4.50%. This front-end sales charge may be reduced or waived in
some cases. See "Applicable Sales Charges -- Investor A Shares." Investor A
Shares are subject to ongoing distribution and service fees at an annual rate of
up to 0.30% of the Portfolio's average daily net assets attributable to its
Investor A Shares.
Investor B Shares are sold at net asset value without an initial sales
charge. Normally, however, a deferred sales charge is paid if the Shares are
redeemed within six years of investment. See "Applicable Sales
Charges -- Investor B Shares." Investor B Shares are subject to ongoing
distribution and service fees at an annual rate of up to 1.00% of the
Portfolio's average daily net assets attributable to its Investor B Shares.
These ongoing fees, which are higher than those charged on Investor A Shares,
will cause Investor B Shares to have a higher expense ratio and pay lower
dividends than Investor A Shares.
Eight years after purchase, Investor B Shares will convert automatically to
Investor A Shares. The purpose of the conversion is to relieve a holder of
Investor B Shares of the higher ongoing expenses charged to those Shares, after
enough time has passed to allow the Distributor to recover approximately the
amount it would have received if a front-end sales charge had been charged. The
conversion from Investor B Shares to Investor A Shares takes place at net asset
value, as a result of which an investor receives dollar-for-dollar the same
value of Investor A Shares as he or she had of Investor B Shares. The conversion
occurs eight years after the beginning of the calendar month in which the Shares
are purchased. As a result of the conversion, the converted Shares are relieved
of
21
<PAGE> 97
the distribution and service fees borne by Investor B Shares, although they are
subject to the distribution and service fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates -- eight years
after the beginning of the calendar month in which the reinvestment occurred or
the date of conversion of the most recently purchased Investor B Shares that
were not acquired through reinvestment of dividends or distributions. For
example, if an investor makes a one-time purchase of Investor B Shares of the
Portfolio, and subsequently acquires additional Investor B Shares of the
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in the Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of the Portfolio on the
same date.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of the Portfolio, investors should consider
whether, during the anticipated life of their investment in the Portfolio, the
accumulated distribution fees and potential contingent deferred sales charges on
Investor B Shares prior to conversion would be less than the initial sales
charge and accumulated distribution fees on Investor A Shares purchased at the
same time, and to what extent such differential would be offset by the higher
yield of Investor A Shares. In this regard, to the extent that the sales charge
for Investor A Shares is waived or reduced by one of the methods described
above, investments in Investor A Shares become more desirable. The Fund will
refuse all purchase orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and service fee,
they are not subject to the higher distribution and service fee applicable to
Investor B Shares. For this reason, Investor A Shares can be expected to pay
correspondingly higher dividends per Share. However, because initial sales
charges are deducted at the time of purchase, purchasers of Investor A Shares
that do not qualify for waivers of or reductions in the initial sales charge
would have less of their purchase price initially invested in the Portfolio than
purchasers of Investor B Shares of the Portfolio.
As described above, purchasers of Investor B Shares will have more of their
initial purchase price invested. Any positive investment return on this
additional invested amount would partially or wholly offset the expected higher
annual expenses borne by Investor B Shares. Because the Portfolio's future
returns cannot be predicted, there can be no assurance that this will be the
case. Holders of Investor B Shares would, however, own Shares that are subject
to higher annual expenses and, for a six-year period, such Shares would be
subject to a contingent deferred sales charge of up to 5.00% upon redemption,
depending upon the year of redemption. Investors expecting to redeem during this
six-year period should compare the cost of the contingent deferred sales charge
plus the aggregate annual Investor B Shares' distribution and service fees to
the cost of the initial sales charge and distribution and service fees on the
Investor A Shares. Over time, the expense of the annual distribution and service
fees on the Investor B Shares may equal or exceed the initial sales charge, if
any, and annual distribution and service fees applicable to Investor A Shares.
For example, if net asset value remains constant, the aggregate distribution and
service fees with respect to Investor B Shares of the Portfolio would equal or
exceed the initial sales charge and aggregate distribution fees of Investor A
Shares of the Portfolio approximately eight years after the purchase. In order
to reduce such fees of investors that hold Investor B Shares for more than
22
<PAGE> 98
eight years, Investor B Shares will be automatically converted to Investor A
Shares as described above at the end of such eight-year period.
EXCHANGE PRIVILEGES
The exchange privilege enables shareholders to exchange (i) Investor A
Shares of the Portfolio for Investor A Shares of another portfolio offered by
the Fund or, under certain circumstances described below, for Trust Shares or
Institutional Shares of the Portfolio, and (ii) Investor B Shares of the
Portfolio for Investor B Shares of another portfolio offered by the Fund. The
exchange privilege may be exercised only in those states where the class of
shares of such other portfolios may be legally sold.
EXCHANGES -- INVESTOR A SHARES. Shareholders who have purchased Investor A
Shares of the Portfolio and who have paid any applicable sales charge ("load")
(including Shares acquired through reinvestment of dividends or distributions on
such Shares) may exchange those Shares for Investor A Shares of another
portfolio offered by the Fund without paying an additional sales load.
In addition, shareholders who have a qualified trust, agency or custodian
account with the trust department of Mercantile or any of its affiliated or
correspondent banks, and whose Shares are to be held in that account, may also
exchange Investor A Shares of the Portfolio for Trust Shares or Institutional
Shares in the Portfolio.
EXCHANGES -- INVESTOR B SHARES. Shareholders who have purchased Investor B
Shares of the Portfolio (including Shares acquired through reinvestment of
dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another portfolio offered by the Fund without the payment
of any contingent deferred sales charge at the time the exchange is made. In
determining the holding period for calculating the contingent deferred sales
charge payable on redemptions of Investor B Shares, the holding period of the
Investor B Shares originally held will be added to the holding period of the
Investor B Shares acquired through the exchange. No exchange fee is imposed by
the Fund.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must have a
current value at least equal to the minimum initial or subsequent investment
required by the particular portfolio into which the exchange is being made. The
Fund reserves the right to reject any exchange request. The exchange privilege
may be modified or terminated at any time upon 60 days' written notice to
shareholders. An investor may telephone an exchange request by calling his or
her investment representative, which is responsible for transmitting such
exchange request to the Fund. See "Other Exchange or Redemption Information"
below. Investors who want to telephone an exchange request directly to the Fund
and have elected this privilege on the account application may follow the
procedures described below under "Redemption by Telephone." An investor should
consult his or her investment representative or the Fund for further information
regarding procedures for exchanging Shares.
23
<PAGE> 99
In addition to the Growth Equity Portfolio described in this Prospectus,
the Fund currently offers Investor A Shares and/or Investor B Shares in the
following portfolios:
The ARCH Treasury Money Market Portfolio*
The ARCH Money Market Portfolio
The ARCH Tax-Exempt Money Market Portfolio*
The ARCH U.S. Government Securities Portfolio
The ARCH Intermediate Corporate Bond Portfolio
The ARCH Bond Index Portfolio*
The ARCH Government & Corporate Bond Portfolio
The ARCH Short-Intermediate Municipal Portfolio
The ARCH Missouri Tax-Exempt Bond Portfolio
The ARCH National Municipal Bond Portfolio
The ARCH Equity Income Portfolio
The ARCH Equity Index Portfolio*
The ARCH Growth & Income Equity Portfolio
The ARCH Small Cap Equity Portfolio
The ARCH Small Cap Equity Index Portfolio*
The ARCH International Equity Portfolio
The ARCH Balanced Portfolio
For more information concerning these portfolios, please call
1-800-452-ARCH (2724). Shareholders exercising the exchange privilege with any
of the other portfolios in the Fund should request and review the portfolio's
prospectus carefully prior to making an exchange.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program enables
shareholders to make regular, automatic withdrawals from an Investor A Share or
Investor B Share account in the Portfolio and use those proceeds to benefit from
Dollar Cost Averaging by automatically making purchases of the same class of
Shares in another portfolio offered by the Fund. With shareholder authorization,
the Fund's Transfer Agent will withdraw the amount specified (subject to the
applicable minimums) from the shareholder's account and will automatically
invest that amount in Shares of the Portfolio designated by the shareholder on
the date of such deduction.
In order to participate in the Automatic Exchange Program, shareholders
must make a minimum initial purchase of $5,000 and maintain a minimum account
balance of $1,000. Additionally, shareholders must complete the supplementary
authorization form which may be obtained from their investment representatives
or the Distributor. To change instructions with respect to the Automatic
Exchange Program or to discontinue this feature, shareholders must send a
written request to their investment representative or to the Fund. The Automatic
Exchange Program may be amended or terminated without notice at any time by the
Distributor.
REDEMPTION OF SHARES
Redemption orders should be placed with or through the same broker-dealer
organization that placed the original purchase order. Redemption orders are
effected at the Portfolio's net asset value
- ---------------
*Does not offer Investor B Shares.
24
<PAGE> 100
per Share next determined after receipt of the order by the Fund. Proceeds from
the redemptions of Investor B Shares will be reduced by the amount of any
applicable contingent deferred sales charge. The organization through which the
investor placed the order is responsible for transmitting redemption orders to
the Fund on a timely basis. No charge for sending redemption payments
electronically is currently imposed by the Fund, although a charge may be
imposed in the future. The Fund reserves the right to send redemption proceeds
electronically within seven days after receiving a redemption order if, in the
judgment of the Adviser, an earlier payment could adversely affect the
Portfolio.
REDEMPTION BY MAIL
A written redemption request must be accompanied by any Share certificates
which are properly endorsed for transfer. The Transfer Agent may require a
signature guarantee by an eligible guarantor institution. For purposes of this
policy, the term "eligible guarantor institution" shall include banks, brokers,
dealers, credit unions, securities exchanges and associations, clearing agencies
and savings associations as those terms are defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000. The signature guarantee requirement will be waived
if all of the following conditions apply: (1) the redemption check is payable to
the shareholder(s) of record and (2) the redemption check is mailed to the
shareholder(s) at the address of record or the proceeds are either mailed or
sent electronically to a commercial bank account previously designated on the
account application. An investor with questions or needing assistance should
contact his or her investment representative or the Fund. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the shareholder selected that option
on the account application. The shareholder may have the proceeds mailed to his
or her address or mailed or sent electronically to a bank account previously
designated on 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.
25
<PAGE> 101
Proceeds from redemptions of Investor A Shares and/or Investor B Shares
with respect to redemption orders received by the Fund before 4:00 p.m. (Eastern
time) on a Business Day normally are sent electronically or mailed by check to
the organization that placed the redemption order within three Business Days
after the Distributor's receipt of the order in good form.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or existing
shareholder of the Portfolio if the value of his or her account (valued at the
net asset value at the time of the establishment of the AWP) equals $10,000 or
more. Shareholders who elect to establish an AWP may receive a monthly,
quarterly, semi-annual, or annual check in a stated amount of not less than $50
on or about the 25th day of the applicable month of withdrawal. Periodic
payments will be reduced by any applicable contingent deferred sales charge.
Portfolio Shares will be redeemed as necessary to meet withdrawal payments.
Withdrawals may reduce principal and eventually deplete the shareholder's
account. The maintenance of an AWP may be disadvantageous for holders of
Investor B Shares due to the effect of the contingent deferred sales charge. A
shareholder who desires to establish an AWP after opening an account should
complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Distributor for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time.
PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Distributor may offer special concessions to enable
investors to purchase Investor A Shares of the Portfolio at net asset value
without payment of a front-end sales charge. To qualify for a net asset value
purchase, the investor must pay for such purchase with the proceeds from the
redemption of shares of a non-affiliated mutual fund on which a front-end sales
charge was paid. A qualifying purchase of Investor A Shares must occur within 30
days of the prior redemption and must be evidenced by a confirmation of the
redemption transaction. At the time of purchase, the investment representative
must notify the Distributor that the purchase qualifies for a purchase at net
asset value. Proceeds from the redemption of Shares on which no front-end sales
charge was paid do not qualify for a purchase at net asset value.
OTHER EXCHANGE OR REDEMPTION INFORMATION
WHEN REDEEMING SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES OR INVESTOR B SHARES. In the event
a redeeming shareholder owns both Investor A Shares and Investor B Shares in the
Portfolio, the Investor A Shares will be redeemed first unless the shareholder
indicates otherwise.
During periods of substantial economic or market change or activity,
telephone redemptions or exchanges may be difficult to complete. In such event,
Shares may be redeemed or exchanged by mailing the request directly to the
organization through which the original Shares were purchased or directly to the
Fund at P.O. Box 78069, St. Louis, Missouri 63178.
26
<PAGE> 102
At various times, the Fund may be requested to redeem Shares for which it
has not yet received good payment. In such circumstances, the Fund may delay the
forwarding of proceeds until payment has been collected for the purchase of such
Shares which may take up to 15 days or more. To avoid delay in payment upon
redemption shortly after purchasing Shares, investors should purchase Shares by
certified or bank check or by electronic transfer. The Fund intends to pay cash
for all Shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Fund may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
A shareholder may be required to redeem Shares in the Portfolio upon 60
days' written notice if the balance in the shareholder's account drops below
$500. The Fund will not require a shareholder to redeem Portfolio Shares if the
value of the shareholder's account drops below $500 due to fluctuations in net
asset value. Share balances may also be redeemed pursuant to arrangements
between broker-dealer organizations and their investors.
YIELDS AND TOTAL RETURNS
Yield and total return quotations are computed separately for Trust Shares,
Institutional Shares, Investor A Shares and Investor B Shares of the Portfolio.
YIELD AND TOTAL RETURN FIGURES WILL FLUCTUATE, ARE BASED ON HISTORICAL EARNINGS,
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The methods used to compute
the Portfolio's yields and total returns are described below and in the
Statement of Additional Information.
From time to time, performance information such as total return and yield
data for the Portfolio's Investor A Shares and Investor B Shares may be quoted
in advertisements, sales literature or in communications to shareholders. The
yield is computed based on the net income of a particular class of Shares in the
Portfolio during a 30-day (or one-month) period identified in connection with
the particular yield quotation. More specifically, the yield is computed by
dividing the Portfolio's net income per Share during a 30-day (or one-month)
period by the maximum public offering price per Share on the last day of the
period and annualizing the result.
The Portfolio's total return may be calculated on an average annual total
return basis, and may also be calculated on an aggregate total return basis, for
various periods. Average annual total returns with respect to a particular class
of Shares reflect the average annual percentage change in value of an investment
in such Shares over the particular measuring period. Aggregate total returns
reflect the cumulative percentage change in value over the measuring period.
Both methods of calculating total returns assume that dividends and capital gain
distributions made by the Portfolio during the period are reinvested in the same
class of Shares of the Portfolio and that the maximum sales load in effect
during the period has been charged by the Portfolio. The Portfolio's total
return figures may also be calculated without the deduction of the maximum sales
charge in effect during the period. The effect of not deducting the sales charge
will be to increase the total return reflected. When considering average annual
total return figures for periods longer than one year, it is important to note
that the Portfolio's annual total return for any one year in the period might
have been more or less than the average for the entire period.
27
<PAGE> 103
Performance data of the Portfolio's Investor A Shares and Investor B Shares
may be compared to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and data such as that provided by S&P, Lehman Brothers, Inc. or any of its
affiliates, Ibbotson Associates, Inc., Lipper Analytical Services, Inc. and
Mutual Fund Forecaster. References may also be made to indices or data published
in Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York
Times, Business Week, American Banker, Institutional Investor, Pensions and
Investments, U.S.A. Today, Fortune, CDA/Wiesenberger, Morningstar, Inc. and
publications of a local or regional nature. In addition to performance
information, general information about the Portfolio that appears in a
publication such as those mentioned above may be included in advertisements and
in reports to shareholders.
Performance quotations of a class of Shares in the Portfolio represent past
performance and should not be considered as representative of future results.
Any account fees charged by an investment representative will not be included in
the calculations of the Portfolio's yields and total returns. Such fees, if any,
will reduce the investor's net return on an investment in the Portfolio.
Investors may call 1-800-452-ARCH (2724) to obtain current yield and total
return information.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Portfolio are declared and paid
monthly as a dividend to shareholders of record. Dividends on each Share of the
Portfolio are determined in the same manner and are paid in the same amounts,
irrespective of class, except that the Portfolio's Trust Shares and
Institutional Shares bear all expenses of the respective Administrative Services
Plans adopted for such Shares and the Portfolio's Investor A Shares and Investor
B Shares bear all expenses of the respective Distribution and Services Plans
adopted for such Shares. In addition, the Portfolio's Institutional Shares bear
the expense of certain sub-transfer agency fees. See "Management of the Fund"
and "Other Information Concerning the Fund and Its Shares" below.
Net realized capital gains of the Portfolio, if any, are distributed at
least annually. All dividends and distributions paid on the Portfolio's Shares
are automatically reinvested (without a sales load) in additional Shares of the
same class unless the investor has (i) otherwise indicated in the account
application, or (ii) redeemed all the Shares held in the Portfolio, in which
case a distribution will be paid in cash. Reinvested dividends and distributions
will be taxed in the same manner as those paid in cash.
TAXES
FEDERAL TAXES
Management of the Fund believes that the Predecessor Portfolio qualified as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code") for the taxable year ended September 30, 1997. It is
intended that the Portfolio will qualify as a regulated investment company as
long as such qualification is in the best interests of shareholders. A regulated
investment company generally is exempt from federal income tax on amounts
distributed to shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if
28
<PAGE> 104
any) net of certain deductions for such year. In general, the Portfolio's
investment company taxable income will be its taxable income, including
dividends, interest and short-term capital gains (the excess of net short-term
capital gain over net long-term capital loss), subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. It is the policy of
the Portfolio to distribute as dividends substantially all of its investment
company taxable income and any net tax-exempt interest income each year. Such
dividends will be taxable as ordinary income to the Portfolio's shareholders who
are not currently exempt from federal income taxes, whether such income is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) In the case of the
Portfolio, such dividends will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
Portfolio from domestic corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital gains,
if any, will be distributed at least annually to its shareholders. The Portfolio
will generally have no tax liability with respect to such gains and the
distributions will be taxable to shareholders who are not currently exempt from
federal income taxes as long-term capital gains, regardless of how long the
shareholders have held the Shares and whether such dividends are received in
cash or reinvested in additional Shares.
An investor considering purchasing Shares of the Portfolio on or just
before the record date of any dividend or capital gains distribution should be
aware that the amount of the forthcoming distribution, although in effect a
return of capital, will be taxable.
Dividends declared by the Portfolio in October, November, or December of
any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by the shareholders and paid by the
Portfolio on December 31 of such year in the event such dividends are actually
paid during January of the following year.
The Portfolio may be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to withholding by the Internal Revenue
Service for failure to properly include on their return payments of taxable
interest or dividends, or who have failed to certify to the Portfolio that they
are not subject to backup withholding when required to do so or that they are
"exempt recipients."
A taxable gain or loss may be realized by an investor upon redemption,
transfer or exchange of Shares, depending upon the cost of such Shares when
purchased and their price at the time of redemption, transfer or exchange. If an
investor holds Shares for six months or less and during that time receives an
exempt-interest dividend on those Shares, any loss realized on the sale or
exchange of those Shares will be disallowed to the extent of the exempt-interest
dividend.
STATE AND LOCAL TAXES
The application of state and local taxes may have different consequences
from those of the federal income tax law described above. In particular,
shareholders should note that dividends paid by the Portfolio may be taxable to
investors under state or local law as dividend income even though all or a
portion of such dividends may be derived from interest on obligations that, if
realized directly, would be exempt from such income taxes.
29
<PAGE> 105
MISCELLANEOUS
The foregoing summarizes some of the important federal and state tax
considerations generally affecting the Portfolio and its shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation. Shareholders will be advised at least
annually as to the federal income tax consequences of distributions made each
year.
MANAGEMENT OF THE FUND
The Fund is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the names of and general background
information concerning each director.
INVESTMENT ADVISER
Mississippi Valley Advisors Inc. ("MVA") serves as the investment adviser
to the Portfolio. MVA's principal office is located at One Mercantile Center,
Seventh & Washington Streets, St. Louis, Missouri 63101. MVA is a wholly-owned
subsidiary of Mercantile. As of December 31, 1996, MVA had approximately $7.9
billion in assets under investment management, including the assets of the Fund,
which were approximately $2.5 billion. MVA also serves as investment adviser to
each of the Fund's other portfolios.
Subject to the general supervision of the Fund's Board of Directors and in
accordance with the Fund's investment policies, MVA manages the Portfolio, makes
investment decisions with respect to and places orders for all purchases and
sales of the Portfolio's securities and other investments, and directs the
maintenance of the Portfolio's records relating to such purchases and sales.
For the services provided and expenses assumed pursuant to the investment
advisory agreement, MVA is entitled to receive fees, computed daily and payable
monthly, at the annual rate of .75% of the average daily net assets of the
Portfolio.
MVA may from time to time voluntarily reduce all or a portion of its
advisory fee to increase the net income of the Portfolio available for
distributions as dividends. The voluntary fee reduction will cause the return of
the Portfolio to be higher than it would otherwise be in the absence of such
reduction.
The Predecessor Portfolio bore advisory fees during the fiscal year ended
September 30, 1996 pursuant to the investment advisory agreement then in effect
with Mark Twain Bank, its former adviser, at the effective annual rate of .75%
of its average daily net assets after fee waivers. Without fee waivers, the
Predecessor Portfolio would have borne advisory fees at the annual rate of .75%
of its average daily net assets.
Gregory A. Glidden is the person primarily responsible for the day-to-day
management of the 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. He managed the Predecessor
Portfolio since October, 1997 and also manages the Fund's Equity Income
Portfolio.
30
<PAGE> 106
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219, acts as the Portfolio's Administrator. The Administrator also serves
as the administrator to each of the Fund's other portfolios.
The Administrator generally assists in all aspects of the Portfolio's
administration and operation and also monitors and performs other services
pertaining to the Portfolio's arrangements with Service Organizations. See
"Service Organizations" below. For its services, the Administrator is entitled
to receive a fee, computed daily and payable monthly, at the annual rate of .20%
of the Portfolio's average daily net assets.
From time to time, the Administrator may voluntarily waive all or a portion
of the administration fees otherwise payable by the Portfolio in order to
increase the net income available for distribution to shareholders.
The Predecessor Portfolio bore administrative fees during the fiscal year
ended September 30, 1996 pursuant to the administrative services agreement then
in effect with Federated Administrative Services, its former administrator, at
the effective annual rate of .39% of its average daily net assets.
DISTRIBUTOR
Investor A Shares and Investor B Shares of the Portfolio are sold
continuously by the Distributor, BISYS Fund Services, an affiliate of the
Administrator. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor also acts as the distributor to each of the Fund's other
portfolios.
The Distributor may, at its expense, provide compensation to dealers in
connection with sales of Shares of the Portfolio. Such compensation may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising
campaigns regarding one or more of the Fund's portfolios, and/or other dealer-
sponsored special events. In some instances, this compensation will be made
available only to certain dealers whose representatives have sold a significant
amount of such Shares. Compensation will include payment for travel expenses,
including lodging incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Compensation
will also include the following types of non-cash compensation offered through
sales contests: (1) business and vacation trips, including the provision of
travel arrangements and lodging at resorts, (2) tickets for entertainment events
(such as concerts, cruises and sporting events), and (3) merchandise (such as
clothing, trophies, clocks and pens). Dealers may not use sales of the
Portfolio's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the aforementioned
compensation is paid for by the Portfolio or its shareholders.
31
<PAGE> 107
DISTRIBUTION AND SERVICES PLANS
The Fund has adopted separate Distribution and Services Plans pursuant to
Rule 12b-1 under the 1940 Act with respect to Investor A Shares and Investor B
Shares of the Portfolio. Under the Distribution and Services Plans, the Fund may
pay (i) the Distributor or another person for distribution services provided and
expenses assumed and (ii) Service Organizations for shareholder administrative
services provided pursuant to servicing agreements in connection with Investor A
Shares or Investor B Shares of the Portfolio. Payments to the Distributor are to
compensate it for distribution assistance and expenses assumed and activities
primarily intended to result in the sale of Investor A Shares or Investor B
Shares, including compensating dealers and other sales personnel (which may
include affiliates of the Fund's Adviser), direct advertising and marketing
expenses and expenses incurred in connection with preparing, printing, mailing
and distributing or publishing advertisements and sales literature, for printing
and mailing Prospectuses and Statements of Additional Information (except those
used for regulatory purposes or for distribution to existing shareholders), and
costs associated with implementing and operating the Distribution and Services
Plan. In addition, payments under the Distribution and Services Plan for
Investor B Shares will be used to pay for or finance sales commissions and other
fees payable to Service Organizations and other broker-dealers who sell Investor
B Shares. See "Management of the Fund -- Service Organizations" below for a
description of the servicing agreements and the services provided by Service
Organizations.
Under the Distribution and Services Plan for Investor A Shares, payments by
the Fund for distribution expenses may not exceed .10% (annualized) of the
average daily net asset value of the Portfolio's outstanding Investor A Shares
and payments for shareholder administrative servicing expenses may not exceed
.20% (annualized) of the average daily net asset value of the Portfolio's
outstanding Investor A Shares.
Under the Distribution and Services Plan for Investor B Shares, payments by
the Fund for distribution expenses may not exceed .75% (annualized) of the
average daily net asset value of the Portfolio's outstanding Investor B Shares
and payments for shareholder administrative servicing expenses may not exceed
.25% (annualized) of the average daily net asset value of the Portfolio's
outstanding Investor B Shares.
Actual distribution expenses paid by the Distributor with respect to
Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
SERVICE ORGANIZATIONS
The servicing agreements adopted under the Distribution and Services Plans
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include Mercantile and its affiliates) to perform
certain services, including providing administrative services with respect to
the beneficial owners of Investor A Shares or Investor B Shares of the
Portfolio, such as establishing and maintaining accounts and records for their
customers who invest in such
32
<PAGE> 108
Shares, assisting customers in processing purchase, exchange and redemption
requests, and responding to customer inquiries concerning their investments.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as fully responsible to the Fund for the acts or
omissions of any subcontractor as it would be for its own acts or omissions. The
fees payable to any sub-contractor are paid by the Service Organization out of
the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by the
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such a Service Organization
receiving servicing fees should read this Prospectus in light of the terms
governing their accounts with their Service Organization.
