<PAGE>
- ------------------------
Annual Report
November 30, 1998
- ------------------------
[GRAPHIC APPEARS HERE]
Money Market Portfolio
Treasury Money Market Portfolio
Tax-Exempt Money Market Portfolio
Growth & Income Equity Portfolio
Small Cap Equity Portfolio
International Equity Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Equity Portfolio
Balanced Portfolio
Government & Corporate Bond Portfolio
U.S. Government Portfolio
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
[LOGO OF ARCH FUNDS APPEARS HERE]
The ARCH Funds
<PAGE>
Table of Contents
Message From Your Chairman
Page 2
Message From Your Investment Advisor
Page 3
Money Market Portfolio
Page 4
Treasury Money Market Portfolio
Page 12
Tax-Exempt Money Market Portfolio
Page 18
Growth & Income Equity Portfolio
Page 26
Small Cap Equity Portfolio
Page 36
International Equity Portfolio
Page 46
Equity Income Portfolio
Page 56
Equity Index Portfolio
Page 66
Growth Equity Portfolio
Page 80
Balanced Portfolio
Page 90
Government & Corporate Bond Portfolio
Page 100
U.S. Government Securities Portfolio
Page 110
Short-Intermediate Municipal Portfolio
Page 120
Missouri Tax-Exempt Bond Portfolio
Page 128
National Municipal Bond Portfolio
Page 138
Intermediate Corporate Bond Portfolio
Page 148
Bond Index Portfolio
Page 158
Notes to Financial Statements
Page 168
Independent Auditors' Report
Page 187
1
<PAGE>
THE ARCH FUND, INC.
Message From Your Chairman
Dear Shareholders,
We are pleased to present this report for the ARCH Fund, Inc. (the Funds) for
the 12 months ended November 30, 1998. Assets in the ARCH family of mutual
funds increased approximately 12% to more than $4.25 billion during the period.
Our shareholders enjoyed solid returns during the year, despite considerable
volatility in the financial markets. In particular, the stock market's 20%
decline from its peak on July 17 forcefully demonstrated that a long-term
investment program must make allowances for market volatility and risk. The
slump was followed by a sharp rebound in equity prices--a reminder that
temporary market declines should not disrupt investment plans, as long as those
plans are founded on solid principles.
Several of our funds performed well during the one year period ended November
30, 1998. For example, for the period, the ARCH National Municipal Bond
Portfolio (Investor A Shares) ranked 41 out of 240 bond funds tracked by
Lipper, Inc., while the ARCH Intermediate Corporate Bond Portfolio (Investor A
Shares) ranked second out of 95 intermediate investment grade debt funds ranked
by Lipper. On the equity side, the ARCH International Equity Portfolio
(Investor A Shares) ranked 111 out of 511 international funds and the ARCH
Growth Equity Portfolio (Investor A Shares) ranked 236 out of 962 growth funds
as tracked by Lipper, Inc./1/
We are pleased to announce that we will introduce a new equity fund into the
ARCH family on December 31, 1998. The ARCH Small Cap Equity Index Portfolio
will attempt to mirror the performance of the S&P SmallCap 600 Index,/2/ an
index of small-company stocks. At the time this report was written, the ARCH
Small Cap Equity Index Portfolio was not available to shareholders. However,
upon receipt of this report, the Portfolio will be open to investment
opportunities.
We also are pleased to announce that the ARCH Mutual Funds are taking a new
name: As of April 1, 1999, they will be known as the Mercantile Mutual Funds,
Inc. The change is meant to enhance investors' awareness of the Funds'
connection to Mercantile Bancorporation Inc., a St. Louis-based bank holding
company with assets of $35 billion. The Funds are managed by an indirect wholly
owned non-banking subsidiary of Mercantile Bancorporation, Mississippi Valley
Advisors Inc. The Funds' management and investment objectives will remain
consistent. Under their new name, the Mercantile Mutual Funds, Inc. will
continue to take a disciplined, long-term approach to investing in the
financial markets.
The benefits of such an approach were evident during the stock market's
recent fluctuations. A long-term investment strategy that employs a diversified
portfolio of funds can reduce investors' exposure to setbacks in individual
financial markets or sectors, providing a smoother path to reaching important
financial goals. Our family of mutual funds offers the tools to create and
manage such a portfolio--one that is uniquely suited to your personal goals and
risk tolerance.
You will find a discussion of each Portfolio of the ARCH Fund, Inc. in the
following pages. These discussions will help you understand your investments,
their recent performances and their current prospects. If you would like any
more information about any of the Portfolios, please call your investment
representative or the ARCH Shareholder Servicing Center at 1-800-452-ARCH.
- -----
/1/For the 3- and 5-year periods ended 11/30/98, the ARCH Growth Equity
Portfolio was ranked 258 out of 583 and 81 out of 364 growth funds, but had
no performance for the 10 year ranking period. For the 3-year period ended
11/30/98, the ARCH International Equity Portfolio was ranked 147 out of 304
International funds, but had no performance for the 5 and 10 year ranking
periods. The ARCH National Municipal Bond Portfolio and the ARCH Intermediate
Corporate Bond Portfolio had no performance for the 3, 5 and 10 year ranking
periods. Lipper Rankings are based on total return and do not include the
effect of a sales charge.
/2/The S&P 600 SmallCap Index consists of 600 domestic stocks, chosen for
market size, liquidity and industry group representation. It is a market-
value weighted index, with each stock's weight in the index proportionate to
its market value.
The ARCH Funds are NOT INSURED BY THE FDIC or any other governmental
agency, are not deposits or obligations of, or endorsed or guaranteed by,
any bank, the distributor or any of their affiliates, and involve
investment risks, including the possible loss of the principal amount
invested.
2
<PAGE>
Message From Your Investment Advisor,
Mississippi Valley Advisors Inc.
The 12-month period ended November 30, 1998, saw major shifts take place in
the global economy and financial markets. Early in the period, the U.S. economy
was characterized by strong growth, falling interest rates, increased consumer
spending and continued low inflation. Those factors were extremely supportive
of both the stock and bond markets.
By mid-year, however, investors had begun to worry about the possibility of a
global economic slowdown. Asian economies continued to struggle, and other
signs of trouble appeared. Most notably, Russia defaulted on its short-term
debt, and Long-Term Capital Management, a large hedge fund, nearly went
bankrupt.
The result was a steep decline in the U.S. stock market. Even shares of many
large multinational firms that had led previous market gains suffered in the
market downturn, in part because some of their overseas customers encountered
financial problems. In the bond market, investors flocked to high-quality
issues at the expense of lower-rated bonds.
During the fall, the Federal Reserve acted to restore liquidity and
confidence by cutting short-term interest rates three times. The result was a
rebound in the equity markets in the United States and some overseas markets.
Potential for a Slowdown
Despite the Federal Reserve's action, we believe that the U.S. economy's
growth is likely to be relatively slow during the coming period. One reason is
the imbalance in the labor market, where job growth has been nearly double the
growth of the working age population--a trend that eventually may result in a
shortage of workers. That shortage, in turn, could undermine growth and cause
inflation to rise. Already, corporate profit growth has slowed considerably.
Moreover, rising stock prices and easy credit for borrowers, in our view,
have led to strong business investment, consumer spending and housing demand.
Stock market declines--which could result from lower corporate profits--might
curtail spending by consumers and businesses, further slowing the economy.
Overseas events also have the potential to impact our economy. Asia's
economies are still struggling, which reduces demand for American products in
that region. Also, while Russia is a very minor trading partner with the United
States, its woes have reduced investor confidence in other emerging markets,
such as those in Latin America. The result could be lower profits for American
companies that sell products and services in those countries.
There is a small risk that the U.S. economy could enter a recession during
the coming year. But we believe that moderate economic growth is more likely.
Meanwhile, corporate profit growth should be modest.
Testing Patience and Skills
The coming period may pose challenges to our Funds and our shareholders, but
we are confident that we can meet them successfully. A selective approach and
an eye for value will be crucial: Thus, the ARCH equity funds will seek to
continue investing in companies' shares we believe to be trading at attractive
prices. Similarly, our fixed-income funds will seek relative values that offer
the potential for strong returns without undue risk.
This is a good time to review your long-term investment strategy to make sure
that it is the best course of action you feel will see you through market
fluctuations that may lie ahead. Our funds offer exposure to a broad array of
investments, including various types of domestic and international stocks and
bonds, as well as cash equivalents. That variety allows you to spread your risk
among different types of assets, to help you stick with your long-term strategy
regardless of the current market environment.
3
<PAGE>
The ARCH Money Market Portfolio+
Q. What is the objective of this Portfolio?
A. The ARCH Money Market Portfolio seeks current income with liquidity and
stability of principal. The net assets of the Portfolio on November 30, 1998,
were $1.5 billion.
Q. What were the conditions in the money markets during the 12 months ended
November 30, 1998?
A. The money markets were relatively flat until September. Until then the
strong growth of the U.S. economy and the deflationary influence of the global
financial crisis had offset each other. Those conflicting forces kept the
Federal Reserve Board (Fed) from raising or lowering interest rates.
In September, concerns arose that economic weakness abroad would hurt the
U.S. economy, and the market started to anticipate a rate cut by the Fed. Those
expectations caused yields to fall and prices to rise in the fixed-income
markets. As expected, the Fed reduced rates in September. A similar trend
continued through two subsequent rate cuts in October and November.
Q. How did you manage the Portfolio in that environment?
A. During most of the period we kept the Portfolio's average maturity between
40 and 50 days. However, we extended the average maturity to 54 days in March
and to 52 days in June to take advantage of quarter-end market aberrations.
Q. What types of securities constituted the Portfolio's largest holdings
during the period?
A. Commercial paper (72.1%) continued to be the Portfolio's largest holding.
The Portfolio also held corporate variable rate notes (7.5%), bank certificates
of deposit (9.7%) and U.S. government agency issues (8.4%).*
Q. How will you manage the Portfolio going forward?
A. We will seek to keep the Portfolio's average maturity in the high 40-day
to low 50-day range. We expect investors to push rates lower in anticipation of
further rate cuts by the Fed. We will strive to continue taking advantage of
opportunities to pick up extra yield.
- -----
+ An investment in the fund is not insured or guaranteed by the FDIC or any
other government agency. Although the fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in the fund.
* Portfolio composition is subject to change.
4
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Money Market Portfolio November 30, 1998
Certificates of Deposit (9.7%)
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ----------- --------------
<S> <C> <C>
LaSalle National Bank, 5.62%*, 12/15/98............. $40,000,000 $ 40,000,000
LaSalle National Bank, 5.11%*, 4/23/99.............. 30,000,000 30,000,000
Westdeutsch Landesbank, 5.20%*, 12/31/98............ 40,000,000 40,000,000
Wilmington Trust, 5.10%*, 12/30/98.................. 40,000,000 40,000,000
--------------
TOTAL CERTIFICATES OF DEPOSIT 150,000,000
--------------
Commercial Paper (72.1%)
Automotive (2.3%):
Daimler-Benz, 5.33%*, 12/11/98...................... 35,000,000 34,948,764
--------------
Beverages (3.1%):
Anheuser-Busch Cos., Inc., 5.67%*, 12/9/98.......... 47,650,000 47,592,291
--------------
Chemicals (0.9%):
Monsanto, 5.56%*, 1/15/99........................... 13,313,000 13,222,305
--------------
Computers (3.2%):
IBM Corp., 5.08%*, 2/3/99........................... 50,000,000 49,554,667
--------------
Consumer Goods & Services (1.9%):
Procter & Gamble Co., 5.59%*, 12/11/98.............. 30,000,000 29,954,583
--------------
Containers & Packaging (2.9%):
Air Products & Chemicals, 5.49%*, 12/31/98.......... 25,000,000 24,887,500
Air Products & Chemicals, 5.31%*, 3/29/99........... 20,000,000 19,661,078
--------------
44,548,578
--------------
Electrical & Electronic (7.0%):
CSC Enterprises, 5.11%*, 12/14/98................... 25,000,000 24,954,229
CSC Enterprises, 5.32%*, 2/9/99..................... 30,000,000 29,693,750
CSC Enterprises, 5.38%*, 2/19/99.................... 15,000,000 14,823,333
Hubbell, Inc., 5.27%*, 12/1/98...................... 39,300,000 39,300,001
--------------
108,771,313
--------------
Financial Services (34.9%):
Block Financial Corp., 5.46%*, 12/1/98.............. 10,000,000 10,000,000
Block Financial Corp., 5.32%*, 2/5/99............... 15,000,000 14,855,625
Block Financial Corp., 5.34%*, 2/26/99.............. 35,000,000 34,554,669
Ciesco LP, 5.23%*, 2/12/99.......................... 40,000,000 39,582,278
Ford Motor Credit, 5.38%*, 12/1/98.................. 50,000,000 49,999,999
General Electric Capital Corp., 5.14%*, 4/15/99..... 35,000,000 34,339,813
General Motors Acceptance Corp., 5.25%*, 1/15/99.... 25,000,000 24,838,125
General Motors Acceptance Corp., 5.23%*, 2/10/99.... 38,500,000 38,108,198
Goldman Sachs, 5.30%*, 3/23/99...................... 35,000,000 34,433,778
J.P. Morgan & Co., Inc., 5.30%*, 12/7/98............ 35,000,000 34,969,375
</TABLE>
Commercial Paper, continued
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ----------- --------------
<S> <C> <C>
J.P. Morgan & Co., Inc., 5.26%*, 12/31/98.......... $40,000,000 $ 39,826,667
Morgan Stanley Dean Witter, 5.16%*, 1/15/99........ 25,000,000 24,840,625
Motorola Credit, 5.18%*, 2/16/99................... 35,000,000 34,616,711
New Center Asset Trust, 5.32%*, 2/16/99............ 46,000,000 45,483,458
Salomon Smith Barney, 5.17%*, 1/19/99.............. 40,000,000 39,722,333
UBS Finance, 5.09%*, 3/19/99....................... 40,000,000 39,400,000
--------------
539,571,654
--------------
Food Products (1.5%):
Campbell Soup Co., 5.57%*, 2/22/99................. 24,000,000 23,700,093
--------------
Manufacturing--Consumer Goods (2.5%):
Illinois Tool Works, 5.23%*, 12/8/98............... 20,000,000 19,979,855
Illinois Tool Works, 5.21%*, 12/29/98.............. 17,900,000 17,828,440
--------------
37,808,295
--------------
Oil & Exploration, Production & Services (3.2%)
Petrofina, 5.37%*, 12/1/98......................... 50,000,000 50,000,000
--------------
Printing & Publishing (2.9%):
McGraw-Hill, 5.31%*, 3/19/99....................... 45,000,000 44,301,375
--------------
Steel (1.6%):
Cargill, Inc., 5.33%*, 12/1/98..................... 25,000,000 25,000,000
--------------
Utilities--Gas & Electric (4.2%):
Michigan Consolidated Gas, 5.30%*, 12/2/98......... 20,000,000 19,997,083
Michigan Consolidated Gas, 5.15%*, 12/17/98........ 15,000,000 14,966,000
Michigan Consolidated Gas, 5.50%*, 1/13/99......... 30,000,000 29,804,709
--------------
64,767,792
--------------
TOTAL COMMERCIAL PAPER 1,113,741,710
--------------
Corporate Bonds (7.5%)
Banking (1.9%):
Northern Trust Co., 5.17%**, 12/8/98, MTN.......... 30,000,000 29,986,142
--------------
Financial Services (3.7%):
Bear Stearns Co., Inc., 5.19%**, 12/2/98, MTN...... 25,000,000 25,000,000
Merrill Lynch & Co., 5.21%**, 12/1/98, MTN......... 30,000,000 30,000,000
--------------
55,000,000
--------------
Insurance (1.9%):
General American Life Insurance Co., 5.42%**,
12/1/98........................................... 30,000,000 30,000,000
--------------
TOTAL CORPORATE BONDS 114,986,142
--------------
</TABLE>
Continued
5
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Money Market Portfolio November 30, 1998
U.S. Government Agencies (8.4%)
<TABLE>
<CAPTION>
Shares
or
Security Principal Amortized
Description Amount Cost
----------- ----------- --------------
<S> <C> <C>
Federal Farm Credit Bank (1.6%):
5.48%, 12/1/98...................................... $25,000,000 $ 25,000,000
--------------
Federal Home Loan Bank (3.9%):
5.57%, 3/9/99....................................... 14,305,000 14,301,853
6.44%, 9/9/99....................................... 15,100,000 15,238,918
5.11%**, 12/1/98.................................... 30,000,000 29,983,233
--------------
59,524,004
--------------
Federal National Mortgage Assoc. (1.5%):
5.52%, 3/26/99, MTN................................. 23,900,000 23,894,202
--------------
Student Loan Marketing Association (1.4%):
5.40%, 2/10/99, MTN................................. 21,000,000 20,992,002
--------------
TOTAL U.S. GOVERNMENT AGENCIES 129,410,208
--------------
Investment Companies (2.4%)
Financial Square Premium Money Market............... 37,045,002 37,045,002
--------------
TOTAL INVESTMENT COMPANIES 37,045,002
--------------
TOTAL INVESTMENTS
(Amortized Cost $1,545,183,062)(a)(100.1%)..................... 1,545,183,062
Liabilities in excess of other assets (-0.1%)................... (2,037,643)
--------------
TOTAL NET ASSETS (100.0%)....................................... $1,543,145,419
==============
</TABLE>
- -----
* Effective yield at date of purchase.
** Variable rate investments. The rate presented on the Schedule of Portfolio
Investments is the rate in effect at November 30, 1998. The date presented
reflects the next rate change date.
(a) Cost for federal income tax and financial reporting purposes are the same.
MTN -- Medium Term Note
See notes to financial statements
6
<PAGE>
THE ARCH FUND, INC.
Money Market Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $1,545,183,062)........ $1,545,183,062
Cash............................................... 362
Interest and dividends receivable.................. 3,992,241
Receivable for capital shares issued............... 2,132
Prepaid expenses and other assets.................. 6,159
--------------
Total Assets...................................... 1,549,183,956
Liabilities:
Dividends payable.................................. $5,134,008
Accrued expenses and other payables:
Investment advisory fees.......................... 446,324
Administration fees............................... 29,575
Distribution and administrative services fees..... 202,380
Custodian fees.................................... 50,846
Other liabilities................................. 175,404
----------
Total Liabilities................................. 6,038,537
--------------
Net Assets:
Capital............................................ 1,543,143,060
Undistributed net investment income................ 7,235
Accumulated net realized losses from investment
transactions...................................... (4,876)
--------------
Net Assets......................................... $1,543,145,419
==============
Investor A Shares
Net Assets........................................ $ 203,583,010
Shares............................................ 203,582,817
Offering and redemption price per share........... $1.00
=====
Investor B Shares
Net Assets........................................ $ 84,330
Shares............................................ 84,331
Offering price per share*......................... $1.00
=====
Trust Shares
Net Assets........................................ $ 820,922,635
Shares............................................ 820,920,532
Offering and redemption price per share........... $1.00
=====
Institutional Shares
Net Assets........................................ $ 28,535,524
Shares............................................ 28,535,460
Offering and redemption price per share........... $1.00
=====
Trust II Shares
Net Assets........................................ $ 490,019,920
Shares............................................ 490,019,920
Offering and redemption price per share........... $1.00
=====
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................ $76,940,377
Dividend income........................................ 657,121
-----------
Total Income.......................................... 77,597,498
Expenses:
Investment advisory fees............................... $5,527,211
Administration fees.................................... 2,763,606
Distribution and services fees, Investor A Shares...... 427,163
Distribution and services fees, Investor B Shares...... 733
Administrative services fees, Trust Shares............. 2,894,327
Administrative services fees, Institutional Shares..... 68,689
Custodian fees......................................... 182,037
Directors' fees and expenses........................... 18,512
Transfer agent fees.................................... 384,549
Other fees............................................. 535,978
----------
Total expenses before voluntary fee reductions........ 12,802,805
Expenses voluntarily reduced.......................... (3,522,691)
-----------
Net Expenses.......................................... 9,280,114
-----------
Net investment income.................................. 68,317,384
-----------
Realized Gains from Investments:
Net realized gains from investment transactions........ 31
-----------
Change in net assets resulting from operations......... $68,317,415
===========
</TABLE>
See notes to financial statements
7
<PAGE>
THE ARCH FUND, INC.
Money Market Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
-------------- --------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income........................ $ 68,317,384 $ 48,679,735
Net realized gains from investment
transactions................................ 31 1,631
-------------- --------------
Change in net assets resulting from
operations................................... 68,317,415 48,681,366
-------------- --------------
Distributions to Investor A Shareholders:
From net investment income................... (8,260,115) (5,589,497)
Distributions to Investor B Shareholders:
From net investment income................... (2,995) (2,942)
Distributions to Trust Shareholders:
From net investment income................... (57,503,882) (42,036,602)
Distributions to Institutional Shareholders:
From net investment income................... (1,329,331) (1,050,694)
Distributions to Trust II Shareholders:
From net investment income................... (1,221,277) --
-------------- --------------
Change in net assets from shareholder
distributions................................ (68,317,600) (48,679,735)
-------------- --------------
Change in net assets from capital
transactions................................. 314,122,425 404,628,989
-------------- --------------
Change in net assets.......................... 314,122,240 404,630,620
Net Assets:
Beginning of period.......................... 1,229,023,179 824,392,559
-------------- --------------
End of period................................ $1,543,145,419 $1,229,023,179
============== ==============
</TABLE>
See notes to financial statements
8
<PAGE>
THE ARCH FUND, INC.
Money Market Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------
1998 1997 1996 1995 1994 (a)
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- -------
Investment Activities
Net investment income......... 0.048 0.048 0.047 0.052 0.033
-------- -------- ------- ------- -------
Total from Investment
Activities................... 0.048 0.048 0.047 0.052 0.033
-------- -------- ------- ------- -------
Distributions
Net investment income......... (0.048) (0.048) (0.047) (0.052) (0.033)
-------- -------- ------- ------- -------
Total Distributions........... (0.048) (0.048) (0.047) (0.052) (0.033)
-------- -------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======= =======
Total Return................... 4.95% 4.93% 4.81% 5.33% 3.37%
Ratios/Supplementary Data:
Net Assets at end of period
(000)......................... $203,583 $164,777 $91,166 $64,865 $48,384
Ratio of expenses to average
net assets.................... 0.78% 0.77% 0.78% 0.77% 0.78%
Ratio of net investment income
to average net assets......... 4.83% 4.84% 4.70% 5.20% 3.35%
Ratio of expenses to average
net assets*................... 0.93% 0.92% 0.93% 0.92% 0.93%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the years
ended November January 26, 1996
30, to
---------------- November 30,
1998 1997 1996 (a)
------- ------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Investment Activities
Net investment income..................... 0.041 0.041 0.033
------- ------- -------
Total from Investment Activities.......... 0.041 0.041 0.033
------- ------- -------
Distributions
Net investment income..................... (0.041) (0.041) (0.033)
------- ------- -------
Total Distributions....................... (0.041) (0.041) (0.033)
------- ------- -------
Net Asset Value, End of Period............. $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total Return (excludes sales charge)....... 4.17% 4.15% 3.35%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).......... $ 84 $ 73 $ 41
Ratio of expenses to average net assets.... 1.53% 1.52% 1.47%(c)
Ratio of net investment income to average
net assets................................ 4.09% 4.10% 3.73%(c)
Ratio of expenses to average net assets*... 1.68% 1.67% 1.68%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Period from commencement of operations. (b) Not annualized. (c)
Annualized.
9
<PAGE>
THE ARCH FUND, INC.
Money Market Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ---------- -------- -------- --------
Investment Activities
Net investment income.... 0.050 0.050 0.049 0.054 0.035
-------- ---------- -------- -------- --------
Total from Investment
Activities.............. 0.050 0.050 0.049 0.054 0.035
-------- ---------- -------- -------- --------
Distributions
Net investment income.... (0.050) (0.050) (0.049) (0.054) (0.035)
-------- ---------- -------- -------- --------
Total Distributions...... (0.050) (0.050) (0.049) (0.054) (0.035)
-------- ---------- -------- -------- --------
Net Asset Value, End of
Period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ========== ======== ======== ========
Total Return.............. 5.08% 5.06% 4.99% 5.52% 3.55%
Ratios/Supplementary Data:
Net Assets at end of
period (000)............. $820,923 $1,042,151 $717,265 $698,131 $544,952
Ratio of expenses to
average net assets....... 0.66% 0.64% 0.61% 0.59% 0.61%
Ratio of net investment
income to average net
assets................... 4.97% 4.96% 4.88% 5.38% 3.45%
Ratio of expenses to
average net assets*...... 0.93% 0.92% 0.76% 0.74% 0.93%
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
Financial Highlights, Institutional Shares
<CAPTION>
For the years ended November 30,
--------------------------------------------------
1998 1997 1996 1995 1994(a)
-------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ---------- -------- -------- --------
Investment Activities
Net investment income.... 0.048 0.048 0.047 0.052 0.033
-------- ---------- -------- -------- --------
Total from Investment
Activities.............. 0.048 0.048 0.047 0.052 0.033
-------- ---------- -------- -------- --------
Distributions
Net investment income.... (0.048) (0.048) (0.047) (0.052) (0.033)
-------- ---------- -------- -------- --------
Total Distributions...... (0.048) (0.048) (0.047) (0.052) (0.033)
-------- ---------- -------- -------- --------
Net Asset Value, End of
Period................... $ 1.00 $ 1.00 $ 1.00 $1.00 $1.00
======== ========== ======== ======== ========
Total Return.............. 4.95% 4.93% 4.81% 5.33% 3.34%
Ratios/Supplementary Data:
Net Assets at end of
period (000)............. $ 28,536 $ 22,022 $ 15,921 $ 13,340 $ 10,295
Ratio of expenses to
average net assets....... 0.78% 0.77% 0.78% 0.77% 0.78%
Ratio of net investment
income to average net
assets................... 4.84% 4.83% 4.70% 5.20% 3.48%
Ratio of expenses to
average net assets*...... 0.93% 0.92% 0.93% 0.92% 0.95%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" shares. The financial highlights presented for
the period prior to January 3, 1994 represent financial highlights applicable
to the Investor Shares.
10
<PAGE>
THE ARCH FUND, INC.
Money Market Portfolio
Financial Highlights, Trust II Shares
<TABLE>
<CAPTION>
November 10, 1998
to
November 30,
1998 (a)
-----------------
<S> <C>
Net Asset Value, Beginning of Period.......................... $ 1.00
--------
Investment Activities
Net investment income........................................ 0.003
--------
Total from Investment Activities............................. 0.003
--------
Distributions
Net investment income........................................ (0.003)
--------
Total Distributions.......................................... (0.003)
--------
Net Asset Value, End of Period................................ $ 1.00
========
Total Return.................................................. 0.27%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................. $490,020
Ratio of expenses to average net assets....................... 0.56%(c)
Ratio of net investment income to average net assets.......... 4.76%(c)
Ratio of expenses to average net assets*...................... 0.71%(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. (a)
Period from commencement of operations. (b) Not annualized. (c) Annualized.
11
<PAGE>
The ARCH Treasury Money Market Portfolio+
Q. What is the objective of the Portfolio?
A. The ARCH Treasury Money Market Portfolio seeks a high level of current
income exempt from state income tax, consistent with liquidity and security of
shareholders' principal. The net assets of the Portfolio on November 30, 1998,
were approximately $349 million.
Q. What were the conditions in the money markets during the 12-month period
ended November 30, 1998?
A. During the first part of the period rates stayed flat, as the strong
domestic economy and weak overseas economies combined to keep the Federal
Reserve Board's monetary policy neutral. Later in the period, however, the Fed
lowered interest rates three times due to concerns that the global financial
crisis could lead to a liquidity crunch that might severely hamper U.S.
economic growth.
Q. What was your strategy in that environment?
A. During the period we sought to keep the Portfolio's average maturity in
the mid 50-day range, slightly longer than it has been in the past. We targeted
that average maturity range to lock in higher yields on longer term securities.
We felt that short-term securities became very expensive when the Fed began to
ease interest rates, and thus we found better opportunities in longer issues.
For most of the year we held the majority of the Portfolio in Treasury bills.
However, as the Fed eased rates and investors fled to the highest quality
issues, we found more opportunities in previously issued Treasury notes with
slightly longer maturities than bills. The Portfolio began the period with
77.8% of assets in Treasury bills and 22.2% in Treasury notes; that weighting
changed to 74.1% and 25.7% respectively as of November 30, 1998.*
Q. How will you manage the Portfolio going forward?
A. We do not foresee changing the average maturity of the Portfolio given the
current economic conditions--slow economic growth and low inflation. Thus, we
will seek to continue targeting securities in the mid 50-day range. To be rated
by Standard and Poor's, the Portfolio must refrain from having an average
maturity longer than 59 days, so we will not extend the average maturity much
further under any circumstances. As of November 30, 1998 the Portfolio's
quality rating was AAAmg, as rated by Standard and Poor's.
- -----
+ An investment in the fund is not insured or guaranteed by the FDIC or any
other government agency. Although the fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in the fund.
* Portfolio composition is subject to change.
12
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Treasury Money Market Portfolio November 30, 1998
U.S. Treasury Bills (74.1%):
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ----------- ------------
<S> <C> <C>
12/3/98............................................... $17,162,000 $ 17,157,742
12/10/98.............................................. 36,273,000 36,228,326
12/17/98.............................................. 4,476,000 4,466,279
12/24/98.............................................. 13,523,000 13,484,095
12/31/98.............................................. 20,223,000 20,147,860
1/7/99................................................ 1,693,000 1,685,998
1/14/99............................................... 20,527,000 20,423,384
1/21/99............................................... 34,916,000 34,689,520
2/4/99................................................ 31,876,000 31,623,087
2/11/99............................................... 14,489,000 14,360,635
2/18/99............................................... 10,000,000 9,903,554
3/4/99................................................ 53,880,000 53,272,267
4/15/99............................................... 1,114,000 1,095,619
------------
TOTAL U.S. TREASURY BILLS 258,538,366
------------
U.S. Treasury Notes (25.7%):
5.13%, 12/31/98....................................... 6,970,000 6,970,583
5.75%, 12/31/98....................................... 43,576,000 43,601,454
6.38%, 1/15/99........................................ 2,984,000 2,992,159
5.00%, 1/31/99........................................ 30,000,000 30,027,138
6.25%, 3/31/99........................................ 6,022,000 6,056,926
------------
TOTAL U.S. TREASURY NOTES 89,648,260
------------
TOTAL INVESTMENTS
(Amortized Cost $348,186,626)(a) (99.8%)............. 348,186,626
Other assets in excess of liabilities (0.2%).......... 667,702
------------
TOTAL NET ASSETS (100.0%) $348,854,328
============
</TABLE>
- -----
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
13
<PAGE>
THE ARCH FUND, INC.
Treasury Money Market Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $348,186,626)............... $348,186,626
Cash.................................................... 264
Interest and dividends receivable....................... 1,835,353
Prepaid expenses and other assets....................... 6,116
------------
Total Assets........................................... 350,028,359
Liabilities:
Dividends payable....................................... $975,710
Accrued expenses and other payables:
Investment advisory fees............................... 95,424
Administration fees.................................... 8,261
Distribution and administrative services fees.......... 46,854
Custodian fees......................................... 11,353
Other liabilities...................................... 36,429
--------
Total Liabilities...................................... 1,174,031
------------
Net Assets:
Capital................................................. 348,839,838
Undistributed net investment income..................... 6,076
Accumulated net realized gains from investment
transactions........................................... 8,414
------------
Net Assets.............................................. $348,854,328
============
Investor A Shares
Net Assets............................................. $ 25,664,572
Shares................................................. 25,664,906
Offering and redemption price per share................ $1.00
=====
Trust Shares
Net Assets............................................. $245,958,815
Shares................................................. 245,942,681
Offering and redemption price per share................ $1.00
=====
Institutional Shares
Net Assets............................................. $ 236,129
Shares................................................. 236,126
Offering and redemption price per share................ $1.00
=====
Trust II Shares
Net Assets............................................. $ 76,994,812
Shares................................................. 76,998,541
Offering and redemption price per share................ $1.00
=====
</TABLE>
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................ $14,302,644
-----------
Total Income.......................................... 14,302,644
Expenses:
Investment advisory fees............................... $1,123,609
Administration fees.................................... 561,805
Distribution and services fees, Investor A Shares...... 38,349
Administrative services fees, Trust Shares............. 654,328
Administrative services fees, Institutional Shares..... 586
Accounting fees........................................ 1,338
Custodian fees......................................... 37,149
Directors' fees and expenses........................... 4,324
Transfer agent fees.................................... 84,947
Other fees............................................. 168,588
----------
Total expenses before voluntary fee reductions........ 2,675,023
Expenses voluntarily reduced.......................... (837,549)
-----------
Net Expenses.......................................... 1,837,474
-----------
Net investment income.................................. 12,465,170
-----------
Realized Gains from Investments:
Net realized gains from investment transactions........ 8,302
-----------
Change in net assets resulting from operations......... $12,473,472
===========
</TABLE>
See notes to financial statements
14
<PAGE>
THE ARCH FUND, INC
Treasury Money Market Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 12,465,170 $ 7,771,484
Net realized gains from investment transactions... 8,302 14,390
------------ ------------
Change in net assets resulting from operations..... 12,473,472 7,785,874
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (647,741) (282,566)
From net realized gains from investment
transactions..................................... (432) (469)
Distributions to Trust Shareholders:
From net investment income........................ (11,660,049) (7,473,431)
From net realized gains from investment
transactions..................................... (13,834) (8,023)
Distributions to Institutional Shareholders:
From net investment income........................ (10,082) (15,487)
From net realized gains from investment
transactions..................................... (12) (18)
Distributions to Trust II Shareholders:
From net investment income........................ (147,298) --
------------ ------------
Change in net assets from shareholder
distributions..................................... (12,479,448) (7,779,994)
------------ ------------
Change in net assets from capital transactions..... 56,565,560 153,000,904
------------ ------------
Change in net assets............................... 56,559,584 153,006,784
Net Assets:
Beginning of period............................... 292,294,744 139,287,960
------------ ------------
End of period..................................... $348,854,328 $292,294,744
============ ============
</TABLE>
See notes to financial statements.
15
<PAGE>
THE ARCH FUND, INC
Treasury Money Market Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
------------------------------------------------
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income...... 0.043 0.044 0.044 0.048 0.031
-------- -------- -------- -------- --------
Total from Investment
Activities................ 0.043 0.044 0.044 0.048 0.031
-------- -------- -------- -------- --------
Distributions
Net investment income...... (0.043) (0.044) (0.044) (0.048) (0.031)
-------- -------- -------- -------- --------
Total Distributions........ (0.043) (0.044) (0.044) (0.048) (0.031)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................ 4.40% 4.53% 4.46% 4.93% 3.16%
Ratios/Supplementary Data:
Net Assets at end of period
(000)...................... $ 25,665 $ 8,409 $ 7,667 $ 2,776 $ 1,713
Ratio of expenses to average
net assets................. 0.81% 0.77% 0.81% 0.78% 0.71%
Ratio of net investment
income to average net
assets..................... 4.22% 4.43% 4.35% 4.84% 3.14%
Ratio of expenses to average
net assets*................ 0.96% 0.92% 0.96% 0.93% 0.94%
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. (a)
On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares.
Financial Highlights, Trust Shares
<CAPTION>
For the years ended November 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Investment Activities
Net investment income...... 0.045 0.046 0.045 0.050 0.033
-------- -------- -------- -------- --------
Total from Investment
Activities................ 0.045 0.046 0.045 0.050 0.033
-------- -------- -------- -------- --------
Distributions
Net investment income...... (0.045) (0.046) (0.045) (0.050) (0.033)
-------- -------- -------- -------- --------
Total Distributions........ (0.045) (0.046) (0.045) (0.050) (0.033)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................ 4.56% 4.70% 4.64% 5.12% 3.38%
Ratios/Supplementary Data:
Net Assets at end of period
(000)...................... $245,959 $283,653 $131,322 $252,780 $242,099
Ratio of expenses to average
net assets................. 0.65% 0.61% 0.61% 0.60% 0.49%
Ratio of net investment
income to average net
assets..................... 4.45% 4.60% 4.55% 5.01% 3.26%
Ratio of expenses to average
net assets*................ 0.96% 0.92% 0.76% 0.75% 0.94%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
16
<PAGE>
THE ARCH FUND, INC.
Treasury Money Market Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended January 26, 1995
November 30, to
--------------------------- November 30,
1998 1997 1996 1995 (a)
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Investment Activities
Net investment income......... 0.043 0.044 0.044 0.042
------- ------- ------- -------
Total from Investment
Activities................... 0.043 0.044 0.044 0.042
------- ------- ------- -------
Distributions
Net investment income......... (0.043) (0.044) (0.044) (0.042)
------- ------- ------- -------
Total Distributions........... (0.043) (0.044) (0.044) (0.042)
------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total Return................... 4.40 % 4.53 % 4.46 % 4.94 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000)......................... $ 236 $ 233 $ 299 $ 28
Ratio of expenses to average
net assets.................... 0.81 % 0.77 % 0.79 % 0.92 %(c)
Ratio of net investment income
to average net assets......... 4.30 % 4.44 % 4.39 % 5.76 %(c)
Ratio of expenses to average
net assets*................... 0.96 % 0.92 % 0.94 % 1.07 %(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. (a)
Period from commencement of operations. (b) Represents total return for the
Investor A Shares from December 1, 1994 to January 25, 1995 plus the total
return for the Institutional Shares from January 26, 1995 to November 30,
1995. (c) Annualized.
Financial Highlights, Trust II Shares
<TABLE>
<CAPTION>
November 13, 1998
to
November 30,
1998 (a)
-----------------
<S> <C>
Net Asset Value, Beginning of Period.......................... $ 1.00
-------
Investment Activities
Net investment income........................................ 0.002
-------
Total from Investment Activities............................. 0.002
-------
Distributions
Net investment income........................................ (0.002)
-------
Total Distributions.......................................... (0.002)
-------
Net Asset Value, End of Period................................ $ 1.00
=======
Total Return.................................................. 0.20 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................. $76,995
Ratio of expenses to average net assets....................... 0.55 %(c)
Ratio of net investment income to average net assets.......... 4.09 %(c)
Ratio of expenses to average net assets*...................... 0.70 %(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Period from commencement of operations. (b) Not annualized. (c)
Annualized.
17
<PAGE>
The ARCH Tax-Exempt Money Market Portfolio+,++
Q. How did the tax-exempt money markets perform during the 12 months through
November 30, 1998?
A. Treasury bills and other taxable money market securities remained
attractive relative to tax-exempt issues in the money markets. For example,
short-term taxable issues, during the period, yielded approximately 4.70%,
equivalent to 3.25% on an after-tax basis, compared to a 2.72% yield for the
Portfolio (Investor A Shares).
Q. How did you manage the Portfolio in that environment?
A. The Portfolio seeks as high a level of current interest income exempt from
federal income tax as is consistent with liquidity and stability of principal.
Consistent with those objectives, the Portfolio seeks to maintain strict credit
quality standards and a relatively low average maturity.
During the first six months of the period the Portfolio's average maturity
was around 45 days, comparable to the average maturity of the Portfolio's
benchmark index, which has an average maturity that ranges from 40 to 50 days.
We reduced the Portfolio's average maturity to approximately 20 to 25 days
later in the period. With yields at extremely low levels, it made sense to
maintain such a low average maturity. We held primarily daily and weekly
securities, and we slightly increased the Portfolio's exposure to select high-
quality commercial paper issues, which offered attractive yields relative to
their risk.*
Q. How will you manage the Portfolio in months ahead?
A. As long as the economy continues to grow slowly and steadily, we see no
need for significant shifts in the Portfolio's strategy. We will attempt to
increase the Portfolio's positions in tax-exempt commercial paper and notes as
new issues become available. We also will look for ways to extend the
Portfolio's average maturity if tax-exempt note yields become more attractive
relative to Treasury yields.
We expect taxable issues to continue to remain more attractive than tax-
exempt securities going forward, unless the Federal Reserve continues to cut
interest rates enough so that yields on short-term taxable issues decline
significantly. If that happens, the yields on tax-exempt securities might not
decline as much; thus, they would appear more attractive. In that environment,
we would look for opportunities to extend the Portfolio's average maturity if
we can do so when prices are more reasonable.
- -----
+ An investment in the fund is not insured or guaranteed by the FDIC or any
other government agency. Although the fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing
in the fund.
++ The portfolio's income may be subject to certain state and local taxes and,
depending on your tax status, the federal alternative minimum tax.
* Portfolio composition is subject to change.
18
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Tax-Exempt Money Market Portfolio November 30, 1998
Commercial Paper (5.0%):
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ---------- ------------
<S> <C> <C>
Texas (2.1%):
Houston, Series B, 3.10%+, 1/13/99.................... $3,600,000 $ 3,600,000
------------
Washington (2.9%):
King County, 3.20%+, 12/9/98.......................... 5,000,000 5,000,000
------------
TOTAL COMMERCIAL PAPER 8,600,000
------------
Municipal Bonds (93.1%):
Alabama (2.9%):
Gadsden, Alabama Industrial Development Board
Pollution Control Revenue, Power Co. Project,
3.25%*, 12/1/98...................................... 5,000,000 5,000,000
------------
Arizona (3.3%):
Chandler Industrial Development Authority, Multifamily
Housing Revenue, Southpark Apartments Project,
3.10%*, 12/2/98 (LOC-CitiBank N.A.).................. 950,000 950,000
Maricopa County, Pollution Control Revenue, Arizona
Public Service, Co., Series F, 3.30%*, 12/1/98 (LOC-
Bank of America Northern Trust & Savings
Association)......................................... 4,700,000 4,700,000
------------
5,650,000
------------
Georgia (5.4%):
Burke County Development Authority, Pollution Control
Revenue, Georgia Power Co., 3.30%*, 12/1/98.......... 2,900,000 2,900,000
Polk School District, G.O., 4.25%, 2/1/99............. 1,720,000 1,721,846
Putnam County Development Authority, Pollution Control
Revenue, Power Pollution Project, Series 2,
3.25%*, 12/1/98...................................... 4,700,000 4,700,000
------------
9,321,846
------------
Idaho (2.9%):
Idaho State, Tax Anticipation Notes, G.O., 4.50%,
6/30/99.............................................. 5,000,000 5,025,100
------------
Illinois (4.0%):
Chicago, O'Hare International Airport Revenue,
American Airlines, Inc., 3.30%*, 12/1/98 (LOC-Royal
Bank of Canada)...................................... 7,000,000 7,000,000
------------
Iowa (7.0%):
Iowa Finance Authority, Solid Waste Disposal Revenue,
Cedar River Paper Co., 3.35%*, 12/1/98, AMT
(LOC-Union Bank of Switzerland)...................... 500,000 500,000
Iowa Finance Authority, Solid Waste Disposal Revenue,
Cedar River Paper Co., Series A, 3.35%*, 12/1/98, AMT
(LOC-Union Bank of Switzerland)...................... 4,300,000 4,300,000
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ---------- ------------
<S> <C> <C>
Iowa, continued:
Iowa Finance Authority, Solid Waste Disposal
Revenue,Cedar River Paper Co., Series A, 3.35%*,
12/1/98, AMT (LOC-Union Bank of Switzerland) ......... $3,000,000 $ 3,000,000
Iowa State, School Cash Anticipation Program, Series B,
4.25%, 1/28/99 (FSA Insured).......................... 4,275,000 4,279,583
------------
12,079,583
------------
Kentucky (6.5%):
Daviess County, Solid Waste Disposal Facilities
Revenue, Scott Paper Co., Series A, 3.35%*, 12/1/98,
AMT (LOC-Kimberly Clark Corp.)........................ 1,000,000 1,000,000
Daviess County, Solid Waste Disposal Facilities
Revenue, Scott Paper Co., Series B, 3.35%*, 12/1/98,
AMT (LOC-Kimberly Clark Corp.)........................ 4,250,000 4,250,000
Lexington-Fayette Urban County Airport, Series A,
3.40%*, 12/1/98, AMT (MBIA Insured)................... 6,000,000 6,000,000
------------
11,250,000
------------
Louisiana (6.3%):
Calcasieu Parish Industrial Development Board, Olin
Corp. Project, Series B, 3.30%*, 12/1/98 (LOC-Wachovia
Bank).. 5,100,000 5,100,000
St. Charles Parish Pollution Control Revenue, Shell Oil
Co. Project, 3.30%*, 12/1/98.......................... 5,800,000 5,800,000
------------
10,900,000
------------
Minnesota (3.7%):
Becker, Pollution Control Revenue, Northern States
Power Co., Series A, 3.05%, 12/8/98**................. 4,000,000 4,000,000
Minneapolis Community Development Agency, Pollution
Control Revenue, Northern States Power Co. Project,
3.30%*, 12/2/98....................................... 2,450,000 2,450,000
------------
6,450,000
------------
Missouri (9.0%):
Missouri State Environmental Improvement and Energy
Resource Authority, Pollution Control Revenue,
Monsanto Co. Project, 3.50%*, 12/2/98................. 1,000,000 1,000,000
Missouri State Health & Educational Facilities
Authority, Educational Facilities Revenue, St. Louis
University, 3.35%*, 12/1/98 (FGIC Insured)............ 1,100,000 1,100,000
Missouri State Health & Educational Facilities
Authority, Educational Facilities Revenue, Washington
University Project, Series A, 3.15%*, 12/2/98 (SPA-
Morgan Guaranty Trust)................................ 4,800,000 4,800,000
</TABLE>
Continued
19
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Tax-Exempt Money Market Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Amortized
Description Amount Cost
----------- ---------- ------------
<S> <C> <C>
Missouri, continued:
Missouri State Health & Educational Facilities
Authority, Educational Facilities Revenue, Washington
University Project, Series B, 3.15%*, 12/2/98 (SPA-
Morgan Guaranty Trust)............................... $1,000,000 $ 1,000,000
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Barnes Hospital
Project, 3.15%*, 12/2/98 (SPA-Morgan Guaranty
Trust)............................................... 4,900,000 4,900,000
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, St. Anthony
Medical Center, Series B, 3.10%*, 12/2/98 (SPA-ABN
AMRO Bank and RABOBANK Nederland Bank)............... 3,000,000 3,000,000
------------
15,800,000
------------
New York (3.5%):
Port Authority New York & New Jersey Special
Obligation Revenue, Versatile Structure Obligations,
Series 2, 3.25%*, 12/1/98 (SPA-Morgan Guaranty
Trust)............................................... 6,100,000 6,100,000
------------
Oklahoma (6.9%):
Oklahoma State Industrial Authority Revenue, Flexible-
Baptist Medical Center, Series B, 3.20%*, 12/2/98.... 7,000,000 7,000,000
Tulsa Industrial Authority Revenue, University of
Tulsa, Series B, 3.15%*, 12/2/98 (MBIA Insured)...... 5,000,000 5,000,000
------------
12,000,000
------------
Oregon (0.9%):
Oregon State, Series 73 G, G.O., 3.15%*, 12/2/98 (SPA-
Morgan Guaranty Trust)............................... 1,500,000 1,500,000
------------
Pennsylvania (6.9%):
Geisinger Authority Pennsylvania Health Systems,
Series B, 3.25%*, 12/1/98 (SPA-Morgan Guaranty
Trust)............................................... 6,000,000 6,000,000
Pennsylvania State Higher Education Facilities
Authority, College & University Revenue, Carnegie
Mellon University, Series C, 3.30%*, 12/1/98 (SPA-
Union Bank of Switzerland and Morgan Guaranty
Trust)............................................... 6,000,000 6,000,000
------------
12,000,000
------------
Tennessee (2.9%):
Memphis, Series A, G.O., 3.30%*, 12/2/98 (SPA-
Westdeutshe Landesbank).............................. 5,000,000 5,000,000
------------
Texas (17.5%):
Harris County, Health Facilities Development Corp.,
Health, Hospital & Nursing Home Revenue, Methodist
Hospital, 3.30%*, 12/1/98 (SPA-Morgan Guaranty
Trust)............................................... 6,000,000 6,000,000
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or
Security Principal Amortized
Description Amount Cost
----------- ---------- ------------
<S> <C> <C>
Texas, continued:
North Central Texas Health Facilities Development
Corp., Health, Hospital & Nursing Home Revenue,
Methodist Hospital of Dallas, Series B,
3.35%*, 12/1/98 (MBIA Insured)........................ $3,800,000 $ 3,800,000
Port Corpus Christi, Port, Airport & Marina Revenue,
Reynolds Metals Co., 3.40%*, 12/2/98 (LOC-Westdeutsche
Landesbank)........................................... 2,200,000 2,200,000
Sabine River Authority, Pollution Control Revenue,
Texas Utilities Electric Co., Series C, 3.80%*,
12/1/98, AMT (LOC-Union Bank of Switzerland).......... 6,000,000 6,000,000
Texas State Tax & Revenue Anticipation Notes, 4.50%,
8/31/99............................................... 5,000,000 5,039,038
Texas State, Multi-Modal-Water Development Board,
Series A, 3.30%*, 12/1/98 (SPA-Canadian Imperial
Bank)................................................. 7,600,000 7,600,000
------------
30,639,038
------------
Utah (3.5%):
Salt Lake County, Pollution Control Revenue, SVC
Station Holdings Project, British Petroleum Co.,
Series B, 3.30%*, 12/1/98............................. 6,000,000 6,000,000
------------
TOTAL MUNICIPAL BONDS 161,715,567
------------
Investment Companies (1.7%):
Federated Tax-Free Fund................................ 1,000 1,000
Nuveen Tax Exempt Fund................................. 2,904,000 2,904,000
------------
TOTAL INVESTMENT COMPANIES 2,905,000
------------
TOTAL INVESTMENTS
(Amortized Cost $173,220,567)(a) (99.8%)......................... 173,220,567
Other assets in excess of liabilities (0.2%)...................... 411,071
------------
TOTAL NET ASSETS (100.0%)......................................... $173,631,638
============
</TABLE>
- -----
* Variable rate investments. The rate presented on the Schedule of Portfolio
Investments is the rate in effect at November 30, 1998. The date presented
reflects the next rate change date.
** Put and demand features exist allowing the fund to require the repurchase
of the investment within variable time periods ranging from daily, weekly,
monthly or semi-annually. Maturity date reflects the next put date.
+ Effective yield at date of purchase.
(a) Cost for federal income tax and financial reporting purposes are the same.
AMTAlternative Minimum Tax
FGICFinancial Guaranty Insurance Corp.
FSAFinancial Securities Assurance, Inc.