CUSTODIAN AND TRANSFER AGENT
Mercantile Bank National Association, an affiliate of the Fund and a
wholly-owned subsidiary of Mercantile Bancorporation, Inc., with principal
offices located at One Mercantile Center, 8th and Locust Streets, St. Louis,
Missouri 63101, serves as Custodian of the Portfolio's assets. BISYS Fund
Services Ohio, Inc. also serves as the Portfolio's transfer agent and dividend
disbursing agent. Its address is 3435 Stelzer Road, Columbus, Ohio 43219.
REGULATORY MATTERS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as Shares of the Portfolio. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Mercantile, MVA, Service Organizations that are banks or
bank affiliates, and broker-dealers that are bank affiliates are subject to such
laws and regulations, but believe they may perform the services for the
Portfolio contemplated by their respective agreements, this Prospectus and the
Statement of Additional Information without violating applicable banking laws
and regulations. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial, or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolio and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with
33
<PAGE> 109
such companies and change its method of operation. It is not expected that
investors would suffer any adverse financial consequences as a result of any of
these occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, Mercantile, or an affiliate of Mercantile, would consider the
possibility of offering to perform additional services for the Portfolio. It is
not possible, of course, to predict whether or in what form such legislation
might be enacted or the terms upon which Mercantile, or such an affiliate, might
offer to provide such services.
Conflict of interest restrictions may apply to the receipt of compensation
paid pursuant to a Servicing Agreement by the Portfolio to a financial
intermediary in connection with the investment of fiduciary funds in the
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES
Except as noted above and in the Statement of Additional Information under
"Investment Advisory and Administrative Contracts" and "Custodian and Transfer
Agent," the Fund's service contractors bear all of their own expenses in
connection with the performance of their services, except that the Distributor
is compensated pursuant to the Distribution and Services Plans as described
under "Distribution and Services Plans" above. The Portfolio's expenses are
deducted from the total income of the Portfolio before dividends and
distributions are paid. These expenses include, but are not limited to, fees
paid to the Adviser and Administrator, transfer agency fees, fees and expenses
of officers and directors who are not affiliated with the Adviser or the
Distributor, taxes, interest, legal fees, custodian fees, auditing fees, 12b-1
fees, servicing fees, certain fees and expenses in registering and qualifying
the Portfolio and its Shares for distribution under federal and state securities
laws, costs of preparing and printing prospectuses and statements of additional
information for regulatory purposes and for distribution to existing
shareholders, the expense of reports to shareholders, shareholders' meetings and
proxy solicitations, fidelity bond and directors' and officers' liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by the Adviser, Distributor or
Administrator under their respective agreements with the Fund. The Fund also
pays for brokerage fees, commissions and other transaction charges, if any, in
connection with the purchase and sale of portfolio securities. Any general
expenses of the Fund that are not readily identifiable as belonging to a
particular portfolio will be allocated among all portfolios by or under the
direction of the Board of Directors in a manner the Board determines to be fair
and equitable. Any expenses relating only to a particular class of Shares within
a portfolio will be borne solely by such class. See "Certain Financial
Information" and "Management of the Fund" above for additional information
regarding expenses of the Portfolio.
34
<PAGE> 110
OTHER INFORMATION CONCERNING THE FUND AND ITS SHARES
DESCRIPTION OF SHARES
The Fund was organized on September 9, 1982 as a Maryland corporation, and
is a mutual fund of the type known as an "open-end management investment
company." The Fund's principal office is located at 3435 Stelzer Road, Columbus,
Ohio 43219.
The Fund's Charter authorizes the Board of Directors to issue up to seven
billion full and fractional Shares of common stock, and to classify and
reclassify any unauthorized and unissued Shares into one or more classes of
Shares. The Board of Directors may similarly classify or reclassify any class of
Shares into one or more series.
Pursuant to such authority, the Board of Directors has authorized the
issuance of the following series of shares representing interests in the
Portfolio, which is classified as a diversified company under the 1940 Act: 50
million Trust Shares, 25 million Institutional Shares, 25 million Investor A
Shares and 25 million Investor B Shares. Trust Shares and Institutional Shares
of the Portfolio are described in separate prospectuses which are available from
the Distributor at the telephone number on page 1 of this Prospectus. Shares in
the Portfolio will be issued without Share certificates.
The Investor A Shares and Investor B Shares of the Portfolio are described
in this Prospectus. The Portfolio also offers Trust Shares and Institutional
Shares. Trust Shares, which are offered to financial institutions acting on
their own behalf or on behalf of certain qualified accounts, and Institutional
Shares, which are offered to financial institutions acting on behalf of accounts
for which they do not exercise investment discretion, are sold without a sales
charge. Trust, Institutional, Investor A and Investor B Shares bear their pro
rata portion of all operating expenses paid by the Portfolio, except that Trust
Shares and Institutional Shares bear all payments under the Portfolio's
respective Administrative Services Plan adopted for such Shares and Investor A
Shares and Investor B Shares bear all payments under the Portfolio's respective
Distribution and Services Plans adopted for such Shares. In addition,
Institutional Shares of the Portfolio bear the expense of certain sub-transfer
agency fees.
Payments under the Administrative Services Plans for Trust Shares and
Institutional Shares are made to Service Organizations for administrative
services provided to the Service Organizations' clients or account holders who
are the beneficial owners of Trust Shares or Institutional Shares. Payments
under the Administrative Services Plans may not exceed .30% (on an annual basis)
of the average daily net asset value of outstanding Trust Shares or
Institutional Shares of the Portfolio.
The Fund offers various services and privileges in connection with its
Investor A Shares and Investor B Shares that are not offered in connection with
its Trust Shares and Institutional Shares, including an automatic investment
program and automatic withdrawal plan. In addition, each class of Shares offers
different exchange privileges.
Shareholders are entitled to one vote for each full Share held and
proportionate fractional votes for fractional Shares held. Shares of all
portfolios of the Fund will vote together and not by class unless otherwise
required by law or permitted by the Board of Directors. All shareholders of a
particular portfolio will vote together as a single class on matters relating to
the portfolio's investment advisory agreement and investment objective and
fundamental policies. Only holders of
35
<PAGE> 111
Trust Shares, however, will vote on matters relating to the Administrative
Services Plan for Trust Shares and only holders of Institutional Shares will
vote on matters relating to the Administrative Services 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 of shareholders except as required by the 1940 Act or other applicable
law. Upon the written request of the holders of 10% or more of the outstanding
Shares, the Fund will call a special meeting to vote on the question of removal
of a director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in this
Prospectus, Shares will be fully paid and nonassessable.
MISCELLANEOUS
As used in this Prospectus, a "vote of a majority of the outstanding
Shares" of the Portfolio or a particular class of Shares means, with respect to
the approval of an investment advisory agreement or distribution plan or a
change in an investment objective or fundamental investment policy, the
affirmative vote of the lesser of (a) more than 50% of the outstanding Shares of
the Portfolio or class of Shares, or (b) 67% or more of the Shares of the
Portfolio or class of Shares present at a meeting if more than 50% of the
outstanding Shares of the Portfolio or class of Shares are represented at the
meeting in person or by proxy.
As of June 3, 1997, Mercantile and its affiliates possessed, of record on
behalf of their underlying customer accounts, voting or investment power with
respect to more than 25% of the Fund's outstanding Shares. Therefore, Mercantile
may be deemed to be a controlling person of the Fund within the meaning of the
1940 Act.
Inquiries regarding the Portfolio may be directed to the Fund at
1-800-452-ARCH (2724).
36
<PAGE> 112
[This Page Intentionally Left Blank]
<PAGE> 113
[This Page Intentionally Left Blank]
<PAGE> 114
[This Page Intentionally Left Blank]
<PAGE> 115
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE PORTFOLIO'S
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PORTFOLIO, THE FUND, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE PORTFOLIO, THE FUND OR THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights................................. 2
Certain Financial Information.............. 4
Expense Summary for Investor Shares........ 4
Financial Highlights....................... 5
Investment Objective, Policies and Risk
Considerations........................... 7
Investment Limitations..................... 14
Pricing of Shares.......................... 15
How to Purchase and Redeem Shares.......... 15
Purchase of Shares....................... 15
Automatic Investment Program (AIP)....... 17
Applicable Sales Charges -- Investor A
Shares................................. 17
Reduced Sales Charges -- Investor A
Shares................................. 18
Applicable Sales Charges -- Investor B
Shares................................. 19
Characteristics of Investor A Shares and
Investor B Shares...................... 21
Factors to Consider When Selecting
Investor A Shares or Investor B
Shares................................. 22
Exchange Privileges...................... 23
Redemption of Shares..................... 24
Redemption by Mail....................... 25
Redemption by Telephone.................. 25
Automatic Withdrawal Plan (AWP).......... 26
Purchase of Investor A Shares at Net
Asset Value............................ 26
Other Exchange or Redemption
Information............................ 26
Yields and Total Returns................... 27
Dividends and Distributions................ 28
Taxes...................................... 28
Management of the Fund..................... 30
Other Information Concerning the Fund and
its Shares............................... 35
Miscellaneous.............................. 36
</TABLE>
Investment Adviser:
Mississippi Valley Advisors Inc.
a wholly-owned subsidiary of
Mercantile Bank
National Association
Distributor:
BISYS Fund Services
THE ARCH FUND(R), INC.
GROWTH EQUITY PORTFOLIO
INVESTOR A SHARES
AND
INVESTOR B SHARES
LOGO
PROSPECTUS
SEPTEMBER 2, 1997
(AS REVISED NOVEMBER 21, 1997)
<PAGE> 116
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
---------------------
The ARCH Growth Equity Portfolio
Heading in Statement of
Form N-1A Part B Item Additional Information
- --------------------- -----------------------
<S> <C> <C>
10. Cover Page............................................................... Cover Page
11. Table of Contents........................................................ Table of Contents
12. General Information and History.......................................... The Fund
13. Investment Objective and Policies........................................ Investment
Objectives and Policies
14. Management of the Fund................................................... Management of the Fund
15. Control Persons and Principal............................................ Miscellaneous
Holders of Securities
16. Investment Advisory and Other............................................ Management of the Fund;
Services Independent Auditors;
Counsel
17. Brokerage Allocation and Other........................................... Investment Objectives
Practices and Policies
18. Capital Stock and Other.................................................. Description of Shares
Securities
19. Purchase, Redemption and Pricing......................................... Net Asset Value;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status............................................................... Additional Information
Concerning Taxes
21. Underwriters............................................................. Management of the Fund
22. Calculation of Performance Data.......................................... Additional Yield and
Total Return
Information; Net Asset
Value
23. Financial Statements..................................................... Financial Statements
</TABLE>
<PAGE> 117
THE ARCH FUND(R), INC.
THE ARCH GROWTH EQUITY PORTFOLIO
Statement of Additional Information
Part B
January 29, 1998
<PAGE> 118
THE ARCH FUND, INC.
Statement of Additional Information
for
The ARCH Growth Equity Portfolio
January 29, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUND............................................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES...................................................................... 1
NET ASSET VALUE........................................................................................ 13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................................... 14
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION.......................................................... 16
DESCRIPTION OF SHARES.................................................................................. 20
ADDITIONAL INFORMATION CONCERNING TAXES................................................................ 22
MANAGEMENT OF THE FUND................................................................................. 27
INDEPENDENT AUDITORS................................................................................... 36
COUNSEL................................................................................................ 36
MISCELLANEOUS.......................................................................................... 36
FINANCIAL STATEMENTS................................................................................... 36
APPENDIX A............................................................................................ A-1
APPENDIX C.............................................................................................C-1
</TABLE>
This Statement of Additional Information, which provides supplemental
information applicable to the ARCH Growth Equity Portfolio, is not a prospectus.
It should be read only in conjunction with the Portfolio's Prospectuses dated
September 2, 1997 (as revised November 21, 1997) as supplemented January 29,
1998 and is incorporated by reference in its entirety into the Prospectuses. No
investment in shares of the Portfolio should be made without reading the
relevant Prospectus. Copies of the Prospectuses may be obtained by writing the
Fund at P.O. Box 78069, St. Louis, Missouri 63178 or by calling (800) 452-ARCH
(2724). Capitalized terms used but not defined herein have the same meanings as
in each Prospectus.
-i-
<PAGE> 119
THE FUND
The ARCH Fund, Inc. (the "Fund") is an open-end,
management investment company currently offering Shares in
eighteen investment portfolios.
The ARCH Growth Equity Portfolio (the "Portfolio") commenced
operations on January 4, 1993 as a separate investment portfolio (the
"Predecessor Portfolio") of Arrow Funds, which was organized as a Massachusetts
business trust. On November 21, 1997, the Predecessor Portfolio was reorganized
as a new portfolio of the Fund. Prior to the reorganization, the Predecessor
Portfolio offered and sold shares of beneficial interests that were similar to
the Fund's Investor A Shares.
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the description of the
investment objective and policies of the Portfolio described in the
Prospectuses.
OTHER APPLICABLE INVESTMENT POLICIES
CONVERTIBLE SECURITIES. The Portfolio may invest in
convertible securities. The Portfolio will exchange or convert the convertible
securities held in its portfolio into shares of the underlying common stock
when, in the Adviser's opinion, the investment characteristics of the underlying
common stock will assist the Portfolio in achieving its investment objective.
Otherwise the Portfolio may hold or trade convertible securities. In selecting
convertible securities for the Portfolio, the Adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determinants of the issuer's profits, and
the issuer's management capability and practices.
WARRANTS. The Portfolio may invest in warrants. Warrants are
basically options to purchase common stock at a specific price (usually at a
premium above the market value of the optioned common stock at issuance) valid
for a specific period of time. Warrants may have a life ranging from less than a
year to twenty years or may be perpetual. However, most warrants have expiration
dates after which they are worthless. In addition, if the market price of the
common stock does not exceed the warrant's exercise price during the life of the
warrant, the warrant will expire as worthless. Warrants have no
<PAGE> 120
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to its
investment policies and limitations, the Portfolio may purchase variable and
floating rate obligations as described in the Prospectuses. The Adviser will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such obligations and, for obligations subject to a demand
feature, will monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, an instrument issued or
guaranteed by the U.S. Government or an agency or instrumentality thereof, or a
variable rate instrument scheduled on its face to be paid in 397 days or less,
will be deemed to have a maturity equal to the period remaining until the next
interest rate adjustment. Other variable and floating rate obligations will be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
RESTRICTED AND ILLIQUID SECURITIES. The Securities and
Exchange Commission ("SEC") has adopted Rule 144A which allows for a broader
institutional trading market for securities otherwise subject to restrictions on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act of 1933, as amended, for the
resale of certain securities to qualified institutional buyers. The purchase of
securities which can be sold under Rule 144A could have the effect of increasing
the level of illiquidity in the Portfolio to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
restricted securities.
The Adviser monitors the liquidity of restricted securities in
the Portfolio under the supervision of the Board of Directors. In reaching
liquidity decisions, the Adviser may consider the following factors, although
such factors may not necessarily be determinative: (1) the unregistered nature
of a security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (4) the trading markets for the security; (5) dealer
undertakings to make a market in the security; and (6) the nature of the
security and the nature of the marketplace trades (including the time needed to
dispose of the security, methods of soliciting offers, and mechanics of
transfer).
-2-
<PAGE> 121
SECURITIES LENDING. When the Portfolio lends its securities,
it continues to receive interest or dividends on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral which will
be invested in readily marketable, high quality, short-term obligations. The
Portfolio may pay reasonable administrative and custodial fees in connection
with such loans and may pay a negotiated portion of the interest earned on the
cash or equivalent collateral to the borrower or placing broker. Loans are
subject to termination at the option of the Portfolio or the borrower. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by the Portfolio if a material event affecting the
investment is to occur.
SECURITIES OF OTHER INVESTMENT COMPANIES. As described in the
Prospectuses, the Portfolio intends to limit investments in securities issued by
other investment companies within the limits prescribed by the 1940 Act. The
Portfolio currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (a) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolio and other investment companies advised by the
Adviser.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. When-issued
and delayed delivery transactions are made to secure what is considered to be an
advantageous price or yield for the Portfolio. No fees or other expenses, other
than normal transaction costs, are incurred. However, cash or liquid securities
of the Portfolio sufficient to make payment for the securities to be purchased
are segregated on the Portfolio's records at the trade date. These assets are
marked to market daily and are maintained until the transaction has been
settled. The Portfolio does not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause the segregation of more than
20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio may engage in
futures and options transactions as described below.
As a means of reducing fluctuations in the net asset value of
its Shares, the Portfolio may attempt to hedge all or a portion of its portfolio
through the purchase of put options on portfolio securities and put options on
financial futures
-3-
<PAGE> 122
contracts for portfolio securities. The Portfolio may attempt to hedge all or a
portion of its portfolio by buying and selling financial futures contracts, and
writing call options on futures contracts. The Portfolio may also write covered
call options on portfolio securities to attempt to increase current income.
The Portfolio will maintain its position in securities,
options and segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position may be closed out
over-the-counter or on an exchange which provides a secondary market for options
of the same series.
FUTURES CONTRACTS. The Portfolio may enter into futures
contracts. A futures contract is a firm commitment by two parties, i.e. the
seller who agrees to sell a specific type of security called for in the contract
("going short") and the buyer who agrees to purchase the security ("going long")
at a certain time in the future.
Financial futures contracts call for the delivery of
particular debt instruments issued or guaranteed by the U.S. Treasury or by
specified agencies or instrumentalities of the U.S. Government at a certain time
in the future. Stock index futures contracts are similar to financial futures
contracts, but their price is based upon fluctuations in a particular index of
stock prices during a specified period, such as the S&P 500 Index. No physical
delivery of the underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract
by the Portfolio is to protect it from fluctuations in the value of securities
caused by unanticipated changes in interest rates or stock prices without
necessarily buying or selling securities. For example, in the fixed income
securities market, price moves inversely to interest rates. A rise in rates
means a drop in price. Conversely, a drop in rates means a rise in price. In
order to hedge its holdings of fixed income securities against a rise in market
interest rates, the Portfolio could enter into contracts to "go short" to
protect itself against the possibility that the prices of its fixed income
securities may decline during the Portfolio's anticipated holding period. The
Portfolio would "go long" to hedge against a decline in market interest rates.
STOCK INDEX OPTIONS. The Portfolio may purchase put options on
stock indexes listed on national securities exchanges or traded in the
over-the-counter market. A stock index fluctuates with changes in the market
value of the stock included in the index.
The effectiveness of purchasing stock index options will
depend upon the extent to which price movements in the
-4-
<PAGE> 123
Portfolio's portfolio securities correlate with price movements of the stock
index selected. Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indexes will be subject to
the ability of the Adviser to predict correctly movements in the direction of
the stock market or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Portfolio may
purchase and write listed put options on financial futures contracts. The
Portfolio would use these options only to protect portfolio securities against
decreases in value resulting from market factors such as anticipated increases
in interest rates.
Unlike entering directly into a future contract which requires
the purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to assume a
short position at the specific price. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related futures
contracts will also decrease in value and the option will increase in value. In
such an event, the Portfolio will normally close out its option by selling an
identical option. If the hedge is successful, the proceeds received by the
Portfolio upon the sale of the second option will be large enough to offset both
the premium paid by the Portfolio for the original option plus the realized
decrease in value of the hedged securities.
Alternatively, the Portfolio may exercise its put option to
close out the position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the strike
price of the option) and exercise the option. The Portfolio would then deliver
the futures contract in return for payment of the strike price. If the Portfolio
neither closes out nor exercises an option, the option will expire on the date
provided in the option contract, and only the premium paid for the contract will
be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS. In addition to
purchasing put options on futures, the Portfolio may write listed call options
on financial futures contracts or over-
-5-
<PAGE> 124
the-counter call options on futures contracts, to hedge its portfolio against an
increase in market interest rates. When the Portfolio writes a call option on a
futures contract, it is undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike price at any time
during the life of the option if the option is exercised. As market interest
rates rise and cause the price of futures to decrease, the Portfolio's
obligation under a call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Portfolio's call option position to
increase.
In other words, as the underlying future's price goes down
below the strike price, the buyer of the option has no reason to exercise the
call, so that the Portfolio keeps the premium received from the option. This
premium can help to substantially offset the drop in value of the Portfolio's
portfolio securities.
Prior to the expiration of a call written by the Portfolio, or
exercise of it by the buyer, the Portfolio may close out the option by buying an
identical option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Portfolio for the initial option. The
net premium income of the Portfolio will then substantially offset the realized
decrease in value of the hedged securities.
The Portfolio will not maintain open positions in futures
contracts it has sold or call options it has written on financial futures if, in
the aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Portfolio will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS. Unlike the purchase or sale
of a security, the Portfolio does not pay or receive money upon the purchase or
sale of a futures contract. Rather, the Portfolio is required to deposit an
amount of "initial margin" in cash or U.S. Treasury bills with its custodian (or
the broker, if legally permitted). The nature of initial margin in futures
transactions is different from that of margin in securities transactions in that
a futures contract's initial margin does not involve the borrowing by the
Portfolio to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Portfolio upon termination of the futures
-6-
<PAGE> 125
contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Portfolio is valued daily at
the official settlement price of the exchange on which it is traded. Each day
the Portfolio pays or receives cash, called "variation margin," equal to the
daily change in the value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or loan by
the Portfolio but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
its daily net asset value, the Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin
when it writes call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES. The Portfolio
may purchase put options on portfolio securities to protect against price
movements in particular securities in its portfolio. A put option gives the
Portfolio, in return for a premium, the right to sell the underlying security to
the writer (seller) at a specified price during the term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES. The
Portfolio may also write covered call options to generate income. As the writer
of a call option, the Portfolio has the obligation, upon exercise of the option
during the option period, to deliver the underlying security upon payment of the
exercise price. The Portfolio may sell call options either on securities held in
its portfolio or on securities which it has the right to obtain without payment
of further consideration (or securities for which it has segregated cash in the
amount of any additional consideration).
OVER-THE-COUNTER OPTIONS. The Portfolio may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options for those options on portfolio securities
held by the Portfolio and not traded on an exchange.
MONEY MARKET INSTRUMENTS. As stated in the Prospectuses and
subject to its investment policies, the Portfolio may invest in the following
money market instruments for temporary defensive or other purposes: commercial
paper and instruments of domestic and foreign banks and savings and loan
associations (collectively, "banks"), such as bankers' acceptances, certificates
of deposit and time deposits.
Commercial paper represents short-term unsecured promissory
notes issued in bearer form by banks or bank holding
-7-
<PAGE> 126
companies, corporations and finance companies. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor but may be subject to early
withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
For purposes of its investment policies and limitations, the
Portfolio considers certificates of deposit and demand and time deposits issued
by a U.S. branch of a domestic bank having capital, surplus and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items".
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with respect to its securities. Under the terms of a repurchase
agreement, the Portfolio purchases securities from financial institutions such
as banks and broker-dealers that are deemed to be creditworthy by the Adviser
under guidelines approved by the Board of Directors, subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price.
Securities subject to repurchase agreements are held by the Portfolio's
Custodian or in the Federal Reserve/Treasury book-entry system. During the term
of any repurchase agreement, the Adviser will continue to monitor the
creditworthiness of the seller. The repurchase price generally equals 102% of
the price paid by the Portfolio plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio securities). Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price, and securities subject to repurchase agreements are
maintained by the Portfolio's Custodian in segregated accounts in accordance
with the 1940 Act. Default by the seller could, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying securities. Repurchase agreements are considered
to be loans by the Portfolio under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. As described in the
Prospectuses, the Portfolio may enter into reverse repurchase agreements
(agreements under which the Portfolio sells portfolio
-8-
<PAGE> 127
securities and agrees to repurchase them at an agreed-upon date and price). At
the time the Portfolio enters into such an arrangement, it will place, in a
segregated custodial account, liquid assets having a value at least equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the price of the
securities that it is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. The Portfolio intends to limit
its borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 5% of its net assets.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of
Directors, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the
Portfolio.
The Portfolio's rate of portfolio turnover may vary greatly
from year to year as well as within a particular year. Portfolio turnover may
also be affected by cash requirements for redemptions of shares and by
requirements which enable a Portfolio to receive certain favorable tax
treatment. Portfolio turnover will not be a limiting factor in making investment
decisions.
At November 30, 1997, the Fund did not hold any securities of
its regular brokers or dealers or their parents.
Transactions on United States stock exchanges involve the
payment of negotiated brokerage commissions. On the exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. For the fiscal years ended September 30, 1997, 1996 and 1995, the
Predecessor Portfolio paid $95,470, $71,770 and $42,563, respectively, in
brokerage commissions on brokerage transactions.
Securities purchased and sold by the Portfolio which are
traded in the over-the-counter market are generally done so on a net basis (i.e.
without commission) through dealers, or otherwise involve transactions directly
with the issuer of an instrument. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price of
those securities includes an undisclosed commission or mark-up. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the
-9-
<PAGE> 128
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
The Portfolio may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
While the Adviser generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide
supplemental investment research to the Adviser may receive orders for
transactions by the Portfolio. Information so received is in addition to and not
in lieu of services required to be performed by the Adviser and does not reduce
the advisory fees payable to it by the Portfolio. Such information may be useful
to the Adviser in serving both the Portfolio and other clients, and conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Portfolio.
Portfolio securities will not be purchased from or sold to the Adviser, the
Distributor, the Administrator or any "affiliated person" (as such term is
defined under the 1940 Act) or any of them acting as principal, except to the
extent permitted by the SEC. In addition, the Portfolio will not give preference
to the Adviser's correspondents with respect to any transactions.
Investment decisions for the Portfolio are made independently
from those for other investment companies and accounts advised or managed by the
Adviser. Such other investment companies and accounts may also invest in the
same securities as the Portfolio. When a purchase or sale of the same security
is made at substantially the same time on behalf of the Portfolio and another
investment company or account, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which the Adviser
believes to be equitable to the Portfolio and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtained by
the Portfolio. To the extent permitted by law, the Adviser may
-10-
<PAGE> 129
aggregate the securities to be sold or purchased for the Portfolio with those to
be sold or purchased for other investment companies or accounts in order to
obtain best execution.
INVESTMENT LIMITATIONS
The following investment limitations may be changed with
respect to the Portfolio only by an affirmative vote of a majority of the
outstanding shares of the Portfolio (as defined under "Other Information
Concerning the Fund and Its Shares -- Miscellaneous" in the Portfolio's
Prospectuses). These investment limitations supplement those that appear in the
Prospectuses.
1. The Portfolio will not sell any securities short or
purchase any securities on margin, but may obtain such short-term credits as are
necessary for clearance of purchases and sales of securities. The deposit or
payment by the Portfolio of initial or variation margin in connection with
financial futures contracts or related options transactions is not considered
the purchase of a security on margin.
2. The Portfolio will not purchase or sell commodities,
commodity contracts, or commodity futures contracts except to the extent that
the Portfolio may engage in transactions involving financial futures contracts
or options on financial futures contracts.
3. The Portfolio will not purchase or sell real estate,
including limited partnership interests, although the Portfolio may invest in
securities of issuers whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or which represent
interests in real estate.
4. The Portfolio will not underwrite any issue of securities,
except as the Portfolio may be deemed to be an underwriter under the Securities
Act of 1933, as amended, in connection with the sale of securities in accordance
with its investment objective, policies, and limitations.
The following limitations may be changed by the Fund's Board
of Directors without shareholder approval, although shareholders will be
notified before any material change in these limitations becomes effective:
5. The Portfolio will not mortgage, pledge, or hypothecate any
assets, except to secure permitted borrowings. In these cases, the Portfolio may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 15% of the value of its total assets at the time of the
pledge. The purchase of securities on a when-issued basis will not be
-11-
<PAGE> 130
deemed to be a pledge of the Portfolio's assets. For purposes of this limitation
the following will not be deemed to be pledges of the Portfolio's assets: (a)
the deposit of assets in escrow in connection with the writing of covered put or
call options and, (b) collateral arrangements with respect to (i) the purchase
and sale of stock options (and options on stock indexes) and (ii) initial or
variation margin for futures contracts.
6. The Portfolio will not invest more than 15% of the value of
its net assets in illiquid securities, including repurchase agreements providing
for settlement more than seven days after notice, over-the-counter options,
certain restricted securities not determined by the Fund's Board of Directors to
be liquid, and non-negotiable time deposits with maturities over seven days.
7. The Portfolio will limit its investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Portfolio will purchase securities of
closed-end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and, therefore, any investment by the
Portfolio in shares of another investment company would be subject to such
duplicate expenses.
8. The Portfolio will not purchase put options on securities,
unless the securities are held in its portfolio and not more than 5% of the
value of the Portfolio's total assets would be invested in premiums on open put
option positions.
9. The Portfolio will not write call options on securities
unless the securities are held in its portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
10. The Portfolio will not purchase securities of a company for
the purpose of exercising control or management.
11. The Portfolio will not invest more than 5% of its net assets
in warrants. No more than 2% of the Portfolio's net assets, to be included
within the overall 5% limit on investments in warrants, may be warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange.
For purposes of this investment restriction, warrants will be valued at the
lower of cost or market, except that warrants acquired by the Portfolio
-12-
<PAGE> 131
in units with or attached to securities may be deemed to be without value.
NET ASSET VALUE
As stated in the applicable Prospectus, the net asset value
per Share of each class of the Portfolio is calculated by adding the value of
all of the portfolio securities and other assets of the Portfolio attributable
to such class, subtracting the liabilities charged to such class, and dividing
the result by the number of outstanding Shares of such class. "Assets belonging
to" each class of the Portfolio consist of the consideration received upon the
issuance of Shares of each class of the Portfolio together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, any
funds or payments derived from any reinvestment of such proceeds, and a portion
of any general assets of the Fund not belonging to a particular portfolio.
Assets belonging to each class of the Portfolio are charged with the direct
liabilities of each class of the Portfolio and with a share of the general
liabilities of the Fund allocated in proportion to the relative net assets of
the Portfolio and the Fund's other portfolios. The determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of general assets, with respect to a particular class of the Portfolio
are conclusive.
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the current bid and asked
prices. Restricted securities and other assets for which market quotations are
not readily available are valued at fair value as determined in accordance with
guidelines approved by the Fund's Board of Directors. In computing net asset
value, the current value of the Portfolio's open futures contracts and related
options will be "marked-to-market."
Among the factors that ordinarily will be considered in
valuing portfolio securities are the existence of restrictions upon the sale of
the security by the Portfolio, the existence and extent of a market for the
security, the extent of any discount in acquiring the security, the estimated
time during which the security will not be freely marketable, the expenses of
registering or otherwise qualifying the security for public sale, underwriting
commissions if underwriting would be required to effect a sale, the current
yields on comparable securities for
-13-
<PAGE> 132
debt obligations traded independently of any equity equivalent, changes in the
financial condition and prospects of the issuer, and any other factors affecting
fair value. In making valuations, opinions of counsel to the issuer may be
relied upon as to whether or not securities are restricted securities and as to
the legal requirements for public sale.
Additionally, the Administrator may use a pricing service to
value certain portfolio securities where the prices provided are believed to
reflect the fair market value of such securities. The methods of valuation used
by the pricing service will be reviewed by the Administrator under the general
supervision of the Fund's Board of Directors. Several pricing services are
available, one or more of which may be used by the Administrator from time to
time. In valuing the Portfolio's securities, the pricing service would normally
take into consideration such factors as yield, risk, quality, maturity, type of
issue, trading characteristics, special circumstances, and other factors which
are deemed relevant in determining valuations for normal institutionalized
trading units of debt securities and would not rely exclusively on quoted
prices.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Portfolio are sold on a continuous basis by the
Distributor. As described in the applicable Prospectuses, Trust Shares and
Institutional Shares of the Portfolio are sold to certain qualified customers at
their net asset value without a sales charge. Investor A Shares of the Portfolio
are sold to retail customers at the public offering price based on the
Portfolio's net asset value plus a front-end load or sales charge as described
in the applicable Prospectus. Investor B Shares of the Portfolio are sold to
retail customers at net asset value but are subject to a contingent deferred
sales charge which is payable upon redemption of such Shares as described in the
applicable Prospectus.
The Fund may redeem Shares involuntarily if the net income
with respect to the Portfolio's Shares is negative or such redemption otherwise
appears appropriate in light of the Fund's responsibilities under the 1940 Act.
An illustration of the computation of the public offering
price per share of shares of beneficial interest of the Predecessor Portfolio,
based on the value of the Predecessor Portfolio's net assets and the number of
outstanding shares at the close of business on September 30, 1997 and the
maximum front-end 3.5% sales charge applicable on such date, is as follows:
-14-
<PAGE> 133
TABLE
-----
Net Assets $68,965,117
Outstanding Shares 3,678,202
Net Asset Value Per
Share $18.75
Sales Charge (3.50% of
offering price, 3.63% of
net asset value per
share) .68
Offering to Public $19.43
Under the 1940 Act, the Portfolio may suspend the right of
redemption or postpone the date of payment for Shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. The Portfolio may also suspend or postpone the
recordation of the transfer of its Shares upon the occurrence of any of the
foregoing conditions.
In addition to the situations described in the Prospectuses
under "How to Purchase and Redeem Shares," the Portfolio may redeem Shares
involuntarily to reimburse the Portfolio for any loss sustained by reason of the
failure of a shareholder to make full payment for Shares purchased by the
shareholder or to collect any charge relating to a transaction effected for the
benefit of a shareholder which is applicable to Portfolio Shares as provided in
the applicable Prospectuses from time to time.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Shares in the
Portfolio as so described in the applicable Prospectus. Any rights an investor
may have to reduce (or have waived) the sales load applicable to an exchange, as
may be provided in a Prospectus, will apply in connection with any such
exchange.
By use of the exchange privilege, the investor authorizes his
or her selected dealer, Service Organization or the Distributor to act on
telephonic instructions from any person representing himself or herself to be
the investor and believed by the selected dealer, Service Organization or the
Distributor to be genuine. The investor, selected dealer, Service Organization
or the Distributor must notify the Transfer Agent of
-15-
<PAGE> 134
the investor's prior ownership of Portfolio Shares and account number. The
Transfer Agent's records of such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' written notice
to shareholders.
ADDITIONAL YIELD AND TOTAL RETURN INFORMATION
From time to time the yields and total returns of Trust
Shares, Institutional Shares, Investor A Shares and Investor B Shares (computed
separately) of the Portfolio may be quoted in advertisements, shareholder
reports or other communications to Shareholders.
The Portfolio's 30-day "yield" described in the Prospectuses
is calculated separately for Trust Shares, Institutional Shares, Investor A
Shares and Investor B Shares by dividing the Portfolio's net investment income
per share earned during a 30-day period by the maximum offering price per share
(the "maximum offering price") with respect to Investor A Shares and the net
asset value per share with respect to Trust Shares, Institutional Shares and
Investor B Shares on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. The
Portfolio's net investment income per share (irrespective of class) earned
during the period is based on the average daily number of Shares outstanding
during the period entitled to receive dividends and includes income dividends
and interest earned during the period minus expenses accrued for the period, net
of reimbursements. This calculation can be expressed as follows:
<TABLE>
<CAPTION>
a-b
Yield = 2 [(-------) (6) - 1]
cd + 1
<S> <C> <C> <C>
Where: a = dividends and interest earned
during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of Shares outstanding
that were entitled to receive dividends.
d = the maximum offering price per Share on the
last day of the period.
</TABLE>
-16-
<PAGE> 135
For the purpose of determining interest earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360 of the stated dividend rate of
the security each day that the security is in the Portfolio. The Portfolio
calculates interest earned on any debt obligation held in its portfolio by
computing the yield to maturity of each obligation held by it based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each 30-day period, or, with respect to
obligations purchased during the 30-day period, the purchase price (plus actual
accrued interest) and dividing the result by 360 and multiplying the quotient by
the market value of the obligation (including actual accrued interest) in order
to determine the interest income on the obligation for each day of the
subsequent 30-day period that the obligation is in the portfolio. The maturity
of an obligation with a call provision is the next call date on which the
obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by the Portfolio to all shareholder accounts
in proportion to the length of the base period and the Portfolio's mean (or
median) account size. Investor A Shares, Investor B Shares, Institutional Shares
and Trust Shares each bear separate fees applicable to the particular class of
shares. Undeclared earned income will not be subtracted from the maximum
offering price per Share (variable "d" in the formula). Undeclared earned income
is net investment income which, at the end of the base period, has not been
declared and paid as a dividend, but is reasonably expected to be and is
declared and paid as a dividend shortly thereafter.
For the 30-day period ended September 30, 1997, the
yield of shares of the Predecessor Portfolio was 0.20%.
TOTAL RETURN CALCULATIONS. The Portfolio computes its "average
annual total return" for each class of Shares by determining the average annual
compounded rate of return during specified periods that would equate the initial
amount invested in a particular class of Shares to the ending redeemable value
of such investment in the class of Shares by dividing the ending redeemable
value of a hypothetical $1,000 payment by $1,000 (representing a hypothetical
initial payment) and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
-17-
<PAGE> 136
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of the 1, 5 or 10 year
(or other) periods (or a fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Portfolio computes its aggregate total returns separately
for each class of Shares by determining the aggregate compounded rates of return
during specified periods that likewise equate the initial amount invested in a
particular class of Shares to the ending redeemable value of such investment in
the class of Shares. The formula for calculating aggregate total return is as
follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all Shareholder accounts, assuming an account size
equal to the Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, the Portfolio's average annual
total return and aggregate total return quotations reflect the deduction of the
maximum front-end sales charge in connection with the purchase of Investor A
Shares and the deduction of any applicable contingent deferred sales charge with
respect to Investor B Shares.
Based on the foregoing calculations, (i) the average annual
total returns of shares of the Predecessor Portfolio for the 12-month period
ended September 30, 1997 and for the period from January 4, 1993 (commencement
of operations) through September 30, 1997 were 29.15% and 15.91%, respectively,
and (ii)
-18-
<PAGE> 137
the aggregate total return of shares of the Predecessor Portfolio for the period
from January 4, 1993 (commencement of operations) through September 30, 1997 was
101.45%.
As stated in the Prospectus relating to Investor A Shares and
Investor B Shares, the Portfolio may also calculate total return figures without
deducting the maximum sales charge imposed on purchases or redemptions. The
effect of not deducting the sales charge will be to increase the total return
reflected.
IN GENERAL
Investors may judge the performance of the Portfolio by
comparing it to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies. Such comparisons may be made
by referring to market indices such as those prepared by Dow Jones & Co., Inc.,
Salomon Brothers, Inc., Standard & Poor's Ratings Group or any of their
affiliates, the Consumer Price Index, the NASDAQ Composite, or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. Such comparisons may also be made
by referring to data prepared by Lipper Analytical Services, Inc. (a widely
recognized independent service which monitors the performance of mutual funds),
Indata, Frank Russell, CDA, and the Bank Rate Monitor (which reports average
yields for money market accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas). Other
similar yield data, including comparisons to the performance of Mercantile
repurchase agreements, or the average yield data for similar asset classes
including but not limited to Treasury bills, notes and bonds, may also be used
for comparison purposes. Comparisons may also be made to indices or data
published in the following national financial publications: MorningStar,
CDA/Wiesenberger, Money Magazine, Forbes, Fortune, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and publications of Ibbotson Associates,
Inc. and other publications of a local or regional nature. In addition to
performance information, general information about the Portfolio that appears in
a publication such as those mentioned above may be included in advertisements
and in reports to Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
portfolios offered by the Fund; (5)
-19-
<PAGE> 138
descriptions of investment strategies for one or more of such portfolios; (6)
descriptions or comparisons of various investment products, which may or may not
include the Portfolio; (7) comparisons of investment products (including the
Portfolio) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of rankings or ratings by recognized rating
organizations.
Such data are for illustrative purposes only and are not
intended to indicate past or future performance results of the Portfolio. Actual
performance of the Portfolio may be more or less than that noted in the
hypothetical illustrations.
Since performance will fluctuate, performance data for the
Portfolio cannot necessarily be used to compare an investment in the Portfolio's
Shares with bank deposits, savings accounts, and similar investment alternatives
which often provide an agreed or guaranteed fixed yield for a stated period of
time. Shareholders should remember that performance is generally a function of
the kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. The current yield and performance of
the Portfolio may be obtained by calling the Fund at: INVESTOR A OR INVESTOR B
SHARES - (800) 452-ARCH (2724); OR TRUST OR INSTITUTIONAL SHARES - (800)
452-4015.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of
Directors to issue up to seven billion full and fractional shares of capital
stock, and to classify or reclassify any unissued shares of the Fund into one or
more additional classes or by setting or changing in any one or more respects,
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. Pursuant to such authority, the Fund's Board of
Directors has authorized the issuance of sixty-four classes of Shares
representing interests in eighteen investment Portfolios: the Treasury Money
Market, Money Market, Tax-Exempt Money Market, U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond,
Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal Bond,
Equity Income, Equity Index, Growth & Income Equity, Growth Equity, Small Cap
Equity, Small Cap Equity Index, International Equity and Balanced Portfolios.
Trust Shares, Institutional Shares, Investor A Shares and/or Investor B Shares
in each portfolio are offered through separate prospectuses to different
categories of investors. Portfolio Shares have no preemptive rights and only
such conversion or exchange rights as the Board may grant in its discretion.
When issued for payment as described in the applicable prospectuses,
-20-
<PAGE> 139
the Shares of the Fund's portfolios will be fully paid and
nonassessable.
Except as noted in the Prospectuses with respect to certain
sub-transfer agency expenses borne by Institutional Shares and below with
respect to the Administrative Services Plans for Trust Shares and Institutional
Shares and the Distribution and Services Plans for Investor A Shares and
Investor B Shares, Shares of each class of the Portfolio bear the same types of
ongoing expenses. In addition, Investor A Shares are subject to a front-end
sales charge and Investor B Shares are subject to a contingent deferred sales
charge as described in the Prospectuses. Each class of Shares also has different
exchange privileges.
In the event of a liquidation or dissolution of the Fund,
Shares of the Portfolio are entitled to receive the assets available for
distribution belonging to the Portfolio, and a proportionate distribution, based
upon the relative asset value of the Portfolio, of any general assets not
belonging to any particular portfolio of the Fund which are available for
distribution. Shareholders of the Portfolio are entitled to participate equally
in the net distributable assets of the Portfolio on liquidation, except that
Trust Shares of the Portfolio will be solely responsible for the Portfolio's
payments pursuant to the Administrative Services Plan for those Shares,
Institutional Shares of the Portfolio will be solely responsible for the
Portfolio's payments pursuant to the Administrative Service Plan for those
Shares, Investor A Shares of the Portfolio will be solely responsible for the
Portfolio's payments pursuant to the Distribution and Services Plan for those
Shares and Investor B Shares of the Portfolio will be solely responsible for the
Portfolio's payments pursuant to the Distribution and Services Plan for those
Shares. In addition, Institutional Shares will be solely responsible for the
payment of certain sub-transfer agency fees attributable to those Shares.
Holders of all outstanding Shares of the Portfolio will vote
together in the aggregate and not by class, except that only Trust Shares of the
Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Portfolio's Administrative Services Plan for
Trust Shares, only Institutional Shares of the Portfolio will be entitled to
vote on matters submitted to a vote of shareholders pertaining to the
Portfolio's Administrative Services Plan for Institutional Shares, only Investor
A Shares of the Portfolio will be entitled to vote on matters submitted to a
vote of shareholders pertaining to the Portfolio's Distribution and Services
Plan for Investor A Shares, and only Investor B Shares of the Portfolio will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Portfolio's Distribution and Services Plan for Investor B Shares. Further,
shareholders of all of the Fund's portfolios,
-21-
<PAGE> 140
irrespective of series, will vote in the aggregate and not separately on a
portfolio-by-portfolio basis, except as otherwise required by law or when the
Board of Directors determines that the matter to be voted upon affects only the
interests of the shareholders of a particular portfolio or class of Shares. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding Shares of each
series (portfolio) affected by the matter. A portfolio is considered to be
affected by a matter unless it is clear that the interests of each portfolio in
the matter are identical or that the matter does not affect any interest of the
particular portfolio. Under the Rule, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a portfolio only if approved by a majority of the outstanding
Shares of the portfolio. However, the Rule also provides that the ratification
of the appointment of independent auditors, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of the Fund's portfolios voting without regard to portfolio
or class.
Shares in the Portfolio will be issued without certificates.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolio or its shareholders, and the discussion here and
in the Prospectuses is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisors with specific reference to
their own tax situations.
The Portfolio is treated as a separate corporate entity under
the Internal Revenue Code of 1986, as amended (the "Code"). The Portfolio
intends to qualify each year as a regulated investment company. In order to so
qualify for a taxable year under the Code, the Portfolio must satisfy, in
addition to the distribution requirements described in the Prospectuses, certain
other requirements set forth below.
At least 90% of the gross income for a taxable year of the
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other
-22-
<PAGE> 141
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to the Portfolio's business of investing in such
stock, securities or currencies (the "90% gross income test").
Also, at the close of each quarter of its taxable year, at
least 50% of the value of the Portfolio's assets must consist of cash and cash
items, U.S. Government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Portfolio has not
-23-
<PAGE> 142
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Portfolio does not hold more than 10% of the
outstanding voting securities of such issuer) and no more than 25% of the value
of the Portfolio's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Portfolio controls
and which are engaged in the same or similar trades or businesses.
The Portfolio will designate any distribution of the excess of
net long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to Shareholders within 60 days after the
close of the Portfolio's taxable year. Such distributions, if any, will be
taxable to Shareholders who are not currently exempt from federal income tax as
long-term capital gains, no matter how long the Shareholder has held these
Shares. Shareholders should note that, upon the sale or exchange of Portfolio
Shares, if the Shareholder has not held such Shares for more than six months,
any loss on the sale or exchange of those Shares will be treated as long-term
capital loss to the extent of the capital gain dividends received with respect
to the Shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, but because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's long-term
capital gains are taxable at a maximum rate of 28%. For corporations, long-term
capital gains and ordinary income are both taxable at a maximum nominal rate of
35% (or at a maximum marginal rate of 39% in the case of corporations having
taxable income between $100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute specified percentages of
their ordinary taxable income and capital gain net income (excess of capital
gains over capital losses). The Portfolio intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income each year to avoid liability for this excise tax.
If for any taxable year the Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its Shareholders).
In such event, dividend distributions would be taxable as ordinary income to
Shareholders, to the extent of the Portfolio's current and accumulated earnings
and profits, and would be eligible for the dividends received deduction allowed
to corporate shareholders.
-24-
<PAGE> 143
The Portfolio will be required in certain cases to withhold
and remit to the United States Treasury 31% of taxable dividends or 31% of gross
sale proceeds paid to Shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to withholding
by the Internal Revenue Service for failure to properly include on his or her
return payments of taxable interest or dividends.
In those states and localities which have income tax laws, the
treatment of the Portfolio and its Shareholders under such laws may differ from
their treatment under federal income tax laws. Under state or local law,
distributions of net income may be taxable to Shareholders as dividend income.
Shareholders are advised to consult their tax advisors concerning the
application of state and local taxes.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of
financial instruments that may be held by the Portfolio. These rules may have a
particular impact on the amount of income or gain that the Portfolio must
distribute to Shareholders to comply with the distribution requirement, on the
income or gain qualifying under the 90% gross income test.
Generally, futures contracts and options on futures contracts
held by the Portfolio at the close of its taxable year are treated for federal
income tax purposes as sold for their fair market value on the last business day
of such year, a process known as "mark-to-market." Forty percent of any gain or
loss resulting from such constructive sales are treated as short-term capital
gain or loss and 60% of such gain or loss are treated as long-term capital gain
or loss without regard to the period the Portfolio holds the futures contract or
related option (the "40%-60% rule"). The amount of any capital gain or loss
actually realized by the Portfolio in a subsequent sale or other disposition of
those futures contracts and related options is adjusted to reflect any capital
gain or loss taken into account by the Portfolio in a prior year as a result of
the constructive sale of the contracts and options. Losses with respect to
futures contracts to sell and related options, which are regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Portfolio, are subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
-25-
<PAGE> 144
termination of the straddle. With respect to certain futures contracts and
related options, deductions for interest and carrying charges may not be
allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell and related options which are properly identified as such, the
Portfolio may make an election which will exempt (in whole or in part) those
identified futures contracts and options from being treated for federal income
tax purposes as sold on the last business day of the Portfolio's taxable year,
but gains and losses will be subject to such short sales, wash sales and loss
deferral rules and the requirement to capitalize interest and carrying charges.
Under Temporary Regulations, the Portfolio would be allowed (in lieu of the
foregoing) to elect either (1) to offset gains or losses from positions which
are part of a mixed straddle by separately identifying each mixed straddle to
which such treatment applies, or (2) to establish a mixed straddle account for
which gains and losses would be recognized and offset on a periodic basis during
the taxable year. Under either election, the 40%-60% rule will apply to the net
gain or loss attributable to the futures contracts and options, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term.
Some of the non-U.S. dollar denominated investments that the
Portfolio may make, such as non-U.S. dollar-denominated debt securities and
preferred stock, may be subject to the provisions of Subpart J of the Code,
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S dollar. The
types of transactions covered by these provisions include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer also is treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and non-equity options generally are not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the mark-to-market rules, unless an election is made to
have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and normally is taxable as ordinary
gain or loss. The Portfolio may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that
-26-
<PAGE> 145
are capital assets in the hands of the Portfolio and which are not part of a
straddle. In accordance with Treasury Regulations, certain transactions subject
to the special currency rules that are part of a "Section 988 hedging
transaction" (as defined in the Code and Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by the
Portfolio which are not subject to the special currency rules (such as foreign
equity investments other than certain preferred stocks) is treated as capital
gain or loss and is not segregated from the gain or loss on the underlying
transaction.
CONCLUSIONS
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information. Such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisors
concerning the application of state and local taxes.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund, their
addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Jerry V. Woodham* Chairman of Treasurer, St. Louis
St. Louis University the Board University, August 1996
3500 Lindell and to present; Treasurer,
Fitzgerald Hall President Washington University,
St. Louis, MO 63131 1981 to 1995
Age: 54
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: 52
</TABLE>
-27-
<PAGE> 146
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
Joseph J. Hunt Director General Vice-President
Iron Workers District International Association of
Council Bridge, Structural and Orna-
3544 Watson Road mental Iron Workers (Interna-
St. Louis, MO 63139 tional Labor Union), January 1994
Age: 55 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: 62 Kellwood Company since May
1989.
Ronald D. Winney* Director; Treasurer, Ralston
Ralston Purina Company Treasurer Purina Company
Checkerboard Square since 1985.
St. Louis, MO 63164
Age: 55
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 Employee of BISYS Fund
3435 Stelzer Road President and Services;
Columbus, OH 43219 Assistant
Age: 52 Treasurer
David Bunstine* Assistant Employee of BISYS Fund Services.
3435 Stelzer Road Secretary
Columbus, OH 43219
Age: 32
- ------------------------
<FN>
* Messrs. Woodham, Winney, Grimm and Bunstine are "interested persons" of the
Fund as defined in the 1940 Act.
</FN>
</TABLE>
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, 1997, the
Fund paid or accrued for the account of its directors as a group, for services
in all
-28-
<PAGE> 147
capacities, a total of $67,500. Drinker Biddle & Reath LLP, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Fund. As of the
date of this Statement of Additional Information, the directors and officers of
the Fund, as a group, owned less than 1% of the outstanding Shares of the Fund.
The following chart provides certain information about the
fees received by the Fund's directors for their services as members of the Board
of Directors and committees thereof for the fiscal year ended November 30, 1997:
<TABLE>
<CAPTION>
=============================================================================================================
PENSION OR TOTAL
AGGREGATE RETIREMENT BENEFITS COMPENSATION
COMPENSATION ACCRUED AS PART OF FROM THE FUND AND
NAME OF DIRECTOR FROM THE FUND FUND EXPENSE FUND COMPLEX*
---------------- ------------- ------------ -------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jerry V. Woodham 15,000 N/A 15,000
- -------------------------------------------------------------------------------------------------------------
Robert M. Cox, Jr. 10,000 N/A 10,000
- -------------------------------------------------------------------------------------------------------------
Joseph J. Hunt 10,000 N/A 10,000
- -------------------------------------------------------------------------------------------------------------
James C. Jacobsen 10,000 N/A 10,000
- -------------------------------------------------------------------------------------------------------------
Donald E. Kiernan** 5,000 N/A 5,000
- -------------------------------------------------------------------------------------------------------------
Lyle L. Meyer** 7,500 N/A 7,500
- -------------------------------------------------------------------------------------------------------------
Ronald D. Winney 10,000 N/A 10,000
=============================================================================================================
<FN>
* The "Fund Complex" consists solely of the Fund.
** Messrs. Kiernan and Meyer resigned as directors of the Fund on April 3, 1997 and September 17,
1997, respectively.