G.O.General Obligation
LOC Letter of Credit
MBIAMunicipal Bond Insurance Association
SPAStandby Purchase Agreement
See notes to financial statements
20
<PAGE>
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $173,220,567)................ $173,220,567
Interest and dividends receivable........................ 736,604
Prepaid expenses and other assets........................ 3,783
------------
Total Assets............................................ 173,960,954
Liabilities:
Payable to custodian for overdraft....................... $ 37
Dividends payable........................................ 240,264
Accrued expenses and other payables:
Investment advisory fees................................ 49,772
Administration fees..................................... 3,334
Distribution and administrative services fees........... 10,036
Custodian fees.......................................... 5,763
Other liabilities....................................... 20,110
--------
Total Liabilities....................................... 329,316
------------
Net Assets:
Capital.................................................. 173,619,478
Undistributed net investment income...................... 12,160
------------
Net Assets............................................... $173,631,638
============
Investor A Shares
Net Assets.............................................. $ 13,980,435
Shares.................................................. 13,980,397
Offering and redemption price per share................. $1.00
=====
Trust Shares
Net Assets.............................................. $ 37,541,379
Shares.................................................. 37,541,346
Offering and redemption price per share................. $1.00
=====
Trust II Shares
Net Assets.............................................. $122,109,824
Shares.................................................. 122,109,824
Offering and redemption price per share................. $1.00
=====
</TABLE>
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income............................................ $5,834,827
Dividend income............................................ 55,704
----------
Total Income.............................................. 5,890,531
Expenses:
Investment advisory fees................................... $680,210
Administration fees........................................ 170,052
Distribution and services fees, Investor A Shares.......... 34,146
Administrative services fees, Trust Shares................. 378,482
Accounting fees............................................ 2,468
Custodian fees............................................. 21,786
Directors' fees and expenses............................... 2,229
Transfer agent fees........................................ 49,950
Other fees................................................. 77,668
--------
Total expenses before voluntary fee reductions............ 1,416,991
Expenses voluntarily reduced.............................. (384,730)
----------
Net Expenses.............................................. 1,032,261
----------
Net investment income...................................... 4,858,270
----------
Change in net assets resulting from operations............. $4,858,270
==========
</TABLE>
See notes to financial statements
21
<PAGE>
THE ARCH FUND, INC
Tax-Exempt Money Market Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................ $ 4,858,270 $ 4,462,657
------------ ------------
Change in net assets resulting from operations.... 4,858,270 4,462,657
------------ ------------
Distributions to Investor A Shareholders:
From net investment income....................... (365,876) (476,137)
Distributions to Trust Shareholders:
From net investment income....................... (4,357,878) (3,986,520)
Distributions to Trust II Shareholders:
From net investment income....................... (134,516) ---
------------ ------------
Change in net assets from shareholder distribu-
tions............................................ (4,858,270) (4,462,657)
------------ ------------
Change in net assets from capital transactions.... 14,325,565 45,596,094
------------ ------------
Change in net assets.............................. 14,325,565 45,596,094
Net Assets:
Beginning of period.............................. 159,306,073 113,709,979
------------ ------------
End of period.................................... $173,631,638 $159,306,073
============ ============
</TABLE>
See notes to financial statements
22
<PAGE>
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
Six Months
Ended
Years Ended November 30, November 30, Years Ended May 31,
---------------------------- ------------ -----------------------
1998 1997 1996 1995 (d) 1995 (a) 1994
------- -------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- ------- --------- ----------
Investment Activities
Net investment income.. 0.027 0.028 0.028 0.014 0.027 0.017
------- -------- ------- ------- --------- ----------
Total from Investment
Activities............ 0.027 0.028 0.028 0.014 0.027 0.017
------- -------- ------- ------- --------- ----------
Distributions
Net investment income.. (0.027) (0.028) (0.028) (0.014) (0.027) (0.017)
------- -------- ------- ------- --------- ----------
Total Distributions.... (0.027) (0.028) (0.028) (0.014) (0.027) (0.017)
------- -------- ------- ------- --------- ----------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= ========= ==========
Total Return............ 2.72 % 2.88 % 2.83 % 1.45 %(b) 2.70 % 1.73 %
Ratios/Supplementary Da-
ta:
Net Assets at end of pe-
riod (000)............. $13,980 $ 15,789 $17,984 $ 5,403 $ 5,138 $ 8,631
Ratio of expenses to av-
erage net assets....... 0.79 % 0.77 % 0.75 % 0.94 %(c) 0.84 % 0.76 %
Ratio of net investment
income to average net
assets................. 2.68 % 2.82 % 2.78 % 2.87 %(c) 2.63 % 1.72 %
Ratio of expenses to av-
erage net assets*...... 0.84 % 0.82 % 0.80 % 0.99 %(c) 0.93 % 0.86 %
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) On September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares. (b) Not annualized. (c) Annualized. (d) Upon reorganizing
as a portfolio of the ARCH Fund, Inc., the Tax-Exempt Money Market Portfolio
changed its fiscal year end from May 31 to November 30.
Financial Highlights, Trust Shares
<CAPTION>
Six Months
Ended
Years Ended November 30, November 30, Years Ended May 31,
---------------------------- ------------ -----------------------
1998 1997 1996 1995 (c) 1995 1994
------- -------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- ------- --------- ----------
Investment Activities
Net investment income.. 0.029 0.030 0.030 0.016 0.029 0.020
------- -------- ------- ------- --------- ----------
Total from Investment
Activities............ 0.029 0.030 0.030 0.016 0.029 0.020
------- -------- ------- ------- --------- ----------
Distributions
Net investment income.. (0.029) (0.030) (0.030) (0.016) (0.029) (0.020)
------- -------- ------- ------- --------- ----------
Total Distributions.... (0.029) (0.030) (0.030) (0.016) (0.029) (0.020)
------- -------- ------- ------- --------- ----------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= ========= ==========
Total Return............ 2.92 % 3.08 % 3.06 % 1.57 %(a) 2.93 % 1.97 %
Ratios/Supplementary Da-
ta:
Net Assets at end of pe-
riod (000)............. $37,541 $143,517 $95,726 $78,031 $ 85,324 $ 112,594
Ratio of expenses to av-
erage net assets....... 0.59 % 0.58 % 0.53 % 0.70 %(b) 0.61 % 0.52 %
Ratio of net investment
income to average net
assets................. 2.88 % 3.04 % 3.01 % 3.10 %(b) 2.87 % 1.95 %
Ratio of expenses to av-
erage net assets*...... 0.84 % 0.83 % 0.58 % 0.75 %(b) 0.70 % 0.86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Not annualized. (b) Annualized. (c) Upon reorganizing as a Portfolio of
the ARCH Fund, Inc., the Tax-Exempt Money Market Portfolio changed its fiscal
year end from May 31 to November 30.
23
<PAGE>
THE ARCH FUND, INC.
Tax-Exempt Money Market Portfolio
Financial Highlights, Trust II Shares
<TABLE>
<CAPTION>
November 16, 1998
to
November 30,
1998 (a)
-----------------
<S> <C>
Net Asset Value, Beginning of Period......................... $ 1.00
--------
Investment Activities
Net investment income....................................... 0.001
--------
Total from Investment Activities............................ 0.001
--------
Distributions
Net investment income....................................... (0.001)
--------
Total Distributions......................................... (0.001)
--------
Net Asset Value, End of Period............................... $ 1.00
========
Total Return................................................. 0.11 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............................ $122,110
Ratio of expenses to average net assets...................... 0.57 %(c)
Ratio of net investment income to average net assets......... 2.69 %(c)
Ratio of expenses to average net assets*..................... 0.62 %(c)
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(a) Period from commencement of operations. (b) Not annualized. (c)
Annualized.
24
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
25
<PAGE>
The ARCH Growth & Income Equity Portfolio
Q. What was the environment like in the stock market during the 12 months
through November 30, 1998?
A. Low inflation and moderate economic growth supported equity prices during
most of the period. The market's gains were interrupted by a sharp decline
during the summer and early fall, but stocks rebounded in October and November.
The S&P 500 Stock Index finished the period up 23.68%, with growth stocks
leading the way.
The market's decline reflected investors' concerns that financial troubles in
Asia and elsewhere would spill over into the U.S. economy. But while corporate
earnings were relatively flat, the Federal Reserve Board's decision to reduce
short-term interest rates late in the period helped relieve those concerns.
Q. What types of stocks did you emphasize in those conditions?
A. We continued to maintain a value orientation in the Fund's portfolio,
seeking individual securities that we believed offered especially good value.
We sold shares of some large companies during the second half of the year.
Those firms included Nordstrom and Ascend Communications (2.2%), which had
exceeded our price targets, and Union Texas Petroleum, which was acquired by
Atlantic Richfield (1.9%). The Portfolio continued to hold shares of technology
stocks, such as Applied Materials (2.1%), Microsoft (1.3%) and First Data
Corporation (1.8%), as well as shares of drug companies, such as Bristol Myers
Squibb Co. (2.5%) and Merck (2.2%).*
Q. What's your outlook for the stock market, and how will you manage the
Portfolio going forward?
A. Rather than attempt to predict market fluctuations, we look for value in
individual companies whose securities are trading at attractive prices given
the firm's growth potential. It seems likely that we will discover good long-
term opportunities in areas that have, recently, performed relatively poorly,
such as energy.
- -----
* Portfolio composition is subject to change.
26
<PAGE>
The ARCH Growth & Income Equity Portfolio
[ARCH GROWTH & INCOME EQUITY PORTFOLIO INVESTOR A CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A Investor B
(No Load) (Load)* (No CDSC) S&P 500
--------- ------ --------- -------
11/30/88 10,000 9,550 10,000 10,000
11/30/89 12,712 12,139 12,708 13,078
11/30/90 12,540 11,976 12,533 12,617
11/30/91 14,722 14,059 14,712 15,186
11/30/92 17,751 16,953 17,732 17,985
11/30/93 19,461 18,586 19,439 19,797
11/30/94 19,502 18,625 19,479 20,010
11/30/95 25,733 24,575 25,557 27,395
11/30/96 31,649 30,225 31,257 35,026
11/30/97 39,213 37,449 38,462 45,022
11/30/98 44,359 42,369 43,205 55,677
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Year
------ ------ -------
Investor A (No Load) 9.35% 17.12% 15.67%
Investor A* 4.40% 16.05% 15.14%
Investor B (No CDSC) 8.59% 16.53% 15.37%
Investor B (CDSC)** 4.07% 16.42% 15.37%
[ARCH GROWTH & INCOME EQUITY PORTFOLIO TRUST/INSTITUTIONAL CHART APPEARS HERE]
Value of a $10,000 Investment
Trust Institutional S&P 500
----- ------------- -------
11/30/88 10,000 10,000 10,000
11/30/89 12,708 12,712 13,078
11/30/90 12,533 12,540 12,617
11/30/91 14,712 14,719 15,186
11/30/92 17,732 17,748 17,985
11/30/93 19,439 19,457 19,797
11/30/94 19,510 19,496 20,010
11/30/95 25,806 25,708 27,395
11/30/96 31,855 31,642 35,026
11/30/97 39,679 39,207 45,022
11/30/98 45,018 44,354 55,677
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Year
------ ------ -------
Trust 9.67% 17.49% 15.84%
Institutional 9.36% 17.12% 15.67%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Growth & Income Equity Portfolio is measured
against the Standard & Poor's 500 Stock Index, an unmanaged index generally
representative of the U.S. stock market. Investors are unable to purchase the
index directly, although they can invest in the underlying securities. The
performance of the index does not reflect the deduction of expenses associated
with a mutual fund, such as investment management and fund accounting fees. By
contrast, the performance of the Portfolio shown on the graph reflects the
deduction of these value-added services, as well as the deduction of a 4.50%
sales charge on Investor A shares and the applicable contingent deferred sales
charge (CDSC) on Investor B shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares, for periods prior to such date, represent the
performance for Investor A shares of the Portfolio, which have been restated to
reflect the contingent deferred sales charges payable by holders of Investor B
shares who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance
would have been reduced.
The Investor B (CDSC) is not included on the above graph due to the fact that
the performance is now over 6 years, and the CDSC charges no longer apply. The
performance for the Investor B (CDSC) will now mirror Investor B (No CDSC)
performance.
Institutional shares were initially offered on January 3, 1994. The
performance figures for Institutional shares, for periods prior to such date,
represent the performance for Investor A shares of the portfolio.
27
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Growth & Income Equity Portfolio November 30, 1998
Commercial Paper (0.2%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ------------
<S> <C> <C>
Finance (0.2%):
American General Finance, 5.37%, 12/1/98................ $743,000 $ 743,000
------------
TOTAL COMMERCIAL PAPER 743,000
------------
Common Stocks (98.4%):
Banking (8.0%):
Bank One Corp. ......................................... 179,405 9,205,719
Chase Manhattan Corp. .................................. 145,800 9,249,187
Crestar Financial Corp. ................................ 120,900 8,024,738
First Union Corp. ...................................... 174,950 10,628,212
------------
37,107,856
------------
Beverages (2.0%):
PepsiCo, Inc. .......................................... 237,700 9,196,019
------------
Building Products (3.9%):
Masco Corp. ............................................ 325,000 9,384,375
Sherwin-Williams Co. ................................... 300,100 8,515,338
------------
17,899,713
------------
Business Services (1.8%):
First Data Corp. ....................................... 310,000 8,273,125
------------
Chemicals (4.2%):
Avery Dennison Corp. ................................... 135,004 6,471,753
Ecolab, Inc. ........................................... 196,600 6,082,313
Millipore Corp. ........................................ 91,300 2,567,813
Solutia, Inc. .......................................... 200,000 4,475,000
------------
19,596,879
------------
Commercial Services (1.2%):
H & R Block, Inc. ...................................... 120,000 5,392,500
------------
Computer Software (4.7%):
Adaptec, Inc.(b)........................................ 525,000 8,531,250
Microsoft Corp.(b)...................................... 50,000 6,100,000
Network Associates, Inc.(b)(c).......................... 141,000 7,173,375
------------
21,804,625
------------
Consumer Goods & Services (2.1%):
Newell Co.(c)........................................... 217,627 9,629,995
------------
Containers & Packaging (2.9%):
Crown Cork & Seal Co., Inc. ............................ 132,150 4,460,063
Sealed Air Corp.(b)..................................... 200,000 8,825,000
------------
13,285,063
------------
Cosmetics (1.6%):
Estee Lauder Cos., Class A(c)........................... 100,000 7,506,250
------------
Electrical & Electronic (4.2%):
Analog Devices(b)....................................... 130,500 2,667,094
General Electric Co. ................................... 100,500 9,095,250
W.W. Grainger, Inc. .................................... 188,104 7,947,394
------------
19,709,738
------------
</TABLE>
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ------------
<S> <C> <C>
Financial Services (5.7%):
Heller Financial, Inc. ................................. 30,000 $ 785,625
MBNA Corp. ............................................. 450,000 10,209,374
SLM Holding Corp. ...................................... 203,728 8,964,032
Washington Mutual, Inc. ................................ 168,000 6,510,000
------------
26,469,031
------------
Food Products & Services (2.4%):
IBP, Inc. .............................................. 447,200 11,347,700
------------
Health Care (2.7%):
C.R. Bard, Inc. ........................................ 139,600 6,395,425
Columbia/HCA Healthcare Corp.(c)........................ 250,000 6,156,250
------------
12,551,675
------------
Oil & Exploration, Production & Services (3.5%):
Murphy Oil Corp. ....................................... 154,800 6,172,650
Vastar Resources, Inc. ................................. 243,600 9,881,025
------------
16,053,675
------------
Oil & Gas Equipment/Services (2.0%):
Baker Hughes, Inc. ..................................... 505,000 9,247,813
------------
Oil Companies - Integrated (4.1%):
Atlantic Richfield Co. ................................. 130,000 8,645,000
USX-Marathon Group ..................................... 360,500 10,229,188
------------
18,874,188
------------
Paper & Related (1.1%):
Mead Corp. ............................................. 162,800 4,934,875
------------
Pharmaceuticals (11.1%):
Allergan, Inc. ......................................... 142,550 8,677,731
Bristol-Myers Squibb Co. ............................... 93,916 11,510,579
Eli Lilly & Co. ........................................ 120,000 10,762,500
Merck & Co., Inc. ...................................... 66,000 10,221,750
Schering-Plough Corp. .................................. 103,000 10,956,625
------------
52,129,185
------------
Restaurants (1.6%):
Tricon Global Restaurants, Inc.(b)...................... 167,820 7,646,299
------------
Retail Stores (6.5%):
Dillards, Inc., Class A................................. 305,900 10,515,312
Office Depot, Inc.(b)................................... 200,000 6,500,000
Pep Boys--Manny, Moe, & Jack............................ 450,000 6,356,250
Wal-Mart Stores, Inc. .................................. 90,000 6,778,125
------------
30,149,687
------------
Semiconductors (3.7%):
Applied Materials, Inc.(b)(c)........................... 247,200 9,579,000
KLA-Tencor Corp.(b)..................................... 225,000 7,664,063
------------
17,243,063
------------
Telecommunications (3.3%):
Ascend Communications, Inc.(b)(c)....................... 180,000 10,113,750
Frontier Corp. ......................................... 174,000 5,241,750
------------
15,355,500
------------
</TABLE>
Continued
28
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Growth & Income Equity Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Tobacco (2.2%):
Philip Morris Companies, Inc. ......................... 185,500 $ 10,376,406
------------
Transportation & Shipping (2.1%):
Burlington Northern Santa Fe........................... 289,500 9,843,000
------------
Utilities - Gas & Electric (5.5%):
CINergy Corp. ......................................... 300,000 10,368,750
Consolidated Natural Gas Co............................ 142,240 7,725,410
New Century Energies, Inc. ............................ 150,000 7,209,375
------------
25,303,535
------------
Utilities - Telephone (2.0%):
GTE Corp. ............................................. 150,000 9,300,000
------------
Wholesale Distribution (2.3%):
Sysco Corp. ........................................... 400,070 10,776,886
------------
TOTAL COMMON STOCKS 457,004,281
------------
Investment Companies (0.5%):
Cash Assets Trust Money Market Fund.................... 2,160,000 2,160,000
------------
TOTAL INVESTMENT COMPANIES 2,160,000
------------
Short-Term Securities Held as Collateral (8.6%):
Repurchase agreements (8.6%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $13,523,500,
collateralized by $16,806,266 various U.S. Government
Agency securities, 0.00%-8.50%, 12/3/98-9/11/28,
market value $13,789,099)............................. 13,521,376 13,521,376
Nationsbanc Montgomery Securities, Inc., 5.68%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity
$1,536,770, collateralized by $1,723,708 various U.S.
Government Agency mortgages, 0.00%-10.50%, 5/1/00-
12/1/28, market value $1,567,258)..................... 1,536,528 1,536,528
</TABLE>
Short-Term Securities Held as Collateral, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $6,761,711,
collateralized by $34,350,284 various U.S.
Government Agency mortgages, 0.00%-8.00%, 10/25/99-
8/1/28, market value $6,895,902).................... $6,760,688 $ 6,760,688
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $4,549,609,
collateralized by $5,334,999 various U.S. Treasury
Notes, 3.63%-8.75%, 10/31/99-11/15/28, market value
$4,639,912)......................................... 4,548,933 4,548,933
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $13,523,366,
collateralized by $16,179,516 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$13,791,803)........................................ 13,521,375 13,521,375
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 39,888,900
------------
TOTAL INVESTMENTS
(Cost $367,232,228)(a) (107.7%)................................ 499,796,181
Liabilities in excess of other assets. (-7.7%).................. (35,566,561)
------------
TOTAL NET ASSETS (100.0%)....................................... $464,229,620
============
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$4,500,000. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
Unrealized appreciation.. $131,939,120
Unrealized depreciation.. (3,875,167)
------------
Net unrealized apprecia-
tion.................... $128,063,953
============
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
See notes to financial statements
29
<PAGE>
THE ARCH FUND, INC.
Growth & Income Equity Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $327,343,328)............ $459,907,281
Repurchase agreements, at value
(cost $39,888,900).................................. 39,888,900
------------
Total investments................................... 499,796,181
Cash................................................. 52
Interest and dividends receivable.................... 460,510
Receivable for capital shares issued................. 523,499
Receivable for investments sold...................... 8,033,785
Prepaid expenses and other assets.................... 826
------------
Total Assets........................................ 508,814,853
Liabilities:
Dividends payable.................................... $ 345,341
Payable for investments purchased.................... 3,972,999
Payable for capital shares redeemed.................. 16,932
Payable for return of collateral received............ 39,888,900
Accrued expenses and other payables:
Investment advisory fees............................ 212,465
Administration fees................................. 9,133
Distribution and administrative services fees....... 45,841
Custodian fees...................................... 34,648
Other liabilities................................... 58,974
-----------
Total Liabilities................................... 44,585,233
------------
Net Assets:
Capital.............................................. 300,571,913
Distributions in excess of net investment income..... (7,807)
Accumulated net realized gains from investment
transactions........................................ 31,101,561
Net unrealized appreciation of investments........... 132,563,953
------------
Net Assets........................................... $464,229,620
============
Investor A Shares
Net Assets.......................................... $ 48,868,457
Shares.............................................. 2,554,054
Redemption price per share.......................... $19.13
======
Maximum Sales Charge -- Investor A Shares............ 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share.................................... $20.03
======
Investor B Shares
Net Assets.......................................... $ 9,040,390
Shares.............................................. 478,600
Offering price per share*........................... $18.89
======
Trust Shares
Net Assets.......................................... $299,188,045
Shares.............................................. 15,575,836
Offering and redemption price per share............. $19.21
======
Institutional Shares
Net Assets.......................................... $107,132,728
Shares.............................................. 5,599,076
Offering and redemption price per share............. $19.13
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income....................................... $ 1,364,898
Dividend income....................................... 6,327,318
Income from securities lending........................ 43,262
-----------
Total Income......................................... 7,735,478
Expenses:
Investment advisory fees.............................. $2,595,988
Administration fees................................... 943,842
Distribution and services fees, Investor A Shares..... 145,541
Distribution and services fees, Investor B Shares..... 79,370
Administrative services fees, Trust Shares............ 939,960
Administrative services fees, Institutional Shares.... 306,428
Accounting fees....................................... 4,623
Custodian fees........................................ 149,479
Directors' fees and expenses.......................... 5,397
Transfer agent fees................................... 148,206
Other fees............................................ 134,077
----------
Total expenses before voluntary fee reductions....... 5,452,911
Expenses voluntarily reduced......................... (1,411,860)
-----------
Net Expenses......................................... 4,041,051
-----------
Net investment income................................. 3,694,427
-----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions....... 32,365,930
Net change in unrealized appreciation from
investments.......................................... 6,355,836
-----------
Net realized/unrealized gains from investments........ 38,721,766
-----------
Change in net assets resulting from operations........ $42,416,193
===========
</TABLE>
See notes to financial statements
30
<PAGE>
THE ARCH FUND, INC.
Growth & Income Equity Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 3,694,427 $ 3,514,224
Net realized gains from investment transactions... 32,365,930 78,993,806
Net change in unrealized appreciation from
investments...................................... 6,355,836 9,568,676
------------ ------------
Change in net assets resulting from operations..... 42,416,193 92,076,706
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (287,715) (285,613)
In excess of net investment income................ (15,741) (66,559)
From net realized gains from investment
transactions..................................... (7,816,180) (2,994,148)
Distributions to Investor B Shareholders:
In excess of net investment income................ (11,629) (19,623)
From net realized gains from investment
transactions..................................... (1,082,825) (278,321)
Distributions to Trust Shareholders:
From net investment income........................ (2,804,823) (3,247,480)
From net realized gains from investment
transactions..................................... (54,343,715) (27,210,627)
Distributions to Institutional Shareholders:
From net investment income........................ (608,619) (539,466)
In excess of net investment income................ (37,514) (149,417)
From net realized gains from investment
transactions..................................... (15,645,712) (5,714,817)
------------ ------------
Change in net assets from shareholder
distributions..................................... (82,654,473) (40,506,071)
------------ ------------
Change in net assets from capital transactions..... 36,928,012 (46,929,826)
------------ ------------
Change in net assets............................... (3,310,268) 4,640,809
Net Assets:
Beginning of period............................... 467,539,888 462,899,079
------------ ------------
End of period..................................... $464,229,620 $467,539,888
============ ============
</TABLE>
See notes to financial statements
31
<PAGE>
THE ARCH FUND, INC.
Growth & Income Equity Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
---------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income........................................ $ 3,694,427
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities................................ (5,207,017,745)
Proceeds from disposition of investment securities........... 5,250,457,864
Cost of investments purchased with cash collateral from
securities lending.......................................... (39,888,900)
Decrease in dividends and interest receivable................ 9,268
Increase in payable for return of collateral received from
securities lending.......................................... 39,888,900
Increase in accrued expenses................................. 43,944
Decrease in prepaid expenses................................. 18,420
Net amortization/accretion from investments.................. (1,364,898)
---------------
Net cash provided by operating activities.................... 45,841,280
---------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................. 68,049,679
Cost of shares redeemed...................................... (88,573,072)
Cash distributions paid...................................... (25,318,049)
---------------
Net cash used in financing activities........................ (45,841,442)
---------------
Decrease in cash.............................................. (162)
Cash:
Beginning balance............................................ 214
---------------
Ending balance............................................... $ 52
===============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $57,228,135.
See notes to financial statements
32
<PAGE>
THE ARCH FUND, INC.
Growth & Income Equity Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
------------------------------------------------
1998 1997 1996 1995 1994 (a)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 21.12 $ 18.67 $ 16.30 $ 12.70 $ 14.74
------- ------- ------- ------- -------
Investment Activities
Net investment income....... 0.12 0.11 0.20 0.23 0.20
Net realized and unrealized
gains (losses) from
investments................ 1.58 3.96 3.32 3.74 (0.17)
------- ------- ------- ------- -------
Total from Investment
Activities................. 1.70 4.07 3.52 3.97 0.03
------- ------- ------- ------- -------
Distributions
Net investment income....... (0.11) (0.13) (0.20) (0.23) (0.21)
In excess of net investment
income..................... (0.01) (0.03) (0.01) -- --
Net realized gains.......... (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net realized
gains...................... -- -- -- -- (1.68)
------- ------- ------- ------- -------
Total Distributions......... (3.69) (1.62) (1.15) (0.37) (2.07)
------- ------- ------- ------- -------
Net Asset Value, End of
Period...................... $ 19.13 $ 21.12 $ 18.67 $ 16.30 $ 12.70
======= ======= ======= ======= =======
Total Return (excludes sales
charge)..................... 9.35 % 23.90 % 22.99 % 31.95 % 0.20 %
Ratios/Supplementary Data:
Net Assets at end of period
(000)....................... $48,868 $46,372 $38,229 $25,082 $18,343
Ratio of expenses to average
net assets.................. 1.04 % 1.04 % 1.05 % 1.05 % 1.05 %
Ratio of net investment
income to average net
assets...................... 0.59 % 0.60 % 1.20 % 1.59 % 1.45 %
Ratio of expenses to average
net assets*................. 1.14 % 1.14 % 1.15 % 1.15 % 1.15 %
Portfolio turnover**......... 91.23 % 57.11 % 63.90 % 58.50 % 65.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) On September 27,
1994, the Portfolio redesignated the Investor Shares as "Investor A" Shares,
and authorized the issuance of a series of shares designated as "Investor B"
Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the years ended March 1, 1995
November 30, to
--------------------------- November 30,
1998 1997 1996 1995 (a)
------- ------ ------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 20.94 $18.58 $16.23 $13.43
------- ------ ------ ------
Investment Activities
Net investment income (loss).... (0.02)(d) (0.02) 0.11 0.14
Net realized and unrealized
gains from investments......... 1.57 3.93 3.30 2.81
------- ------ ------ ------
Total from Investment
Activities..................... 1.55 3.91 3.41 2.95
------- ------ ------ ------
Distributions
Net investment income........... -- -- (0.11) (0.15)
In excess of net investment
income......................... (0.03) (0.09) (0.01) --
Net realized gains.............. (3.57) (1.46) (0.94) --
------- ------ ------ ------
Total Distributions............. (3.60) (1.55) (1.06) (0.15)
------- ------ ------ ------
Net Asset Value, End of Period... $ 18.89 $20.94 $18.58 $16.23
======= ====== ====== ======
Total Return (excludes sales
charge)......................... 8.59 % 23.04 % 22.29 % 31.20 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000)........................... $ 9,040 $6,349 $3,537 $ 781
Ratio of expenses to average net
assets.......................... 1.74 % 1.73 % 1.75 % 1.75 %(c)
Ratio of net investment income to
average net assets.............. (0.10)% (0.11)% 0.49 % 0.87 %(c)
Ratio of expenses to average net
assets*......................... 1.84 % 1.83 % 1.85 % 1.85 %(c)
Portfolio turnover**............. 91.23 % 57.11 % 63.90 % 58.50 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
33
<PAGE>
THE ARCH FUND, INC.