</FN>
</TABLE>
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
MVA serves as investment adviser to the Portfolio. Pursuant to
the advisory agreement, MVA has agreed to provide investment advisory services
as described in the Portfolio's Prospectuses. MVA has agreed to pay all expenses
incurred by it in connection with its activities under the agreement other than
the cost of securities, including brokerage commissions, if any, purchased for
the Portfolio.
The investment advisory agreement provides that MVA shall not
be liable for any error of judgment or mistake of law or for any loss suffered
in connection with the performance of its agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or
-29-
<PAGE> 148
a loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard by it of its duties and
obligations thereunder.
For the fiscal year ended September 30, 1997, MVA (and the
predecessor adviser, Mark Twain Bank) earned advisory fees of $468,080, of
which $0 was waived. For the fiscal years ended September 30, 1996 and
1995, Mark Twain Bank earned advisory fees of $368,254 and $253,371,
respectively, of which $13,853 and $15,785, respectively, were waived.
Under its administration agreement with the Fund, BISYS Fund
Services Ohio, Inc. (the "Administrator") serves as administrator. The
Administrator has agreed to maintain office facilities for the Portfolio,
furnish the Portfolio with statistical and research data, clerical, accounting,
and certain bookkeeping services, stationery and office supplies, and certain
other services required by the Portfolio, and to compute the net asset value and
net income of the Portfolio. The Administrator prepares annual and semi-annual
reports to the SEC on Form N-SAR, compiles data for and prepares federal and
state tax returns and required tax filings other than those required to be made
by the Fund's Custodian and Transfer Agent, prepares the Fund's compliance
filings with state securities commissions, maintains the registration or
qualification of Shares for sale under the securities laws of any state in which
the Fund's Shares shall be registered, assists in the preparation of annual and
semi-annual reports to Shareholders of record, participates in the periodic
updating of the Fund's Registration Statement, prepares and assists in the
timely filing of notices to the SEC required pursuant to Rule 24f-2 under the
1940 Act, arranges for and bears the cost of processing Share purchase, exchange
and redemption orders, keeps and maintains the Portfolio's financial accounts
and records including calculation of daily expense accruals, monitors compliance
procedures for the Portfolio with the Portfolio's investment objective, policies
and limitations, tax matters, and applicable laws and regulations, and generally
assists in all aspects of the Portfolio's operations. The Administrator bears
all expenses in connection with the performance of its services, except that the
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities. See "Net Asset Value" above.
For the fiscal years ended September 30, 1997, 1996 and 1995,
Federated Administrative Services, the former administrator of the Predecessor
Portfolio, earned administrative fees of $90,965, $71,420 and $52,746,
respectively.
From time to time, MVA and the Administrator may voluntarily
waive a portion or all of their respective fees otherwise payable to them with
respect to the Portfolio in order
-30-
<PAGE> 149
to increase the net income available for distribution to Shareholders.
CUSTODIAN AND TRANSFER AGENT
Mercantile is Custodian of the Portfolio's assets pursuant to a
Custodian Agreement. Under the Custodian Agreement, Mercantile has agreed to (i)
maintain a separate account or accounts in the name of the Portfolio; (ii)
receive and disburse money on behalf of the Portfolio; (iii) collect and receive
all income and other payments and distributions on account of the Portfolio's
portfolio securities; (iv) respond to correspondence relating to its duties; and
(v) make periodic reports to the Fund's Board of Directors concerning the
operations of the Portfolio. Mercantile may, at its own expense, open and
maintain a custody account or accounts on behalf of the Portfolio with other
banks or trust companies, provided that Mercantile shall remain liable for the
performance of all of its custodial duties under the Custodian Agreement,
notwithstanding any delegation. Mercantile is authorized to select one or more
banks or trust companies to serve as sub-custodian on behalf of the Portfolio,
provided that Mercantile shall remain responsible for the performance of all of
its duties under the Custodian Agreement and shall hold the Fund harmless from
the acts and omissions of any bank or trust company serving as sub-custodian.
In the opinion of the staff of the SEC, since the Custodian is
an affiliate of the Adviser, the Fund and the Custodian are subject to the
requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and the
Custodian intend to comply with the requirements of such Rule.
Pursuant to the Custodian Agreement with the Fund, the
Portfolio pays Mercantile an annual fee. This fee, which is paid monthly, is
calculated as the greater of $6,000 or $.30 for each $1,000 of the Portfolio's
average daily net assets, plus $15.00 for each purchase, sale or delivery of a
security upon its maturity date, $50.00 for each interest collection or claim
item, $20.00 for each transaction involving GNMA, tax-free or other
non-depository registered items with monthly dividends or interest, $30.00 for
each purchase, sale or expiration of an option contract, $50.00 for each
purchase, sale or expiration of a futures contract, and $15.00 for each
repurchase trade with an institution other than Mercantile. In addition, the
Portfolio pays Mercantile's incremental costs in providing foreign custody
services for any foreign-denominated and foreign-held securities and reimburses
Mercantile for out-of-pocket expenses related to such services.
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
-31-
<PAGE> 150
Agreement. Under the Agreement, the Transfer Agent has agreed to (i) process
Shareholder purchase and redemption orders; (ii) maintain Shareholder records
for the Portfolio's Shareholders; (iii) process transfers and exchanges of
Shares of the Portfolio; (iv) issue periodic statements for the Portfolio's
Shareholders; (v) process dividend payments and reinvestments; (vi) assist in
the mailing of Shareholder reports and proxy solicitation materials; and (vii)
make periodic reports to the Fund's Board of Directors concerning the operations
of the Portfolio.
DISTRIBUTOR AND SERVICE ORGANIZATIONS
BISYS Fund Services (the "Distributor"), an affiliate of the
Administrator, serves as the distributor of the Portfolio's Shares pursuant to a
Distribution Agreement. Under the Distribution Agreement, the Distributor, as
agent, sells Shares of the Portfolio on a continuous basis. The Distributor has
agreed to use appropriate efforts to solicit orders for the sale of Shares. With
respect to the Portfolio's Trust Shares and Institutional Shares, no
compensation is payable by the Fund to the Distributor for distribution
services. With respect to the Portfolio's Investor A Shares, the Distributor is
entitled to receive a portion of the front-end sales charge imposed on such
Shares. The Distributor is also entitled to the payment of contingent deferred
sales charges upon the redemption of Investor B Shares of the Portfolio. In
addition, under the Distribution and Services Plan for Investor A Shares
described below, the Distributor is entitled to a distribution fee at the annual
rate of .10% for distribution services and under the Distribution and Services
Plan for Investor B Shares described below, the Distributor is entitled to a
distribution fee at the annual rate of .75% for distribution services. For
information regarding the distribution services provided thereunder, see
"Distribution and Services Plans" under "Management of the Fund" in the
Prospectuses and "The Plans" below.
THE PLANS
DISTRIBUTION AND SERVICES PLANS. As described in the
Prospectuses, the Fund has adopted separate Distribution and Services Plans with
respect to Investor A Shares and Investor B Shares of the Portfolio pursuant to
the 1940 Act and Rule 12b-1 thereunder. Any material amendment to the Plans or
arrangements with the Distributor or Service Organizations (which may include
selected dealers and affiliates of the Fund's Adviser) must be approved by a
majority of the Board of Directors, including a majority of the directors who
are not "interested persons" of the Fund as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Directors") and by a majority of the Investor A Shares and Investor B Shares,
respectively, of the Portfolio. Pursuant to the Plans, the Fund may enter into
Servicing Agreements with
-32-
<PAGE> 151
broker-dealers and other organizations ("Servicing Agreements") that purchase
Investor A Shares or Investor B Shares of the Portfolio. The Servicing
Agreements provide that the Servicing Organizations will render certain
shareholder administrative support services to their customers who are the
record or beneficial owners of Investor A Shares or Investor B Shares. Services
provided pursuant to the Servicing Agreements may include such services as
providing information periodically to customers showing their positions in
Investor A Shares or Investor B Shares and monitoring services for their
customers who have invested in Investor A Shares or Investor B Shares, including
the operation of telephone lines for daily quotations of return information.
Service Organizations and other broker/dealers receive
commissions from the Distributor for selling Investor B Shares, which are paid
at the time of the sale. These commissions approximate the commissions payable
with respect to sales of Investor A Shares. The distribution fees payable under
the Distribution and Services Plan for Investor B Shares are intended to cover
the expense to the Distributor of paying such up-front commissions, and the
contingent deferred sales charge is calculated to charge the investor with any
shortfall that would occur if Investor B Shares are redeemed prior to the
expiration of the eight year period after which Investor B Shares automatically
convert to Investor A Shares. To provide funds for the payment of up-front sales
commissions, the Distributor has entered into an agreement with MVA pursuant to
which MVA provides funds for the payment of commissions and other fees payable
to Service Organizations and broker/dealers who sell Investor B Shares. Under
the terms of that agreement, the Distributor has assigned to MVA the fees which
may be payable from time to time to the Distributor under the Distribution and
Services Plan for Investor B Shares and the contingent deferred sales charges
payable to the Distributor with respect to Investor B Shares.
Shares of the Predecessor Portfolio were subject to a
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act. The Plan
provided for payment of fees to Federated Securities Corp., the former
distributor of the Predecessor Portfolio, at an annual rate of .25% of the
Predecessor Portfolio's average daily net assets, to finance activity which was
primarily intended to result in the sale of the Predecessor Portfolio's shares
subject to the Plan. Pursuant to the Plan, Federated Securities Corp. was
permitted to pay fees to brokers for distribution and administrative services
and to administrators (i.e. financial institutions) for administrative services
provided to the Predecessor Portfolio and its shareholders. For the fiscal years
ended September 30, 1997, 1996 and 1995, brokers and administrators earned fees
on behalf of the Predecessor Portfolio of $156,027, $122,734 and $84,456,
respectively, all of which were voluntarily waived for each year.
-33-
<PAGE> 152
ADMINISTRATIVE SERVICES PLANS. As described in the applicable
Prospectuses, separate Administrative Services Plans have been adopted with
respect to Trust Shares and Institutional Shares of the Portfolio. Pursuant to
each Plan and the Distribution and Services Plans described above, the Fund may
enter into Servicing Agreements with banks, trust departments, and other
financial institutions and with broker-dealers and other organizations ("Service
Organizations") that purchase Trust Shares, Institutional Shares, Investor A
Shares or Investor B Shares of the Portfolio, respectively. The Servicing
Agreements provide that the Service Organizations will render certain
shareholder administrative support services to their customers who are the
record or beneficial owners of Trust Shares, Institutional Shares, Investor A
Shares or Investor B Shares, respectively. Services provided pursuant to the
Servicing Agreements may include some or all of the following services: (i)
processing dividend and distribution payments from the Portfolio on behalf of
customers; (ii) providing information periodically to customers showing their
positions in Trust, Institutional, Investor A or Investor B Shares; (iii)
arranging for bank wires; (iv) responding to routine customer inquiries relating
to services performed by the particular Service Organization; (v) providing
sub-accounting with respect to Trust, Institutional, Investor A or Investor B
Shares owned of record or beneficially by customers or the information necessary
for sub- accounting; (vi) as required by law, forwarding Shareholder
communications (such as proxies, Shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to customers;
(vii) forwarding to customers proxy statements and proxies containing any
proposals regarding Servicing Agreements or the related Plan; (viii) aggregating
and processing purchase, redemption, and exchange requests from customers and
placing net purchase and redemption orders with the Fund's Distributor; (ix)
providing customers with a service that invests the assets of their accounts in
Trust, Institutional, Investor A or Investor B Shares pursuant to specific or
pre-authorized instructions; (x) maintaining records relating to each customer's
Share transactions; or (xi) other similar services if requested by the Fund and
permitted by law. In addition, Service Organizations may also provide dedicated
facilities and equipment in various local locations to serve the needs of
investors, including walk-in facilities, 800 numbers, and communication systems
to handle shareholder inquiries, and in connection with such facilities, provide
on-site management personnel and monitoring services for their customers who
have invested in Investor A Shares or Investor B Shares, including the operation
of telephone lines for daily quotations of return information.
OTHER PLAN INFORMATION. The Board of Directors has
approved each Plan and its respective arrangements with the
Distributor, Service Organizations and broker-dealers based on
information provided by the Fund's service contractors that there
-34-
<PAGE> 153
is a reasonable likelihood that these Plans and arrangements will benefit the
Portfolio and its shareholders. Pursuant to each Plan, the Board of Directors
reviews, at least quarterly, a written report of the amounts of distribution
fees and/or servicing fees expended pursuant to each Plan, the Service
Organizations to whom such fees were paid, and the purposes for which the
expenditures were made. So long as the Fund has one or more of the above
described Plans in effect, the selection and nomination of the members of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Fund will be committed to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer
accounts, Service Organizations, selected dealers, and other institutions may
also charge their customers directly for cash management and other services
provided in connection with the accounts, including, for example, account
maintenance fees, compensating balance requirements, or fees based upon account
transactions, assets, or income. An investor should therefore read the
Prospectuses and this Statement of Additional Information in light of the terms
of his or her account with a Service Organization, selected dealer, or other
institution before purchasing Trust, Institutional, Investor A or Investor B
Shares of the Portfolio.
FUND EXPENSES. As discussed previously, the Portfolio's service
contractors bear all of their own expenses in connection with the performance of
their services, except that the Portfolio bears certain expenses incurred
pursuant to the Distribution and Services Plans, the Administration Services
Plans and certain sub-transfer agency fees (with respect to Institutional
Shares). The Portfolio also bears the expenses incurred in its operations. Fund
expenses include taxes, interest, fees and salaries of its directors and
officers, SEC fees, state securities qualification fees, costs of preparing and
printing prospectuses for regulatory purposes and for distribution to
Shareholders, advisory and administration fees, distribution fees for
distribution services provided to and expenses assumed in connection with
marketing Investor A Shares and Investor B Shares, charges of the Custodian and
Transfer Agent, Service Organization fees, certain insurance premiums, outside
auditing and legal expenses, costs of any independent pricing service, costs of
Shareholder reports and meetings and any extraordinary expenses. The Portfolio
also pays for brokerage fees, commission and other transaction charges (if any)
incurred in connection with the purchase and sale of portfolio securities.
-35-
<PAGE> 154
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, certified public accountants, with
offices at Two Nationwide Plaza, Columbus, Ohio 43215, serves as independent
auditors for the Fund. KPMG Peat Marwick LLP performs an annual audit of the
Fund's financial statements. Reports of its activities are provided to the
Fund's Board of Directors.
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of
the Fund, is a partner), Suite 1100, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496, is counsel to the Fund and will pass upon certain legal
matters on its behalf.
MISCELLANEOUS
As of January 23, 1998, Mercantile held of record 99.994% and
59.118% of the outstanding Institutional and Trust shares, respectively, in the
Treasury Money Market Portfolio; 99.724% and 36.508% of the outstanding
Institutional and Trust shares, respectively, in the Money Market Portfolio;
85.962% of the outstanding Trust shares in the Tax-Exempt Money Market
Portfolio; 96.129% and 95.919% of the outstanding Institutional and Trust
shares, respectively, in the U.S. Government Securities Portfolio; 96.135% and
95.447% of the outstanding Institutional and Trust shares, respectively, in the
Intermediate Corporate Bond Portfolio; 99.466% and 99.787% of the outstanding
Institutional and Trust shares, respectively, in the Government & Corporate Bond
Portfolio; 99.679% and 98.342% of the outstanding Institutional and Trust
shares, respectively, in the Bond Index Portfolio; 96.944% of the outstanding
Trust shares in the Short-Intermediate Municipal Portfolio; 98.153% of the
outstanding Trust shares in the Missouri Tax-Exempt Bond Portfolio; 99.691% of
the outstanding Trust shares in the National Municipal Bond Portfolio; 99.181%
and 96.088% of the outstanding Institutional and Trust shares, respectively, in
the Growth & Income Equity Portfolio; 99.993% and 49.942% of the outstanding
Institutional and Trust shares, respectively, in the Small Cap Equity Portfolio;
95.527% and 93.081% of the outstanding Institutional and Trust shares,
respectively, in the International Equity Portfolio; 97.046% of the outstanding
Trust shares in the Equity Income Portfolio; 84.937 and 99.999%, of the
outstanding Institutional and Trust shares, respectively, in the Equity Index
Portfolio; 99.693% and 99.838% of the outstanding Institutional and Trust
shares, respectively, in the Balanced Portfolio, and 99.999% and 99.999% of the
outstanding Institutional and Trust shares, respectively, in the Growth Equity
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.
<PAGE> 155
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 - BISYS Fund
Services, FBO Mercantile EOD Sweep, Attn: Linda Zerbe, First and Market
Building, Suite 300, Pittsburgh, PA 15222 (24.240%); Mercantile Bank of
Arkansas, Custodian, Treasurer's Office, State of AR, Attn: Stephanie Noel, 220
State Capitol, Little Rock, AR 72201 (6.222%); Investor A Shares - National
Financial Services Corp., For the Benefit of Our Customers, 1 World Financial
Center, 200 Liberty Street, 5th Floor, New York, NY 10281 (59.788%); Mercantile
Bank of St. Louis, NA Custodian Richard E. Crippa, Rollover IRA, 2948 Castleford
Dr., Florissant, MO 63033-0000 (7.846%); St. Louis Regional Medical Center,
Attn: Sharon Edison, 5535 Delmar Blvd., St. Louis, MO 63112 (25.468%).
As of the same date, the following institutions also owned of
record 5% or more of the Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Hawaiian Trust
Company Ltd., 783 Funds Accounting, P.O. Box 3170, Honolulu, HI 96802-3170
(8.479%); BISYS Fund Services, FBO Mercantile EOD Sweep, Attn: Linda Zerbe,
First and Market Building, Suite 300, Pittsburgh, PA 15222 (34.892%); Investor A
Shares - National Financial Services Corp., For the Benefit of Our Customers, 1
World Financial Center, 200 Liberty Street, 5th Floor, New York, NY 10281
(91.361%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian Pheba
A. Steinmeyer, IRA, HC 3 Box 1266, Rocky Mt., MO 65072-9042 (7.085%); Alberta
Buenemann and Ernie W. Buenemann Trust, Alberta Buenemann Revocable Living Trust
DTD 08-30-91, 1649 Sand Run Road, Troy, MO 63379 (9.550%); Mercantile Bank of
St. Louis, NA Custodian Lois Arlene Klaser, IRA, RR 5 Box 510, Galena, MO 65656
(5.210%); Mercantile Bank of St. Louis, NA Custodian Edwin C. Hogrebe, IRA, 5537
Goethe, St. Louis, MO 63109 (6.229%); Homer R. Turner and Edna M. Turner Trust,
Edna M. Turner Trust DTD 04-17-90, 33409 E. Pink Hill Rd., Grain Valley, MO
64029 (10.147%).
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 - BISYS Fund
Services, FBO Mercantile EOD Sweep, Attn: Linda Zerbe, First and Market
Building, Suite 300, Pittsburgh, PA 15222 (8.922%); Investor A Shares - National
Financial Services Corp., For the Benefit of Our Customers, 1 World Financial
Center, 200 Liberty Street, 5th Floor, New York, NY 10281 (97.326%).
<PAGE> 156
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 (5.886%); Mercantile Bank of St. Louis, NA
Custodian William J. Gaffney, IRA Rollover, 1424 Bopp Road, St. Louis, MO 63131
(5.169%); Investor B Shares - NFSC FEBO M22-050270, NFSC FMTC IRA, FBO Patricia
J. Vander Haar, 4022 Ave. F, St. Louis, MO 63123 (5.240%); NFSC FEBO M26-044423,
NFSC FMTC IRA, FBO Wayne Brunk, 17825 Highway 71, St. Joseph, MO 64505
(18.860%); NFSC FEBO M26-945293, NFSC FMTC IRA Rollover, FBO Charlene V. Brunk,
17825 Hwy. 21, St. Joseph, MO 64505 (5.880%); NFSC FEBO M26-942529, Esther E.
Cantley TTEE, Esther E. Cantley Trust, U/A 4-21-97, Rt. 3 Box 692, Cobool, MO
65689 (6.514%).
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: Investor A Shares -
Gary E. Timmons, P.O. Box 3149, Laredo, TX 78044 (8.888%); Jill Larson, 27165
Punario, Mission Viejo, CA 92692-3204 (8.888%); George Gregory Timmons, 1332 E.
Desert Cv., Phoenix, AZ 85020 (8.888%); Betty Jane Eckhart, Trust Betty Jane
Eckhart Trust U/A DTD 04-19-82, 28265 Beach Rd., Sarcoxie, MO 64862 (30.988%);
Lynn C. Prescott, 4180 Rincon Circle, Palo Alto, CA 94306-3138 (17.628%); NFSC
FEBO M22-988855, Edwin N. Howald, 4747 Nebraska Ave. A, St. Louis, MO 63111
(11.236%).
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: Investor A Shares - Thomas Young Trust,
Beatrice Young Trust DTD 8-15-69 A/C M27-997382, 9204 Roger Lee Lane, St. Louis,
MO 63126 (14.993%); Thomas Young Trust, Henry Young Trust DTD 11-12-69, A/C
M27-997390, 9204 Roger Lee Lane, St. Louis, MO 63126 (8.487%); NFSC FEBO
M23-983284, Amy C. Gaut, Andrew W. Gaut, Michael Fleming, 8601 Juniper, Prairie
Village, KS 66207 (5.968%); Gerhard Radi, 2965 Berwick Ct., St. Charles, MO
63303 (19.397%); Lynn Ellen Mayorwitz Trust, Paul Mayorwitz Trust, For Mary K.
Anderson, 2895 Lesmer Ct., St. Louis, MO 63114 (25.507%); Gary C. Nelling and
Helen L. Nelling, JTWROS, 850 Warder Ave., St. Louis, MO 63130 (17.777%).
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 (5.809%); Investor B Shares - Mercantile Bank of
St. Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(6.081%); NFSC FEBO M22-038792, Alvina Borgard, Michael A. Borgard, 1502 Topping
Road, Town and Country, MO 63131 (11.676%); NFSC FEBO M22-050563, Carl S.
Jackson, Steven J. Jackson, 3016 Sunset Drive, Apt. B, Carbondale, IL 62901
(6.491%); NFSC FEBO M26-040169, Lewis D. Kelly, Leola F. Kelly, 527 N. Ellsworth
Ave., Marshall, MO 65340 (5.514%); Homer R. Turner and Edna M. Turner Trust,
Edna M. Turner Trust DTD 04-17-90, 33409 E. Pink Hill Road, Grain Valley, MO
64029 (5.333%); Alberta Buenemann and Ernie W. Buenemann Trust, Alberta
Buenemann Revocable Living Trust DTD 08-30-91, 1649 Sand Run Road, Troy, MO
63379 (5.013%).
<PAGE> 157
As of the same date, the following institutions also
owned of record 5% or more of the Short-Intermediate Municipal
Bond Portfolio's outstanding shares as fiduciary or agent on
behalf of their customers: Investor A Shares - James Sutten,
P.O. Box 2465, Inverness, FL 34451-2465 (6.620%); Lane P. Baker
and Madelynn A. Baker, JTWROS, P.O. Box 979, Essex, CT 06426-0000
(93.313%).
As of the same date, the following institutions also owned of
record 5% or more of the Missouri Tax-Exempt Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Investor A Shares -
Boatmen's Trust Company Trust, Nancy J. Rogers Revocable Living Trust DTD
10-3-90, Attn: Securities Movements Dept., P.O. Box 500409, St. Louis, MO
63150-0409 (12.241%); Investor B Shares - NFSC FEBO M22-036374, Laura May Young,
Trustee of the Laura May Young Trust U/A 8-14-95, 427 Clifside Drive, St. Louis,
MO 63122 (6.939%); NFSC FEBO M22-465747, Mae B. Strain, TOD, 4200 Botanical, St.
Louis, MO 63110 (7.117%); NFSC FEBO M22-462144, Wilbur E. Huber, Theresa R.
Huber, 4169 Humphrey, St. Louis, MO 63116 (5.238%); NFSC FEBO M22-444065, Harold
G. Reitz, 70D, 3959 Potomac, St. Louis, MO 63116 (5.299%); NFSC FEBO M22-402761,
Kenneth Russell, Helen Russell, Trustee, Helen Russell Revocable Trust, 320 Lake
Apollo, Hannibal, MO 63401 (10.564%).
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 (5.382%); Gail
P. Ruga, Bin 7137-2175, 207 Aintree Road, Rolla, MO 65401- 3760 (12.206%); Kim
P. Wheeler, 1003 S. 19th, Rogers, AR 72758 (12.206%); NFSC FEBO M27-045063,
Eleanor R. Strain, Trustee of the Eleanor R. Strain Trust, U/A 11-16-84, 33 Log
Cabin Drive, St. Louis, MO 63124 (6.122%); NFSC FEBO M22-119300, Elisabeth M.
Goela, 5 Gerold Lane, Belleville, IL 62223 (8.246%); NFSC FEBO M27-947334,
William Oliver Shillington II, 2917 N. Kristopher Bend, St. Charles, MO 63303
(7.828%); NFSC FEBO M22-945560, Robert W. Saitz Revocable Trust, Robert W. Smith
U/A 12-12-97, 8618 Green Springs, St. Louis, MO 63123 (5.825%); Boatmen's Trust
Company Trust, Nancy Rogers CST Monaca Rogers UMTML DTD 10-23-95, Attn:
Securities Movements Dept., P.O. Box 500409, St. Louis, MO 63150-0409 (5.723%);
Investor B Shares - NFSC FEBO M22-988642, Ronald E. Ryan, Marian H. Ryan, 875
Glen Elm Drive, St. Louis, MO 63122 (9.479%); NFSC FEBO M22-967220, Casatta
Revocable Living Trust, Raymond H. Casatta U/A 10-06-87, 5658 Tholozan, St.
Louis, MO 65109 (13.596%); NFSC FEBO M22-961817, Gladine Coleman, Andrew B.
Coleman, 5945 Loughborough, St. Louis, MO 63109 (9.392%); NFSC FEBO M22-423394,
Nancy M. Prewitt, TOD, 16 Toussaint, O'Fallon, MO 63366 (7.981%); NFSC FEBO
M22-479039, Constance M. McManus, TOD, 4271 Wyoming, St. Louis, MO 63116
(16.157%); NFSC M22-473782, Roland Charles Oesterle, TOD, 2849 Missouri, St.
Louis, MO 63118 (6.756%); NFSC FEBO M22-559440, Wilma C. Mayer, TOD, 3812
Chippewa, St. Louis, MO 63116 (15.624%).
<PAGE> 158
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 Trust U/A DTD 04-19-82, 28265 Beech Road, Sarcoxie, MO 64862
(8.938%); Lynn C. Prescott, 4180 Rincon Circle, Palo Alto, CA 94306-3138
(7.119%); Thomas Young Trust, Beatrice Young Trust DTD 8-15-69 A/C M27-997382,
9204 Roger Lee Lane, St. Louis, MO 63126 (5.332%); NFSC Febo M27-947334 William
Oliver Shillington, II, 2917 N. Kristopher Bend, ST. Charles, MO 63126
(21.578%); Lynn Ellen Mayorwitz Trust, Paul Mayorwitz Trust, for Mary K.
Anderson, 2895 Lesher Court, St. Louis, MO 63114 (13.376%); Sandra Kungle Trust,
Sandra Kungle Trust, 139 Arrowhead Court, Boone, NC 28607 (13.577%); Investor B
Shares NFSC FEBO M22-979570, NFSC FMTC IRA Rollover FBO Kevin O. Webb, 1107
Wilshire, ST. Louis, MO 63130 (17.783%); NFSC FEBO M24- 988707, NFSC FMTC IRA
Rollover FBO Wayne L. Clough, 1176 Liberty Ave., Waterloo, IA 50702 (10.314%);
NFSC FEBO M23-999598, Randy R. Hamill, Carol K. Hammill, 9333 W. MacArthur,
Wichita, KS 67215 (6.343%); NFSC FEBO M23-031925, Anne Lloyd Oppenheimer, 31-Y
Street, Lake Lotwana, MO 64086 (58.874%).
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, Attn: Admin. & Regulatory Services, 3435 Stelzer Rd., Columbus,
OH 43219 (15.062%); Investor A Shares - NFSC FEBO M22-108910, Daniel J. Pierron,
1531 Washington 3F, St. Louis, MO 63103 (7.588%); NFSC FEBO M22-968145, Carl R.
Stock, TOD David Lee Stock, 4000 D. Brittany Circle, Bridgeton, MO 63044
(44.667%); NFSC FEBO M26- 952311, Robert E. Ellington, Catherine L. Ellington,
2655 E. Portland, Springfield, MO 65804 (5.727%); NFSC FEBO M22-940410, William
K. Haydon, 2343 Albion Place, St. Louis, MO 63104 (6.358%).
As of the same date, the following institutions also owned of
record 5% or more of the Small Cap Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - The Northern
Trust Co., Trust Carpenters Pension Trust Fund, A/C 26-43664, Attn: Mutual Fund,
P.O. Box 92956, Chicago, IL 60675-2956 (7.300%); American Bar Endowment, 750 N.
Lake Shore Dr., Chicago, IL 60611 (6.808%); Vanguard Fiduciary Trust Co., FBO
Pioneer Hi Bred Mix 3, Attn: Specialized Services Unit, P.O. Box 2600 VM A14,
Valley Forge, PA 19482 (5.685%); Vanguard Fiduciary Trust Co., FBO Pioneer Hi
Bred Mix 4, Attn: Specialized Services Unit, P.O. Box 2600 VM A14, Valley Forge,
PA 19482 (6.373%); Bankers' Trust Co., FBO Sheet Metal Local 36, Miss Van Arch
FD 191719, Attn: Mike Bloebaun, 648 Grassmere Park Road, Nashville, TN 37211
(5.877%).
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 (11.589%).
<PAGE> 159
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 (5.825%); Investor B Shares - Mercantile Bank of St. Louis, NA Custodian
Edmund Frances Codr, Rollover IRA, 2820 S. 42nd St., St. Joseph, MO 64503
(5.722%); Mercantile Bank of St. Louis, NA Custodian Richard Dell Woods, SEP
IRA, 3114 Pickett Rd., St. Joseph, MO 64503 (7.393%); Mercantile Bank of St.
Louis, NA Custodian Gerald C. Pasch, IRA, 2817 Duncan, St. Joseph, MO 64507
(6.046%); NFSC FEBO M22-030490, NFSC FMTC IRA, FBO Loren D, Salmons, 7 Ranchero
Drive, St. Charles, MO 63303 (5.696%); Primevest Financial Services Cust, Cust
David J. Neumann IRA U/A 09-29-97, 2330 Goff Ave., St. Joseph, MO 64505
(5.079%).
As of the same date, the following institutions also owned of
record 5% or more of the Growth Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Investor A Shares - NFSC FEBO
M22-540196, Tiger Limited Partnership, 903 Claymark, ST. Louis, MO 63131
(10.495%); NFSC FEBO M22-478237, Bernard B. Birger, Trustee, Bernard B. Birger
Revocable Living Trust U/A 5-25-76, 250 Hilltop, Collinsville, IL 62234
(5.965%); Investor B Shares - BISYS Fund Services, OH Inc., Attn: Admin. &
Regulatory Services, 3435 Stelzer Road, Columbus, OH 43219 (100.00%).
On the basis of information received from these institutions,
the Fund believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As of January 26, 1998, on the basis of information received
from these institutions, the Fund believes that substantially all of the Shares
owned of record were also beneficially owned by these institutions because they
possessed or shared voting or investment power with respect to such Shares on
behalf of their underlying accounts.
FINANCIAL STATEMENTS
The financial statements of the Predecessor Portfolio for the
fiscal year ended September 30, 1997 and periods prior thereto, which have been
included in this Statement of Additional Information, and the information
included in the Financial Highlights table for the same periods, which appears
in the Prospectus for Investor A and Investor B Shares of the Portfolio, have
been audited by KPMG Peat Marwick LLP, independent accountants for the
Predecessor Portfolio, whose report thereon is included in this Statement of
Additional Information, and have been included in reliance upon the report of
said firm as independent accountants given upon their authority as experts in
accounting and auditing.
-36-
<PAGE> 160
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations rated "A-1". However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation 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. The "D" rating will also be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A-1
<PAGE> 161
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do 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 the 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.
A-2
<PAGE> 162
"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 issues as investment grade. Risk
factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure 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 IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
securities rated "F1".
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality.
this designation indicates minimal capacity for timely payment of
A-3
<PAGE> 163
financial commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment
default.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment 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 Thomson BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
A-4
<PAGE> 164
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - Debt is more vulnerable to non-payment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
A-5
<PAGE> 165
"D" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
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 are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly
A-6
<PAGE> 166
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 speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
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.
A-7
<PAGE> 167
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 ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is very unlikely to
be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to adverse changes in
circumstances or in economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. these
ratings indicate that significant credit risk is present, but a
A-8
<PAGE> 168
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities
are not meeting obligations and are extremely speculative. "DDD"
designates the highest potential for recovery on these
securities, and "D" represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are
assigned by Thomson BankWatch to non-investment grade long-term
A-9
<PAGE> 169
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 a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"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 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" - This designation denotes 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" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
A-10
<PAGE> 170
"MIG-3"/"VMIG-3" - This designation denotes 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" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
A-11
<PAGE> 171
APPENDIX B
----------
FINANCIAL STATEMENTS
B-1
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Trustees of the
ARROW FUNDS:
We have audited the accompanying statement of assets and liabilities of the
Arrow Equity Portfolio (the Fund), including the portfolio of investments, as of
September 30, 1997, and the related statement of operations, statements of
changes in net assets and the financial highlights for each of the periods
indicated herein. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included verification of securities owned as of September 30, 1997,
by confirmation with the custodian and brokers and other appropriate audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, the 1997 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Arrow Equity Portfolio at September 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for each of the
periods indicated herein, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Columbus, Ohio
January 23, 1998
<PAGE> 173
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.4%
BANKING--12.9%
34,000 BankAmerica Corp. $ 2,492,625
16,000 Citicorp 2,143,000
52,000 MBNA Corp. 2,106,000
25,000 NationsBank Corp. 1,546,875
10,000 Norwest Corp. 612,500
----------------
Total 8,901,000
----------------
COMMERCIAL SERVICES--1.0%
34,000 Reynolds & Reynolds Co., Class A 660,875
----------------
CONSUMER DURABLES--1.9%
30,000 Brunswick Corp. 1,057,500
8,000 Mattel, Inc. 265,000
----------------
Total 1,322,500
----------------
CONSUMER NON-DURABLES--6.8%
25,000 PepsiCo, Inc. 1,014,063
66,000 Philip Morris Cos., Inc. 2,743,125
30,000 UST, Inc. 916,875
----------------
Total 4,674,063
----------------
ELECTRONIC TECHNOLOGY--15.0%
7,500 Compaq Computer Corp. 560,625
3,000 (a) Dell Computer Corp. 290,625
5,000 (a) EMC Corp. Mass 291,875
15,000 Hewlett-Packard Co. 1,043,438
30,000 Intel Corp. 2,769,375
15,000 Lucent Technologies, Inc. 1,220,625
40,000 (a) Sun Microsystems, Inc. 1,872,500
10,000 Tektronix, Inc. 674,375
20,000 United Technologies Corp. 1,620,000
----------------
Total $ 10,343,438
----------------
</TABLE>
<PAGE> 174
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY MINERALS--0.9%
15,000 Unocal Corp. $ 648,750
---------------
FINANCE--14.5%
46,000 Freddie Mac 1,621,500
22,000 Fannie Mae 1,034,000
80,000 Green Tree Financial Corp. 3,760,000
15,000 Household International, Inc. 1,697,813
27,000 Travelers Group, Inc. 1,842,750
---------------
Total 9,956,063
---------------
HEALTH SERVICES--1.3%
18,000 United Healthcare Corp. 900,000
---------------
HEALTH TECHNOLOGY--15.4%
25,000 Abbott Laboratories 1,598,438
25,000 (a) Amgen, Inc. 1,198,438
40,000 Medtronic, Inc. 1,880,000
14,000 Merck & Co., Inc. 1,399,125
25,000 Pfizer, Inc. 1,501,563
60,000 Schering Plough Corp. 3,090,000
---------------
Total 10,667,564
---------------
INDUSTRIAL SERVICES--2.6%
30,000 Halliburton Co. 1,560,000
5,000 (a) Rowan Companies, Inc. 178,125
---------------
Total 1,738,125
---------------
INSURANCE--1.3%
9,000 American International Group, Inc. 928,688
---------------
NON-ENERGY MINERALS--0.8%
13,000 Texas Industries, Inc. 551,688
---------------
</TABLE>
<PAGE> 175
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PROCESS INDUSTRIES--1.3%
14,000 Avery Dennison Corp. $ 560,000
5,000 Du Pont (E.I.) de Nemours & Co. 307,813
------------
Total 867,813
------------
PRODUCER MANUFACTURING--10.8%
44,000 Allied-Signal, Inc. 1,870,000
12,000 General Electric Co. 816,750
34,000 Illinois Tool Works, Inc. 1,700,000
8,000 (a) Thermo Electron Corp. 320,000
15,000 (a) U.S. Filter Corp. 645,938
25,000 Xerox Corp. 2,104,688
------------
Total 7,457,376
------------
RETAIL TRADE--6.6%
7,000 Dayton-Hudson Corp. 419,563
12,500 Dollar General Corp. 425,781
20,000 Home Depot, Inc. 1,042,500
25,000 (a) Kroger Co., Inc. 754,688
12,000 (a) Safeway, Inc. 652,500
35,000 Wal-Mart Stores, Inc. 1,281,875
------------
Total 4,576,907
------------
TRANSPORTATION--0.7%
6,000 (a) UAL Corp. 507,750
------------
UTILITIES--1.6%
25,000 (a) Airtouch Communications, Inc. 885,930
5,000 Williams Cos., Inc. (The) 234,063
------------
Total 1,119,993
------------
TOTAL COMMON STOCKS (IDENTIFIED COST
$40,309,549) 65,822,593
------------
</TABLE>
<PAGE> 176
ARROW EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
MUTUAL FUNDS--4.5%
740,368 Aquila Funds Cash Asset Treasury Fund $ 740,368
2,332,468 Financial Square Treasury Obligations Fund 2,332,468
--------------
TOTAL MUTUAL FUNDS (AT NET ASSET VALUE) 3,072,836
--------------
TOTAL INVESTMENTS (IDENTIFIED COST
$43,382,385)(b) $ 68,895,429
==============
</TABLE>
(a) Non-income producing security.
(b) The cost for federal tax purposes amounts to $43,430,157. The net
appreciation of investments on a federal tax basis amounts to
$25,465,272 which is comprised of $25,800,011 appreciation and
$334,739 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($68,965,117) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 177
ARROW EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified cost $43,382,385, and tax cost $43,430,157) $ 68,895,429
Cash 41,023
Income receivable 92,292
Deferred expenses 229
---------------
Total assets 69,028,973
LIABILITIES:
Payable for shares redeemed $ 49,167
Accrued expenses 14,689
---------------
Total liabilities 63,856
---------------
Net Assets for 3,678,202 shares outstanding $ 68,965,117
===============
NET ASSETS CONSIST OF:
Paid in capital $ 38,759,704
Net unrealized appreciation of investments 25,513,044
Accumulated net realized gain on investments 4,669,446
Undistributed net investment income 22,923
---------------
Total Net Assets $ 68,965,117
===============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
Net Asset Value Per Share ($68,965,117/3,678,202 shares outstanding) $18.75
===============
Offering Price Per Share (100/96.50 of $18.75)* $19.43
===============
Redemption Proceeds Per Share $18.75
===============
</TABLE>
* See "What Shares Cost" in the Prospectus.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 178
ARROW EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 954,331
Interest 35,267
---------------
Total income 989,598
EXPENSES:
Investment advisory fee $ 468,080
Administrative personnel and services fee 90,965
Custodian fees 23,992
Transfer and dividend disbursing agent fees and expenses 35,707
Directors'/Trustees' fees 1,475
Auditing fees 13,006
Legal fees 3,471
Portfolio accounting fees 46,434
Distribution services fee 156,027
Share registration costs 16,223
Printing and postage 5,591
Insurance premiums 3,971
Miscellaneous 5,451
---------------
Total expenses 870,393
Waivers --
Waiver of distribution services fee (156,027)
Net expenses 714,366
---------------
Net investment income 275,232
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 4,917,751
Net change in unrealized appreciation of investments 13,265,621
---------------
Net realized and unrealized gain on investments 18,183,372
---------------
Change in net assets resulting from operations $ 18,458,604
===============
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE> 179
ARROW EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS--
Net investment income $ 275,232 $ 423,781
Net realized gain (loss) on investments
($4,926,379 and $4,600,860 net gains, respectively, as computed for
federal tax purposes) 4,917,751 4,612,534
Net change in unrealized appreciation/depreciation of investments 13,265,621 (11,835)
------------ ------------
Change in net assets resulting from operations 18,458,604 5,024,480
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
Distributions from net investment income (330,048) (381,222)
Distributions from net realized gains (3,886,419) (218,057)
------------ ------------
Change in net assets resulting from distributions to
shareholders (4,216,467) (599,279)
------------ ------------
SHARE TRANSACTIONS--
Proceeds from sale of shares 15,587,127 12,339,545
Net asset value of shares issued to shareholders in payment of
distributions declared 407,045 47,007
Cost of shares redeemed (16,843,944) (4,946,669)
------------ ------------
Change in net assets resulting from share transactions (849,772) 7,439,883
------------ ------------
Change in net assets 13,392,365 11,865,084
NET ASSETS:
Beginning of period 55,572,752 43,707,668
------------ ------------
End of period (including undistributed net investment income of
$22,923 and $77,739, respectively) $ 68,965,117 $ 55,572,752
============ ============
</TABLE>
(See Notes which are an integral part of the Financial Statements)
<PAGE> 180
ARROW EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
Arrow Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act") as an open-end, management investment company. The
Trust consists of four portfolios. The financial statements included herein are
only those of Arrow Equity Portfolio (the "Fund"), a diversified portfolio. The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held. The Fund's investment objective is
capital appreciation by investing primarily in equity securities.
On October 27, 1996, Mark Twain Bancshares, Inc., the parent company of Mark
Twain Bank, entered into a definitive agreement whereby Mark Twain Bancshares
Inc. merged with Mercantile Bancorp Inc., a bank holding company headquartered
in St. Louis (the "Merger"). As a result, upon completion the Merger, all
existing subsidiaries of Mark Twain Bancshares Inc., including Mark Twain Bank,
were merged into Mercantile Bancorp Inc. and its subsidiaries. The Merger was
effective April 25, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS - Listed equity securities are valued at the last
sale price reported on a national securities exchange. Short-term
securities are valued at the prices provided by an independent pricing
service. However, short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value. Investments in other open-end regulated
investment companies are valued at net asset value.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS - Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
FEDERAL TAXES - It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS - The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
DEFERRED EXPENSES - The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being
amortized over a period not to exceed five years from the Fund's
commencement date.
<PAGE> 181
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
OTHER - Investment transactions are accounted for on the trade date.
3. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---- ----
Shares sold 993,820 867,438
Shares issued to shareholders in
payment of distributions declare 26,717 3,298
Shares redeemed (1,032,878) (346,978)
----------- ---------
Net change resulting from share
transactions (12,341) 523,758
=========== =========
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE - Mississippi Valley Advisors, Inc., the Fund's
investment advisor (the "Advisor"), receives for its services an annual
investment advisory fee equal to 0.75% of the Fund's average daily net
assets. The Advisor may voluntarily choose to waive any portion of its fee.
The Advisor can modify or terminate this voluntary waiver at any time at
its sole discretion.
Mississippi Valley Advisors, Inc. became the advisor on April 25, 1997.
Prior to April 25, 1997 Mark Twain Bank was the investment advisor. The
fees earned by each advisor for the year ended September 30, 1997 are as
follows.
ADVISER NAME AMOUNT
------------ ------
Mark Twain Bank $ 254,011
Mississippi Valley Advisors $ 214,069
--------------
Total advisory fees $ 468,080
--------------
ADMINISTRATIVE FEE - Federated Administrative Services ("FAS") provides the
Fund with certain administrative personnel and services. The fee paid to
FAS is based on the level of average aggregate net assets of the Fund for
the period.
DISTRIBUTION SERVICES FEE - The Fund has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan,
the Fund will compensate Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Fund to finance activities intended
to result in the sale of the Fund's shares. The Plan provides that the Fund
may incur distribution expenses up to 0.25% of the average daily net assets
of the Fund shares, annually, to FSC. The distributor may voluntarily
choose to waive any portion of its fee. The distributor can modify or
terminate this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES - Federated
Services Company ("FServ"), through its subsidiary, Federated Shareholder
Services Company ("FSSC") serves as
<PAGE> 182
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC
is based on the size, type, and number of accounts and transactions made by
shareholders.
PORTFOLIO ACCOUNTING FEES - FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES - Mercantile Bank National Association is the Fund's
custodian. The fee is based on the level of the Fund's average daily net
assets for the period, plus out-of-pocket expenses.
Mercantile Bank National Association became the Fund's custodian on April
25, 1997. Prior to April 25, 1997 Mark Twain Bank was the Fund's custodian.
The fees earned by each custodian for the year ended September 30, 1997 are
as follows.
CUSTODIAN NAME AMOUNT
-------------- ------
Mark Twain Bank $ 13,541
Mercantile Bank National Association $ 10,451
-------------
Total custodian fees $ 23,992
-------------
ORGANIZATIONAL EXPENSES - Organizational expenses of $17,560 were borne
initially by FAS. The Fund has agreed to reimburse FAS for the
organizational expenses during the five year period following effective
date. For the period ended September 30, 1997, the Fund paid $5,136
pursuant to this agreement.
GENERAL - Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.
5. INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for
the period ended September 30, 1997, were as follows:
PURCHASES $ 27,272,804
------------
SALES $ 34,074,520
------------
6. SUBSEQUENT EVENT
The Trust entered an Agreement and Plan of Reorganization with The ARCH
Fund, Inc. pursuant to which all the assets and liabilities of the Arrow
Equity Portfolio were transferred to the ARCH Growth Equity Portfolio. The
reorganization, which qualified as a tax-free exchange for federal income
tax purposes, was completed on November 21, 1997, following approval by
shareholders of the Trust at a special shareholder meeting held on November
12, 1997. The Fund's investment advisor, Mississippi Valley Advisors, Inc.,
has remained as the advisor after the reorganization. The ARCH Growth
Equity Portfolio has retained the investment objectives and assumed the
financial history of the Arrow Equity Portfolio.
<PAGE> 183
ARROW EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1997 1996 1995 1994 1993(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $15.06 $13.80 $ 9.74 $10.02 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.08 0.12 0.10 0.07 0.04
Net realized and
unrealized gain (loss)
on investments 4.75 1.32 4.05 (0.25) 0.02
------ ------ ------ ------ ------
Total from investment
operations 4.83 1.44 4.15 (0.18) 0.06
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.09) (0.11) (0.09) (0.07) (0.04)
Distributions from net
realized gain on -------- -------- --------
investments (1.05) (0.07) -- (0.03) --
------ ------ ------ ------ ------
Total distributions (1.14) (0.18) (0.09) (0.10) (0.04)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $18.75 $15.06 $13.80 $ 9.74 $10.02
====== ====== ====== ====== ======
TOTAL RETURN (b) 33.85% 10.48% 42.90% (1.84%) 0.60%
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.14% 1.17% 1.28% 1.36% 1.32%*
Net investment income 0.44% 0.86% 0.90% 0.74% 0.62%*
Expense waiver/
reimbursement (c) 0.25% 0.28% 0.30% 0.28% 0.30%*
SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted) $68,965 $55,573 $43,708 $30,282 $31,159
Average commission
rate paid (d) $0.0815 $0.0756 -- -- --
Portfolio turnover 42% 45% 45% 127% 54%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from January 4, 1993 (date of initial
public investment) to September 30, 1993.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
<PAGE> 184
FORM N-1A
---------
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
---------------------
(1) (a) Included in Part A: Financial Highlights for
Arrow Funds Equity Portfolio for the period
January 4, 1993 (date of initial public
investment) through September 30, 1993 and
the fiscal years ended September 30, 1994
through September 30, 1997 (Investor A
Shares).
(b) Included in Part B: Financial Statements for
the Arrow Funds Equity Portfolio for the
fiscal year ended September 30, 1997.
(2) All required financial statements are included in
Parts A and B hereof. All other financial statements
and schedules are inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation dated September 9,
1982.(3)
(b) Articles Supplementary to Registrant's
Articles of Incorporation dated October 28,
1982.(3)
(c) Articles Supplementary to Registrant's
Articles of Incorporation dated December 22,
1987.(3)
(d) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
October 30, 1990.(5)
(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)
-1-
<PAGE> 185
(g) Certificate of Correction dated April 30,
1991 to Articles Supplementary dated as of
March 19, 1991.(3)
(h) Articles Supplementary to Registrant's
Articles of Incorporation dated as of June
25, 1991.(3)
(i) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
November 15, 1991.(3)
(j) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
January 26, 1993.(3)
(k) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
March 23, 1993.(3)
(l) Articles Supplementary to Registrant's
Articles of Incorporation dated as of March
7, 1994.(3)
(m) Certificate of Correction dated October 17,
1994 to Articles Supplementary dated as of
March 8, 1994 to Registrant's Articles of
Incorporation.(3)
(n) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
February 22, 1995.(3)
(o) Articles Supplementary to Registrant's
Articles of Incorporation dated as of
April 17, 1995.(3)
(p) Articles Supplementary to Registrant's
Articles of Incorporation dated June 27,
1995.(3)
(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)
-2-
<PAGE> 186
(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) Articles Supplementary to Registrant's
Articles of Incorporation dated October 29,
1997.
(2) Restated and Amended By-Laws as approved and adopted
by Registrant's Board of Directors.(6)
(3) None.
(4) None.
(5) (a) Amended and Restated Advisory Agreement
between Registrant and Mississippi Valley
Advisors Inc. dated April 1, 1991.(3)
(b) Addendum No. 1 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the ARCH Treasury Money Market
Portfolio, dated September 27, 1991.(3)
(c) Addendum No. 2 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors, Inc. with
respect to the ARCH Small Cap Equity
(formerly Emerging Growth Portfolio), dated
April 1, 1992.(3)
(d) Addendum No. 3 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the ARCH Balanced Portfolio dated
April 1, 1993.(3)
(e) Addendum No. 4 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. dated March
15, 1994.(3)
(f) Addendum No. 5 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect
-3-
<PAGE> 187
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) Addendum No. 9 to Amended and Restated
Advisory Agreement between Registrant and
Mississippi Valley Advisors Inc. with
respect to the Growth Equity Portfolio dated
November 21, 1997.
(k) Form of Addendum No. 10 to Amended and
Restated Advisory Agreement between
Registrant and Mississippi Valley Advisors
Inc. with respect to the Small Cap Equity
Index Portfolio.
(l) Sub-Advisory Agreement between Mississippi
Valley Advisors Inc. and Clay Finlay Inc.
dated August 29, 1996.(5)
(6) (a) Distribution Agreement between Registrant
and The Winsbury Company Limited Partnership
dated October 1, 1993 is incorporated herein
by reference to Exhibit (6)(a) of Post-
Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(b) Addendum No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership with respect to the ARCH
-4-
<PAGE> 188
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 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) Addendum No. 7 to Distribution Agreement
between Registrant and BISYS Fund Services
with respect to the Growth Equity and Small
Cap Equity Index Portfolios dated November
21, 1997.
-5-
<PAGE> 189
(i) Amendment No. 1 to Distribution Agreement
between Registrant and The Winsbury Company
Limited Partnership dated as of September
29, 1995.(1)
(7) None.
(8) (a) Custodian Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated as of April 1, 1992 is
incorporated herein by reference to Exhibit
(8)(a) of Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form
N-1A, filed March 31, 1992.
(b) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated April 1, 1995 is
incorporated herein by reference to Exhibit
(8)(b) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form
N-1A, filed April 14, 1995.
(c) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated July 10, 1995 is
incorporated herein by reference to Exhibit
(8)(c) of Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form
N-1A, filed September 20, 1995.
(d) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis, National
Association dated September 29, 1995.(3)
(e) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated
November 15, 1996.(6)
(f) Custody Fee Agreement between Registrant and
Mercantile Bank National Association dated
February 14, 1997.(7)
(g) Custody Fee Agreement between Registrant and
Mercantile Bank of St. Louis National
Association dated November 21, 1997.
(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
-6-
<PAGE> 190
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.
(9) (a) Administration Agreement between Registrant
and The Winsbury Service Corporation dated
October 1, 1993 is incorporated herein by
reference to Exhibit (9)(a) of
Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form
N-1A, filed November 8, 1994.