Growth & Income Equity Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 21.19 $ 18.71 $ 16.32 $ 12.72 $ 14.74
-------- -------- -------- -------- --------
Investment Activities
Net investment income.. 0.17 0.23 0.24 0.27 0.22
Net realized and
unrealized gains
(losses) from
investments........... 1.59 3.96 3.34 3.74 (0.17)
-------- -------- -------- -------- --------
Total from Investment
Activities............ 1.76 4.19 3.58 4.01 0.05
-------- -------- -------- -------- --------
Distributions
Net investment income.. (0.17) (0.25) (0.24) (0.27) (0.21)
In excess of net
investment income..... -- -- (0.01) -- --
Net realized gains..... (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net
realized gains........ -- -- -- -- (1.68)
-------- -------- -------- -------- --------
Total Distributions.... (3.74) (1.71) (1.19) (0.41) (2.07)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 19.21 $ 21.19 $ 18.71 $ 16.32 $ 12.72
======== ======== ======== ======== ========
Total Return............ 9.67 % 24.55 % 23.45 % 32.27 % 0.36 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $299,188 $322,304 $348,183 $286,546 $235,955
Ratio of expenses to
average net assets..... 0.74 % 0.74 % 0.75 % 0.75 % 0.75 %
Ratio of net investment
income to average net
assets................. 0.90 % 0.91 % 1.50 % 1.89 % 1.72 %
Ratio of expenses to
average net assets*.... 1.14 % 1.14 % 0.85 % 0.85 % 1.15 %
Portfolio turnover**.... 91.23 % 57.11 % 63.90 % 58.50 % 65.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 21.12 $ 18.67 $ 16.29 $ 12.70 $ 14.74
-------- -------- -------- -------- --------
Investment Activities
Net investment income.. 0.12 0.12 0.20 0.23 0.20
Net realized and
unrealized gains
(losses) from
investments........... 1.58 3.95 3.33 3.74 (0.17)
-------- -------- -------- -------- --------
Total from Investment
Activities............ 1.70 4.07 3.53 3.97 0.03
-------- -------- -------- -------- --------
Distributions
Net investment income.. (0.11) (0.13) (0.20) (0.24) (0.21)
In excess of net
investment income..... (0.01) (0.03) (0.01) -- --
Net realized gains..... (3.57) (1.46) (0.94) (0.14) (0.18)
In excess of net
realized gains........ -- -- -- -- (1.68)
-------- -------- -------- -------- --------
Total Distributions.... (3.69) (1.62) (1.15) (0.38) (2.07)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 19.13 $ 21.12 $ 18.67 $ 16.29 $ 12.70
======== ======== ======== ======== ========
Total Return............ 9.36 % 23.90 % 23.08 % 31.88 % 0.19 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $107,133 $ 92,515 $ 72,950 $ 40,228 $ 21,897
Ratio of expenses to
average net assets..... 1.04 % 1.04 % 1.05 % 1.05 % 1.05 %
Ratio of net investment
income to average net
assets................. 0.60 % 0.60 % 1.19 % 1.58 % 1.41 %
Ratio of expenses to
average net assets*.... 1.14 % 1.14 % 1.15 % 1.15 % 1.16 %
Portfolio turnover**.... 91.23 % 57.11 % 63.90 % 58.50 % 65.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) On January 3, 1994, the Portfolio issued a new series of shares which were
designated as "Institutional" Shares. The financial highlights presented for
the period prior to January 3, 1994 represent financial highlights applicable
to the Investor Shares.
34
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE>
The ARCH Small Cap Equity Portfolio+
Q. How did small-company stocks perform during the 12 months ended November
30, 1998?
A. During most of the period the environment for small-capitalization stocks
was difficult due to problems in Asia, Latin America and Russia, as well as
political uncertainty in the United States. The growing fear of a global
recession led to extreme volatility in the overall market, causing investors to
seek the safe havens of blue-chip equities and Treasury bonds. From early
October until the end of the period, however, small-cap stocks performed
extremely well as a recession appeared unlikely, and investors took advantage
of those shares' attractive valuations.
Investors before that rebound had avoided small-company stocks despite
extremely attractive valuations. As a result, according to Bloomberg, the
market value of the average small firm (market capitalization of less than $250
million) declined 53.9% from its 52-week high during the period ended August
31, 1998. By comparison, the market value of the average mid-sized company
(market capitalization of less than $1 billion) fell 45%. And the value of the
average large company's market value (market capitalization greater than $20
billion) declined only 26%.
Q. What was your strategy in that environment?
A. Our strategy does not change: We look for the best relative values across
various sectors of the market. During the 12-month period, we steadily added to
our holdings in the technology sector. This sector was hurt by the Asian crisis
and concerns about excessive inventories at many firms. That environment pushed
down the share prices of some solid technology companies, and we were able to
find extremely attractive valuations in the sector.
For example, we added to our holdings in PRI Automation (3.0% of the
Portfolio's net assets), a leading supplier of advanced robotics technology
used in semiconductor manufacturing. We also added shares of Kulicke & Soffa
Industries (2.7%), a leading manufacturer of semiconductor packaging, as well
as Phototronics (1.9%), a leading manufacturer of photomask equipment used in
the fabrication of semiconductors. In addition, we've added shares of companies
such as SMART Modular Technologies (1.9%) and Flextronics (1.1%), which
benefited from the trend among technology companies to outsource manufacturing
of various components and products.*
Q. What is your outlook for small-company stocks going forward, and how will
you manage the Portfolio with that in mind?
A. We believe that small-company stocks continue to offer good value, with
lower price-to-earnings ratios and lower price-to-book ratios than large-
company shares. Small-company stocks also offer potentially greater earnings
growth, in part because weak foreign economies reduce the profits of domestic
blue-chip corporations with foreign exposure. Although liquidity concerns and
fears of a global recession may dampen small-caps' performance, it is likely
they could perform well in the coming months.
- -----
+ Small-capitalization funds typically carry additional risks since smaller
companies generally have a higher risk of failure. Historically, small
company stocks have experienced a greater degree of market volatility than
large company stocks on average.
* Portfolio composition is subject to change.
36
<PAGE>
The ARCH Small Cap Equity Portfolio+
[ARCH SMALL CAP EQUITY PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A Investor B Russell 2000
(No Load) (Load)* (No CDSC) Index
--------- ------ --------- -----
May-92 10,000 9,551 10,000 10,000
Nov-92 11,255 10,750 11,255 11,032
Nov-93 13,478 12,873 13,478 13,128
Nov-94 14,473 13,823 14,472 12,981
Nov-95 17,579 16,790 17,487 16,680
Nov-96 19,049 18,193 18,822 19,434
Nov-97 22,754 21,733 22,326 23,984
May-98 24,135 23,052 23,593 25,553
Nov-98 19,525 18,649 19,023 22,396
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (5/6/92)
------ ------ --------
Investor A (No Load) -14.19% 7.69% 10.72%
Investor A* -18.06% 6.71% 9.95%
Investor B (No CDSC) -14.79% 7.14% 10.28%
Investor B (CDSC)** -18.70% 7.00% 10.28%
[ARCH SMALL CAP EQUITY PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Trust Institutional Russell 2000 Index
----- ------------- ------------------
May-92 10,000 10,000 10,000
Nov-92 11,255 11,255 11,032
Nov-93 13,478 13,478 13,128
Nov-94 14,497 14,436 12,981
Nov-95 17,642 17,531 16,680
Nov-96 19,181 19,002 19,434
Nov-97 22,973 22,691 23,984
May-98 24,392 24,056 25,553
Nov-98 19,784 19,475 22,396
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (5/6/92)
------ ------ --------
Trust -13.90% 7.98% 10.94%
Institutional -14.17% 7.64% 10.68%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Small Cap Equity Portfolio is measured against
the Russell 2000 Index, an unmanaged index generally representative of the
total return of small to mid-sized companies. Investors are unable to purchase
the index directly, although they can invest in the underlying securities. The
performance of the index does not reflect the deduction of expenses associated
with a mutual fund, such as investment management and fund accounting fees. By
contrast, the performance of the Portfolio shown on the graph reflects the
deduction of these value-added services, as well as the deduction of a 4.50%
sales charge on Investor A shares and the applicable contingent deferred sales
charge (CDSC) on Investor B shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares, for periods prior to such date, represent the
performance for Investor A shares of the Portfolio, which have been restated to
reflect the contingent deferred sales charges payable by holders of Investor B
shares who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance
would have been reduced.
The Investor B (CDSC) is not included on the above graph due to the fact that
the performance is now over 6 years, and the CDSC charges no longer apply. The
performance for the Investor B (CDSC) will now mirror Investor B (No CDSC)
performance.
Institutional shares were initially offered on January 3, 1994. The
performance figures for Institutional shares, for periods prior to such date,
represent the performance for Investor A shares of the portfolio.
37
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Small Cap Equity Portfolio November 30, 1998
Commercial Paper (4.8%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Finance (4.8%):
American General Finance, 5.37%, 12/1/98............... $8,020,000 $ 8,020,000
------------
TOTAL COMMERCIAL PAPER 8,020,000
------------
Common Stocks (92.4%):
Automotive Parts (1.8%):
Aftermarket Technology Corp.(b)........................ 86,200 495,650
Superior Industries International, Inc. ............... 100,000 2,600,000
------------
3,095,650
------------
Banking (6.7%):
Associated Banc-Corp. ................................. 63,500 2,166,938
Bank United Corp., Class A(c).......................... 59,500 2,610,562
Commercial Federal Corp. .............................. 68,000 1,559,750
Cullen/Frost Bankers, Inc. ............................ 21,461 1,150,846
Sovereign Bancorp, Inc. ............................... 145,000 1,857,813
St. Paul Bancorp, Inc. ................................ 85,000 1,795,625
------------
11,141,534
------------
Broadcasting & Publishing (1.3%):
Cumulus Media, Inc., Class A(b)........................ 30,752 418,996
Young Broadcasting, Inc., Class A(b)................... 47,843 1,704,407
------------
2,123,403
------------
Business Services (7.1%):
Condor Technology Solutions, Inc.(b)................... 93,000 930,000
Cotelligent Group, Inc.(b)............................. 101,424 1,857,327
Hub Group, Inc., Class A(b)............................ 108,363 1,977,625
Interim Services, Inc.(b)(c)........................... 72,500 1,504,375
National Data Corp.(c)................................. 99,500 3,718,812
SunGard Data Systems, Inc.(b).......................... 65,000 2,080,000
------------
12,068,139
------------
Chemicals (7.0%):
Cytec Industries, Inc.(b).............................. 45,200 1,019,825
M. A. Hanna Co. ....................................... 138,705 1,950,539
Minerals Technologies, Inc. ........................... 72,736 3,191,292
OM Group, Inc. ........................................ 81,000 2,931,188
RPM, Inc. ............................................. 160,000 2,620,000
------------
11,712,844
------------
Commercial Services (3.6%):
Applied Graphics Technologies, Inc.(b)(c).............. 144,987 1,857,646
Iron Mountain, Inc.(b)................................. 82,742 2,420,203
Source Information Management Co.(b)(c)................ 227,000 1,674,125
------------
5,951,974
------------
Computer Software (7.1%):
Cognos, Inc.(b)(c)..................................... 160,000 3,200,000
SMART Modular Technologies, Inc.(b)(c)................. 150,000 3,131,250
SPSS, Inc.(b)(c)....................................... 126,000 2,315,250
Zebra Technologies Corp., Class A(b)(c)................ 102,088 3,426,328
------------
12,072,828
------------
</TABLE>
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ------------
<S> <C> <C>
Consumer Goods & Services (1.1%)
Kellwood Co. ............................................ 67,000 $ 1,809,000
------------
Electrical & Electronic (9.8%):
Amkor Technologies, Inc.(b)(c)........................... 252,000 1,590,750
Barnett, Inc.(b)......................................... 119,717 1,496,463
CFM Technologies, Inc.(b)(c)............................. 120,395 1,053,456
Flextronics International Ltd.(b)(c)..................... 28,000 1,862,000
General Scanning, Inc.(b)................................ 198,400 1,140,800
Kulicke & Soffa Industries, Inc.(b)(c)................... 265,650 4,532,653
PRI Automation, Inc.(b)(c)............................... 206,375 4,952,999
------------
16,629,121
------------
Financial Services (5.5%):
CCB Financial Corp. ..................................... 50,000 2,712,500
Finova Group, Inc. ...................................... 57,000 3,010,313
Metris Companies, Inc. .................................. 58,993 1,968,891
Unicapital Corp.(b)...................................... 178,620 1,473,615
------------
9,165,319
------------
Food Products & Services (5.0%):
Beringer Wine Estates Holdings, Inc.(b)(c)............... 48,000 1,758,000
Canandaigua Wine, Inc., Class A(b)....................... 53,767 2,674,908
Hormel Foods Corp. ...................................... 56,000 1,655,500
Performance Food Group Co.(b)(c)......................... 93,754 2,296,973
------------
8,385,381
------------
Health Care (2.2%):
Curative Health Services, Inc.(b)........................ 72,500 2,084,375
Ocular Sciences, Inc.(b)(c).............................. 73,000 1,642,500
------------
3,726,875
------------
Insurance (1.5%):
HCC Insurance Holdings, Inc. ............................ 134,600 2,498,513
------------
Machinery & Equipment (2.1%):
DT Industries, Inc. ..................................... 103,000 1,892,625
Rental Service Corp.(b).................................. 75,894 1,608,004
------------
3,500,629
------------
Manufacturing - Consumer Goods (3.1%):
AptarGroup, Inc. ........................................ 84,856 2,370,665
Blyth Industries, Inc.(b)(c)............................. 81,000 2,748,937
------------
5,119,602
------------
Medical Equipment & Supplies (5.5%):
Dentsply International, Inc. ............................ 137,000 3,681,875
Hanger Orthopedic Group, Inc.(b)......................... 109,650 2,631,600
Maxxim Medical, Inc.(b)(c)............................... 107,363 2,925,642
------------
9,239,117
------------
Medical Services (1.8%):
American Oncology Resources, Inc.(b)(c).................. 166,136 1,858,647
Sun Healthcare Group, Inc.(b)(c)......................... 220,032 1,155,168
------------
3,013,815
------------
</TABLE>
Continued
38
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Small Cap Equity Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Oil & Exploration, Production & Services (2.3%):
Global Industries Ltd.(b)............................... 177,000 $ 1,006,688
IRI International Corp.(b).............................. 226,500 990,938
Ocean Energy, Inc. (b).................................. 89,157 724,401
Swift Energy Co.(b)(c).................................. 129,914 1,209,823
------------
3,931,850
------------
Paper & Related (0.8%):
Caraustar Industries, Inc.(c)........................... 50,000 1,328,125
------------
Pharmaceuticals (4.7%):
Allergan, Inc. ......................................... 55,940 3,405,348
Shire Pharmaceuticals Group PLC ADR(b).................. 148,255 3,261,610
Zonagen, Inc.(b)(c)..................................... 60,000 1,155,000
------------
7,821,958
------------
Restaurants (1.2%):
Brinker International, Inc.(b).......................... 76,000 1,933,250
------------
Retail Stores (1.8%):
Marks Bros. Jewelers, Inc.(b)........................... 115,000 1,667,500
The Bombay Company, Inc.(b)............................. 265,072 1,308,793
------------
2,976,293
------------
Semiconductors (3.9%):
Burr-Brown Corp.(b)(c).................................. 82,452 1,947,929
Etec Systems, Inc.(b)................................... 41,659 1,369,540
Photronics, Inc.(b)(c).................................. 159,246 3,184,919
------------
6,502,388
------------
Telecommunications (1.5%):
IXC Communications, Inc.(b)(c).......................... 89,000 2,436,375
------------
Transportation & Shipping (0.2%):
Air Express International Corp.(c)...................... 3,000 66,750
U.S. Freightways Corp................................... 7,822 210,216
------------
276,966
------------
Utility - Electricity (1.2%):
Cleco Corp. ............................................ 61,000 2,085,438
------------
Wholesale Distribution (2.6%):
CDW Computer Centers, Inc.(b)(c)........................ 38,400 3,110,400
Watsco, Inc............................................. 66,298 1,189,220
------------
4,299,620
------------
TOTAL COMMON STOCKS 154,846,007
------------
U.S. Government Agencies (1.2%):
Federal Farm Credit Bank (1.2%):
5.15%, 12/1/98.......................................... $2,000,000 2,000,000
------------
TOTAL U.S. GOVERNMENT AGENCIES 2,000,000
------------
</TABLE>
Short-Term Securities Held as Collateral (22.9%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Repurchase agreements (22.9%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $12,982,579,
collateralized by $16,134,039 various U.S.
Government Agency securities, 0.00%-8.50%, 12/3/98-
9/11/28, market value $13,237,554).................. $12,980,540 $ 12,980,540
Nationsbanc Montgomery Securities, Inc., 5.68%,
12/1/98 (Purchased on 11/30/98, proceeds at maturity
$1,475,301, collateralized by $1,654,762 various
U.S. Government Agency mortgages, 0.00%-10.50%,
5/1/00-12/1/28, market value $1,504,570)............ 1,475,069 1,475,069
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $6,491,252,
collateralized by $32,976,321 various U.S.
Government Agency mortgages, 0.00%-8.00%, 10/25/99-
8/1/28, market value $6,620,075).................... 6,490,270 6,490,270
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $4,367,631,
collateralized by $5,121,607 various U.S. Treasury
Notes, 3.63%-8.75%, 10/31/99-11/15/28, market value
$4,454,322)......................................... 4,366,981 4,366,981
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $12,982,451,
collateralized by $15,532,358 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$13,240,150)........................................ 12,980,540 12,980,540
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL....... 38,293,400
------------
TOTAL INVESTMENTS
(Cost $205,220,471)(a) (121.3%) 203,159,407
Liabilities in excess of other assets (-21.3%) (35,644,729)
------------
TOTAL NET ASSETS (100.0%) $167,514,678
============
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$1,313,636. Cost for federal income tax purposes differs from value by net
unrealized depreciation of securities as follows:
Unrealized apprecia-
tion................... $ 23,804,200
Unrealized deprecia-
tion................... (27,178,900)
------------
Net unrealized deprecia-
tion................... $ (3,374,700)
============
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
ADR American Depositary Receipt
PLC Public Limited Company
See notes to financial statements
39
<PAGE>
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets
Investments, at value (cost $166,927,071)........... $164,866,007
Repurchase agreements, at value (cost $38,293,400).. 38,293,400
------------
Total investments.................................. 203,159,407
Cash................................................ 162
Interest and dividends receivable................... 83,440
Receivable for capital shares issued................ 30
Receivable for investments sold..................... 2,929,099
Prepaid expenses and other assets................... 1,477
------------
Total Assets....................................... 206,173,615
Liabilities:
Payable for investments purchased................... $ 196,225
Payable for capital shares redeemed................. 8,285
Payable for return of collateral received........... 38,293,400
Accrued expenses and other payables:
Investment advisory fees........................... 104,730
Administration fees................................ 3,276
Distribution and administrative services fees...... 10,238
Custodian fees..................................... 13,897
Other liabilities.................................. 28,886
-----------
Total Liabilities.................................. 38,658,937
------------
Net Assets:
Capital............................................. 170,180,595
Accumulated net realized losses from investment
transactions....................................... (604,853)
Net unrealized depreciation from investments........ (2,061,064)
------------
Net Assets.......................................... $167,514,678
============
Investor A Shares
Net Assets......................................... $ 11,601,051
Shares............................................. 978,282
Redemption price per share......................... $11.86
======
Maximum Sales Charge -- Investor A Shares........... 4.50%
Maximum Offering Price
(100%/(100% -- Maximum Sales Charge) of net asset
value adjusted to the nearest cent) per share...... $12.42
======
Investor B Shares
Net Assets......................................... $ 1,285,739
Shares............................................. 111,485
Offering price per share*.......................... $11.53
======
Trust Shares
Net Assets......................................... $129,591,321
Shares............................................. 10,784,604
Offering and redemption price per share............ $12.02
======
Institutional Shares
Net Assets......................................... $ 25,036,567
Shares............................................. 2,118,283
Offering and redemption price per share............ $11.82
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income....................................... $ 388,165
Dividend income....................................... 1,316,440
Income from securities lending........................ 168,416
------------
Total Income......................................... 1,873,021
Expenses:
Investment advisory fees.............................. $1,776,377
Administration fees................................... 473,700
Distribution and services fees, Investor A Shares..... 42,655
Distribution and services fees, Investor B Shares..... 14,972
Administrative services fees, Trust Shares............ 572,618
Administrative services fees, Institutional Shares.... 90,787
Accounting fees....................................... 6,124
Custodian fees........................................ 74,379
Directors' fees and expenses.......................... 3,285
Transfer agent fees................................... 75,135
Other fees............................................ 71,025
----------
Total expenses before voluntary fee reductions....... 3,201,057
Expenses voluntarily reduced......................... (809,461)
------------
Net Expenses......................................... 2,391,596
------------
Net investment loss................................... (518,575)
------------
Realized/Unrealized Losses from Investments:
Net realized losses from investment transactions...... (132,296)
Net change in unrealized appreciation/depreciation
from investments..................................... (34,779,392)
------------
Net realized/unrealized losses from investments....... (34,911,688)
------------
Change in net assets resulting from operations........ $(35,430,263)
============
</TABLE>
See notes to financial statements
40
<PAGE>
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment loss............................... $ (518,575) $ (131,925)
Net realized gains (losses) from investment trans-
actions.......................................... (132,296) 20,891,156
Net change in unrealized appreciation/depreciation
from investments................................. (34,779,392) 21,069,188
------------ ------------
Change in net assets resulting from operations..... (35,430,263) 41,828,419
------------ ------------
Distributions to Investor A Shareholders:
In excess of net investment income................ -- (4,444)
From net realized gains from investment transac-
tions............................................ (1,204,394) (848,322)
In excess of net realized gains from investment
transactions..................................... (33,038) --
Distributions to Investor B Shareholders:
From net realized gains from investment transac-
tions............................................ (120,768) (78,682)
In excess of net realized gains from investment
transactions..................................... (3,765) --
Distributions to Trust Shareholders:
From net investment income........................ -- (128,362)
From net realized gains from investment transac-
tions............................................ (16,700,771) (10,472,317)
In excess of net realized gains from investment
transactions..................................... (364,216) --
Distributions to Institutional Shareholders:
In excess of net investment income................ -- (2,874)
From net realized gains from investment transac-
tions............................................ (2,733,301) (1,844,024)
In excess of net realized gains from investment
transactions..................................... (71,538) --
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (21,231,791) (13,379,025)
------------ ------------
Change in net assets from capital transactions..... (37,577,165) 16,766,967
------------ ------------
Change in net assets............................... (94,239,219) 45,216,361
Net Assets:
Beginning of period............................... 261,753,897 216,537,536
------------ ------------
End of period..................................... $167,514,678 $261,753,897
============ ============
</TABLE>
See notes to financial statements
41
<PAGE>
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
---------------
<S> <C>
Cash Flows from Operating Activities:
Net investment loss.......................................... $ (518,575)
Adjustments to reconcile net investment loss to net cash pro-
vided by operating activities:
Cost of investment securities................................ (1,881,656,474)
Proceeds from disposition of investment securities........... 1,941,375,785
Cost of investments purchased with cash collateral from secu-
rities lending.............................................. (38,293,400)
Decrease in dividends and interest receivable................ 36,585
Increase in payable for return of collateral received from
securities lending.......................................... 38,293,400
Decrease in accrued expenses................................. (60,960)
Decrease in prepaid expenses................................. 9,160
Net amortization/accretion from investments.................. (388,165)
---------------
Net cash provided by operating activities.................... 58,797,356
---------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................. 103,326,873
Cost of shares redeemed...................................... (159,949,308)
Cash distributions paid...................................... (2,175,418)
---------------
Net cash used in financing activities........................ (58,797,853)
---------------
Decrease in cash.............................................. (497)
Cash:
Beginning balance............................................ 659
---------------
Ending balance............................................... $ 162
===============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
distributions of net realized capital gains of $19,056,373.
See notes to financial statements
42
<PAGE>
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
------------------------------------------------
1998 1997 1996 1995 1994 (a)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 15.03 $ 13.40 $ 13.44 $ 11.99 $ 13.14
------- ------- ------- ------- -------
Investment Activities
Net investment loss......... (0.06) (0.05) (0.01) -- (0.03)
Net realized and unrealized
gains (losses) from
investments................ (1.89) 2.50 1.03 2.36 0.89
------- ------- ------- ------- -------
Total from Investment
Activities................. (1.95) 2.45 1.02 2.36 0.86
------- ------- ------- ------- -------
Distributions
In excess of net investment
income..................... -- -- (0.01) -- --
Net realized gains.......... (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net realized
gains...................... (0.03) -- -- -- (0.23)
------- ------- ------- ------- -------
Total Distributions......... (1.22) (0.82) (1.06) (0.91) (2.01)
------- ------- ------- ------- -------
Net Asset Value, End of
Period...................... $ 11.86 $ 15.03 $ 13.40 $ 13.44 $ 11.99
======= ======= ======= ======= =======
Total Return (excludes sales
charge)..................... (14.19)% 19.45 % 8.36 % 21.47 % 7.38 %
Ratios/Supplementary Data:
Net Assets at end of period
(000)....................... $11,601 $14,213 $13,889 $15,056 $10,899
Ratio of expenses to average
net assets.................. 1.25 % 1.25 % 1.26 % 1.26 % 1.25 %
Ratio of net investment loss
to average net assets....... (0.45)% (0.29)% (0.13)% (0.12)% (0.44)%
Ratio of expenses to average
net assets*................. 1.35 % 1.35 % 1.36 % 1.36 % 1.36 %
Portfolio turnover**......... 69.72 % 80.23 % 65.85 % 83.13 % 85.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On September
27, 1994, the Portfolio redesignated the Investor Shares as "Investor A"
Shares, and authorized the issuance of a series of shares designated as
"Investor B" Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
March 1, 1995
For the years ended November 30, to
------------------------------------ November 30,
1998 1997 1996 1995 (a)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 14.74 $ 13.24 $ 13.37 $11.83
---------- ---------- ---------- ------
Investment Activities
Net investment loss..... (0.14) (0.13) (0.07) (0.03)
Net realized and
unrealized gains
(losses) from
investments............ (1.85) 2.45 0.99 1.57
---------- ---------- ---------- ------
Total from Investment
Activities............. (1.99) 2.32 0.92 1.54
---------- ---------- ---------- ------
Distributions
Net realized gains...... (1.18) (0.82) (1.05) --
In excess of net
realized gains......... (0.04) -- -- --
---------- ---------- ---------- ------
Total Distributions..... (1.22) (0.82) (1.05) --
---------- ---------- ---------- ------
Net Asset Value, End of
Period.................. $ 11.53 $ 14.74 $ 13.24 $13.37
========== ========== ========== ======
Total Return (excludes
sales charge)........... (14.79)% 18.62 % 7.63 % 20.83 %(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)............ $ 1,286 $ 1,503 $ 1,272 $ 603
Ratio of expenses to
average net assets...... 1.95 % 1.95 % 1.96 % 1.96 %(c)
Ratio of net investment
loss to average net
assets.................. (1.15)% (0.99)% (0.83)% (0.78)%(c)
Ratio of expenses to
average net assets*..... 2.05 % 2.05 % 2.06 % 2.06 %(c)
Portfolio turnover**..... 69.72 % 80.23 % 65.85 % 83.13 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
43
<PAGE>
THE ARCH FUND, INC.