(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
-7-
<PAGE> 191
Statement on Form N-1A, filed September 20,
1995.(3)
(e) Addendum No. 4 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Tax-Exempt
Money Market, Missouri Tax-Exempt Bond and
Kansas Tax-Exempt Bond Portfolios dated
September 29, 1995.(3)
(f) Addendum No. 5 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity
Income, National Municipal Bond and
Intermediate Corporate bond (formerly
Short-Intermediate Corporate Bond)
Portfolios dated November 15, 1996.(6)
(g) Addendum No. 6 to Administration Agreement
between Registrant and BISYS Fund Services
Ohio, Inc. with respect to the Equity Index
and Bond Index Portfolios dated February 14,
1997.(7)
(h) 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 dated
November 21, 1997.
(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
-8-
<PAGE> 192
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-
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) 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 dated
November 21, 1997.
(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)
-9-
<PAGE> 193
(s) (1) Administrative Services Plan (Trust
Shares) and Form of Agreement.(9)
(2) Administrative Services Plan
(Institutional Shares) and Form of
Agreement.(9)
(t) Agreement and Plan of Reorganization between
Registrant and Arrow Funds.(10)
(10) Opinion and consent of counsel.(2)
(11) (a) Consent of KPMG Peat Marwick LLP.
(b) Consent of Drinker Biddle & Reath LLP.
(12) None.
(13) (a) Purchase Agreement between Registrant and
Shearson/American Express Inc. dated
November 23, 1982, is incorporated herein by
reference to Exhibit (13) of Pre-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1, filed on November 24,
1982.
(b) Purchase Agreement between Registrant and
The Winsbury Service Corporation dated April
1, 1994 is incorporated herein by reference
to Exhibit (13)(b) of Post-Effective
Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed
November 8, 1994.
(c) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated as of
February 28, 1995 are incorporated herein by
reference to Exhibit (13)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(d) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated as of
July 7, 1995 are incorporated herein by
reference to Exhibit (13)(d) of Post-
Effective Amendment No. 31 to Registrant's
Registration Statement on Form N-1A, filed
September 20, 1995.
-10-
<PAGE> 194
(e) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated
September 29, 1995.(3)
(f) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. dated
November 14, 1996.(6)
(g) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated
February 6, 1997.(7)
(h) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. dated
February 27, 1997.(7)
(i) Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. dated April
30, 1997.(8)
(j) Purchase Agreements between Registrant and
BISYS Fund Services Ohio, Inc. dated
November 21, 1997.
(14) None.
(15) (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)
(16) (a) Schedule of Computation of Performance
Calculations for Investor A (formerly
Investor) Shares and Trust Shares of the
Money Market, Treasury Money Market,
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth and Balanced Portfolio are
incorporated herein by reference to Exhibit
(16) of Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form
N-1A, filed on March 31, 1994.
(b) Schedule of Computation of Performance
Calculations for Investor A (formerly
Investor), Trust and Institutional Shares of
the International Equity Portfolio is
incorporated herein by reference to Exhibit
-11-
<PAGE> 195
(16)(b) of Post-Effective Amendment No. 25
to Registrant's Registration Statement on
Form N-1A, filed November 8, 1994.
(c) Schedule of Computation of Performance
Calculations for Institutional Shares of the
Money Market, Treasury Money Market,
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth, Balanced and International Equity
Portfolios is incorporated herein by
reference to Exhibit (16)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(d) Schedule of Computation of Performance
Calculations for Investor B Shares of the
Government & Corporate Bond, Growth & Income
Equity, U.S. Government Securities, Emerging
Growth, Balanced and International Equity
Portfolios is incorporated herein by
reference to Exhibit (16)(c) of Post-
Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed
April 14, 1995.
(e) Schedule of Computation of Performance
Calculations for Trust Shares and Investor A
Shares of the Short-Intermediate Municipal
Portfolio.(1)
(f) Schedule of Computation of Performance
Calculations for Trust and Investor A Shares
of the Tax-Exempt Money Market, Missouri
Tax- Exempt Bond and Kansas Tax-Exempt Bond
Portfolios and for Investor B Shares of the
Missouri Tax-Exempt Bond and Kansas Tax-
Exempt Bond Portfolios.(3)
(g) Schedule of Computation of Performance
Calculations for Trust, Investor A and
Investor B Shares of the National Municipal
Bond Portfolio.(6)
(h) Schedule of Computation of Performance
Calculations for Trust, Investor A and
Investor B Shares of the National Municipal
Bond Portfolio.(8)
-12-
<PAGE> 196
(i) Schedule of Computation of Performance
Calculations for Trust, Institutional and
Investor A Shares of the Intermediate
Corporate Bond Portfolio.(11)
(j) Schedule of Computation of Performance
Calculations for Trust, Institutional and
Investor A Shares of the Bond Index
Portfolio.(11)
(k) Schedule of Computation of Performance
Calculations for Trust, Institutional,
Investor A and Investor B Shares of the
Equity Income Portfolio.(11)
(l) Schedule of Computation of Performance
Calculations for Trust, Institutional and
Investor A Shares of the Equity Index
Portfolio.(11)
(18) Amended and Restated Plan Pursuant to Rule 18f-3
for Operation of a Multi-Class System.(9)
(27) Financial Data Schedules.
- -----------------------------------------------
1. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 2, 1996.
2. Filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice on
January 28, 1997.
3. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on February 28, 1996.
4. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 35 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 28, 1996.
5. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 36 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on October 8, 1996.
-13-
<PAGE> 197
6. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 37 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on January 30, 1997.
7. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 38 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on March 31, 1997.
8. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 39 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on May 28, 1997.
9. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 40 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on June 18, 1997.
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.
11. Filed electronically as an Exhibit and incorporated herein by reference
to Post-Effective Amendment No. 41 to Registrant's Registration
Statement on Form N-1A (File No. 2-79285) on August 29, 1997.
Item 25. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
Not Applicable.
-14-
<PAGE> 198
Item 26. Number of Holders of Securities
-------------------------------
As of December 31, 1997:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Class A Common Stock (The ARCH
Money Market Portfolio)............................................................... 171
Class A - Special Series 1 Common Stock
(The ARCH Money Market
Portfolio)............................................................................. 48
Class A - Special Series 2 Common Stock
(The ARCH Money Market Portfolio)...................................................... 4
Class A - Special Series 3 Common Stock
(The ARCH Money Market
Portfolio)............................................................................. 48
Class B Common Stock (The ARCH
(Treasury Money Market
Portfolio)............................................................................. 12
Class B - Special Series 1 Common Stock
(The ARCH Treasury Money Market
Portfolio)............................................................................. 26
Class B - Special Series 2 Common Stock
(The ARCH Treasury Money Market
Portfolio)............................................................................. 2
Class C Common Stock (The ARCH
Growth & Income Equity
Portfolio)............................................................................. 2649
Class C -Special Series 1 Common Stock
(The ARCH Growth & Income Equity
Portfolio)............................................................................. 16
Class C -Special Series 2 Common Stock
(The ARCH Growth & Income Equity
Portfolio)............................................................................. 7
Class C -Special Series 3 Common Stock
(The ARCH Growth & Income Equity
Portfolio)............................................................................. 672
Class D Common Stock (The ARCH
Government & Corporate Bond
Portfolio)............................................................................. 269
Class D - Special Series 1 Common Stock
(The ARCH Government & Corporate Bond
Portfolio)............................................................................. 7
Class D - Special Series 2 Common Stock
(The ARCH Government & Corporate Bond
Portfolio)............................................................................. 4
Class D - Special Series 3 Common Stock
(The ARCH Government & Corporate Bond
Portfolio)............................................................................. 58
Class E Common Stock (The ARCH
U.S. Government Securities
Portfolio)............................................................................. 229
Class E - Special Series 1 Common Stock
(The ARCH U.S. Government Securities
Portfolio)............................................................................. 6
Class E - Special Series 2 Common Stock
(The ARCH U.S. Government Securities
Portfolio)............................................................................. 4
</TABLE>
-15-
<PAGE> 199
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Class E - Special Series 3 Common Stock
(The ARCH U.S. Government Securities
Portfolio)............................................................................. 60
Class F Common Stock (The ARCH Small
Cap Equity Portfolio).................................................................. 1546
Class F - Special Series 1 Common Stock
(The ARCH Small Cap Equity
Portfolio)............................................................................. 22
Class F - Special Series 2 Common Stock
(The ARCH Small Cap Equity
Portfolio)............................................................................. 4
Class F - Special Series 3 Common Stock
(The ARCH Small Cap Equity
Portfolio)............................................................................. 278
Class G Common Stock (The ARCH Balanced
Portfolio)............................................................................. 362
Class G - Special Series 1 Common Stock
Common Stock (The ARCH Balanced
Portfolio)............................................................................. 5
Class G - Special Series 2 Common Stock
Stock (The ARCH Balanced
Portfolio)............................................................................. 4
Class G Common Stock - Special Series 3
Common Stock (The ARCH Balanced
Portfolio)............................................................................. 66
Class H Common Stock (The ARCH
International Equity
Portfolio)............................................................................. 479
Class H - Special Series 1 Common
Stock - (The ARCH International Equity
Portfolio)............................................................................. 6
Class H - Special Series 2 Common Stock
(The ARCH International Equity
Portfolio)............................................................................. 3
Class H - Special Series 3 Common Stock
(The ARCH International Equity
Portfolio)............................................................................. 168
Class I Common Stock (The ARCH
Short-Intermediate Municipal
Portfolio)............................................................................. 3
Class I - Special Series 1 Common Stock
(The ARCH Short-Intermediate
Municipal Portfolio).................................................................. 4
Class J Common Stock (The ARCH Tax-Exempt
Money Market Portfolio)............................................................... 15
Class J - Special Series 1
Common Stock (The ARCH Tax-Exempt Money
Market Portfolio)...................................................................... 25
Class K Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio)............................................................ 727
Class K - Special Series 1
Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio)............................................................. 4
Class K - Special Series 2
Common Stock (The ARCH Missouri
Tax-Exempt Bond Portfolio)............................................................. 61
Class L Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio)............................................................. 0
</TABLE>
-16-
<PAGE> 200
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Class L - Special Series 1
Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio)............................................................. 0
Class L - Special Series 2
Common Stock (The ARCH Kansas
Tax-Exempt Bond Portfolio)............................................................. 0
Class M - Common Stock (The ARCH Equity
Income Portfolio)...................................................................... 18
Class M - Special Series 1
Common Stock (The ARCH Equity Income Portfolio)........................................ 6
Class M - Special Series 2
Common Stock (The ARCH Equity Income Portfolio)........................................ 1
Class M - Special Series 3
Common Stock (The ARCH Equity Income Portfolio)........................................ 7
Class N - Common Stock (The ARCH National
Municipal Bond Portfolio).............................................................. 32
Class N - Special Series 1
Common Stock (The ARCH National
Municipal Bond Portfolio).............................................................. 10
Class N - Special Series 2
Common Stock (The ARCH National
Municipal Bond Portfolio).............................................................. 12
Class O - Common Stock (The ARCH Intermediate
Corporate Bond Portfolio).............................................................. 11
Class O - Special Series 1
Common Stock (The ARCH Intermediate
Corporate Bond Portfolio).............................................................. 3
Class O - Special Series 2
Common Stock (The ARCH Intermediate
Corporate Bond Portfolio).............................................................. 2
Class P - Common Stock (The ARCH Equity
Index Portfolio)....................................................................... 24
Class P - Special Series 1
Common Stock (The ARCH Equity Index
Portfolio)............................................................................. 3
Class P - Special Series 2
Common Stock (The ARCH Equity Index
Portfolio)............................................................................. 2
Class Q - Common Stock (The ARCH Bond Index
Portfolio)............................................................................. 10
Class Q - Special Series 1
Common Stock (The ARCH Bond Index Portfolio)........................................... 10
Class Q - Special Series 2
Common Stock (The ARCH Bond Index Portfolio)........................................... 2
Class R - Common Stock (The ARCH Small Cap Equity Index
Portfolio)............................................................................. 0
Class R - Special Series 1
(The ARCH Small Cap Equity Index Portfolio)............................................ 0
Class R - Special Series 2
(The ARCH Small Cap Equity Index Portfolio)............................................ 0
Class S - Common Stock (The ARCH Growth Equity
Portfolio)............................................................................. 129
Class S - Special Series 1
(The ARCH Growth Equity Portfolio)..................................................... 3
Class S - Special Series 2
(The ARCH Growth Equity Portfolio)..................................................... 2
Class S - Special Series 3
(The ARCH Growth Equity Portfolio)..................................................... 1
</TABLE>
-17-
<PAGE> 201
Item 27. Indemnification
---------------
Indemnification of Registrant's principal underwriter, custodian and
transfer agent against certain losses is provided for, respectively, in Sections
1.11 and 1.12 of the Distribution Agreement, incorporated herein by reference as
Exhibit (6)(a), and Sections 24 and 18, respectively, of the Custody Agreement,
incorporated herein by reference as Exhibit (8)(a) and the Transfer Agency
Agreement incorporated herein by reference as Exhibit (9)(c). The Registrant has
obtained from a major insurance carrier a directors' and officers' liability
policy covering certain types of errors and omissions. In no event will the
Registrant indemnify any of its directors, officers, employees or agents against
any liability to which such person would otherwise be subject by reason of his
willful misfeasance, bad faith or gross negligence in the performance of his
duties, or by reason of his reckless disregard of the duties involved in the
conduct of his office or under his agreement with the Registrant. Registrant
will comply with Rule 484 under the Securities Act of 1933 and Release 11330
under the Investment Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
A. Mercantile Bank National Association ("Mercantile") is a full-service
national bank located in St. Louis, Missouri. Mississippi Valley Advisors Inc.
is a wholly-owned subsidiary of Mercantile and is responsible for providing
advisory services to each of Registrant's investment portfolios.
B. The information required by this Item 28 with respect to each Director
and Officer of Mercantile and Mississippi Valley
-18-
<PAGE> 202
Advisors Inc. is incorporated by reference to Form ADV and Schedules A and D
filed by Mississippi Valley Advisors Inc. with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (File No. 801-28897).
C. Clay Finlay Inc. is registered as an investment adviser with the
Securities and Exchange Commission and provides sub- advisory services to the
Registrant's International Equity Portfolio.
D. The information required by this Item 28 with respect to each Director
and Officer of Clay Finlay Inc. is included in Form ADV and Schedules A and D
filed by Clay Finlay Inc. with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934 (File No. 801-17316).
Item 29. Principal Underwriter
---------------------
A. BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
(formerly The Winsbury Company Limited Partnership) acts as distributor
and its affiliate, BISYS Fund Services Ohio, Inc., acts as
administrator for the Registrant. BISYS Fund Services also distributes
the securities of American Performance Funds, AmSouth Mutual Funds, The
BB&T Mutual Funds Group, The Coventry Group, First Choice Funds Trust,
Fountain Square Funds, HSBC Family of Funds, The Infinity Mutual Funds,
Inc., The Kent Funds, MarketWatch Funds, MMA Praxis Mutual Funds,
M.S.D. & T. Funds, Inc., Pacific Capital Funds, Parkstone Group of
Funds, The Parkstone Advantage Funds, Pegasus Funds, The Republic
Funds, The Riverfront Funds, Inc., SBSF Funds, Inc. d/b/a Key Mutual
Funds, The Sessions Group, Summit Investment Trust, and The Victory
Portfolios, each of which is a management investment company.
B. To the best of Registrant's knowledge, the partners of BISYS Fund
Services are as follows:
<TABLE>
<CAPTION>
Positions and Offices
Name and Principal with BISYS Positions and Offices
Business Address Fund Services with Registrant
------------------ --------------------- ---------------------
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219-3035
WC Subsidiary Corporation Sole Limited Partner
3435 Stelzer Road None
Columbus, Ohio 43219-3035
</TABLE>
C. None.
-19-
<PAGE> 203
Item 30. Location of Accounts and Records
--------------------------------
(1) Mercantile Bank National Association, One Mercantile Center, 8th and
Locust Streets, St. Louis, MO 63101 (records relating to its functions
as custodian).
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as distributor).
(3) Mississippi Valley Advisors Inc., 7th and Washington Streets, 21st
Floor, St. Louis, MO 63101 (records relating to its functions as
investment adviser).
(4) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its function as administrator).
(5) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its function as transfer agent and dividend
disbursing agent).
(6) Drinker Biddle & Reath LLP, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, PA 19107-3496 (Registrant's Articles of
Incorporation, By-Laws and Minute Books).
(7) Clay Finlay Inc. 200 Park Avenue, 56th Floor, New York, New
York 10166 (records relating to its function as sub-adviser
to the International Equity Portfolio).
(8) Bankers Trust Company, 16 Wall Street, New York, New York 10005
(records relating to its function as sub-custodian for the
International Equity Portfolio).
Item 31. Management Services
-------------------
Inapplicable.
Item 32. Undertakings
------------
(a) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) Registrant hereby undertakes to file a post-effective amendment
with respect to the ARCH Small Cap Equity Index Portfolio, using financial
statements that need not be certified, within four to six months from the
effective date of the Registration Statement pertaining to such Portfolio.
-20-
<PAGE> 204
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
all of the requirements for effectiveness of this Post-Effective Amendment No.
42 to its Registration Statement on Form N-1A pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused such Post-Effective Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of St. Louis and the State of Missouri, on the 29th day of January, 1998.
THE ARCH FUND, INC.
(Registrant)
/s/ Jerry V. Woodham
--------------------------
Jerry V. Woodham
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 42 to Registrant's Registration Statement on Form
N-1A has been signed below 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 January 29, 1998
- -------------------- Board, Director and
Jerry V. Woodham President
/s/* James C. Jacobsen Director January 29, 1998
- --------------------
James C. Jacobsen
/s/* Joseph J. Hunt Director January 29, 1998
- --------------------
Joseph J. Hunt
/s/* Robert M. Cox, Jr. Director January 29, 1998
- --------------------
Robert M. Cox, Jr.
/s/* Ronald D. Winney Director & Treasurer
- --------------------
Ronald D. Winney January 29, 1998
</TABLE>
*By: /s/ Jerry V. Woodham
--------------------
Jerry V. Woodham
Attorney-in-fact
<PAGE> 205
THE ARCH FUND(R), INC.
Power of Attorney
-----------------
Joseph J. Hunt, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/Joseph J. Hunt
---------------------------
Joseph J. Hunt
Date: January 20, 1998
<PAGE> 206
THE ARCH FUND(R), INC.
Power of Attorney
-----------------
James C. Jacobsen, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/James C. Jacobsen
---------------------------
James C. Jacobsen
Date: January 20, 1998
<PAGE> 207
THE ARCH FUND(R), INC.
Power of Attorney
-----------------
Ronald D. Winney, whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/Ronald D. Winney
---------------------------
Ronald D. Winney
Date: January 20, 1998
<PAGE> 208
THE ARCH FUND(R), INC.
Power of Attorney
-----------------
Robert M. Cox, Jr., whose signature appears below, does hereby
constitute and appoint Jerry V. Woodham and W. Bruce McConnel, III, and either
of them, his true and lawful attorneys and agents, with full power of
substitution and resubstitution, to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or either of them, may
deem necessary or advisable or which may be required to enable The ARCH Fund,
Inc. (the "Fund") to comply with the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing and effectiveness of the Fund's Registration
Statement and of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement on Form N-1A pursuant to said Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned on behalf of
the Fund and/or as a director and/or officer of the Fund any and all amendments
filed with the Securities and Exchange Commission under said Acts, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
/s/Robert M. Cox, Jr.
---------------------------
Robert M. Cox, Jr.
Date: January 28, 1998
<PAGE> 209
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
1(u) Articles Supplementary
5(j) Addendum No. 9 to Amended and Restated
Advisory Agreement
5(k) Form of Addendum No. 10 to Amended and Restated Advisory
Agreement
6(h) Addendum No. 7 to Distribution Agreement
8(g) Custody Fee Agreement
9(h) Addendum No. 7 to Administration Agreement
9(p) Addendum No. 7 to Transfer Agency Agreement
11(a) Consent of KPMG Peat Marwick LLP
11(b) Consent of Drinker Biddle and Reath LLP.
13(j) Purchase Agreement
27 Financial Data Schedules
</TABLE>
<PAGE> 1
Exhibit 1(u)
THE ARCH FUND, INC.
ARTICLES SUPPLEMENTARY
THE ARCH FUND, INC., a Maryland corporation having its
principal office in Maryland in the City of Baltimore, Maryland (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The total number of shares of capital stock
which the Corporation was heretofore authorized to issue was Seven
Billion (7,000,000,000) shares (of the par value of One Mill ($.001)
each) and of the aggregate par value of Seven Million Dollars
($7,000,000) of Common Stock
classified as follows:
Number of Shares
Classification Authorized
-------------- -----------------
Class A 550,000,000
Class A-Special Series 1 1,800,000,000
Class A-Special Series 2 300,000,000
Class A-Special Series 3 50,000,000
Class B 100,000,000
Class B-Special Series 1 1,000,000,000
Class B-Special Series 2 300,000,000
Class C 5,000,000
Class C-Special Series 1 50,000,000
Class C-Special Series 2 20,000,000
Class C-Special Series 3 50,000,000
Class D 5,000,000
Class D-Special Series 1 50,000,000
Class D-Special Series 2 20,000,000
Class D-Special Series 3 50,000,000
Class E 5,000,000
Class E-Special Series 1 15,000,000
Class E-Special Series 2 20,000,000
Class E-Special Series 3 50,000,000
Class F 5,000,000
Class F-Special Series 1 35,000,000
Class F-Special Series 2 20,000,000
Class F-Special Series 3 50,000,000
Class G 5,000,000
Class G-Special Series 1 15,000,000
Class G-Special Series 2 20,000,000
Class G-Special Series 3 50,000,000
Class H 10,000,000
Class H-Special Series 1 10,000,000
Class H-Special Series 2 10,000,000
Class H-Special Series 3 50,000,000
Class I 25,000,000
Class I-Special Series 1 25,000,000
Class J 50,000,000
Class J-Special Series 1 300,000,000
Class K 25,000,000
Class K-Special Series 1 25,000,000
Class K-Special Series 2 10,000,000
<PAGE> 2
Number of Shares
Classification Authorized
-------------- -----------------
Class L 25,000,000
Class L-Special Series 1 25,000,000
Class L-Special Series 2 10,000,000
Class M 25,000,000
Class M-Special Series 1 50,000,000
Class M-Special Series 2 25,000,000
Class M-Special Series 3 25,000,000
Class N 25,000,000
Class N-Special Series 1 50,000,000
Class N-Special Series 2 25,000,000
Class O 25,000,000
Class O-Special Series 1 50,000,000
Class O-Special Series 2 25,000,000
Class P 25,000,000
Class P-Special Series 1 50,000,000
Class P-Special Series 2 25,000,000
Class Q 25,000,000
Class Q-Special Series 1 50,000,000
Class Q-Special Series 2 25,000,000
Unclassified 1,235,000,000
-------------
TOTAL 7,000,000,000
SECOND: Pursuant to Article VI of the Corporation's
Articles of Incorporation (the "Charter"), the Board of Directors of the
Corporation has classified Two Hundred Twenty-Five Million (225,000,000)
authorized and unissued shares of previously unclassified Common Stock as
follows:
Number of Shares
Classification Classified
-------------- ----------------
Class R 25,000,000
Class R-Special Series 1 50,000,000
Class R-Special Series 2 25,000,000
Class S 25,000,000
Class S-Special Series 1 50,000,000
Class S-Special Series 2 25,000,000
Class S-Special Series 3 25,000,000
pursuant to resolutions unanimously adopted by the Board of Directors
of the Corporation on March 15, 1997.
THIRD: Pursuant to Article VI, Section (5) of the
Charter, the shares of Common Stock newly classified hereby shall have the
following preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption:
-2-
<PAGE> 3
A.1. ASSETS BELONGING TO A CLASS. All consideration received by the
Corporation for the issue and sale of shares of Class R Common Stock, Class R
Common Stock - Special Series 1 and Class R Common Stock - Special Series 2
shall be invested and reinvested with the consideration received by the
Corporation for the issue and sale of all other shares now or hereafter
classified as shares of Class R Common Stock (irrespective of whether said
shares have been classified as a part of a series of said Class and, if so
classified as a part of a series, irrespective of the particular series
classification), together with all income, earnings, profits, and proceeds
thereof, including any proceeds derived from the sale, exchange, or liquidation
thereof, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, and any general assets of the
Corporation allocated to Class R Common Stock, Class R - Special Series 1 Common
Stock and Class R - Special Series 2 Common Stock or such other shares with
respect to such Class by the Board of Directors in accordance with the
Corporation's Charter. All income, earnings, profits, and proceeds, including
any proceeds derived from the sale, exchange or liquidation of such shares, and
any assets derived from any reinvestment of such proceeds in whatever form shall
be allocated among Class R Common Stock, Class R - Special Series 1 Common Stock
and Class R - Special Series 2 Common Stock and all other shares now or
hereafter designated as Class R Common Stock, respectively, (irrespective of
whether said shares have been classified as a part of a series of said Class
and, if so classified as a part of a series, irrespective of the particular
series classification), in proportion to their respective net asset values, or
such other method as the board of directors may determine pursuant to applicable
law.
2. LIABILITIES BELONGING TO A CLASS. All the liabilities (including
expenses) of the Corporation in respect of Class R Common Stock, Class R -
Special Series 1 Common Stock and Class R - Special Series 2 Common Stock and
all other shares now or hereafter designated as Class R Common Stock,
respectively, (irrespective of whether said shares have been classified as a
part of a series of said Class and, if so classified, irrespective of the
particular series classification) and in respect of any general liabilities
(including expenses) of the Corporation allocated to Class R Common Stock, Class
R - Special Series 1 Common Stock and Class R - Special Series 2 Common Stock or
such other shares with respect to such Class by the Board of Directors in
accordance with the Corporation's Charter shall be allocated among Class R
Common Stock, Class R - Special Series 1 Common Stock and Class R - Special
Series 2 Common Stock and all other shares, respectively,
-3-
<PAGE> 4
(irrespective of whether said shares have been classified as a part of a series
of said Class and, if so classified as a part of a series, irrespective of the
particular series classification), in proportion to their respective net asset
values, or such other method as the board of directors may determine pursuant to
applicable law:
a. If in the future the Board of Directors determines to enter into
agreements which provide for services only for Class R Common Stock,
Class R - Special Series 1 Common Stock or Class R - Special Series 2
Common Stock and to allocate any related expenses to the extent that
may be from time to time determined by the Board of Directors:
(1) only the shares of Class R Common Stock shall
bear: (i) the expenses and liabilities of payments to
institutions under any agreements entered into by or on behalf
of the Corporation which provide for services by the
institutions exclusively for their customers who own of record
or beneficially such shares; and (ii) such other expenses and
liabilities as the Board of Directors may from time to time
determine are directly attributable to such shares and which
therefore should be borne solely by shares of Class R Common
Stock;
(2) only the shares of Class R - Special Series 1
Common Stock shall bear: (i) the expenses and liabilities of
payments to institutions under any agreements entered into by
or on behalf of the Corporation which provide for services by
the institutions exclusively for their customers who own of
record or beneficially such shares; and (ii) such other
expenses and liabilities as the Board of Directors may from
time to time determine are directly attributable to such
shares and which therefore should be borne solely by shares of
Class R - Special Series 1 Common Stock;
(3) Only the shares of Class R - Special Series 2
Common Stock shall bear: (i) the expenses and liabilities of
payments to institutions under any agreements entered into by
or on behalf of the Corporation which provide for services by
the institutions exclusively for their customers who own of
record or beneficially such shares; and (ii) such other
expenses and liabilities as the Board of Directors may from
time to time determine are directly attributable
-4-
<PAGE> 5
to such shares and which therefore should be borne solely by
shares of Class R - Special Series 2 Common Stock;
(4) No shares of Class R Common Stock shall bear the
expenses and liabilities described in subparagraphs (2) and
(3) above;
(5) No shares of Class R - Special Series 1 Common
Stock shall bear the expenses and liabilities described in
subparagraphs (1) and (3) above; and
(6) No shares of Class R - Special Series 2 Common
Stock shall bear the expenses and liabilities described in
subparagraphs (1) and (2) above.
3. Preferences, Conversion and Other Rights, Voting Powers,
Restrictions, Limitations as to Dividends, Qualifications, and Terms
and Conditions of Redemption. Except as provided hereby, each share of
Class R Common Stock, Class R Common Stock - Special Series 1 and Class
R Common Stock - Special Series 2 shall have the same preferences,
conversion, and other rights, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption
applicable to all other shares of Common Stock as set forth in the
Charter and shall also have the same preferences, conversion, and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption as each other
share formerly, now or hereafter classified as a share of Class R
Common Stock (irrespective of whether said share has been classified as
a part of a series of said Class and, if so classified as a part of a
series, irrespective of the particular series classification) except
that:
(a)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(1) (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses, or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only the shares of Class R Common Stock
(excluding the other shares classified as a series of such
Class other than Class R Common Stock) shall be entitled to
vote, except that if said matter affects shares of capital
stock in the Corporation other than shares of Class R Common
Stock, such other affected shares of capital stock in the
Corporation shall also be entitled to vote, and in such case,
such shares of Class R Common Stock shall be
-5-
<PAGE> 6
voted in the aggregate together with such other affected
shares and not by class or series except where otherwise
required by law or permitted by the Board of Directors of the
Corporation; and (ii) if any matter submitted to a vote of the
shareholders of the Corporation does not affect the shares of
Class R Common Stock, such shares shall not be entitled to
vote (except where required by law or permitted by the Board
of Directors) even though the matter is submitted to a vote of
the holders of shares of capital stock in the Corporation
other than said shares of Class R Common Stock;
(b)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(2) above (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses, or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only shares of Class R Common Stock - Special
Series 1 (excluding shares designated as a series of such
Class other than Class R Common Stock - Special Series 1)
shall be entitled to vote, except that if said matter affects
shares of capital stock of the Corporation other than shares
of Class R Common Stock - Special Series 1, such other
affected shares of capital stock of the Corporation shall also
be entitled to vote, and in such case shares of Class R Common
Stock - Special Series 1 shall be voted in the aggregate
together with such other affected shares and not by class or
series except where otherwise required by law or permitted by
the Board of Directors of the Corporation; and (ii) if any
matter submitted to a vote of the shareholders of the
Corporation does not affect shares of Class R Common Stock -
Special Series 1, said shares shall not be entitled to vote
(except where required by law or permitted by the Board of
Directors) even though the matter is submitted to a vote of
holders of shares of capital stock in the Corporation other
than said shares of Class R Common Stock - Special Series 1;
and
(c)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(4) above (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only shares of Class R Common Stock - Special
Series 2 (excluding shares designated as a series of such
Class other than Class R Common Stock - Special Series 2)
shall be entitled to vote except that if said matter affects
shares of capital stock other than shares of
-6-
<PAGE> 7
Class R Common Stock - Special Series 2, such other affected
shares of capital stock in the Corporation shall also be
entitled to vote, and in such case, such shares of Class R
Common Stock - Special Series 2 shall be voted in the
aggregate together with such other affected shares and not by
class or series except where otherwise required by law or
permitted by the Board of Directors of the Corporation; and
(ii) if any matter submitted to a vote of the shareholders of
the Corporation does not affect the shares of Class R Common
Stock - Special Series 2, such shares shall not be entitled to
vote (except where required by law or permitted by the Board
of Directors) even though the matter is submitted to a vote of
the holders of shares of capital stock in the Corporation
other than said shares of Class R Common Stock - Special
Series 2.
B.1. ASSETS BELONGING TO A CLASS. All consideration received
by the Corporation for the issue and sale of shares of Class S Common
Stock, Class S Common Stock - Special Series 1, Class S Common Stock -
Special Series 2 and Class S Common Stock - Special Series 3 shall be
invested and reinvested with the consideration received by the
Corporation for the issue and sale of all other shares now or hereafter
classified as shares of Class S Common Stock (irrespective of whether
said shares have been classified as a part of a series of said Class
and, if so classified as a part of a series, irrespective of the
particular series classification), together with all income, earnings,
profits, and proceeds thereof, including any proceeds derived from the
sale, exchange, or liquidation thereof, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the
same may be, and any general assets of the Corporation allocated to
Class S Common Stock, Class S - Special Series 1 Common Stock, Class S
- Special Series 2 Common Stock and Class S - Special Series 3 Common
Stock or such other shares with respect to such Class by the Board of
Directors in accordance with the Corporation's Charter. All income,
earnings, profits, and proceeds, including any proceeds derived from
the sale, exchange or liquidation of such shares, and any assets
derived from any reinvestment of such proceeds in whatever form shall
be allocated among Class S Common Stock, Class S - Special Series 1
Common Stock, Class S - Special Series 2 Common Stock and Class S -
Special Series 3 Common Stock and all other shares now or hereafter
designated as Class S Common Stock, respectively, (irrespective of
whether said shares have been classified as a part of a series of said
Class and, if so classified as a part of a series, irrespective of the
particular series classification), in proportion to their respective
net asset values, or such other method as
-7-
<PAGE> 8
the board of directors may determine pursuant to applicable
law.
2. LIABILITIES BELONGING TO A CLASS. All the liabilities
(including expenses) of the Corporation in respect of Class S Common
Stock, Class S - Special Series 1 Common Stock, Class S - Special
Series 2 Common Stock and Class S - Special Series 3 Common Stock and
all other shares now or hereafter designated as Class S Common Stock,
respectively, (irrespective of whether said shares have been classified
as a part of a series of said Class and, if so classified as part of a
series, irrespective of the particular series classified) and in
respect of any general liabilities (including expenses) of the
Corporation allocated to Class S Common Stock, Class S - Special Series
1 Common Stock, Class S - Special Series 2 Common Stock and Class S -
Special Series 3 Common Stock or such other shares with respect to such
shares by the Board of Directors in accordance with the Corporation's
Charter shall be allocated among Class S Common Stock, Class S -
Special Series 1 Common Stock, Class S - Special Series 2 Common Stock
and Class S - Special Series 3 Common Stock and all other shares now or
hereafter classified as shares of Class S Common Stock, respectively,
(irrespective of whether said shares have been classified as a part of
a series of said Class and, if so classified as a part of a series,
irrespective of the particular series classification), respectively,
(irrespective of whether said shares have been classified as a part of
a series of said Class and, if so classified as a part of a series,
irrespective of the particular series classification), in proportion to
their respective net asset values, or such other method as the board of
directors may determine pursuant to applicable law:
a. If in the future the Board of Directors determines to enter
into agreements which provide for services only for shares of
Class S Common Stock, Class S Special Series 1 Common Stock,
Class S - Special Series 2 Common Stock or Class S - Special
Series 3 Common Stock and to allocate any related expenses to
the extent that may be from time to time determined by the
Board of Directors:
(1) only the shares of Class S Common Stock
shall bear: (i) the expenses and liabilities of
payments to institutions under any agreements entered
into by or on behalf of the Corporation which provide
for services by the institutions exclusively for
their customers who own of record or beneficially
such shares; and (ii) such other expenses and
liabilities as the Board of Directors may from time
to time determine are directly
-8-
<PAGE> 9
attributable to such shares and which therefore
should be borne solely by shares of Class S Common
Stock;
(2) only the shares of Class S - Special
Series 1 Common Stock shall bear: (i) the expenses
and liabilities of payments to institutions under any
agreements entered into by or on behalf of the
Corporation which provide for services by the
institutions exclusively for their customers who own
of record or beneficially such shares; and (ii) such
other expenses and liabilities as the Board of
Directors may from time to time determine are
directly attributable to such shares and which
therefore should be borne solely by shares of Class S
- Special Series 1 Common Stock;
(3) Only the shares of Class S - Special
Series 2 Common Stock shall bear: (i) the expenses
and liabilities of payments to institutions under any
agreements entered into by or on behalf of the
Corporation which provide for services by the
institutions exclusively for their customers who own
of record or beneficially such shares; and (ii) such
other expenses and liabilities as the Board of
Directors may from time to time determine are
directly attributable to such shares and which
therefore should be borne solely by shares of Class S
- Special Series 2 Common Stock;
(4) only the shares of Class S - Special
Series 3 Common Stock shall bear: (i) the expenses
and liabilities of payments to institutions under any
agreements entered into by or on behalf of the
Corporation which provide for services by the
institutions exclusively for their customers who own
of record or beneficially such shares; and (ii) such
other expenses and liabilities as the Board of
Directors may from time to time determine are
directly attributable to such shares and which
therefore should be borne solely by shares of Class S
- Special Series 3 Common Stock;
(5) No shares of Class S Common Stock shall
bear the expenses and liabilities described in
subparagraphs (2), (3) and (4) above;
(6) No shares of Class S - Special Series 1
Common Stock shall bear the expenses and
-9-
<PAGE> 10
liabilities described in subparagraphs (1), (3)
and (4) above;
(7) No shares of Class S - Special Series 2
Common Stock shall bear the expenses and liabilities
described in subparagraphs (1), (2) and (4) above;
and
(8) No shares of Class S - Special Series 3
Common Stock shall bear the expenses and liabilities
described in subparagraphs (1), (2) and (3) above.
3. PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS,
RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERMS
AND CONDITIONS OF REDEMPTION. Except as provided hereby, each share of
Class S Common Stock, Class S Common Stock - Special Series 1, Class S
Common Stock - Special Series 2 and Class S Common Stock Special Series
3 shall have the same preferences, conversion, and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption applicable to all other shares of
Common Stock as set forth in the Charter and shall also have the same
preferences, conversion, and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions
of redemption as each other share formerly, now or hereafter classified
as a share of Class S Common Stock (irrespective of whether said share
has been classified as a part of a series of said Class and, if so
classified as a part of a series, irrespective of the particular series
classification) except that:
(a)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(1) (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses, or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only the shares of Class S Common Stock
(excluding the other shares classified as a series of such
Class other than Class S Common Stock) shall be entitled to
vote, except that if said matter affects shares of capital
stock in the Corporation other than shares of Class S Common
Stock, such other affected shares of capital stock in the
Corporation shall also be entitled to vote, and in such case,
such shares of Class S Common Stock shall be voted in the
aggregate together with such other affected shares and not by
class or series except where otherwise required by law or
permitted by the Board of Directors of the Corporation; and
(ii) if any matter
-10-
<PAGE> 11
submitted to a vote of the shareholders of the Corporation
does not affect the shares of Class S Common Stock, such
shares shall not be entitled to vote (except where required by
law or permitted by the Board of Directors) even though the
matter is submitted to a vote of the holders of shares of
capital stock in the Corporation other than said shares of
Class S Common Stock;
(b)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(2) above (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses, or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only shares of Class S Common Stock - Special
Series 1 (excluding shares designated as a series of such
Class other than Class S Common Stock - Special Series 1)
shall be entitled to vote, except that if said matter affects
shares of capital stock of the Corporation other than shares
of Class S Common Stock - Special Series 1, such other
affected shares of capital stock of the Corporation shall also
be entitled to vote, and in such case shares of Class S Common
Stock - Special Series 1 shall be voted in the aggregate
together with such other affected shares and not by class or
series except where otherwise required by law or permitted by
the Board of Directors of the Corporation; and (ii) if any
matter submitted to a vote of the shareholders of the
Corporation does not affect shares of Class S Common Stock -
Special Series 1, said shares shall not be entitled to vote
(except where required by law or permitted by the Board of
Directors) even though the matter is submitted to a vote of
holders of shares of capital stock in the Corporation other
than said shares of Class S Common Stock - Special Series 1;
(c)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(3) above (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only shares of Class S Common Stock - Special
Series 2 (excluding shares designated as a series of such
Class other than Class S Common Stock - Special Series 2)
shall be entitled to vote except that if said matter affects
shares of capital stock other than shares of Class S Common
Stock - Special Series 2, such other affected shares of
capital stock in the Corporation shall also be entitled to
vote, and in such case, such shares of Class S Common Stock -
Special Series 2 shall
-11-
<PAGE> 12
be voted in the aggregate together with such other affected
shares and not by class or series except where otherwise
required by law or permitted by the Board of Directors of the
Corporation; and (ii) if any matter submitted to a vote of the
shareholders of the Corporation does not affect the shares of
Class S Common Stock - Special Series 2, such shares shall not
be entitled to vote (except where required by law or permitted
by the Board of Directors) even though the matter is submitted
to a vote of the holders of shares of capital stock in the
Corporation other than said shares of Class S Common Stock -
Special Series 2;
(d)(i) on any matter that pertains to the agreements
or expenses and liabilities described in Section 2, clause
a.(4) above (or to any plan or other document adopted by the
Corporation relating to said agreements, expenses, or
liabilities) and is submitted to a vote of shareholders of the
Corporation, only shares of Class S Common Stock - Special
Series 3 (excluding shares designated as a series of such
Class other than Class S Common Stock - Special Series 3)
shall be entitled to vote, except that if said matter affects
shares of capital stock of the Corporation other than shares
of Class S Common Stock - Special Series 3, such other
affected shares of capital stock of the Corporation shall also
be entitled to vote, and in such case shares of Class S Common
Stock - Special Series 3 shall be voted in the aggregate
together with such other affected shares and not by class or
series except were otherwise required by law or permitted by
the Board of Directors of the Corporation; and (ii) if any
matter submitted to a vote of the shareholders of the
Corporation does not affect shares of Class S Common Stock -
Special Series 3, said shares shall not be entitled to vote
(except where required by law or permitted by the Board of
Directors) even though the matter is submitted to a vote of
holders of shares of capital stock of the Corporation other
than said shares of Class S Common Stock - Special Series 3;
and
(e) At such times, which may vary among the holders
of shares within the series, as may be determined by the Board
of Directors (or with the authorization of the Board of
Directors, the officers of the Corporation) in accordance with
the Investment Company Act of 1940, as amended, and applicable
rules and regulations of the National Association of
Securities Dealers, Inc. and reflected in the registration
statement relating to the Corporation's Class S - Special
Series 3 Common Stock, shares of Class S - Special Series 3
Common Stock may be
-12-
<PAGE> 13
automatically converted into shares of Class S Common Stock of
the Corporation based on the relative net asset values of such
series at the time of conversion, subject, however, to any
conditions of conversion that may be imposed by the Board of
Directors (or with the authorization of the Board of
Directors, the officers of the Corporation) and reflected in
the registration statement relating to the Class S - Special
Series 3 Common Stock as aforesaid.
FOURTH: The total number of shares of capital stock
which the Corporation is presently authorized to issue is Seven Billion
(7,000,000,000) shares (of the par value of One Mill ($.001) each) of
Common Stock classified as follows:
Number of Shares
Classification Authorized
-------------- ----------------
Class A 550,000,000
Class A-Special Series 1 1,800,000,000
Class A-Special Series 2 300,000,000
Class A-Special Series 3 50,000,000
Class B 100,000,000
Class B-Special Series 1 1,000,000,000
Class B-Special Series 2 300,000,000
Class C 5,000,000
Class C-Special Series 1 50,000,000
Class C-Special Series 2 20,000,000
Class C-Special Series 3 50,000,000
Class D 5,000,000
Class D-Special Series 1 50,000,000
Class D-Special Series 2 20,000,000
Class D-Special Series 3 50,000,000
Class E 5,000,000
Class E-Special Series 1 15,000,000
Class E-Special Series 2 20,000,000
Class E-Special Series 3 50,000,000
Class F 5,000,000
Class F-Special Series 1 35,000,000
Class F-Special Series 2 20,000,000
Class F-Special Series 3 50,000,000
Class G 5,000,000
Class G-Special Series 1 15,000,000
Class G-Special Series 2 20,000,000
Class G-Special Series 3 50,000,000
Class H 10,000,000
Class H-Special Series 1 10,000,000
Class H-Special Series 2 10,000,000
Class H-Special Series 3 50,000,000
Class I 25,000,000
Class I-Special Series 1 25,000,000
Class J 50,000,000
Class J-Special Series 1 300,000,000
Class K 25,000,000
Class K-Special Series 1 25,000,000
Class K-Special Series 2 10,000,000
Class L 25,000,000
Class L-Special Series 1 25,000,000
-13-
<PAGE> 14
Number of Shares
Classification Authorized
-------------- ----------------
Class L-Special Series 2 10,000,000
Class M 25,000,000
Class M-Special Series 1 50,000,000
Class M-Special Series 2 25,000,000
Class M-Special Series 3 25,000,000
Class N 25,000,000
Class N-Special Series 1 50,000,000
Class N-Special Series 2 25,000,000
Class O 25,000,000
Class O-Special Series 1 50,000,000
Class O-Special Series 2 25,000,000
Class P 25,000,000
Class P-Special Series 1 50,000,000
Class P-Special Series 2 25,000,000
Class Q 25,000,000
Class Q-Special Series 1 50,000,000
Class Q-Special Series 2 25,000,000
Class R 25,000,000
Class R-Special Series 1 50,000,000
Class R-Special Series 2 25,000,000
Class S 25,000,000
Class S-Special Series 1 50,000,000
Class S-Special Series 2 25,000,000
Class S-Special Series 3 25,000,000
Unclassified 1,010,000,000
-------------
TOTAL 7,000,000,000
The aggregate par value of all shares having par value is Seven Million
Dollars ($7,000,000).
FIFTH: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
IN WITNESS WHEREOF, The ARCH Fund, Inc. has caused these presents to be
signed in its name and on its behalf by its President and its corporate seal to
be hereunto affixed and attested to by its Secretary as of October 29, 1997.
THE ARCH FUND, INC.
Attest:
By: /s/ Jerry V. Woodham
-----------------------------
Jerry V. Woodham, President
/s/ W. Bruce McConnel, III
- --------------------------
W. Bruce McConnel, III
Secretary
-14-
<PAGE> 15
CERTIFICATE
THE UNDERSIGNED, Chairman of the Board and President of THE ARCH FUND,
INC., who executed on behalf of said Corporation the attached Articles
Supplementary of said Corporation, of which this Certificate is made a part,
hereby acknowledges, in the name and on behalf of said Corporation, the attached
Articles Supplementary to be the corporate act of said Corporation, and
certifies that to the best of his knowledge, information and belief the matters
and facts set forth in the attached Articles Supplementary with respect to
authorization and approval are true in all material respects, under the
penalties for perjury.
/s/ Jerry V. Woodham
-------------------------------
Jerry V. Woodham, President
Dated: October 29, 1997
<PAGE> 1
Exhibit 5(j)
ADDENDUM NO. 9 TO AMENDED AND RESTATED ADVISORY AGREEMENT
---------------------------------------------------------
This Addendum, dated as of November 21, 1997, is entered into
between THE ARCH FUND, INC., a Maryland corporation (the "Fund"), and
MISSISSIPPI VALLEY ADVISORS INC., a Missouri corporation ("MVA").
WHEREAS, the Fund and MVA have entered into an Amended and
Restated Advisory Agreement dated as of April 1, 1991, which was extended to
additional investment portfolios of the Fund (pursuant to Section 1(b) of the
Agreement) by Addenda dated September 27, 1991, April 1, 1992, April 1, 1993,
March 15, 1994, July 10, 1995, September 29, 1995, November 15, 1996 and
February 14, 1997 (the "Advisory Agreement"), pursuant to which the Fund
appointed MVA to act as investment adviser to the Fund for the ARCH Money
Market, Treasury Money Market, Growth & Income Equity, Small Cap Equity
(formerly Emerging Growth), Government & Corporate Bond, U.S. Government
Securities, Balanced, International Equity, Short-Intermediate Municipal,
Tax-Exempt Money Market, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
Equity Income, National Municipal Bond, Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond), Equity Index and Bond Index Portfolios;
WHEREAS, Section 1(b) of the Advisory Agreement provides that
in the event the Fund establishes one or more additional investment portfolios
with respect to which it desires to retain MVA to act as the investment adviser
under the Advisory Agreement, the Fund shall so notify MVA in writing, and if
MVA is willing to render such services it shall notify the Fund in writing, and
the compensation to be paid to MVA shall be that which is agreed to in writing
by the Fund and MVA; and
WHEREAS, the Fund has notified MVA that it has established one
new portfolio, namely, the ARCH Growth Equity Portfolio (the "New Portfolio"),
and that it desires to retain MVA to act as the investment adviser therefor, and
MVA has notified the Fund that it is willing to serve as investment adviser for
the New Portfolio;
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints MVA to act as
investment adviser to the Fund for the New Portfolio for the period and on the
terms set forth in the Advisory Agreement. MVA hereby accepts such appointment
and agrees to render the services set forth in the Advisory Agreement, for the
compensation herein provided.
<PAGE> 2
2. COMPENSATION. For the services provided and expenses
assumed pursuant to the Advisory Agreement with respect to the New Portfolio,
the Fund will pay MVA from the assets belonging to the New Portfolio, and MVA
will accept as full compensation therefor a fee, computed daily and payable
monthly (in arrears), at the annual rate of .75% of the average daily net assets
of the New Portfolio.
The fee attributable to the New Portfolio shall be the
obligation of the New Portfolio and not of any other Portfolio of the Fund.
3. CAPITALIZED TERMS. From and after the date hereof, the
term "Portfolios" as used in the Advisory Agreement shall be deemed to include
the New Portfolio. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Advisory Agreement.
4. MISCELLANEOUS. Except to the extent supplemented hereby,
the Advisory Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
------------------------------
Jerry V. Woodham
President
MISSISSIPPI VALLEY ADVISORS INC.
By: /s/ John H. Blixen
------------------------------
John H. Blixen
President
-2-
<PAGE> 1
Exhibit 5(K)
ADDENDUM NO. 10 TO AMENDED AND RESTATED ADVISORY AGREEMENT
----------------------------------------------------------
This Addendum, dated as of _______, 1997, is entered into
between THE ARCH FUND, INC., a Maryland corporation (the "Fund"), and
MISSISSIPPI VALLEY ADVISORS INC., a Missouri corporation ("MVA").
WHEREAS, the Fund and MVA have entered into an Amended and
Restated Advisory Agreement dated as of April 1, 1991, which was extended to
additional investment portfolios of the Fund (pursuant to Section 1(b) of the
Agreement) by Addenda dated September 27, 1991, April 1, 1992, April 1, 1993,
March 15, 1994, July 10, 1995, September 29, 1995, November 15, 1996, February
14, 1997 and November 21, 1997 (the "Advisory Agreement"), pursuant to which the
Fund appointed MVA to act as investment adviser to the Fund for the ARCH Money
Market, Treasury Money Market, Growth & Income Equity, Small Cap Equity
(formerly Emerging Growth), Government & Corporate Bond, U.S. Government
Securities, Balanced, International Equity, Short-Intermediate Municipal,
Tax-Exempt Money Market, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
Equity Income, National Municipal Bond, Intermediate Corporate Bond (formerly
Short-Intermediate Corporate Bond), Equity Index, Bond Index and Growth Equity
Portfolios;
WHEREAS, Section 1(b) of the Advisory Agreement provides that
in the event the Fund establishes one or more additional investment portfolios
with respect to which it desires to retain MVA to act as the investment adviser
under the Advisory Agreement, the Fund shall so notify MVA in writing, and if
MVA is willing to render such services it shall notify the Fund in writing, and
the compensation to be paid to MVA shall be that which is agreed to in writing
by the Fund and MVA; and
WHEREAS, the Fund has notified MVA that it has established one
new portfolio, namely, the ARCH Small Cap Equity Index Portfolio (the "New
Portfolio"), and that it desires to retain MVA to act as the investment adviser
therefor, and MVA has notified the Fund that it is willing to serve as
investment adviser for the New Portfolio;
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints MVA to act as
investment adviser to the Fund for the New Portfolio for the period and on the
terms set forth in the Advisory Agreement. MVA hereby accepts such appointment
and agrees to render the services set forth in the Advisory Agreement, for the
compensation herein provided.
<PAGE> 2
2. COMPENSATION. For the services provided and expenses
assumed pursuant to the Advisory Agreement with respect to the New Portfolio,
the Fund will pay MVA from the assets belonging to the New Portfolio, and MVA
will accept as full compensation therefor a fee, computed daily and payable
monthly (in arrears), at the annual rate of .40% of the average daily net assets
of the New Portfolio.
The fee attributable to the New Portfolio shall be the
obligation of the New Portfolio and not of any other Portfolio of the Fund.
3. CAPITALIZED TERMS. From and after the date hereof, the term
"Portfolios" as used in the Advisory Agreement shall be deemed to include the
New Portfolio. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Advisory Agreement.
4. MISCELLANEOUS. Except to the extent supplemented hereby, the
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By:
------------------------
Jerry V. Woodham
President
MISSISSIPPI VALLEY ADVISORS INC.
By:
------------------------
John H. Blixen
President
-2-
<PAGE> 1
Exhibit 6(h)
ADDENDUM NO. 7 TO DISTRIBUTION AGREEMENT
----------------------------------------
This Addendum, dated as of November 21, 1997, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES ("BISYS"), an Ohio limited partnership formerly known as The Winsbury
Company Limited Partnership.