Small Cap Equity Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 15.17 $ 13.49 $ 13.49 $ 12.01 $ 13.14
-------- -------- -------- -------- -------
Investment Activities
Net investment income
(loss)................ (0.02) 0.01 0.02 0.03 (0.01)
Net realized and
unrealized gains
(losses) from
investments........... (1.91) 2.50 1.05 2.36 0.89
-------- -------- -------- -------- -------
Total from Investment
Activities............ (1.93) 2.51 1.07 2.39 0.88
-------- -------- -------- -------- -------
Distributions
Net investment income.. -- (0.01) (0.02) -- --
Net realized gains..... (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net
realized gains........ (0.03) -- -- -- (0.23)
-------- -------- -------- -------- -------
Total Distributions.... (1.22) (0.83) (1.07) (0.91) (2.01)
-------- -------- -------- -------- -------
Net Asset Value, End of
Period................. $ 12.02 $ 15.17 $ 13.49 $ 13.49 $ 12.01
======== ======== ======== ======== =======
Total Return............ (13.90)% 19.77 % 8.72 % 21.70 % 7.56 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $129,591 $211,643 $171,295 $139,681 $77,690
Ratio of expenses to
average net assets..... 0.95 % 0.95 % 0.96 % 0.96 % 0.95 %
Ratio of net investment
income (loss) to
average net assets..... (0.16)% 0.01 % 0.17 % 0.18 % (0.16)%
Ratio of expenses to
average net assets*.... 1.35 % 1.35 % 1.06 % 1.06 % 1.36 %
Portfolio turnover**.... 69.72 % 80.23 % 65.85 % 83.13 % 85.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
<TABLE>
<CAPTION>
Financial Highlights, Institutional Shares
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 14.98 $ 13.36 $ 13.40 $ 11.96 $ 13.14
-------- -------- -------- -------- -------
Investment Activities
Net investment loss.... (0.07) (0.04) (0.01) (0.01) (0.03)
Net realized and
unrealized gains
(losses) from
investments........... (1.87) 2.48 1.03 2.36 0.86
-------- -------- -------- -------- -------
Total from Investment
Activities............ (1.94) 2.44 1.02 2.35 0.83
-------- -------- -------- -------- -------
Distributions
In excess of net
investment income..... -- -- (0.01) -- --
Net realized gains..... (1.19) (0.82) (1.05) (0.91) (1.78)
In excess of net
realized gains........ (0.03) -- -- -- (0.23)
-------- -------- -------- -------- -------
Total Distributions.... (1.22) (0.82) (1.06) (0.91) (2.01)
-------- -------- -------- -------- -------
Net Asset Value, End of
Period................. $ 11.82 $ 14.98 $ 13.36 $ 13.40 $ 11.96
======== ======== ======== ======== =======
Total Return............ (14.17)% 19.41 % 8.39 % 21.43 % 7.11 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 25,037 $ 34,395 $ 30,081 $ 17,620 $ 5,633
Ratio of expenses to
average net assets..... 1.25 % 1.25 % 1.26 % 1.26 % 1.25 %
Ratio of net investment
loss to average net
assets................. (0.45)% (0.29)% (0.13)% (0.11)% (0.41)%
Ratio of expenses to
average net assets*.... 1.35 % 1.35 % 1.36 % 1.36 % 1.37 %
Portfolio turnover**.... 69.72 % 80.23 % 65.85 % 83.13 % 85.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On January 3,
1994, the Portfolio issued a new series of shares which were designated as
"Institutional" Shares. The financial highlights presented for the period
prior to January 3, 1994 represent financial highlights applicable to the
Investor Shares.
44
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
45
<PAGE>
The ARCH International Equity Portfolio+
Q. How did the global equity markets perform during the 12-month period ended
November 30, 1998?
A. Financial troubles in many overseas economies hampered the performance of
foreign stock markets during much of the period. Early on, investors were most
concerned about the continuing Asian financial crisis. But during the summer,
there were signs that problems were spreading to other economies. Investors
were particularly concerned about the implications of Russia's decision to
default on its short-term debt and the financial troubles of a large hedge
fund, Long-Term Capital Management.
The Morgan Stanley Capital International Europe Australia & Far East Index
posted a total return of 16.78% for the 12-month period, but there were wide
differences among regions and individual markets. Asian markets performed
poorly, with the MSCI Far East Ex-Japan Index/1/ suffering a 26.4% decline for
the period; the Japanese stock market fell 4.5% as of November 30, 1998.
European markets weren't immune to economic strife--for example, many German
banks were hurt by Russia's default. But falling interest rates, corporate
restructuring and the advent of a single currency helped support gains during
the second half of the period--and allowed the markets to rebound quickly from
their summer slump. The MSCI Europe Index/2/ finished the year ended November
30, 1998, up 28.02%.
Q. How did you manage the Portfolio in that environment?
A. We reduced the Portfolio's investment in Japan from 18.1% to 12.5% of the
Portfolio's assets; badly needed economic reforms have been slow to arrive in
that country. We also trimmed the Portfolio's investments in Hong Kong,
Singapore and India, which accounted for 2.8% of assets, to sidestep further
troubles in those markets.*
Meanwhile, we increased the Portfolio's investment in Australia from 1.2% to
3.9% because its fast-growing economy is well isolated from the financial
problems in the rest of the region. We also increased the Portfolio's
investments in France, Germany, the Netherlands and Switzerland from a combined
31.3% at the beginning of the period to 34.3% at the end; that shift was
designed to take advantage of falling interest rates in those economies. And we
found some opportunities in selected emerging markets, adding to the
Portfolio's positions in Greece, Hungary and Papua New Guinea. Finally, we
increased the Portfolio's cash holdings from around $2.4 million (as of
5/31/98) to $3.4 million (as of 6/30/98) in order to prepare for anticipated
redemption requests during the market turmoil this summer.
Q. How did your strategy affect the Portfolio's performance?
A. The Portfolio's over weighting in countries such as Italy (up 52%) and
Spain (up 50%) boosted its returns. The Portfolio's individual stock picks also
contributed to its performance in some countries. For example, our holdings in
Spain rose 63%; and the Portfolio's German investments climbed 68%, compared to
a 32% gain for that market. Likewise, shares of the Australian stocks in the
Portfolio rose 27%, versus an 11% gain for that country's stock market.
Our decision to underweight Japanese stocks, during the last 12-month period,
also helped. Still, individual Japanese stocks in the Portfolio fell 9%, worse
than the 4.5% decline for the overall Japanese market.
Q. What is your outlook for overseas markets during the next several months?
A. Japan's market should eventually show some improvement. Already, some
banks are beginning to sort out their debt problems, and recent tax cuts may
likely boost consumer spending. But fundamental reforms could be slow in
coming, so we will continue to approach that market with caution, to avoid
other Asian stock markets, which have worse financial problems; the same is
true of Russia.
We expect moderate economic growth in Europe, and modest returns from markets
in that region. We will look for opportunities in individual sectors; for
example, deregulation should support growth in the European telecommunications
industry. Also, some financial services companies could benefit from Europeans'
increased willingness to invest for long-term goals such as retirement. And we
will retain our holdings in a few emerging markets, such as Hungary and Papua
New Guinea, that we believe offer special growth opportunities.
- -----
+ International investing involves increased risk and volatility.
* Portfolio composition is subject to change.
46
<PAGE>
The ARCH International Equity Portfolio+
[ARCH INTERNATIONAL EQUITY PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Morgan Stanley
Europe,
Investor A Investor A Investor B Investor B Australia &
(No Load) (Load)* (No CDSC) (CDSC)** Far East Index
--------- ------- --------- -------- --------------
4/4/94 10,000 9,551 10,000 10,000 10,000
Nov-94 9,900 9,456 9,900 9,405 10,370
Nov-95 10,780 10,296 10,730 10,330 11,189
Nov-96 12,072 11,530 11,922 11,622 12,543
Nov-97 12,384 11,828 12,138 11,838 12,528
May-98 14,978 14,306 14,635 14,435 14,560
Nov-98 14,278 13,637 13,896 13,696 14,630
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (4/4/94)
------ --------
Investor A (No Load) 15.33% 7.95%
Investor A* 10.19% 6.89%
Investor B (No CDSC) 14.48% 7.32%
Investor B (CDSC)** 9.48% 6.99%
[ARCH INSTITUTIONAL AND TRUST PORTFOLIOS CHART APPEARS HERE]
Value of a $10,000 Investment
Morgan Stanley Europe,
Trust Institutional Australia & Far East Index
----- ------------- --------------------------
4/4/94 10,000 10,000 10,000
Nov-94 9,920 9,900 10,370
Nov-95 10,810 10,770 11,189
Nov-96 12,142 12,052 12,543
Nov-97 12,495 12,364 12,528
May-98 15,138 14,960 14,560
Nov-98 14,461 14,260 14,630
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (4/4/94)
------ --------
Trust 15.73% 8.24%
Institutional 15.37% 7.92%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
/1/The Morgan Stanley Capital International Far East Ex-Japan Index is an
unmanaged index representative of the performance of Asian stocks, excluding
Japan. Investors are unable to purchase the index directly, although they can
invest in the underlying securities. The performance of the index does not
reflect the deduction of expenses associated with a mutual fund, such as
investment management and fund accounting fees.
/2/The Morgan Stanley Capital International Europe Index is an unmanaged index
representative of the performance of European stocks. Investors are unable to
purchase the index directly, although they can invest in the underlying
securities. The performance of the Index does not reflect the deduction of
expenses associated with a mutual fund, such as investment management and
fund accounting fees.
The performance of the ARCH International Equity Portfolio is measured
against the Morgan Stanley Capital International Europe, Australia and Far East
Index (EAFE), an unmanaged index representative of the performance of
international stocks. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CSDC) on
Investor B shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares, for periods prior to such date, represent the
performance for Investor A shares of the Portfolio, which have been restated to
reflect the contingent deferred sales charges payable by holders of Investor B
shares who redeem within six years of the date of purchase. Investor B shares
are also subject to distribution and service fees at a maximum annual rate of
1.00%. Had these distribution and service fees been reflected, performance
would have been reduced.
Institutional Shares were initially offered on April 24, 1994. The
performance figures for institutional shares, for periods prior to such date,
represent the performance of Trust Shares of the Portfolio.
47
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
International Equity Portfolio November 30, 1998
Common Stocks (94.4%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Australia (3.9%):
Beverages (1.2%):
Foster's Brewing Group Ltd. ............................ 335,000 $ 878,419
-----------
Oil & Gas Exploration, Production, & Services (1.7%):
Australian Gas & Light Co. ............................. 85,400 635,868
Oil Search Ltd. ........................................ 437,000 588,053
-----------
1,223,921
-----------
Telecommunications (1.0%):
Telstra Corp. Ltd. ..................................... 164,000 730,126
-----------
2,832,466
-----------
Finland (2.1%):
Telecommunications (2.1%):
Nokia Oyj, Class A...................................... 15,200 1,492,862
-----------
France (10.9%):
Banking (0.7%):
Societe Generale........................................ 3,200 505,572
-----------
Electrical & Electronic (1.3%):
Schneider SA............................................ 15,500 955,221
-----------
Financial Services (0.9%):
Paribas................................................. 7,500 670,493
-----------
Hotels & Lodging (1.6%):
Accor SA................................................ 5,100 1,124,101
-----------
Insurance (2.1%):
AXA Uap................................................. 11,700 1,516,345
-----------
Metals - Fabrication (1.5%):
Compagnie Generale D'Industrie Participations........... 20,200 1,093,490
-----------
Oil Companies - Integrated (1.6%):
Total SA, Class B....................................... 9,500 1,180,967
-----------
Retail Stores (1.2%):
Castorama Dubois........................................ 4,353 882,697
-----------
7,928,886
-----------
Germany (10.7%):
Automotive (1.9%):
DaimlerChrysler AG(b)................................... 14,672 1,382,333
-----------
Computer Software (1.2%):
SAP AG.................................................. 1,685 879,971
-----------
Cosmetics & Toiletries (1.6%):
Douglas Holding AG...................................... 17,300 1,084,575
Douglas Holding AG-New(b)(c)............................ 1,330 79,448
-----------
1,164,023
-----------
Diversified Operations (0.8%):
Siemens AG.............................................. 8,250 578,691
-----------
Insurance (1.8%):
Allianz AG, Registered(c)............................... 3,551 1,282,165
-----------
</TABLE>
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Germany, continued:
Machinery & Equipment (1.7%):
Mannesmann AG........................................... 11,500 $ 1,248,078
-----------
Telecommunications (1.7%):
Mobilcom AG(c).......................................... 4,000 1,204,164
-----------
7,739,425
-----------
Greece (1.4%):
Financial Services (0.6%):
Ergo Bank SA............................................ 4,600 444,225
-----------
Telecommunications (0.8%):
Hellenic Telecommunication Organization................. 21,555 539,388
-----------
983,613
-----------
Hong Kong (2.3%):
Banking (0.7%):
HSBC Holdings PLC....................................... 20,000 512,721
-----------
Construction (0.6%):
Cheung Kong Infrastructure.............................. 168,000 401,395
-----------
Diversified - Holding Companies (0.2%):
Citic Pacific Ltd. ..................................... 70,000 158,659
-----------
Telecommunications (0.8%):
China Telecom (Hong Kong) Ltd.(b)....................... 291,000 580,647
-----------
1,653,422
-----------
Italy (9.7%):
Banking (1.8%):
Unicredito Italiano SpA................................. 219,600 1,252,029
-----------
Financial Services (1.4%):
Banca Fideuram SpA...................................... 170,000 1,010,363
-----------
Hotels & Lodging (0.8%):
Ciga SpA(b)............................................. 671,000 588,776
-----------
Insurance (1.7%):
Istituto Nazionale Delle Assicurazioni (INA)............ 453,000 1,198,692
-----------
Publishing (1.0%):
Seat Pagine Gialle SpA(b)............................... 834,000 735,289
-----------
Real Estate (0.3%):
Unione Immobiliare SpA(b)............................... 453,000 227,291
-----------
Retail Stores (1.5%):
Autogrill SpA........................................... 143,600 1,118,504
-----------
Telecommunications (1.2%):
Telecom Italia SpA...................................... 106,800 867,911
-----------
6,998,855
-----------
Japan (12.5%):
Banking (0.3%):
Toyo Trust & Banking(d)................................. 68,000 211,324
-----------
</TABLE>
Continued
48
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
International Equity Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Japan, continued:
Computer Software (1.7%):
Fujitsu Ltd. ........................................... 47,000 $ 543,719
Meitec.................................................. 7,400 174,585
NTT Data Corp.(d)....................................... 120 525,220
-----------
1,243,524
-----------
Cosmetics & Toiletries (0.5%):
Aderans Co. Ltd. ....................................... 12,000 342,662
-----------
Electrical & Electronic (3.4%):
Fujikura Ltd. .......................................... 54,000 301,806
Minebea Co. Ltd.(d)..................................... 22,000 236,788
NEC Corp. .............................................. 60,000 511,553
Rohm Co. Ltd. .......................................... 5,000 423,039
Shinko Electric Industries(d)........................... 11,900 445,331
Sony Corp. ............................................. 5,000 366,499
Yamaichi Electronics Co., Ltd. ......................... 15,000 252,603
-----------
2,537,619
-----------
Financial Services (1.7%):
JAFCO Co. Ltd. ......................................... 10,000 285,552
Orix Corp. ............................................. 5,100 364,701
Shohkoh Fund & Co. Ltd. ................................ 1,800 594,532
-----------
1,244,785
-----------
Office Automation & Equipment (0.5%):
Canon, Inc. ............................................ 16,000 354,051
-----------
Paper Products (0.4%):
Uni-Charm Corp. ........................................ 7,600 325,838
-----------
Real Estate (0.4%):
Sumitomo Realty & Development Co. Ltd. ................. 72,000 262,415
-----------
Recreation (0.5%):
Nintendo Co. Ltd. ...................................... 3,600 334,169
-----------
Retail Stores (2.2%):
Matsumotokiyoshi........................................ 11,100 428,034
Otsuka Kagu Ltd.(b)..................................... 8,200 502,994
Ryohin Keikaku Co. Ltd.................................. 5,900 671,982
-----------
1,603,010
-----------
Telecommunications (0.9%):
NTT Mobile Communications Network, Inc.(b).............. 18 688,253
-----------
9,147,650
-----------
Netherlands (6.4%):
Commercial Services (1.6%):
Randstad Holding NV..................................... 12,300 640,611
Vedior NV............................................... 25,000 511,382
-----------
1,151,993
-----------
Financial Services (1.6%):
ING Groep NV............................................ 19,590 1,125,094
-----------
</TABLE>
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Netherlands, continued:
Insurance (1.8%):
Aegon NV................................................ 12,600 $ 1,352,124
-----------
Publishing (1.4%):
VNU NV.................................................. 28,500 982,089
-----------
4,611,300
-----------
New Zealand (0.3%):
Oil & Gas Exploration, Production, & Services (0.3%):
Fletcher Challenge Energy............................... 115,000 243,338
-----------
Portugal (0.9%):
Commercial Services (0.9%):
Brisa-Auto Estradas de Portugal SA...................... 12,000 650,500
-----------
Singapore (0.3%):
Telecommunications (0.3%):
Singapore Telecommunications(d)......................... 127,000 212,052
-----------
Spain (7.4%):
Banking (0.7%):
Banco Central Hispanoamerica SA......................... 42,200 486,878
-----------
Diversified - Holding Companies (1.9%):
Corp Financiera Reunida SA(b)........................... 100,000 1,344,871
-----------
Oil Companies - Integrated (1.8%):
Repsol SA............................................... 23,700 1,347,415
-----------
Telecommunications (1.7%):
Telefonica SA........................................... 26,500 1,248,749
-----------
Utilities - Electric (1.3%):
Endesa SA............................................... 36,700 960,352
-----------
5,388,265
-----------
Sweden (0.7%):
Pharmaceuticals (0.7%):
Astra AB, A Shares...................................... 27,600 506,921
-----------
Switzerland (6.3%):
Banking (0.9%):
UBS AG, Registered(b)................................... 2,050 618,757
-----------
Health Care - Drugs (3.1%):
Novartis AG, Registered................................. 590 1,110,888
Roche Holding AG........................................ 101 1,190,370
-----------
2,301,258
-----------
Insurance (1.4%):
Swiss Life, Bearer...................................... 1,400 981,962
-----------
Telecommunications (0.9%):
Swisscom AG, Registered(b).............................. 1,965 663,708
-----------
4,565,685
-----------
</TABLE>
Continued
49
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
International Equity Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
United Kingdom (14.4%):
Automotive Parts & Equipment (1.4%):
GKN PLC................................................. 91,400 $ 1,017,651
-----------
Banking (2.8%):
Abbey National PLC...................................... 52,000 1,042,061
Lloyds TSB Group PLC.................................... 74,000 1,031,578
-----------
2,073,639
-----------
Business Services (1.1%):
Corporate Services Group PLC(c)......................... 337,500 810,602
-----------
Diversified Operations (1.8%):
Rentokil Initial PLC.................................... 195,600 1,275,371
-----------
Electrical & Electronic (1.0%):
Electrocomponents PLC................................... 98,400 698,448
-----------
Insurance (2.1%):
Allied Zurich PLC(b).................................... 107,390 1,542,247
-----------
Telecommunications (1.6%):
Cable & Wireless Communications PLC(b).................. 132,300 1,181,484
-----------
Transportation & Shipping (2.6%):
Firstgroup PLC.......................................... 139,000 900,586
Stagecoach Holdings PLC................................. 258,680 984,248
-----------
1,884,834
-----------
10,484,276
-----------
United States (4.2%):
Health Care (1.8%):
Elan Corp. PLC, Sponsored ADR (b)....................... 18,500 1,273,031
-----------
Telecommunications (2.4%):
Ericsson LM, Sponsored ADR.............................. 34,900 1,003,375
Matav RT, Sponsored ADR................................. 26,900 744,794
-----------
1,748,169
-----------
3,021,200
-----------
TOTAL COMMON STOCKS 68,460,716
-----------
</TABLE>
U.S. Government Agencies (1.8%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Federal Farm Credit Bank (1.8%):
5.15%, 12/1/98................................... $1,293,000 $ 1,292,815
-----------
TOTAL U.S. GOVERNMENT AGENCIES 1,292,815
-----------
Closed Ended Investment Companies (0.1%):
India Magnum Fund (b)(e)......................... 2,855 79,940
-----------
TOTAL CLOSED END INVESTMENT COMPANIES 79,940
-----------
Short-Term Securities Held as Collateral (1.2%):
Investment Companies (1.2%):
BT Institutional Daily Net Asset Fund............ 857,365 857,365
-----------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 857,365
-----------
TOTAL INVESTMENTS
(Cost $59,245,158)(a) (97.5%).............................. 70,690,836
Other assets in excess of liabilities (2.5%)................ 1,791,745
-----------
TOTAL NET ASSETS (100.0%)................................... $72,482,581
===========
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of $415
and by the amount of mark to market adjustment for passive foreign
investment companies of $200,423. Cost for federal income tax purposes
differs from value by net unrealized appreciation of securities as
follows:
<TABLE>
<S> <C>
Unrealized appreciation...................................... $14,090,512
Unrealized depreciation...................................... (2,845,672)
-----------
Net unrealized appreciation.................................. $11,244,840
===========
</TABLE>
(b) Represents non-income producing securities.
(c) Restricted security which cannot be sold to individuals within the United
States of America.
(d) A portion of this security was loaned as of November 30, 1998.
(e) This security has been deemed illiquid by the Board of Directors.
ABAktiebolag (Swedish Stock Co.)
ADRAmerican Depositary Receipt
AGAktiengesellschaft (West German Stock Co.)
NVNaamloze Vennootschaap (Dutch Corp.)
PLCPublic Limited Company
SASociete Anonyme (French Corp.)
SpASocieta per Azioni (Italian Corp.)
See notes to financial statements
50
<PAGE>
THE ARCH FUND, INC.
International Equity Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $59,245,158)............... $70,690,836
Foreign currency, at value (cost $4,175,717)........... 4,175,189
Cash................................................... 905
Interest and dividends receivable...................... 33,732
Receivable for investments sold........................ 1,961,493
Tax reclaim receivable................................. 133,222
Deferred organization costs............................ 1,929
Prepaid expenses and other assets...................... 1,266
-----------
Total Assets.......................................... 76,998,572
Liabilities:
Payable for investments purchased...................... $3,551,546
Payable for capital shares redeemed.................... 220
Payable for return of collateral received.............. 857,365
Accrued expenses and other payables:
Investment advisory fees.............................. 57,693
Administration fees................................... 1,379
Distribution and administrative services fees......... 3,156
Custodian fees........................................ 34,139
Other liabilities..................................... 10,493
----------
Total Liabilities..................................... 4,515,991
-----------
Net Assets:
Capital................................................ 56,937,514
Undistributed net investment income.................... 29,471
Accumulated net realized gains from investment and
foreign currency transactions......................... 4,056,185
Net unrealized appreciation of investments and
translation of assets and liabilities in foreign
currencies............................................ 11,459,411
-----------
Net Assets............................................. $72,482,581
===========
Investor A Shares
Net Assets............................................ $ 3,153,782
Shares................................................ 237,623
Redemption price per share............................ $13.27
======
Maximum Sales Charge -- Investor A Shares.............. 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share...................................... $13.90
======
Investor B Shares
Net Assets............................................ $ 623,729
Shares................................................ 48,079
Offering price per share*............................. $12.97
======
Trust Shares
Net Assets............................................ $60,646,832
Shares................................................ 4,527,176
Offering and redemption price per share............... $13.40
======
Institutional Shares
Net Assets............................................ $ 8,058,238
Shares................................................ 608,191
Offering and redemption price per share............... $13.25
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $ 121,538
Dividend income........................................... 1,258,857
Income from securities lending............................ 10,810
Foreign tax withholding................................... (211,766)
----------
Total Income............................................. 1,179,439
Expenses:
Investment advisory fees.................................. $731,112
Administration fees....................................... 146,222
Distribution and services fees, Investor A Shares......... 9,455
Distribution and services fees, Investor B Shares......... 6,033
Administrative services fees, Trust Shares................ 185,195
Administrative services fees, Institutional Shares........ 22,873
Accounting fees........................................... 1,373
Custodian fees............................................ 126,397
Directors' fees and expenses.............................. 892
Transfer agent fees....................................... 20,806
Other fees................................................ 35,859
--------
Total expenses before voluntary fee reductions........... 1,286,217
Expenses voluntarily reduced............................. (314,036)
----------
Net Expenses............................................. 972,181
----------
Net investment income..................................... 207,258
----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment and foreign currency
transactions............................................. 4,276,064
Net change in unrealized appreciation from investments and
translation of assets and liabilities in foreign
currencies............................................... 5,453,398
----------
Net realized/unrealized gains from investments and foreign
currency................................................. 9,729,462
----------
Change in net assets resulting from operations............ $9,936,720
==========
</TABLE>
See notes to financial statements
51
<PAGE>
THE ARCH FUND, INC.