WHEREAS, the Fund and BISYS have entered into a Distribution
Agreement dated as of October 1, 1993 as amended March 15, 1994, March 1, 1995,
July 10, 1995, September 29, 1995, November 15, 1996 and February 14, 1997 (the
"Distribution Agreement"), pursuant to which the Fund appointed BISYS to act as
Distributor for the Fund's ARCH Money Market, Treasury Money Market, Growth &
Income Equity, Small Cap Equity (formerly Emerging Growth), Government &
Corporate Bond, U.S. Government Securities, Balanced, International Equity,
Short-Intermediate Municipal, Tax-Exempt Money Market, Missouri Tax-Exempt Bond,
Kansas Tax-Exempt Bond, Equity Income, National Municipal Bond, Intermediate
Corporate Bond (formerly Short-Intermediate Corporate Bond), Equity Index and
Bond Index Portfolios;
WHEREAS, Section 9 of the Distribution Agreement provides that
no provision of the Agreement may be changed, discharged or terminated orally,
but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS that it has established
two new portfolios, namely, the ARCH Small Cap Equity Index and ARCH Growth
Equity Portfolios (collectively, the "New Portfolios"), and that it desires to
retain BISYS to act as the Distributor therefor, and BISYS has notified the Fund
that it is willing to serve as Distributor for the New Portfolios.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints BISYS to act as
Distributor to the Fund for the New Portfolios for the period and on the terms
set forth in the Distribution Agreement. BISYS hereby accepts such appointment
and agrees to render the services set forth in the Distribution Agreement.
2. TERMS. From and after the date hereof, the term
"Portfolios" as used in the Distribution Agreement shall be deemed to include
the New Portfolios. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Distribution Agreement.
<PAGE> 2
3. APPENDIX A. Appendix A to the Distribution Agreement is
hereby supplemented to read as set forth in Appendix A attached hereto.
4. MISCELLANEOUS. Except to the extent supplemented hereby,
the Distribution Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES
By: /s/ Stephen G. Mintos
--------------------------------
Stephen G. Mintos
Executive Vice President
-2-
<PAGE> 3
APPENDIX A
to the
DISTRIBUTION AGREEMENT
between
THE ARCH FUND, INC.
and
BISYS FUND SERVICES
- -------------------------------------------------------------------------------
Money Market Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
Treasury Money Market Portfolio (Trust shares, Investor A shares
and Institutional shares)
Growth & Income Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Small Cap Equity Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
Government & Corporate Bond Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
U.S. Government Securities Portfolio (Trust shares, Investor A
shares, Institutional shares and Investor B shares)
Balanced Portfolio (Trust shares, Investor A shares, Institutional shares and
Investor B shares)
International Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Short-Intermediate Municipal Portfolio (Trust Shares and Investor
A shares)
Tax-Exempt Money Market Portfolio (Trust shares and Investor A
shares)
Missouri Tax-Exempt Bond Portfolio (Trust shares, Investor A
shares and Investor B shares)
Kansas Tax-Exempt Bond Portfolio (Trust shares, Investor A shares
and Investor B shares)
Equity Income Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
<PAGE> 4
National Municipal Bond Portfolio (Trust shares, Investor A
shares and Investor B shares)
Intermediate Corporate Bond Portfolio (Trust shares, Investor A
shares and Institutional shares)
Equity Index Portfolio (Trust shares, Investor A shares and
Institutional shares)
Bond Index Portfolio (Trust shares, Investor A shares and
Institutional shares)
Small Cap Equity Index Portfolio (Trust shares, Investor A shares
and Institutional shares)
Growth Equity Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
-2-
<PAGE> 1
Exhibit 8(g)
Novemer 21, 1997
Mercantile Bank National Association
One Mercantile Center
St. Louis, Missouri 63101
RE: Custody Fees for the ARCH Small Cap Equity Index
and ARCH Growth Equity Portfolios
-------------------------------------------------
Gentlemen:
This letter constitutes our agreement with respect to
compensation to be paid to Mercantile Bank National Association ("Mercantile")
with respect to the ARCH Small Cap Equity Index Portfolio (comprised of Class R
shares, Class R - Special Series 1 shares and Class R - Special Series 2 shares)
and the ARCH Growth Equity Portfolio (comprised of Class S shares, Class S
Special Series 1 shares, Class S - Special Series 2 shares and Class S - Special
Series 3 shares) (each class a "Series") under the terms of the Custodian
Agreement dated as of April 1, 1992 (the "Custodian Agreement") between The ARCH
Fund, Inc. (the "Fund") and Mercantile. Pursuant to Paragraph 23 of the
Custodian Agreement, and in consideration of the services to be provided by you,
we will pay Mercantile the following:
1. An annual custody fee (exclusive of any transaction charges), which
shall be calculated daily and paid monthly (in arrears) for each Series as
follows:
- The ARCH Small Cap Equity Index Portfolio - the greater of
$6,000.00 or $.30 for each $1,000.00 of the Series' average
daily net assets; and
- The ARCH Growth Equity Portfolio - the greater of $6,000.00 or
$.30 for each $1,000.00 of the Series' average daily net
assets.
2. A transaction charge of $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,
<PAGE> 2
Mercantile Bank National Association
November 21, 1997
Page Two
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;
3. Mercantile's incremental costs in providing foreign custody services
for foreign denominated and held securities; and
4. Mercantile's out-of-pocket expenses, including but not limited to
postage, telephone, telex, Federal Express and Federal Reserve wire fees, on
behalf of the Series.
The fee and expenses attributable to each Series shall be the
obligation of that Series and not of any other portfolio of the Fund. The fee
for the period from the day of the year this agreement is entered into until the
end of that fiscal year of the Series, or for any portion of a fiscal year
immediately prior to its termination, shall be pro-rated according to the
proportion which such period bears to the full annual period.
If the foregoing accurately sets forth our agreement and you
intend to be legally bound thereby, please execute a copy of this letter and
return it to us.
Very truly yours,
THE ARCH FUND, INC.
By:/s/ Jerry V. Woodham
---------------------------
Jerry V. Woodham, President
ACCEPTED: MERCANTILE BANK
NATIONAL ASSOCIATION
By: /s/ Schuyler Gott Andews
---------------------------
Dated as of: November 21, 1997
<PAGE> 1
Exhibit 9(h)
ADDENDUM NO. 7 TO ADMINISTRATION AGREEMENT
------------------------------------------
This Addendum, dated as of November 21, 1997, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES OHIO, INC. ("BISYS Ohio"), an Ohio corporation formerly known as The
Winsbury Service Corporation.
WHEREAS, the Fund and BISYS Ohio have entered into an
Administration Agreement dated as of October 1, 1993 as amended March 15, 1994,
March 1, 1995, July 10, 1995, September 29, 1995, November 15, 1996 and February
14, 1997 (the "Administration Agreement"), pursuant to which the Fund appointed
BISYS Ohio to act as Administrator for the Fund's ARCH Money Market, Treasury
Money Market, Growth & Income Equity, Small Cap Equity (formerly Emerging
Growth), Government & Corporate Bond, U.S. Government Securities, Balanced,
International Equity, Short-Intermediate Municipal, Tax-Exempt Money Market,
Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond, Equity Income, National
Municipal Bond, Intermediate Corporate Bond (formerly Short-Intermediate
Corporate Bond), Equity Index and Bond Index Portfolios;
WHEREAS, Section 10 of the Administration Agreement provides
that no provision of the Agreement may be changed, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS Ohio that it has
established two new portfolios, namely, the ARCH Small Cap Equity Index and ARCH
Growth Equity Portfolios (collectively, the "New Portfolios"), and that it
desires to retain BISYS Ohio to act as the Administrator therefor, and BISYS
Ohio has notified the Fund that it is willing to serve as Administrator for the
New Portfolios.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints BISYS Ohio to act as
Administrator to the Fund for the New Portfolios for the period and on the terms
set forth in the Administration Agreement. BISYS Ohio hereby accepts such
appointment and agrees to render the services set forth in the Administration
Agreement, for the compensation herein provided.
2. COMPENSATION. For the services provided and expenses
assumed pursuant to the Administration Agreement with respect to the New
Portfolios, the Fund will pay BISYS Ohio, as agent for itself, a monthly fee (in
arrears) on the first
<PAGE> 2
business day of each month at the annual rate of .20% of the average daily net
assets of each New Portfolio.
The fee attributable to each of the New Portfolios shall be
the obligation of that respective New Portfolio and not of any other Portfolio
of the Fund.
3. TERMS. From and after the date hereof, the term "Portfolios" as used
in the Administration Agreement shall be deemed to include the New Portfolios.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Administration Agreement.
4. APPENDIX A. Appendix A to the Administration Agreement is hereby
supplemented to read as set forth in Appendix A attached hereto.
5. MISCELLANEOUS. Except to the extent supplemented hereby, the
Administration Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: /s/ Stephen G. Mintos
--------------------------------
Stephen G. Mintos
Executive Vice President
-2-
<PAGE> 3
APPENDIX A
to the
ADMINISTRATION AGREEMENT
between
THE ARCH FUND, INC.
and
BISYS FUND SERVICES OHIO, INC. (formerly
known as The Winsbury Service Corporation)
- ------------------------------------------------------------------------------
Money Market Portfolio (Trust Shares, Investor A Shares, Institutional Shares
and Investor B Shares)
Treasury Money Market Portfolio (Trust Shares, Investor A Shares and
Institutional Shares)
Growth & Income Equity Portfolio (Trust Shares, Investor A Shares, Institutional
and Investor B Shares)
Small Cap Equity Portfolio (Trust Shares, Investor A Shares, Institutional and
Investor B Shares)
Government & Corporate Bond Portfolio (Trust Shares, Investor A Shares,
Institutional and Investor B Shares)
U.S. Government Securities Portfolio (Trust Shares, Investor A Shares,
Institutional and Investor B Shares)
Balanced Portfolio (Trust Shares, Investor A Shares, Institutional and Investor
B Shares)
International Equity Portfolio (Trust Shares, Investor A Shares, Institutional
and Investor B Shares)
Short-Intermediate Municipal Portfolio (Trust Shares and Investor A Shares)
Tax-Exempt Money Market Portfolio (Trust Shares and Investor A Shares)
Missouri Tax-Exempt Bond Portfolio (Trust Shares, Investor A Shares and Investor
B Shares)
Kansas Tax Exempt Bond Portfolio (Trust Shares, Investor A Shares and Investor B
Shares)
<PAGE> 4
Equity Income Portfolio (Trust Shares, Investor A Shares, Institutional Shares
and Investor B Shares)
National Municipal Bond Portfolio (Trust Shares, Investor A Shares and Investor
B Shares)
Intermediate Corporate Bond Portfolio (Trust Shares, Investor A Shares and
Institutional Shares)
Equity Index Portfolio (Trust Shares, Investor A Shares and Institutional
Shares)
Bond Index Portfolio (Trust Shares, Investor A Shares and Institutional Shares)
Small Cap Equity Index Portfolio (Trust Shares, Investor A Shares and
Institutional Shares)
Growth Equity Portfolio (Trust Shares, Investor A Shares, Institutional Shares
and Investor B Shares)
-2-
<PAGE> 1
Exhibit 9(p)
ADDENDUM NO. 7 TO TRANSFER AGENCY AGREEMENT
-------------------------------------------
This Addendum, dated as of November 21, 1997, is entered into
between THE ARCH FUND, INC. (the "Fund"), a Maryland corporation, and BISYS FUND
SERVICES OHIO, INC. ("BISYS Ohio"), an Ohio corporation formerly known as The
Winsbury Service Corporation.
WHEREAS, the Fund and BISYS Ohio have entered into a Transfer
Agency Agreement dated as of October 1, 1993 as amended March 15, 1994, March 1,
1995, July 10, 1995, September 29, 1995 November 15, 1996 and February 14, 1997
(the "Transfer Agency Agreement"), pursuant to which the Fund appointed BISYS
Ohio to act as Transfer Agent for the Fund's ARCH Money Market, Treasury Money
Market, Growth & Income Equity, Small Cap Equity (formerly Emerging Growth),
Government & Corporate Bond, U.S. Government Securities, Balanced, International
Equity, Short-Intermediate Municipal, Tax-Exempt Money Market, Missouri
Tax-Exempt Bond, Kansas Tax-Exempt Bond, Equity Income, National Municipal Bond,
Intermediate Corporate Bond (formerly Short-Intermediate Corporate Bond), Equity
Index and Bond Index Portfolios;
WHEREAS, Section 20 of the Transfer Agency Agreement provides
that no provision of the Agreement may be changed, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
enforcement of the change, discharge or termination is sought; and
WHEREAS, the Fund has notified BISYS Ohio that it has
established two new portfolios, namely, the ARCH Small Cap Equity Index and ARCH
Growth Equity Portfolios (collectively, the "New Portfolios"), and that it
desires to retain BISYS Ohio to act as the Transfer Agent therefor, and BISYS
Ohio has notified the Fund that it is willing to serve as Transfer Agent for the
New Portfolios.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. APPOINTMENT. The Fund hereby appoints BISYS Ohio to act as
Transfer Agent to the Fund for the New Portfolios for the period and on the
terms set forth in the Transfer Agency Agreement. BISYS Ohio hereby accepts such
appointment and agrees to render the services set forth in the Transfer Agency
Agreement, for the compensation herein provided.
2. FEES. For the services provided and expenses assumed
pursuant to the Transfer Agency Agreement with respect to the New Portfolios,
the Fund will pay BISYS Ohio in accordance with, and in the manner set forth in,
Appendix C hereto. Fees for any additional services to be provided by the
Transfer Agent
<PAGE> 2
pursuant to an amendment to Appendix B hereto shall be subject to mutual
agreement at the time such amendment to Appendix B is proposed.
3. TERMS. From and after the date hereof, the term "Portfolios" as used
in the Transfer Agency Agreement shall be deemed to include the New Portfolios.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Transfer Agency Agreement.
4. APPENDIX A. Appendix A to the Transfer Agency Agreement is hereby
supplemented to read as set forth in Appendix A attached hereto.
5. MISCELLANEOUS. Except to the extent supplemented hereby, the
Transfer Agency Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
----------------------------
Jerry V. Woodham
President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
----------------------------
David Huber
President
-2-
<PAGE> 3
APPENDIX A
TO THE
TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC.
AND
BISYS FUND SERVICES OHIO, INC. (FORMERLY
KNOWN AS THE WINSBURY SERVICE CORPORATION)
- -------------------------------------------------------------------------------
Money Market Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
Treasury Money Market Portfolio (Trust shares, Investor A shares
and Institutional shares)
Growth & Income Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Small Cap Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Government & Corporate Bond Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
U.S. Government Securities Portfolio (Trust shares, Investor A shares,
Institutional shares and Investor B shares)
Balanced Portfolio (Trust shares, Investor A shares, Institutional shares and
Investor B shares)
International Equity Portfolio (Trust shares, Investor A shares, Institutional
shares and Investor B shares)
Short-Intermediate Municipal Portfolio (Trust Shares and Investor A shares)
Tax-Exempt Money Market Portfolio (Trust shares and Investor A shares)
Missouri Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
Kansas Tax-Exempt Bond Portfolio (Trust shares, Investor A shares and Investor B
shares)
A-1
<PAGE> 4
Equity Income Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
National Municipal Bond Portfolio (Trust shares, Investor A shares and Investor
B shares)
Intermediate Corporate Bond Portfolio (Trust shares, Investor A shares and
Institutional shares)
Equity Index Portfolio (Trust shares, Investor A shares and Institutional
shares)
Bond Index Portfolio (Trust shares, Investor A shares and Institutional shares)
Small Cap Equity Index Portfolio (Trust shares, Investor A shares and
Institutional shares)
Growth Equity Portfolio (Trust shares, Investor A shares, Institutional shares
and Investor B shares)
A-2
<PAGE> 5
APPENDIX B
----------
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC. AND BISYS FUND SERVICES OHIO, INC.
------------------------------------------------------
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
----------------------------------------------------
TRANSFER AGENCY SERVICES
------------------------
1. SHAREHOLDER TRANSACTIONS
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10 under the
Securities Exchange Act of 1934, as amended, and in accordance
with Section 8-408 of the Maryland Commercial Law Article, as
amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares
through dividend reinvestment.
2. SHAREHOLDER INFORMATION SERVICES
a. Make information available to shareholder servicing unit and
other remote access units regarding trade date, share price,
current holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or
special order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements, or marketing material to current
shareholders.
3. COMPLIANCE REPORTING
a. Provide reports to the Securities and Exchange Commission, the
National Association of Securities Dealers and the States in
which the Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service forms
for corresponding Portfolio and shareholder income and capital
gains.
B-1
<PAGE> 6
c. Issue tax withholding reports to the Internal Revenue Service.
4. DEALER/LOAD PROCESSING
a. Provide reports for tracking rights of accumulation and purchases
made under a Letter of Intent.
b. Account for separation of shareholder investments from
transaction sale charges in connection with purchases and
redemptions of Portfolio shares.
c. Calculate fees due under 12b-1 plans for distribution and
marketing expenses.
d. Track sales and commission statistics by dealer and provide for
payment of commissions on direct shareholder purchases in a load
Portfolio.
5. SHAREHOLDER ACCOUNT MAINTENANCE
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
e. Provide sub-accounting services for a record holder upon request
of such record holder.
B-2
<PAGE> 7
APPENDIX C
----------
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC. AND BISYS FUND SERVICES OHIO, INC.
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
FEE SCHEDULE
------------
A. ANNUAL BASE FEE
1. Portfolios which have Investor A Shares shall pay an Annual
Base Fee of $10,000 plus $19 per shareholder per Portfolio.
2. Portfolios which have Investor B Shares shall pay an Annual
Base Fee of $10,000 plus $19 per shareholder per Portfolio.
3. Portfolios which have Trust Shares shall pay an Annual Base
Fee of $8,000 plus $15 per shareholder per Portfolio.
4. Portfolios which have Institutional Shares shall pay an
Annual Base Fee of $8,000 plus $15 per shareholder per
Portfolio.
B. ANNUAL ADDITIONAL FEES. These fees are in addition to the Annual
Base Fees.
1. Portfolios participating in the Asset Advisor (asset
allocation) program shall pay an annual fee of $3,000 per
Portfolio
2. Out of pocket costs, including postage, Tymnet charges,
statement/confirm paper, forms, and microfiche will be added
to the Transfer Agency Fees.
C. ALLOCATION OF FEES. Transfer Agency fees paid under this
Agreement shall be treated as an expense of the Company and shall
be accrued and allocated pro rata each month to the Portfolios on
the basis of their respective net assets at the end of the
preceding month and paid monthly.
C-1
<PAGE> 8
APPENDIX D
----------
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
THE ARCH FUND, INC. AND BISYS FUND SERVICES OHIO, INC.
------------------------------------------------------
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
----------------------------------------------------
REPORTS
-------
I. Daily Shareholder Activity Journal
II. Daily Portfolio Activity Summary Report
A. Beginning Balance
B. Dealer Transactions
C. Shareholder Transactions
D. Reinvested Dividends
E. Exchanges
F. Adjustments
G. Ending Balance
III. Daily Wire and Check Registers
IV. Monthly Dealer Processing Reports
V. Monthly Dividend Reports
VI. Sales Data Reports for Blue Sky Registration
VII. Annual report by independent auditors concerning the Transfer
Agent's shareholder system and internal accounting control
systems to be filed with the Securities and Exchange
Commission pursuant to Rule 17Ad-13 of the Securities Exchange
Act of 1934, as
amended.
D-1
<PAGE> 1
EXHIBIT 11 (a)
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
The ARCH Fund, Inc.:
We consent to the use of our report dated January 23, 1998 relating to the Arrow
Equity Portfolio, included herein and to the references to our firm under the
heading "Financial Highlights" in the Prospectus and under the headings
"Independent Auditors" and "Financial Statements" in the
Statement of Additional Information.
/s/KPMG Peat Marwick LLP
------------------------
Columbus, Ohio
January 29, 1998
<PAGE> 1
Exhibit (11)(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post- Effective Amendment No. 42 to the Registration Statement
(No. 2- 79285) on Form N-1A under the Securities Act of 1933, as amended, 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 the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
-------------------------------
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
January 29, 1998
<PAGE> 1
Exhibit 13(j)
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby purchases one
(1) Class S share of common stock representing an interest in the ARCH Growth
Equity Portfolio (the "Portfolio") at a price of $16.45 (such share of common
stock in the Portfolio being hereinafter known as the "Share"). BISYS Ohio
hereby acknowledges the purchase of the Share and the Fund hereby acknowledges
receipt from BISYS Ohio of funds in the amount of $16.45 in full payment for
the Share.
2. BISYS Ohio represents and warrants to the Fund that the Share is
being acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
---------------------
Title: President
<PAGE> 2
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby purchases one
(1) Class S - Special Series 1 share of common stock representing an interest
in the ARCH Growth Equity Portfolio (the "Portfolio") at a price of $16.45
(such share of common stock in the Portfolio being hereinafter known as the
"Share"). BISYS Ohio hereby acknowledges the purchase of the Share and the Fund
hereby acknowledges receipt from BISYS Ohio of funds in the amount of $16.45 in
full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the Share is
being acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
---------------------
Title: President
<PAGE> 3
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby purchases one
(1) Class S - Special Series 2 share of common stock representing an
interest in the ARCH Growth Equity Portfolio (the "Portfolio") at a price of
$16.45 (such share of common stock in the Portfolio being hereinafter known as
the "Share"). BISYS Ohio hereby acknowledges the purchase of the Share and the
Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount of
$16.45 in full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the Share is
being acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
---------------------
Title: President
<PAGE> 4
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with
transferable shares, and BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an Ohio
corporation, hereby agree with each other as follows:
1. The Fund hereby offers BISYS Ohio and BISYS Ohio hereby purchases one
(1) Class S - Special Series 3 share of common stock representing an interest
in the ARCH Growth Equity Portfolio (the "Portfolio") at a price of $16.45
(such share of common stock in the Portfolio being hereinafter known as the
"Share"). BISYS Ohio hereby acknowledges the purchase of the Share and the Fund
hereby acknowledges receipt from BISYS Ohio of funds in the amount of $16.45 in
full payment for the Share.
2. BISYS Ohio represents and warrants to the Fund that the Share is
being acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
--------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
---------------------
Title: President
<PAGE> 5
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with transferable
shares, and BISYs Fund Services Ohio, Inc. ("BISYs Ohio), an Ohio corporation,
hereby agree with each other as follows:
1. The Fund hereby offers BISYs Ohio and BISYs Ohio hereby purchases
one (1) Class R share of common stock representing an interest in the ARCH
Small Cap Equity Index Portfolio (the "Portfolio") at a price of $10.00
(such share of common stock in the Portfolio being hereinafter known as the
"Share"). BISYs Ohio hereby acknowledges the purchase of the Share and the
Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount of
$10.00 in full payment for the Share.
2. BISYs Ohio represents and warrants to the Fund that the Share is being
acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
------------------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
-------------------------------
Title: President
<PAGE> 6
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with transferable
shares, and BISYs Fund Services Ohio, Inc. ("BISYs Ohio), an Ohio corporation,
hereby agree with each other as follows:
1. The Fund hereby offers BISYs Ohio and BISYs Ohio hereby purchases
one (1) Class R - Special Series 1 share of common stock representing an
interest in the ARCH Small Cap Equity Index Portfolio (the "Portfolio") at a
price of $10.00 (such share of common stock in the Portfolio being hereinafter
known as the "Share"). BISYs Ohio hereby acknowledges the purchase of the Share
and the Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount
of $10.00 in full payment for the Share.
2. BISYs Ohio represents and warrants to the Fund that the Share is being
acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
------------------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
-------------------------------
Title: President
<PAGE> 7
PURCHASE AGREEMENT
------------------
The ARCH Fund, Inc. (the "Fund"), a Maryland corporation with transferable
shares, and BISYs Fund Services Ohio, Inc. ("BISYs Ohio), an Ohio corporation,
hereby agree with each other as follows:
1. The Fund hereby offers BISYs Ohio and BISYs Ohio hereby purchases
one (1) Class R - Special Series 2 share of common stock representing an
interest in the ARCH Small Cap Equity Index Portfolio (the "Portfolio") at a
price of $10.00 (such share of common stock in the Portfolio being hereinafter
known as the "Share"). BISYs Ohio hereby acknowledges the purchase of the Share
and the Fund hereby acknowledges receipt from BISYS Ohio of funds in the amount
of $10.00 in full payment for the Share.
2. BISYs Ohio represents and warrants to the Fund that the Share is being
acquired for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the 21st day of November, 1997.
THE ARCH FUND, INC.
By: /s/ Jerry V. Woodham
------------------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ David Huber
-------------------------------
Title: President
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 43,382,385
<INVESTMENTS-AT-VALUE> 68,895,429
<RECEIVABLES> 92,292
<ASSETS-OTHER> 41,252
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69,028,973
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63,856
<TOTAL-LIABILITIES> 63,856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,759,704
<SHARES-COMMON-STOCK> 3,678,202
<SHARES-COMMON-PRIOR> 3,690,543
<ACCUMULATED-NII-CURRENT> 22,923
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,669,446
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,513,044
<NET-ASSETS> 68,965,117
<DIVIDEND-INCOME> 835,181
<INTEREST-INCOME> 154,417
<OTHER-INCOME> 0
<EXPENSES-NET> 714,366
<NET-INVESTMENT-INCOME> 275,232
<REALIZED-GAINS-CURRENT> 4,917,751
<APPREC-INCREASE-CURRENT> 13,265,621
<NET-CHANGE-FROM-OPS> 18,458,604
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 330,048
<DISTRIBUTIONS-OF-GAINS> 3,886,419
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 993,820
<NUMBER-OF-SHARES-REDEEMED> 1,032,878
<SHARES-REINVESTED> 26,717
<NET-CHANGE-IN-ASSETS> 13,392,365
<ACCUMULATED-NII-PRIOR> 77,739
<ACCUMULATED-GAINS-PRIOR> 3,638,114
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 468,080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 870,393
<AVERAGE-NET-ASSETS> 62,196,082
<PER-SHARE-NAV-BEGIN> 15.06
<PER-SHARE-NII> 0.080
<PER-SHARE-GAIN-APPREC> 4.75
<PER-SHARE-DIVIDEND> 0.09
<PER-SHARE-DISTRIBUTIONS> 1.05
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.750
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