International Equity Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................... $ 207,258 $ 24,596
Net realized gains from investment and foreign
currency transactions.............................. 4,276,064 2,616,208
Net change in unrealized appreciation from
investments and translation of assets and
liabilities in foreign currencies.................. 5,453,398 (1,063,329)
----------- -----------
Change in net assets resulting from operations....... 9,936,720 1,577,475
----------- -----------
Distributions to Investor A Shareholders:
From net investment income.......................... (563) --
In excess of net investment income.................. (15,934) (11,517)
From net realized gains from investment
transactions....................................... (102,677) (67,022)
Distributions to Investor B Shareholders:
In excess of net investment income.................. (1,057) (1,047)
From net realized gains from investment
transactions....................................... (20,585) (11,381)
Distributions to Trust Shareholders:
From net investment income.......................... (329,516) (156,995)
In excess of net investment income.................. (123,727) (109,629)
From net realized gains from investment
transactions....................................... (1,964,807) (1,335,713)
Distributions to Institutional Shareholders:
From net investment income.......................... (4,462) --
In excess of net investment income.................. (35,224) (26,541)
From net realized gains from investment
transactions....................................... (245,038) (156,272)
----------- -----------
Change in net assets from shareholder distributions.. (2,843,590) (1,876,117)
----------- -----------
Change in net assets from capital transactions....... 137,095 4,300,938
----------- -----------
Change in net assets................................. 7,230,225 4,002,296
Net Assets:
Beginning of period................................. 65,252,356 61,250,060
----------- -----------
End of period....................................... $72,482,581 $65,252,356
=========== ===========
</TABLE>
See notes to financial statements
52
<PAGE>
THE ARCH FUND, INC.
International Equity Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
-------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income.......................................... $ 207,258
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities.................................. (628,322,703)
Proceeds from disposition of investment securities............. 630,982,217
Cost of investments purchased with cash collateral from
securities lending............................................ (857,365)
Decrease in dividends and interest receivable.................. 752
Increase in payable for return of collateral received from
securities lending............................................ 857,365
Decrease in accrued expenses................................... (11,999)
Increase in tax reclaim receivable............................. (34,401)
Amortization expense on organizational costs................... 5,475
Decrease in prepaid expenses................................... 1,870
Net amortization/accretion from investments.................... (121,548)
-------------
Net cash provided by operating activities...................... 2,706,921
-------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................... 12,074,330
Cost of shares redeemed........................................ (13,645,951)
Cash distributions paid........................................ (1,134,874)
-------------
Net cash used in financing activities.......................... (2,706,495)
-------------
Increase in cash................................................ 426
Cash:
Beginning balance.............................................. 479
-------------
Ending balance................................................. $ 905
=============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $1,708,716.
See notes to financial statements
53
<PAGE>
THE ARCH FUND, INC.
International Equity Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
April 4, 1994
For the years ended November 30, to
----------------------------------------- November 30,
1998 1997 1996 1995 1994 (a)(b)(c)
-------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.99 $ 12.05 $ 10.76 $ 9.90 $10.00
-------- -------- -------- -------- ------
Investment Activities
Net investment income
(loss)................ 0.01 (0.02) 0.02 0.02 (0.01)
Net realized and
unrealized gains
(losses) from
investments and
foreign currency...... 1.77 0.32 1.27 0.86 (0.09)
-------- -------- -------- -------- ------
Total from Investment
Activities............ 1.78 0.30 1.29 0.88 (0.10)
-------- -------- -------- -------- ------
Distributions
In excess of net
investment income..... (0.07) (0.05) -- -- --
Net realized gains..... (0.43) (0.31) -- (0.01) --
Tax return of capital.. -- -- -- (0.01) --
-------- -------- -------- -------- ------
Total Distributions.... (0.50) (0.36) -- (0.02) --
-------- -------- -------- -------- ------
Net Asset Value, End of
Period................. $ 13.27 $ 11.99 $ 12.05 $ 10.76 $ 9.90
======== ======== ======== ======== ======
Total Return (excludes
sales charge).......... 15.33 % 2.58 % 11.99 % 8.89 % (1.00)%(d)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 3,154 $ 2,854 $ 2,573 $ 1,568 $ 791
Ratio of expenses to
average net assets..... 1.58 % 1.59 % 1.44 % 1.45 % 1.55 %(e)
Ratio of net investment
income to average net
assets................. 0.02 % (0.20)% 0.19 % 0.07 % (0.39)%(e)
Ratio of expenses to
average net assets*.... 1.75 % 1.75 % 1.75 % 1.76 % 1.89 %(e)
Portfolio turnover**.... 88.95 % 75.18 % 77.63 % 62.78 % 21.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) On April 4, 1994, the Portfolio issued a
series of shares which were designated as "Trust" Shares. In addition, on May
2, 1994, the Portfolio issued a new series of shares which were designated as
"Investor" Shares. The financial highlights presented for April 4, 1994 to May
2, 1994 represent financial highlights applicable to the Trust Shares. (c) On
September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares. (d) Not annualized. (e) Annualized.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
March 1, 1995
For the years ended November 30, to
------------------------------------ November 30,
1998 1997 1996 1995 (a)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 11.77 $ 11.90 $ 10.71 $ 9.26
---------- ---------- ---------- ------
Investment Activities
Net investment loss..... (0.09) (0.09) (0.04) (0.03)
Net realized and
unrealized gains from
investments and
foreign currency....... 1.74 0.30 1.23 1.48
---------- ---------- ---------- ------
Total from Investment
Activities............. 1.65 0.21 1.19 1.45
---------- ---------- ---------- ------
Distributions
In excess of net
investment income...... (0.02) (0.03) -- --
Net realized gains...... (0.43) (0.31) -- --
---------- ---------- ---------- ------
Total Distributions..... (0.45) (0.34) -- --
---------- ---------- ---------- ------
Net Asset Value, End of
Period.................. $ 12.97 $ 11.77 $ 11.90 $10.71
========== ========== ========== ======
Total Return (excludes
sales charge)........... 14.48 % 1.82 % 11.11 % 8.38 %(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)............ $ 624 $ 562 $ 437 $ 102
Ratio of expenses to
average net assets...... 2.28% 2.29% 2.14% 2.02 %(c)
Ratio of net investment
income to average net
assets.................. (0.70)% (0.91)% (0.50)% (0.96)%(c)
Ratio of expenses to
average net assets*..... 2.45 % 2.45 % 2.46 % 2.44 %(c)
Portfolio turnover**..... 88.95 % 75.18 % 77.63 % 62.78 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
54
<PAGE>
THE ARCH FUND, INC.
International Equity Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30, April 4, 1994 to
---------------------------------------- November 30,
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 12.09 $ 12.12 $ 10.79 $ 9.92 $ 10.00
-------- -------- -------- -------- -------
Investment Activities
Net investment income.. 0.04 0.01 0.06 0.03 0.01
Net realized and
unrealized gains
(losses) from
investments and
foreign currency...... 1.80 0.33 1.27 0.86 (0.09)
-------- -------- -------- -------- -------
Total from Investment
Activities............ 1.84 0.34 1.33 0.89 (0.08)
-------- -------- -------- -------- -------
Distributions
Net investment income.. (0.07) (0.04) -- -- --
In excess of net
investment income..... (0.03) (0.02) -- -- --
Net realized gains..... (0.43) (0.31) -- (0.01) --
Tax return of capital.. -- -- -- (0.01) --
-------- -------- -------- -------- -------
Total Distributions.... (0.53) (0.37) -- (0.02) --
-------- -------- -------- -------- -------
Net Asset Value, End of
Period................. $ 13.40 $ 12.09 $ 12.12 $ 10.79 $ 9.92
======== ======== ======== ======== =======
Total Return............ 15.73 % 2.91 % 12.33% 8.97 % (0.80)%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 60,647 $ 55,038 $ 52,181 $ 36,096 $23,746
Ratio of expenses to
average net assets..... 1.28 % 1.29 % 1.14% 1.16 % 1.23 %(c)
Ratio of net investment
income to average net
assets................. 0.34 % 0.09 % 0.51% 0.39 % 0.23 %(c)
Ratio of expenses to
average net assets*.... 1.75 % 1.75 % 1.45% 1.46 % 1.95 %(c)
Portfolio turnover**.... 88.95 % 75.18 % 77.63% 62.78 % 21.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended November 30, April 4, 1994 to
---------------------------------------- November 30,
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.97 $ 12.03 $ 10.75 $ 9.90 $10.00
-------- -------- -------- -------- ------
Investment Activities
Net investment income
(loss)................ -- (0.03) 0.01 0.01 (0.01)
Net realized and
unrealized gains
(losses) from
investments and
foreign currency...... 1.78 0.33 1.27 0.86 (0.09)
-------- -------- -------- -------- ------
Total from Investment
Activities............ 1.78 0.30 1.28 0.87 (0.10)
-------- -------- -------- -------- ------
Distributions
Net investment income.. (0.01) -- -- -- --
In excess of net
investment income..... (0.06) (0.05) -- -- --
Net realized gains..... (0.43) (0.31) -- (0.01) --
Tax return of capital.. -- -- -- (0.01) --
-------- -------- -------- -------- ------
Total Distributions.... (0.50) (0.36) -- (0.02) --
-------- -------- -------- -------- ------
Net Asset Value, End of
Period................. $ 13.25 $ 11.97 $ 12.03 $ 10.75 $ 9.90
======== ======== ======== ======== ======
Total Return............ 15.37% 2.59% 11.91% 8.78% (1.00)%(b)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 8,058 $ 6,798 $ 6,059 $ 2,159 $ 197
Ratio of expenses to
average net assets..... 1.58 % 1.59 % 1.44% 1.44 % 1.70 %(c)
Ratio of net investment
income to average net
assets................. 0.01 % (0.21)% 0.16% 0.13 % (0.48)%(c)
Ratio of expenses to
average net assets*.... 1.75 % 1.75 % 1.76% 1.75 % 2.17 %(c)
Portfolio turnover**.... 88.95 % 75.18 % 77.63% 62.78 % 21.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On April 24,
1994, the Portfolio issued a new series of shares which were designated as
"Institutional" Shares. The financial highlights presented for April 4, 1994
to April 24, 1994 represent financial highlights applicable to the Trust
Shares. (b) Not annualized. (c) Annualized.
55
<PAGE>
The ARCH Equity Income Portfolio
Q. What was the overall environment for stocks during the 12 months through
November 30, 1998?
A. Stocks performed well during most of the 12-month period, with the S&P 500
gaining 23.68% and the Portfolio's benchmark, the Russell 1000 Value Index,
gaining 15.09%. Early in the period, fears that the Asian economic crisis would
put a damper on U.S. growth prevented the Federal Reserve Board from raising
interest rates. Later, those concerns deepened as signs of a global liquidity
crisis began to occur--for example, Russia's default on its debt. The stock
market fell sharply from its early summer peaks, but rebounded in the fall when
the Fed acted to lower short-term interest rates and boost the money supply.
Shares of health-care, financial and retail companies did well during the
first half of the year. In August we lowered our exposure to all three sectors
and began buying shares of deep cyclicals--companies whose fortunes are closely
linked to the U.S. economy's growth rate. We took that step when Federal
Reserve Chairman Alan Greenspan said he would reduce rates in order to
stabilize commodity prices.
Q. How did that environment affect the Portfolio's returns?
A. The relatively strong performance of growth stocks meant that conditions
were not ideal for the Portfolio, which uses the Russell 1000 Value Index as
its benchmark. We take a value-oriented approach to choosing stocks, buying
shares that we believe will pay attractive yields and trade at prices that
don't fully reflect their worth.
However, the Portfolio benefited from the fact that large-company shares
continued to attract investors during most of the period. The Portfolio
consists primarily of high-quality, large-company stocks.
Q. Where did you find the best values during the period?
A. The Portfolio was overweighted in both financial and health care stocks
during the first half of the year. But we reduced its weightings in those areas
later in the period. The reduction in financial services stocks came partly
because several companies in the Portfolio were acquired.*
The Portfolio's return during the second half was driven by shares of
cyclical companies whose fortunes are closely linked to the economy's growth.
They included Union Carbide (2.0% of the Portfolio's net assets) and USX-US
Steel (1.6%). We had avoided stocks of those firms until late summer due to the
risk that a global economic decline would hurt demand for their products. But
the Fed's decision to lower interest rates reduced that risk.*
Q. What is your outlook for the stock market going forward, and how will you
manage the Portfolio with that in mind?
A. We believe that value-oriented stocks eventually will out-gain growth
shares, which should be good for the stocks in the Portfolio. Meanwhile, we
will continue to rely upon careful selection of value-oriented shares to help
boost the Portfolio's performance.
- -----
* Portfolio composition is subject to change.
56
<PAGE>
The ARCH Equity Income Portfolio
[ARCH EQUITY INCOME PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A INVESTOR B INVESTOR B Russell 1000
(No Load) (Load)* (NO CDSC) (CDSC)** Value Index
--------- ------- ---------- ---------- -----------
- -
2/27/97 10,000 9,551 9,500 10,000 10,000
Nov-97 11,742 11,215 11,175 11,675 12,013
5/31/98 13,298 12,701 13,179 12,779 14,103
Nov-98 13,114 12,526 12,956 12,556 13,826
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (2/27/97)
------ ---------
Investor A (No Load) 11.69% 16.69%
Investor A* 6.71% 13.68%
Investor B (No CDSC) 10.98% 15.86%
Investor B (CDSC)** 6.55% 13.82%
[ARCH EQUITY INCOME PORTFOLIO TRUST/INSTITUTIONAL CHART APPEARS HERE]
Value of a $10,000 Investment
Trust Institutional Russell 1000 Value Index
----- ------------- ------------------------
2/27/97 10,000 10,000 10,000
Nov-97 11,764 11,764 12,013
5/31/98 13,352 13,334 14,103
Nov-98 13,174 13,154 13,826
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (2/27/97)
------ ---------
Trust 12.00% 17.00%
Institutional 11.82% 16.89%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Equity Income Portfolio is measured against the
Russell 1000 Value Index, an unmanaged index generally representative of those
securities in the Russell 1000 Index with certain valuation and historical
growth characteristics indicative of value-based stocks. Companies in this
index generally have low price-to-book and price-to-earnings ratios, higher
dividend yields and lower forecasted growth values. Investors are unable to
purchase the Index directly, although they can invest in the underlying
securities. The performance of the Index does not reflect the deduction of
expenses associated with a mutual fund, such as investment management and fund
accounting fees. By contrast, the performance of the Portfolio shown on the
graph reflects the deduction of these value-added services, as well as the
deduction of a 4.50% sales charge on Investor A shares and the applicable
contingent deferred sales charge (CDSC) on Investor B shares.
57
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Income Portfolio November 30, 1998
Commercial Paper (2.6%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Finance (2.6%):
American General Finance, 5.37%, 12/1/98............... $2,914,000 $ 2,914,000
------------
TOTAL COMMERCIAL PAPER 2,914,000
------------
Common Stocks (94.0%):
Automotive (2.7%):
Cooper Industries, Inc. ............................... 34,800 1,709,550
Genuine Parts Co. ..................................... 40,000 1,317,500
------------
3,027,050
------------
Banking (20.1%):
Bank One Corp. ........................................ 43,617 2,238,097
Chase Manhattan Corp. ................................. 40,000 2,537,499
Comerica, Inc. ........................................ 28,500 1,838,250
Crestar Financial Corp. ............................... 33,525 2,225,222
First Union Corp. ..................................... 39,000 2,369,250
Mellon Bank Corp. ..................................... 35,000 2,202,813
National City Corp. ................................... 22,800 1,533,300
PNC Bank Corp. ........................................ 39,500 2,036,719
U.S. Bancorp........................................... 50,000 1,840,625
Union Planters Corp.(c)................................ 37,500 1,785,938
Wachovia Corp. ........................................ 27,600 2,409,824
------------
23,017,537
------------
Building Products (2.0%):
Sherwin-Williams Co. .................................. 81,500 2,312,563
------------
Business Services (1.4%):
First Data Corp. ...................................... 60,000 1,601,250
------------
Chemicals (3.3%):
E. I. duPont de Nemours & Co. ......................... 11,000 646,250
FMC Corp.(b)........................................... 15,000 871,875
Union Carbide Corp. ................................... 51,000 2,282,250
------------
3,800,375
------------
Commercial Services (1.8%):
H & R Block, Inc. ..................................... 45,000 2,022,188
------------
Consumer Goods & Services (2.0%):
Newell Co. ............................................ 51,300 2,270,025
------------
Containers & Packaging (2.1%):
Crown Cork & Seal Co., Inc. ........................... 20,000 675,000
Sealed Air Corp.(b).................................... 40,000 1,765,000
------------
2,440,000
------------
Electrical & Electronic (0.9%):
W.W. Grainger, Inc. ................................... 25,140 1,062,165
------------
Financial Services (5.7%):
Fannie Mae ............................................ 35,000 2,546,250
Heller Financial, Inc. ................................ 88,000 2,304,500
MBNA Corp. ............................................ 75,393 1,710,479
------------
6,561,229
------------
Common Stocks, continued:
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ------------
<S> <C> <C>
Food Products & Services (3.5%):
IBP, Inc. .............................................. 70,000 $ 1,776,250
Sara Lee Corp. ......................................... 37,400 2,183,225
------------
3,959,475
------------
Health Care (1.7%):
C.R. Bard, Inc. ........................................ 41,600 1,905,800
------------
Oil & Exploration, Production & Services (4.6%):
Murphy Oil Corp. ....................................... 20,000 797,500
National Fuel Gas Co. .................................. 42,000 1,929,375
Vastar Resources, Inc. ................................. 62,000 2,514,875
------------
5,241,750
------------
Oil & Gas Equipment/Services (2.9%):
Baker Hughes, Inc. ..................................... 100,000 1,831,250
McDermott International, Inc. .......................... 55,000 1,474,688
------------
3,305,938
------------
Oil Companies--Integrated (3.7%):
Atlantic Richfield Co. ................................. 15,500 1,030,750
Phillips Petroleum Co. ................................. 50,000 2,100,000
USX-Marathon Group ..................................... 40,000 1,135,000
------------
4,265,750
------------
Paper & Related (2.7%):
Consolidated Papers, Inc. .............................. 85,000 2,172,813
Mead Corp. ............................................. 30,000 909,375
------------
3,082,188
------------
Pharmaceuticals (7.2%):
Abbott Laboratories..................................... 60,000 2,879,999
Allergan, Inc. ......................................... 41,400 2,520,225
Pharmacia & UpJohn, Inc. ............................... 54,000 2,811,375
------------
8,211,599
------------
Retail Stores (6.2%):
Consolidated Stores Corp.(b)............................ 90,000 1,935,000
Dillards, Inc., Class A................................. 60,000 2,062,499
May Department Stores Co.(c)............................ 30,000 1,809,375
Pep Boys--Manny, Moe, & Jack............................ 90,000 1,271,250
------------
7,078,124
------------
Semiconductors (1.5%):
KLA-Tencor Corp.(b)..................................... 50,000 1,703,125
------------
Steel (1.6%):
USX-U.S. Steel Group.................................... 75,000 1,832,813
------------
Telecommunications (1.6%):
Frontier Corp. ......................................... 60,000 1,807,500
------------
Tobacco (5.1%):
Philip Morris Companies, Inc. .......................... 57,400 3,210,813
UST, Inc. .............................................. 75,000 2,606,250
------------
5,817,063
------------
Transportation & Shipping (1.5%):
Burlington Northern Santa Fe............................ 49,000 1,666,000
------------
</TABLE>
Continued
58
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Income Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Utilities - Gas & Electric (8.2%):
Ameren Corp.(c)..................................... 28,400 $ 1,169,725
Baltimore Gas & Electric Co. ....................... 49,000 1,503,687
CINergy Corp. ...................................... 35,000 1,209,688
Consolidated Natural Gas Co. ....................... 30,000 1,629,374
New Century Energies, Inc. ......................... 20,000 961,250
NICOR, Inc. ........................................ 25,000 1,051,563
SCANA Corp.(c)...................................... 57,700 1,882,462
------------
9,407,749
------------
TOTAL COMMON STOCKS 107,399,256
Real Estate Investment Trusts (3.1%):
Health Care (0.9%):
Nationwide Health Properties, Inc. ................. 47,700 1,067,288
------------
Hotels & Lodging (0.6%):
Felcor Lodging Trust, Inc.(c)....................... 30,000 714,375
------------
Office Property (1.6%):
Prentiss Properties Trust........................... 80,000 1,740,000
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS 3,521,663
------------
Short-Term Securities Held as Collateral (3.1%):
Repurchase agreements (3.1%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,215,860,
collateralized by $1,511,005 various U.S.
Government Agency securities, 0.00%-8.50%, 12/3/98-
9/11/28, market value $1,239,740).................. $1,215,669 1,215,669
Nationsbanc Montgomery Securities, Inc., 5.68%,
12/1/98 (Purchased on 11/30/98, proceeds at
maturity $138,167, collateralized by $154,974
various U.S. Government Agency mortgages, 0.00%-
10.50%, 5/1/00-12/1/28, market value $140,908)..... 138,145 138,145
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $607,927,
collateralized by $3,088,338 various U.S.
Government Agency mortgages, 0.00%-8.00%, 10/25/99-
8/1/28, market value $619,991)..................... 607,835 607,835
Short-Term Securities Held as Collateral, continued:
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $409,043,
collateralized by $479,655 various U.S. Treasury
Notes, 3.63%-8.75%, 10/31/99-11/15/28, market value
$417,162)........................................... $ 408,982 $ 408,982
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,215,848,
collateralized by $1,454,655 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$1,239,983)......................................... 1,215,669 1,215,669
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 3,586,300
------------
TOTAL INVESTMENTS
(Cost $89,933,826)(a) (102.9%)................................. 117,421,219
Liabilities in excess of other assets (-2.9%).................. (3,291,492)
------------
TOTAL NET ASSETS (100.0%)....................................... $114,129,727
============
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$417,974. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation... $28,205,192
Unrealized depreciation... (1,135,773)
-----------
Net unrealized apprecia-
tion..................... $27,069,419
===========
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
See notes to financial statements
59
<PAGE>
THE ARCH FUND, INC.
Equity Income Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $86,347,526).............. $113,834,919
Repurchase agreements, at value
(cost $3,586,300).................................... 3,586,300
------------
Total investments.................................... 117,421,219
Cash.................................................. 754
Interest and dividends receivable..................... 205,827
Receivable for capital shares issued.................. 3,743
Receivable for investments sold....................... 1,636,424
Deferred organization costs........................... 25,344
Prepaid expenses and other assets..................... 2,095
------------
Total Assets......................................... 119,295,406
Liabilities:
Dividends payable..................................... $ 177,633
Payable for investments purchased..................... 1,287,900
Payable for capital shares redeemed................... 15,566
Payable for return of collateral received............. 3,586,300
Accrued expenses and other payables:
Investment advisory fees............................. 72,392
Administration fees.................................. 2,242
Distribution and administrative services fees........ 858
Custodian fees....................................... 9,121
Other liabilities.................................... 13,667
----------
Total Liabilities.................................... 5,165,679
------------
Net Assets:
Capital............................................... 62,137,528
Undistributed net investment income................... 10,965
Accumulated net realized gains from investment
transactions......................................... 24,493,841
Net unrealized appreciation from investments.......... 27,487,393
------------
Net Assets............................................ $114,129,727
============
Investor A Shares
Net Assets........................................... $ 1,709,108
Shares............................................... 166,945
Redemption price per share........................... $10.24
======
Maximum Sales Charge -- Investor A Shares............. 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share..................................... $10.72
======
Investor B Shares
Net Assets........................................... $ 519,722
Shares............................................... 50,818
Offering price per share*............................ $10.23
======
Trust Shares
Net Assets........................................... $111,865,947
Shares............................................... 10,919,833
Offering and redemption price per share.............. $10.24
======
Institutional Shares
Net Assets........................................... $ 34,950
Shares............................................... 3,414
Offering and redemption price per share.............. $10.24
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
<TABLE>
Statement of Operations
For the year ended November 30, 1998
<S> <C> <C>
Investment Income:
Interest income....................................... $ 353,384
Dividend income....................................... 2,668,098
Income from securities lending........................ 8,366
------------
Total Income......................................... 3,029,848
Expenses:
Investment advisory fees.............................. $857,485
Administration fees................................... 228,663
Distribution and services fees, Investor A Shares..... 2,997
Distribution and services fees, Investor B Shares..... 2,575
Administrative services fees, Trust Shares............ 339,199
Administrative services fees, Institutional Shares.... 25
Accounting fees....................................... 2,595
Custodian fees........................................ 36,693
Directors' fees and expenses.......................... 1,630
Transfer agent fees................................... 28,224
Other fees............................................ 77,877
--------
Total expenses before voluntary fee reductions....... 1,577,963
Expenses voluntarily reduced......................... (761,704)
------------
Net Expenses......................................... 816,259
------------
Net investment income................................. 2,213,589
------------
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains from investment transactions....... 24,493,831
Net change in unrealized appreciation from
investments.......................................... (13,549,445)
------------
Net realized/unrealized gains from investments........ 10,944,386
------------
Change in net assets resulting from operations........ $ 13,157,975
============
</TABLE>
See notes to financial statements
60
<PAGE>
THE ARCH FUND, INC.
Equity Income Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended period ended
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 2,213,589 $ 2,288,136
Net realized gains from investment transactions... 24,493,831 26,171,918
Net change in unrealized appreciation from
investments...................................... (13,549,445) (7,875,618)
------------ ------------
Change in net assets resulting from operations..... 13,157,975 20,584,436
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (16,781) (1,695)
In excess of net investment income................ -- (68)
From net realized gains from investment
transactions..................................... (34,436) --
Distributions to Investor B Shareholders:
From net investment income........................ (2,683) (267)
In excess of net investment income................ -- (200)
From net realized gains from investment
transactions..................................... (26,125) --
Distributions to Trust Shareholders:
From net investment income........................ (2,270,617) (2,205,201)
From net realized gains from investment
transactions..................................... (26,111,109) --
Distributions to Institutional Shareholders:
From net investment income........................ (164) (19)
In excess of net realized gains from investment
transactions..................................... (233) --
------------ ------------
Change in net assets from shareholder
distributions..................................... (28,462,148) (2,207,450)
------------ ------------
Change in net assets from capital transactions..... (2,790,787) 113,847,701
------------ ------------
Change in net assets............................... (18,094,960) 132,224,687
Net Assets:
Beginning of period............................... 132,224,687 --
------------ ------------
End of period..................................... $114,129,727 $132,224,687
============ ============
</TABLE>
- -----
(a) Period commmenced February 27, 1997.
See notes to financial statements
61
<PAGE>
THE ARCH FUND, INC.
Equity Income Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
---------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income........................................ $ 2,213,589
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities................................ (1,326,012,638)
Proceeds from disposition of investment securities........... 1,355,299,332
Cost of investments purchased with cash collateral from
securities lending.......................................... (3,586,300)
Decrease in dividends and interest receivable................ 81,804
Increase in payable for return of collateral received from
securities lending.......................................... 3,586,300
Increase in accrued expenses................................. 79,238
Amortization expense on organizational costs................. 2,920
Decrease in prepaid expenses................................. 1,623
Net amortization/accretion from investments.................. (311,661)
---------------
Net cash provided by operating activities.................... 31,354,207
---------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................. 22,829,936
Cost of shares redeemed...................................... (26,355,552)
Cash distributions paid...................................... (27,828,660)
---------------
Net cash used in financing activities........................ (31,354,276)
---------------
Decrease in cash.............................................. (69)
Cash:
Beginning balance............................................ 823
---------------
Ending balance............................................... $ 754
===============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $746,652.
See notes to financial statements
62
<PAGE>
THE ARCH FUND, INC.
Equity Income Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the February 27,
year ended 1997 to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............. $11.56 $10.00
------ ------
Investment Activities
Net investment income............................ 0.17 0.16
Net realized and unrealized gains from
investments..................................... 0.98 1.57
------ ------
Total from Investment Activities................. 1.15 1.73
------ ------
Distributions
Net investment income............................ (0.18) (0.16)
In excess of net investment income............... -- (0.01)
Net realized gains............................... (2.29) --
------ ------
Total Distributions.............................. (2.47) (0.17)
------ ------
Net Asset Value, End of Period.................... $10.24 $11.56
====== ======
Total Return (excludes sales charge).............. 11.69 % 17.42 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................. $1,709 $ 173
Ratio of expenses to average net assets........... 1.15 % 0.45 %(c)
Ratio of net investment income to average net
assets........................................... 1.51 % 2.29 %(c)
Ratio of expenses to average net assets*.......... 1.38 % 1.38 %(c)
Portfolio turnover**.............................. 98.32 % 48.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the February 27,
year ended 1997 to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $11.55 $10.00
------ ------
Investment Activities
Net investment income........................... 0.11 (d) 0.10
Net realized and unrealized gains from
investments.................................... 0.97 1.57
------ ------
Total from Investment Activities................ 1.08 1.67
------ ------
Distributions
Net investment income........................... (0.11) (0.10)
In excess of net investment income.............. -- (0.02)
Net realized gains.............................. (2.29) --
------ ------
Total Distributions............................. (2.40) (0.12)
------ ------
Net Asset Value, End of Period................... $10.23 $11.55
====== ======
Total Return (excludes sales charge)............. 10.98 % 16.75 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................ $ 520 $ 131
Ratio of expenses to average net assets.......... 1.84 % 1.14 %(c)
Ratio of net investment income to average net
assets.......................................... 0.83 % 1.53 %(c)
Ratio of expenses to average net assets*......... 2.08 % 2.07 %(c)
Portfolio turnover**............................. 98.32 % 48.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized. (d) Per share
net investment income has been calculated using the daily average share
method.
63
<PAGE>
THE ARCH FUND, INC.
Equity Income Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the February 27,
year ended 1997 to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $ 11.56 $ 10.00
-------- --------
Investment Activities
Net investment income........................... 0.19 0.20
Net realized and unrealized gains from
investments.................................... 0.98 1.55
-------- --------
Total from Investment Activities................ 1.17 1.75
-------- --------
Distributions
Net investment income........................... (0.20) (0.19)
Net realized gains.............................. (2.29) --
-------- --------
Total Distributions............................. (2.49) (0.19)
-------- --------
Net Asset Value, End of Period................... $ 10.24 $ 11.56
======== ========
Total Return..................................... 12.00 % 17.64 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................ $111,866 $131,919
Ratio of expenses to average net assets.......... 0.71 % 0.15 %(c)
Ratio of net investment income to average net
assets.......................................... 1.94 % 2.51 %(c)
Ratio of expenses to average net assets*......... 1.37 % 1.38 %(c)
Portfolio turnover**............................. 98.32 % 48.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the February 27,
year ended 1997 to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............. $11.56 $10.00
------ ------
Investment Activities
Net investment income............................ 0.18 0.19
Net realized and unrealized gains from
investments..................................... 0.98 1.56
------ ------
Total from Investment Activities................. 1.16 1.75
------ ------
Distributions
Net investment income............................ (0.19) (0.19)
Net realized gains............................... (2.29) --
------ ------
Total Distributions.............................. (2.48) (0.19)
------ ------
Net Asset Value, End of Period.................... $10.24 $11.56
====== ======
Total Return...................................... 11.82 % 17.64 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................. $ 35 $ 1
Ratio of expenses to average net assets........... 1.23 % 0.37 %(c)
Ratio of net investment income to average net
assets........................................... 1.40 % 2.34 %(c)
Ratio of expenses to average net assets*.......... 1.32 % 1.60 %(c)
Portfolio turnover**.............................. 98.32 % 48.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
64
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
65
<PAGE>
The ARCH Equity Index Portfolio
Q. What is the role of an index fund such as this one?
A. Index funds attempt to mirror the performance of a particular market index
or benchmark. The ARCH Equity Index Portfolio's benchmark is the Standard &
Poor's 500 Stock Index. The Fund seeks to provide a performance similar to that
of the S&P 500 and the large-company stocks that compose it. By contrast,
actively managed funds' performances depend upon the investment decisions of
their portfolio managers, and those funds' returns may be considerably higher
or lower than the returns of the Index.
Q. What were the conditions affecting the S&P 500 and the Portfolio during
the 12-month period ended November 30, 1998?
A. Stocks performed well early in the period, as the domestic economy grew
moderately and inflation remained low. In early July, however, fears that the
global financial crisis would hurt the U.S. economy caused many investors to
sell stocks. The Federal Reserve Board became concerned that weakness in
overseas economies could lead to a global credit crisis, and the Fed reduced
interest rates three times to boost the money supply. That policy encouraged
investors to move money back into stocks.
Q. How did the Portfolio perform during the recent period?
A. As an index fund, the ARCH Equity Index Portfolio attempts to mirror the
performance of the Standard & Poor's 500 Stock Index, the domestic stock
market's most widely used performance benchmark. Thus, the Portfolio gained
23.01% (Investor A Shares without load)/1/ during the 12 months through
November 30, 1998, similar to the 23.68% gain for the S&P 500. The Portfolio's
net assets increased from $32 million to around $62 million during the period.*
Q. What accounts for differences between the Portfolio's return and the
return of the Index?
A. Index funds as a rule lag their benchmarks by a small margin. One reason
is that the funds have transaction costs, unlike their benchmark indices. Also,
the funds usually hold a small amount of cash unless they rebalance their
portfolios every day. Cash can act as a slight drag on performance when the
stock market is rising. Despite such factors, however, this Portfolio's
performance in the past has been very close to that of the S&P 500 Stock Index,
and that should continue to be the case.
- -----
* Portfolio composition is subject to change.
/1/With the maximum sales charge of 2.50%, the Portfolio's total return would
have been 19.89%.
66
<PAGE>
The ARCH Equity Index Portfolio
[ARCH EQUITY INDEX PORTFOLIO CHART APPEARS HERE]
<TABLE>
<CAPTION>
Value of a $10,000 Investment
Investor A (No Load) Investor A (Load)* Trust Institutional S&P 500 Index
-------------------- ----------------- ----- ------------- -------------
<S> <C> <C> <C> <C> <C>
May-97 10,000 9,747 10,000 10,000 10,000
Nov-97 12,014 11,710 12,040 12,040 11,964
May-98 13,782 13,433 13,831 13,815 13,767
Nov-98 14,778 14,404 14,851 14,812 14,797
</TABLE>
* Reflects 2.50% sales charge
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (5/1/97)
------ ---------
Investor A (No Load) 23.01% 27.97%
Investor A* 19.89% 25.91%
Trust 23.34% 28.37%
Institutional 23.01% 28.16%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The Performance of the ARCH Equity Index Portfolio is measured against the
Standard & Poor's 500 Stock Index, an unmanaged index generally representative
of the U.S. stock market. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 2.50% sales charge on
Investor A shares.
67
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Commercial Paper (2.7%):
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ----------- -----------
<S> <C> <C>
Finance (2.7%):
American General Finance, 5.37%, 12/1/98............... $ 1,657,000 $ 1,657,000
-----------
TOTAL COMMERCIAL PAPER 1,657,000
-----------
Common Stocks (98.5%):
Advertising (0.2%):
Interpublic Group Cos., Inc. .......................... 821 56,444
Omnicom Group, Inc. ................................... 1,116 59,636
-----------
116,080
-----------
Aerospace/Defense (1.3%):
Boeing Co. ............................................ 6,526 265,119
General Dynamics Corp. ................................ 816 47,379
Lockheed Martin Corp. ................................. 1,262 130,933
Northrop Grumman Corp. ................................ 461 37,456
Raytheon Co., Class B.................................. 2,189 121,216
TRW, Inc. ............................................. 769 42,343
United Technologies Corp. ............................. 1,494 160,138
-----------
804,584
-----------
Aircraft Engines & Engine Parts (0.3%):
AlliedSignal, Inc. .................................... 3,610 158,840
-----------
Airlines (0.3%):
AMR Corp.(b)........................................... 1,144 75,432
Delta Air Lines, Inc. ................................. 998 53,580
Southwest Airlines Co. ................................ 2,125 45,688
US Airways Group, Inc.(b).............................. 637 33,124
-----------
207,824
-----------
Apparel/Shoes (0.5%):
Fruit of the Loom, Class A(b).......................... 489 7,213
Gap, Inc. ............................................. 2,485 182,803
Liz Claiborne, Inc. ................................... 392 13,279
Nike, Inc. ............................................ 1,828 73,120
Reebok International Ltd.(b)(c)........................ 402 6,407
Russell Corp. ......................................... 206 4,905
VF Corp. .............................................. 795 39,005
-----------
326,732
-----------
Automotive (1.4%):
Cooper Industries, Inc. ............................... 791 38,858
Cummins Engine Co. .................................... 211 7,833
Dana Corp. ............................................ 1,172 45,708
Ford Motor Co. ........................................ 7,867 434,652
General Motors Corp. .................................. 4,212 294,840
Genuine Parts Co. ..................................... 1,113 36,659
Navistar International Corp.(b)........................ 400 10,350
PACCAR, Inc. .......................................... 518 23,569
-----------
892,469
-----------
Banking (6.3%):
Bank of New York, Inc. ................................ 5,004 171,387
Bank One Corp. ........................................ 7,642 392,116
BankAmerica Corp. ..................................... 11,323 738,117
BankBoston Corp. ...................................... 1,850 77,006
Bankers Trust New York Corp. .......................... 634 55,158
Common Stocks, continued:
<CAPTION>
Security Market
Description Shares Value
----------- ---------- -----------
<S> <C> <C>
Banking, continued:
BB & T Corp. ............................................ 1,824 $ 67,374
Chase Manhattan Corp. ................................... 5,634 357,407
Comerica, Inc. .......................................... 996 64,242
Fifth Third Bancorp...................................... 1,697 112,638
First Union Corp. ....................................... 6,358 386,249
Huntington BancShares, Inc. ............................. 1,391 41,208
KeyCorp.................................................. 2,817 86,447
Mellon Bank Corp. ....................................... 1,708 107,497
Mercantile Bancorporation, Inc. ......................... 1,011 44,547
National City Corp. ..................................... 2,112 142,032
Northern Trust Corp. .................................... 743 59,997
PNC Bank Corp. .......................................... 1,895 97,711
Republic New York Corp. ................................. 702 32,819
State Street Corp. ...................................... 1,008 69,174
Summit Bancorp........................................... 1,161 48,544
SunTrust Banks, Inc.(c).................................. 1,286 89,779
Synovus Financial Corp. ................................. 1,723 38,014
U.S. Bancorp............................................. 4,792 176,406
Union Planters Corp. .................................... 830 39,529
Wachovia Corp. .......................................... 1,325 115,689
Wells Fargo & Co. ....................................... 10,704 385,344
-----------
3,996,431
-----------
Beverages (3.1%):
Adolph Coors Co. ........................................ 230 11,443
Anheuser-Busch Co. ...................................... 3,139 190,302
Brown-Forman Corp. ...................................... 407 29,609
Coca-Cola Co. ........................................... 16,237 1,137,604
Coca-Cola Enterprises, Inc.(c)........................... 2,757 104,249
PepsiCo, Inc. ........................................... 9,595 371,207
Seagram Co. Ltd. ........................................ 2,264 77,684
-----------
1,922,098
-----------
Building Products (0.2%):
Masco Corp. ............................................. 2,160 62,371
Owens Corning............................................ 388 14,477
Sherwin-Williams Co. .................................... 1,126 31,950
-----------
108,798
-----------
Business Services (0.6%):
Automatic Data Processing, Inc. ......................... 1,968 151,536
Ceridian Corp.(b)........................................ 507 32,987
Computer Science Corp. .................................. 1,049 59,924
Equifax, Inc. ........................................... 913 37,890
First Data Corp. ........................................ 2,853 76,139
-----------
358,476
-----------
Chemicals (1.9%):
Air Products & Chemicals, Inc. .......................... 1,462 55,739
Avery Dennison Corp. .................................... 751 36,001
Dow Chemical Co.(c)...................................... 1,467 142,849
E. I. duPont de Nemours & Co. ........................... 7,398 434,632
Eastman Chemical Co. .................................... 517 29,954
Ecolab, Inc. ............................................ 828 25,616
Engelhard Corp. ......................................... 887 17,130
FMC Corp.(b)............................................. 177 10,288
Great Lakes Chemical Corp. .............................. 421 16,814
Hercules, Inc. .......................................... 618 20,317
</TABLE>
Continued
68
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Chemicals, continued:
Millipore Corp. ............................................. 252 $ 7,088
Monsanto Co. ................................................ 3,977 180,207
Morton International, Inc. .................................. 806 23,727
Nalco Chemical Co. .......................................... 450 15,047
Praxair, Inc. ............................................... 989 37,767
Rohm & Haas Co. ............................................. 1,108 38,711
Sigma-Aldrich Corp. ......................................... 683 21,941
Union Carbide Corp. ......................................... 870 38,933
W.R. Grace & Co.(b).......................................... 500 8,250
-----------
1,161,011
-----------
Commercial Services (0.3%):
Browning-Ferris Industries, Inc. ............................ 1,095 32,303
Cendant Corp.(b)............................................. 5,700 108,300
H & R Block, Inc. ........................................... 700 31,456
-----------
172,059
-----------
Computer Software (4.4%):
Adobe Systems, Inc. ......................................... 475 21,256
BMC Software, Inc.(b)........................................ 1,290 65,871
Computer Associates International, Inc. ..................... 3,749 165,893
Electronic Data Systems Corp. ............................... 3,163 123,357
IMS Health, Inc. ............................................ 1,020 67,703
Microsoft Corp.(b)........................................... 16,103 1,964,565
Novell, Inc.(b).............................................. 2,238 37,067
Oracle Corp.(b).............................................. 6,454 221,050
Parametric Technology Corp.(b)............................... 1,742 29,614
Peoplesoft, Inc.(b).......................................... 1,494 30,720
-----------
2,727,096
-----------
Computers (6.0%):
3Com Corp.(b)................................................ 2,269 87,782
Apple Computer, Inc.(b)(c)................................... 859 27,434
Cabletron Systems, Inc.(b)................................... 1,061 14,854
Cisco Systems, Inc.(b)....................................... 10,278 774,703
Compaq Computer Corp. ....................................... 11,035 358,638
Data General Corp.(b)........................................ 363 6,579
Dell Computer Corp.(b)....................................... 8,320 505,960
EMC Corp.(b)................................................. 3,233 234,393
Gateway 2000, Inc.(b)........................................ 973 54,610
Hewlett-Packard Co. ......................................... 6,892 432,473
IBM Corp. ................................................... 6,203 1,023,494
Seagate Technology, Inc.(b).................................. 1,560 46,020
Silicon Graphics, Inc.(b).................................... 1,220 14,945
Sun Microsystems, Inc.(b).................................... 2,578 190,933
Unisys Corp.(b).............................................. 1,589 45,287
-----------
3,818,105
-----------
Construction (0.2%):
Armstrong World Industries, Inc. ............................ 244 16,257
Centex Corp. ................................................ 411 14,668
Ingersoll-Rand Co. .......................................... 1,095 51,259
Kaufman & Broad Home Corp. .................................. 234 5,894
Pulte Corp. ................................................. 290 7,377
-----------
95,455
-----------
Common Stocks, continued:
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Consumer Goods & Services (1.9%):
Black & Decker Corp. ...................................... 560 $ 30,345
Clorox Co. ................................................ 697 77,411
Colgate-Palmolive Co. ..................................... 1,850 158,406
Fortune Brands, Inc. ...................................... 1,070 36,447
Jostens, Inc. ............................................. 233 5,461
Newell Co. ................................................ 1,049 46,418
Procter & Gamble Co. ...................................... 8,750 766,719
Rubbermaid, Inc. .......................................... 912 30,153
Tupperware Corp. .......................................... 329 5,737
-----------
1,157,097
-----------
Containers & Packaging (0.2%):
Ball Corp. ................................................ 175 7,481
Bemis Co.(c)............................................... 289 10,928
Crown Cork & Seal Co., Inc. ............................... 774 26,123
Owens-Illinois, Inc.(b).................................... 1,010 32,445
Sealed Air Corp.(b)........................................ 524 23,122
-----------
100,099
-----------
Cosmetics (0.7%):
Alberto-Culver Co.(c)...................................... 303 7,764
Avon Products, Inc. ....................................... 1,636 66,463
Gillette Co. .............................................. 7,332 336,814
International Flavors & Fragrances, Inc. .................. 726 30,401
-----------
441,442
-----------
Diversified Operations (1.7%):
Aeroquip-Vickers, Inc. .................................... 140 5,093
CBS Corp. ................................................. 4,742 141,371
Corning, Inc. ............................................. 1,509 60,549
Crane Co. ................................................. 394 12,731
Eastern Enterprises........................................ 133 5,395
Eaton Corp. ............................................... 490 33,473
ITT Industries, Inc. ...................................... 733 26,388
Minnesota Mining & Manufacturing Co. ...................... 2,557 205,359
National Service Industries, Inc. ......................... 235 9,077
PPG Industries, Inc. ...................................... 1,174 71,834
Raychem Corp. ............................................. 489 16,657
Tenneco, Inc. ............................................. 1,072 38,190
Textron, Inc. ............................................. 1,026 79,707
Unilever NV, New York Shares............................... 4,141 320,150
-----------
1,025,974
-----------
Electrical & Electronic (3.7%):
AMP, Inc. ................................................. 1,218 58,921
Emerson Electric Co. ...................................... 2,976 193,440
General Electric Co. ...................................... 21,448 1,941,050
Tandy Corp. ............................................... 651 29,336
Tektronix, Inc. ........................................... 277 7,427
Thomas & Betts Corp. ...................................... 392 16,979
W.W. Grainger, Inc. ....................................... 634 26,787
-----------
2,273,940
-----------
Engineering (0.0%):
Fluor Corp. ............................................... 493 21,107
Foster Wheeler Corp. ...................................... 241 4,127
-----------
25,234
-----------
</TABLE>
Continued
69
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Entertainment (1.8%):
Brunswick Corp. ............................................. 677 $ 14,894
Harrah's Entertainment, Inc.(b).............................. 645 10,038
Harris Corp. ................................................ 468 17,755
King World Productions, Inc.(b).............................. 431 11,745
Meredith Corp. .............................................. 294 11,411
The Walt Disney Co. ......................................... 13,471 433,597
Time Warner, Inc. ........................................... 4,022 425,327
Viacom, Inc., Class B(b)(c).................................. 2,445 162,745
-----------
1,087,512
-----------
Environmental Services (0.3%):
Waste Management, Inc. ...................................... 3,657 156,794
-----------
Financial Services (6.1%):
American Express Co.......................................... 2,960 296,185
Associates First Capital Corp. .............................. 2,249 175,141
Bear Stearns Co., Inc. ...................................... 723 30,366
Capital One Financial Corp. ................................. 462 50,820
Citigroup, Inc. ............................................. 15,009 753,263
Countrywide Credit Industries, Inc. ......................... 680 33,660
Dun & Bradstreet Corp. ...................................... 1,120 33,810
Fannie Mae................................................... 6,860 499,065
Fleet Financial Group, Inc. ................................. 3,792 158,079
Franklin Resources, Inc. .................................... 1,584 67,716
Freddie Mac.................................................. 4,546 275,033
Golden West Financial Corp. ................................. 409 38,727
Household International, Inc. ............................... 3,320 129,895
J. P. Morgan & Co., Inc. .................................... 1,106 118,204
Lehman Brothers Holding, Inc. ............................... 750 37,453
MBIA, Inc. .................................................. 629 40,728
MBNA Corp. .................................................. 4,845 109,921
Merrill Lynch & Co. ......................................... 2,271 170,325
MGIC Investment Corp. ....................................... 757 33,261
Morgan Stanley Dean Witter & Co. ............................ 3,790 264,353
Paychex, Inc. ............................................... 1,050 52,238
Providian Financial Corp. ................................... 558 51,231
Regions Financial Corp. ..................................... 1,400 54,250
Schwab (Charles) Corp. ...................................... 1,696 95,612
SLM Holding Corp. ........................................... 1,037 45,628
Washington Mutual, Inc. ..................................... 3,835 148,606
-----------
3,763,570
-----------
Food Products & Services (2.0%):
Archer-Daniels Midland Co. .................................. 3,851 70,762
Bestfoods.................................................... 1,799 104,567
Campbell Soup Co. ........................................... 2,908 166,120
ConAgra, Inc. ............................................... 3,162 99,405
General Mills, Inc. ......................................... 960 72,480
H. J. Heinz Co. ............................................. 2,304 134,352
Hershey Foods Corp. ......................................... 877 58,978
Kellogg Co. ................................................. 2,772 101,525
Pioneer Hi-Bred International, Inc. ......................... 1,533 45,894
Quaker Oats Co. ............................................. 880 54,010
Ralston Purina Group......................................... 2,052 71,435
Sara Lee Corp. .............................................. 3,040 177,460
Wm. Wrigley Jr. Co. ......................................... 725 63,891
-----------
1,220,879
-----------
Common Stocks, continued:
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Funeral Services (0.1%):
Service Corp. International.................................. 1,613 $ 60,286
-----------
Health Care (2.0%):
American Home Products Corp. ................................ 8,616 458,801
C.R. Bard, Inc. ............................................. 408 18,692
Columbia/HCA Healthcare Corp. ............................... 4,292 105,691
HBO & Co. ................................................... 2,780 69,326
HCR Manor Care, Inc.(b)...................................... 667 21,177
HEALTHSOUTH Corp.(b)......................................... 2,861 38,445
Humana, Inc.(b).............................................. 1,089 21,576
Tenet Healthcare Corp.(b).................................... 1,980 58,534
United Healthcare Corp. ..................................... 1,227 55,368
Warner-Lambert Co. .......................................... 5,299 400,075
-----------
1,247,685
-----------
Hotels & Lodging (0.2%):
Hilton Hotels Corp. ......................................... 1,684 36,627
Marriott International, Inc., Class A........................ 1,600 47,000
Mirage Resorts, Inc.(b)...................................... 1,178 17,523
-----------
101,150
-----------
Household - Major Appliances (0.1%):
Maytag Corp. ................................................ 559 30,256
Whirlpool Corp. ............................................. 479 26,824
-----------
57,080
-----------
Instrumentation (0.3%):
EG&G, Inc. .................................................. 343 9,583
Honeywell, Inc. ............................................. 818 65,388
Johnson Controls, Inc. ...................................... 590 34,146
Parker Hannifin Corp. ....................................... 731 25,402
Perkin-Elmer Corp. .......................................... 278 25,924
-----------
160,443
-----------
Insurance (3.7%):
Aetna, Inc. ................................................. 941 72,751
Allstate Corp. .............................................. 5,482 223,391
American General Corp. ...................................... 1,610 113,404
American International Group, Inc. .......................... 6,865 645,309
Aon Corp. ................................................... 1,063 61,255
Chubb Corp. ................................................. 1,061 74,336
Cigna Corp. ................................................. 1,396 108,626
Cincinnati Financial Corp. .................................. 1,082 42,266
Conseco, Inc. ............................................... 2,135 70,722
General Re Corp. ............................................ 511 119,319
Hartford Financial Services Group, Inc. ..................... 1,460 80,574
Jefferson-Pilot Corp. ....................................... 721 49,208
Lincoln National Corp. ...................................... 651 54,481
Loews Corp. ................................................. 720 72,000
March & McLennan Cos., Inc. ................................. 1,602 93,216
Progressive Corp. ........................................... 484 71,814
Provident Companies, Inc. ................................... 854 32,826
SAFECO Corp. ................................................ 915 39,288
St. Paul Companies, Inc. .................................... 1,500 52,875
SunAmerica, Inc. ............................................ 1,310 103,818
Torchmark Corp. ............................................. 899 34,162
Transamerica Corp. .......................................... 446 47,388
UNUM Corp. .................................................. 898 48,380
-----------
2,311,409
-----------
</TABLE>
Continued
70
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Machinery & Equipment (0.5%):
Case Corp. .................................................. 500 $ 12,125
Caterpillar, Inc. ........................................... 2,489 123,049
Deere & Co. ................................................. 1,595 55,725
Dover Corp. ................................................. 1,418 50,516
Harnischfeger Industries, Inc. .............................. 351 3,510
Milacron, Inc. .............................................. 238 4,820
Nacco Industries, Inc., Class A.............................. 33 2,873
Snap-On, Inc. ............................................... 424 14,416
Stanley Works................................................ 513 15,679
Thermo Electron Corp.(b)..................................... 1,060 17,888
-----------
300,601
-----------
Manufacturing (0.7%):
Briggs & Stratton Corp. ..................................... 118 5,952
Danaher Corp. ............................................... 820 37,413
Fleetwood Enterprises, Inc. ................................. 270 9,096
Illinois Tool Works, Inc. ................................... 1,587 100,873
Pall Corp. .................................................. 814 18,926
Tyco International Ltd. ..................................... 4,287 282,137
-----------
454,397
-----------
Medical Equipment & Supplies (1.0%):
ALZA Corp.(b)................................................ 595 31,089
Bausch & Lomb, Inc. ......................................... 402 22,311
Baxter International, Inc. .................................. 1,865 118,544
Becton Dickinson & Co. ...................................... 1,604 68,170
Biomet, Inc. ................................................ 742 28,382
Boston Scientific Corp.(b)................................... 1,292 63,954
Guidant Corp. ............................................... 956 82,037
Mallinckrodt, Inc. .......................................... 427 13,797
Medtronic, Inc. ............................................. 3,010 203,739
St. Jude Medical, Inc.(b)(c)................................. 556 16,159
-----------
648,182
-----------
Medical Services (0.0%):
Shared Medical Systems Corp. ................................ 121 6,337
-----------
Metals & Mining (0.3%):
Alcan Aluminum Ltd. ......................................... 1,474 39,245
Aluminum Co. of America...................................... 1,183 87,691
Asarco, Inc. ................................................ 225 4,359
Cyprus Amax Minerals Co. .................................... 631 7,178
Freeport McMoran Copper & Gold, Inc. ........................ 1,189 15,531
Inco Ltd. ................................................... 1,062 12,279
Phelps Dodge Corp. .......................................... 415 23,525
Reynolds Metals Co. ......................................... 497 27,273
-----------
217,081
-----------
Office Equipment & Services (0.6%):
Deluxe Corp. ................................................ 536 18,626
IKON Office Solutions, Inc. ................................. 875 8,531
Moore Corp. Ltd.(c).......................................... 608 6,650
Pitney Bowes, Inc. .......................................... 1,712 95,872
Xerox Corp. ................................................. 2,126 228,545
-----------
358,224
-----------
Oil & Exploration, Production & Services (0.3%):
Anadarko Petroleum Corp. .................................... 736 20,746
Apache Corp. ................................................ 642 14,766
</TABLE>
<TABLE>
<CAPTION>
Common Stocks, continued:
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Oil & Exploration, Production & Services, continued:
Burlington Resources, Inc. .................................. 1,098 39,116
Coastal Corp. ............................................... 1,310 45,686
Kerr-McGee Corp. ............................................ 273 10,784
Oryx Energy Co.(b)........................................... 703 9,710
Rowan Cos., Inc.(b).......................................... 499 4,896
Sonat, Inc. ................................................. 727 21,583
Union Pacific Resources Group, Inc. ......................... 1,620 18,124
-----------
185,411
-----------
Oil & Gas Equipment/Services (0.6%):
Baker Hughes, Inc. .......................................... 2,062 37,760
Halliburton Co. ............................................. 2,840 83,425
McDermott International, Inc. ............................... 349 9,358
Schlumberger Ltd. ........................................... 3,537 158,060
Williams Cos., Inc. ......................................... 2,757 79,436
-----------
368,039
-----------
Oil Companies - Integrated (6.0%):
Amerada Hess Corp. .......................................... 530 29,415
Amoco Corp. ................................................. 6,287 370,540
Ashland, Inc. ............................................... 503 24,458
Atlantic Richfield Co. ...................................... 2,066 137,389
Chevron Corp. ............................................... 4,215 352,479
Enron Corp. ................................................. 2,139 112,431
Exxon Corp. .................................................16,043 1,204,228
Helmerich & Payne, Inc. ..................................... 279 4,813
Mobil Corp. ................................................. 5,168 445,417
Occidental Petroleum Corp. .................................. 2,293 46,433
Pennzoil Co. ................................................ 265 9,838
Phillips Petroleum Co. ...................................... 1,675 70,350
Royal Dutch Petroleum Co.-NY Shares..........................14,156 665,332
Sunoco, Inc. ................................................ 573 19,418
Texaco, Inc. ................................................ 3,460 199,166
Unocal Corp. ................................................ 1,573 53,285
USX-Marathon Group........................................... 1,999 56,722
-----------
3,801,714
-----------
Paper & Related (1.0%):
Boise Cascade Corp. ......................................... 398 12,612
Champion International Corp. ................................ 565 23,483
Fort James Corp. ............................................ 1,377 53,875
Georgia-Pacific Corp. ....................................... 548 31,099
International Paper Co. ..................................... 1,976 85,833
Kimberly-Clark Corp. ........................................ 3,683 193,817
Louisiana-Pacific Corp. ..................................... 694 11,798
Mead Corp. .................................................. 701 21,249
Potlatch Corp. .............................................. 143 5,407
Temple-Inland, Inc. ......................................... 401 21,529
Union Camp Corp. ............................................ 459 29,692
Westvaco Corp. .............................................. 691 19,434
Weyerhaeuser Co. ............................................ 1,235 61,904
Williamette Industries, Inc. ................................ 702 24,526
-----------
596,258
-----------
Pharmaceuticals (9.0%):
Abbott Laboratories..........................................10,046 482,208
Allergan, Inc. .............................................. 442 26,907
Amgen, Inc.(b)............................................... 1,655 124,539
</TABLE>
Continued
71
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Pharmaceuticals, continued:
Bristol-Myers Squibb Co. .................................... 6,516 $ 798,617
Eli Lilly & Co. ............................................. 7,258 650,952
Johnson & Johnson............................................ 8,839 718,169
Merck & Co., Inc. ........................................... 7,848 1,215,458
Pfizer, Inc. ................................................ 8,566 956,179
Pharmacia & UpJohn, Inc. .................................... 3,425 178,314
Schering-Plough Corp. ....................................... 4,743 504,537
-----------
5,655,880
-----------
Photography (0.3%):
Eastman Kodak Co. ........................................... 2,111 153,179
Polaroid Corp.(c)............................................ 236 5,015
-----------
158,194
-----------
Precious Metals (0.2%):
Barrick Gold Corp. .......................................... 2,384 47,679
Battle Mountain Gold Co. .................................... 1,492 6,994
Homestake Mining Co. ........................................ 1,349 14,502
Newmont Mining Corp.(c)...................................... 1,036 20,591
Placer Dome, Inc. ........................................... 1,578 22,980
-----------
112,746
-----------
Printing & Publishing (0.7%):
American Greetings Corp. Class A............................. 481 20,352
Dow Jones & Co., Inc. ....................................... 620 29,644
Gannett Co., Inc. ........................................... 1,777 114,728
Knight-Ridder, Inc. ......................................... 533 27,416
McGraw-Hill Cos., Inc. ...................................... 631 56,475
New York Times Co. .......................................... 1,190 36,964
R.R. Donnelley Co. .......................................... 891 37,812
Times Mirror Co. ............................................ 507 29,723
Tribune Co. ................................................. 803 51,492
-----------
404,606
-----------
Restaurants (0.6%):
Darden Restaurants, Inc. .................................... 903 14,279
McDonald's Corp. ............................................ 4,425 310,026
Tricon Global Restaurants, Inc.(b)........................... 954 43,467
Wendy's International, Inc. ................................. 853 17,060
-----------
384,832
-----------
Retail Stores (5.7%):
Albertson's, Inc. ........................................... 1,575 89,873
American Stores Co. ......................................... 1,740 58,399
AutoZone, Inc.(b)............................................ 964 29,041
Circuit City Stores, Inc. ................................... 625 22,617
Consolidated Stores Corp.(b)................................. 683 14,685
CVS Corp. ................................................... 2,464 121,660
Dayton Hudson Corp. ......................................... 2,822 126,990
Dillards, Inc., Class A...................................... 739 25,403
Dollar General Corp. ........................................ 1,191 28,361
Federated Department Stores, Inc.(b)......................... 1,349 56,236
Fred Meyer, Inc. (b)......................................... 1,000 50,875
Great Atlantic & Pacific Tea Co. ............................ 231 6,309
Harcourt General, Inc. ...................................... 415 21,476
Home Depot, Inc. ............................................ 9,560 475,609
J.C. Penney, Inc.(c)......................................... 1,584 87,120
KMart Corp.(b)............................................... 3,328 50,752
</TABLE>
<TABLE>
Common Stocks, continued:
<S> <C> <C>
Retail Stores, continued:
Kohl's Corp.(b).............................................. 1,058 52,040
Kroger Co.(b)................................................ 1,630 86,492
Limited, Inc. ............................................... 1,432 41,439
Longs Drug Stores, Inc. ..................................... 234 8,336
Lowe's Cos. ................................................. 2,264 95,654
May Department Stores Co. ................................... 1,500 90,469
Nordstrom, Inc. ............................................. 906 33,749
Pep Boys--Manny, Moe, & Jack................................. 447 6,314
Rite-Aid Corp. .............................................. 1,627 75,452
Safeway, Inc. (b)............................................ 3,281 173,278
Sears, Roebuck & Co. ........................................ 2,674 126,848
Staples, Inc.(b)............................................. 1,815 63,412
TJX Cos., Inc. .............................................. 2,018 51,711
Toys 'R' Us, Inc.(b)......................................... 1,786 35,274
Venator Group, Inc.(b)....................................... 872 6,867
Wal-Mart Stores, Inc. .......................................14,643 1,102,800
Walgreen Co. ................................................ 3,360 180,390
Winn-Dixie Stores, Inc.(c)................................... 938 37,813
-----------
3,533,744
-----------
Semiconductors (2.7%):
Advanced Micro Devices, Inc.(b).............................. 908 25,140
Applied Materials, Inc.(b)................................... 2,353 91,179
Intel Corp. ................................................. 10,952 1,178,709
KLA-Tencor Corp.(b).......................................... 544 18,530
LSI Logic Corp.(b)........................................... 899 13,935
Micron Technology, Inc.(b)(c)................................ 1,356 56,020
National Semiconductor Corp.(b).............................. 1,095 15,741
Rockwell International Corp. ................................ 1,194 58,431
Texas Instruments, Inc. ..................................... 2,481 189,486
-----------
1,647,171
-----------
Steel (0.1%):
Allegheny Teledyne, Inc. .................................... 1,212 24,921
Bethlehem Steel Corp.(b)..................................... 806 6,650
Nucor Corp. ................................................. 508 21,336
USX-U.S. Steel Group......................................... 596 14,565
Worthington Industries, Inc. ................................ 619 7,544
-----------
75,016
-----------
Technology (0.4%):
Autodesk, Inc. .............................................. 345 12,549
Motorola, Inc. .............................................. 4,021 249,302
-----------
261,851
-----------
Telecommunications (4.3%):
AirTouch Communication, Inc.(b).............................. 3,848 220,058
Andrew Corp.(b)(c)........................................... 571 9,136
Ascend Communications, Inc.(b)(c)............................ 1,400 78,663
Clear Channel Communications, Inc.(b)........................ 1,630 76,203
Comcast Corp. ............................................... 2,333 113,442
Frontier Corp. .............................................. 1,094 32,957
General Instrument Corp.(b).................................. 934 26,269
Lucent Technologies, Inc. ................................... 8,612 741,169
MCI Worldcom, Inc.(b)........................................ 11,642 686,877
MediaOne Group, Inc.(b)...................................... 4,051 164,066
Nextel Communications, Inc. Class A(b)....................... 1,850 39,775
Northern Telecom Ltd. ....................................... 4,208 196,461
</TABLE>
Continued
72
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Telecommunications, continued:
Scientific-Atlanta, Inc. ................................... 516 $ 9,998
Sprint Corp. (PCS Group)(b)................................. 2,779 44,464
Tele-Communications -- TCI Class A(b)....................... 3,528 149,058
Tellabs, Inc.(b)............................................ 1,282 69,308
-----------
2,657,904
-----------
Textile Products (0.0%):
Springs Industries, Inc. ................................... 132 5,140
-----------
Tire & Rubber (0.1%):
B. F. Goodrich Co. ......................................... 519 19,690
Cooper Tire & Rubber Co. ................................... 461 9,018
Goodyear Tire & Rubber Co. ................................. 985 55,899
-----------
84,607
-----------
Tobacco (1.6%):
Philip Morris Companies, Inc. .............................. 15,953 892,371
RJR Nabisco Holdings Corp. ................................. 2,103 60,593
UST, Inc. .................................................. 1,235 42,916
-----------
995,880
-----------
Toys (0.2%):
Hasbro, Inc. ............................................... 853 29,908
Mattel, Inc. ............................................... 1,830 63,250
-----------
93,158
-----------
Transportation & Shipping (0.7%):
Burlington Northern Santa Fe................................ 3,050 103,700
CSX Corp. .................................................. 1,436 59,863
FDX Corp.(b)................................................ 944 61,242
Laidlaw, Inc. .............................................. 2,132 21,187
Norfolk Southern Corp. ..................................... 2,458 74,662
Timken Co. ................................................. 431 8,297
Union Pacific Corp. ........................................ 1,575 76,584
-----------
405,535
-----------
Trucking & Leasing (0.0%):
Ryder Systems, Inc. ........................................ 510 14,567
-----------
Utilities - Gas & Electric (2.7%):
AES Corp.(b)................................................ 1,090 49,868
Ameren Corp.(c)............................................. 842 34,680
American Electric Power, Inc. .............................. 1,265 58,664
Baltimore Gas & Electric Co. ............................... 903 27,711
Carolina Power & Light Co. ................................. 918 42,572
Central & South West Corp. ................................. 1,361 37,428
CINergy Corp. .............................................. 994 34,355
Columbia Energy Group....................................... 550 31,213
Consolidated Edison, Inc. .................................. 1,510 76,727
Consolidated Natural Gas Co. ............................... 612 33,239
Dominion Resources, Inc. ................................... 1,286 59,397
DTE Energy Co. ............................................. 918 40,048
Duke Power Co. ............................................. 2,292 143,392
Edison International........................................ 2,319 63,773
Entergy Corp. .............................................. 1,568 45,962
FirstEnergy Corp. .......................................... 1,500 46,406
FPL Group, Inc. ............................................ 1,122 68,723
GPU, Inc. .................................................. 817 35,795
Houston Industries, Inc. ................................... 1,852 58,570
</TABLE>
<TABLE>
<CAPTION>
Common Stocks, continued:
Security Market
Description Shares Value
----------- ------ -----------
<S> <C> <C>
Utilities - Gas & Electric, continued:
New Century Energies, Inc. ................................. 714 34,317
Niagara Mohawk Power Corp.(b)............................... 1,215 18,681
NICOR, Inc. ................................................ 353 14,848
Northern States Power Co. .................................. 964 26,269
Oneok, Inc. ................................................ 187 6,510
PacifiCorp.................................................. 2,053 38,494
Peco Energy Co. ............................................ 1,459 58,542
People's Energy Corp. ...................................... 218 8,216
PG & E Corp. ............................................... 2,609 80,716
PP & L Resources, Inc. ..................................... 1,038 28,350
Public Service Enterprise Group, Inc. ...................... 1,499 58,461
Sempra Energy............................................... 1,522 38,145
Southern Co. ............................................... 4,626 136,466
Texas Utilities Co. ........................................ 1,780 79,321
Unicom Corp. ............................................... 1,381 52,046
-----------
1,667,905
-----------
Utilities - Telephone (6.0%):
Alltel Corp. ............................................... 1,740 92,220
Ameritech Corp. ............................................ 7,188 389,051
AT&T Corp. ................................................. 11,892 741,019
Bell Atlantic Corp. ........................................ 10,136 563,815
BellSouth Corp. ............................................ 6,498 566,951
GTE Corp. .................................................. 6,328 392,336
SBC Communications, Inc. ................................... 12,865 616,715
Sprint Corp. ............................................... 2,758 200,645
US West, Inc. .............................................. 3,352 208,662
-----------
3,771,414
-----------
Wholesale Distribution (0.4%):
Cardinal Health, Inc. ...................................... 1,237 84,889
Costo Companies, Inc.(b).................................... 1,407 88,290
SUPERVALU, Inc. ............................................ 746 19,256
Sysco Corp. ................................................ 2,192 59,047
-----------
251,482
-----------
TOTAL COMMON STOCKS 61,174,528
-----------
Investment Companies (0.7%):
S&P 500 Depositary Receipt.................................. 3,500 407,642
-----------
TOTAL INVESTMENT COMPANIES 407,642
-----------
Short-Term Securities Held as Collateral (1.3%):
Repurchase agreements (1.3%)
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $265,586, collateralized
by $330,056 various U.S. Government Agency securities,
0.00%-8.50%, 12/3/98-9/11/28, market value $270,802)..... $265,544 265,544
Nationsbanc Montgomery Securities, Inc., 5.68%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity $30,180,
collateralized by $33,852 various U.S. Government Agency
mortgages, 0.00%-10.50%, 5/1/00-12/1/28, market value
$30,779)................................................. 30,176 30,176
</TABLE>
Continued
73
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Equity Index Portfolio November 30, 1998
Short-Term Securities Held as Collateral, continued:
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- -------- -----------
<S> <C> <C>
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $132,792,
collateralized by $674,600 various U.S. Government
Agency mortgages, 0.00%-8.00%, 10/25/99-8/1/28, market
value $135,428)....................................... $132,772 $ 132,772
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $89,349, collateralized
by $104,773 various U.S. Treasury Notes, 3.63%-8.75%,
10/31/99-11/15/28, market value $91,123).............. 89,336 89,336
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $265,583,
collateralized by $317,747 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$270,855)............................................. 265,544 265,544
-----------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 783,372
-----------
TOTAL INVESTMENTS
(Cost $51,394,684)(a) (103.1%)................................. 64,022,542
Liabilities in excess of other assets (-3.1%)................... (1,932,824)
-----------
TOTAL NET ASSETS (100.0%)....................................... $62,089,718
===========
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$7,464. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation...................................... $14,585,289
Unrealized depreciation...................................... (1,964,895)
-----------
Net unrealized appreciation.................................. $12,620,394
===========
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
See notes to financial statements
74
<PAGE>
THE ARCH FUND, INC.
Equity Index Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $50,611,312)............... $63,239,170
Repurchase agreements, at value
(cost $783,372)....................................... 783,372
-----------
Total investments..................................... 64,022,542
Cash................................................... 223
Interest and dividends receivable...................... 86,036
Receivable for capital shares issued................... 20,000
Receivable for investments sold........................ 14,381
Deferred organization costs............................ 20,523
-----------
Total Assets.......................................... 64,163,705
Liabilities:
Dividends payable...................................... $ 48,925
Payable for investments purchased...................... 1,202,408
Payable for capital shares redeemed.................... 1,134
Payable for return of collateral received.............. 783,372
Accrued expenses and other payables:
Investment advisory fees.............................. 14,714
Administration fees................................... 1,212
Distribution and administrative services fees......... 2,884
Custodian fees........................................ 4,532
Other liabilities..................................... 14,806
----------
Total Liabilities..................................... 2,073,987
-----------
Net Assets:
Capital................................................ 48,675,257
Undistributed net investment income.................... 6,589
Accumulated net realized gains from investment
transactions.......................................... 780,014
Net unrealized appreciation from investments........... 12,627,858
-----------
Net Assets............................................. $62,089,718
===========
Investor A Shares
Net Assets............................................ $ 914,155
Shares................................................ 62,864
Redemption price per share............................ $14.54
======
Maximum Sales Charge -- Investor A Shares.............. 2.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share...................................... $14.91
======
Trust Shares
Net Assets............................................ $50,232,024
Shares................................................ 3,453,037
Offering and redemption price per share............... $14.55
======
Institutional Shares
Net Assets............................................ $10,943,539
Shares................................................ 752,593
Offering and redemption price per share............... $14.54
======
</TABLE>
<TABLE>
Statement of Operations
For the year ended November 30, 1998
<S> <C> <C>
Investment Income:
Interest income.......................................... $ 27,170
Dividend income.......................................... 699,436
Income from securities lending........................... 3,375
Foreign tax withholding.................................. (5,572)
----------
Total Income............................................ 724,409
Expenses:
Investment advisory fees................................. $139,902
Administration fees...................................... 93,268
Distribution and services fees, Investor A Shares........ 1,613
Administrative services fees, Trust Shares............... 119,561
Administrative services fees, Institutional Shares....... 18,728
Accounting fees.......................................... 25,850
Custodian fees........................................... 13,997
Directors' fees and expenses............................. 654
Transfer agent fees...................................... 10,389
Legal fees............................................... 25,288
Other fees............................................... 32,470
--------
Total expenses before voluntary fee reductions.......... 481,720
Expenses voluntarily reduced............................ (205,666)
----------
Net Expenses............................................ 276,054
----------
Net investment income.................................... 448,355
----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions.......... 780,875
Net change in unrealized appreciation from investments... 7,781,805
----------
Net realized/unrealized gains from investments........... 8,562,680
----------
Change in net assets resulting from operations........... $9,011,035
==========
</TABLE>
See notes to financial statements
75
<PAGE>
THE ARCH FUND, INC.
Equity Index Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended period ended
November 30, November 30,
1998 1997(a)
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................... $ 448,355 $ 252,124
Net realized gains from investment transactions..... 780,875 56,897
Net change in unrealized appreciation from
investments........................................ 7,781,805 4,846,053
----------- -----------
Change in net assets resulting from operations....... 9,011,035 5,155,074
----------- -----------
Distributions to Investor A Shareholders:
From net investment income.......................... (4,251) (378)
In excess of net investment income.................. -- (81)
From net realized gains from investment
transactions....................................... (374) --
Distributions to Trust Shareholders:
From net investment income.......................... (406,100) (243,890)
From net realized gains from investment
transactions....................................... (57,368) --
Distributions to Institutional Shareholders:
From net investment income.......................... (43,165) (31)
From net realized gains from investment
transactions....................................... (14) --
----------- -----------
Change in net assets from shareholder distributions.. (511,272) (244,380)
----------- -----------
Change in net assets from capital transactions....... 21,589,407 27,089,854
----------- -----------
Change in net assets................................. 30,089,170 32,000,548
Net Assets:
Beginning of period................................. 32,000,548 --
----------- -----------
End of period....................................... $62,089,718 $32,000,548
=========== ===========
</TABLE>
(a) Period commenced May 1, 1997.
See notes to financial statements
76
<PAGE>
THE ARCH FUND, INC.
Equity Index Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
-------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income.......................................... $ 448,355
Adjustments to reconcile net investment income to net cash used
in operating activities:
Cost of investment securities.................................. (150,509,732)
Proceeds from disposition of investment securities............. 129,021,382
Cost of investments purchased with cash collateral from
securities lending............................................ (783,372)
Increase in dividends and interest receivable.................. (28,303)
Increase in payable for return of collateral received from
securities lending............................................ 783,372
Increase in accrued expenses................................... 22,174
Amortization expense on organizational costs................... 2,920
Decrease in prepaid expenses................................... 511
Net amortization/accretion from investments.................... (27,170)
-------------
Net cash used in operating activities.......................... (21,069,863)
-------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................... 24,976,722
Cost of shares redeemed........................................ (3,876,197)
Cash distributions paid........................................ (31,276)
-------------
Net cash provided by financing activities...................... 21,069,249
-------------
Decrease in cash................................................ (614)
Cash:
Beginning balance.............................................. 837
-------------
Ending balance................................................. $ 223
=============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $469,796.
See notes to financial statements
77
<PAGE>
THE ARCH FUND, INC.
Equity Index Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the
year ended May 1, 1997 to
November 30, November 30,
1998 1997 (a)
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $11.93 $10.00
------ ------
Investment Activities
Net investment income........................... 0.09 0.07
Net realized and unrealized gains from
investments.................................... 2.64 1.94
------ ------
Total from Investment Activities................ 2.73 2.01
------ ------
Distributions
Net investment income........................... (0.10) (0.07)
In excess of net investment income.............. -- (0.01)
Net realized gains.............................. (0.02) --
------ ------
Total Distributions............................. (0.12) (0.08)
------ ------
Net Asset Value, End of Period................... $14.54 $11.93
====== ======
Total Return (excludes sales charge)............. 23.01 % 20.14 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................ $ 914 $ 206
Ratio of expenses to average net assets.......... 0.86 % 0.78 %(c)
Ratio of net investment income to average net
assets.......................................... 0.70 % 1.02 %(c)
Ratio of expenses to average net assets*......... 1.03 % 1.21 %(c)
Portfolio turnover**............................. 14.83 % 1.66 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the
year ended May 1, 1997 to
November 30, November 30,
1998 1997 (a)
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $ 11.94 $ 10.00
------- -------
Investment Activities
Net investment income........................... 0.13 0.10
Net realized and unrealized gains from
investments.................................... 2.64 1.94
------- -------
Total from Investment Activities................ 2.77 2.04
------- -------
Distributions
Net investment income........................... (0.14) (0.10)
Net realized gains.............................. (0.02) --
------- -------
Total Distributions............................. (0.16) (0.10)
------- -------
Net Asset Value, End of Period................... $ 14.55 $ 11.94
======= =======
Total Return..................................... 23.34 % 20.40 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................ $50,232 $31,787
Ratio of expenses to average net assets.......... 0.54 % 0.39 %(c)
Ratio of net investment income to average net
assets.......................................... 1.02 % 1.48 %(c)
Ratio of expenses to average net assets*......... 1.03 % 1.12 %(c)
Portfolio turnover**............................. 14.83 % 1.66 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
78
<PAGE>
THE ARCH FUND, INC.
Equity Index Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the
year ended May 1, 1997 to
November 30, November 30,
1998 1997 (a)
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period............. $ 11.94 $10.00
------- ------
Investment Activities
Net investment income........................... 0.10 0.10
Net realized and unrealized gains from
investments.................................... 2.63 1.94
------- ------
Total from Investment Activities................ 2.73 2.04
------- ------
Distributions
Net investment income........................... (0.11) (0.10)
Net realized gains.............................. (0.02) --
------- ------
Total Distributions............................. (0.13) (0.10)
------- ------
Net Asset Value, End of Period................... $ 14.54 $11.94
======= ======
Total Return..................................... 23.01 % 20.40 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)................ $10,944 $ 8
Ratio of expenses to average net assets.......... 0.91 % 0.46 %(c)
Ratio of net investment income to average net
assets.......................................... 0.63 % 1.30 %(c)
Ratio of expenses to average net assets*......... 1.03 % 1.19 %(c)
Portfolio turnover**............................. 14.83 % 1.66 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
79
<PAGE>
The ARCH Growth Equity Portfolio+
Q. What was the overall environment in the stock market during the 12 months
through November 30, 1998?
A. The market showed remarkable resilience this year. After posting strong
returns during the first half of the period, stocks declined sharply in July
and August as continued economic and financial problems in Asia and elsewhere
fueled fears of a potential global liquidity crisis. Stocks rebounded late in
the period, thanks to a series of three interest rate cuts by the Federal
Reserve Board.
Large-cap stocks continued to outperform small-cap stocks. One reason:
Investors who were worried about a potential economic slowdown shifted assets
into shares of large growth companies.
Q. How did you manage the Portfolio in that environment?
A. The market slump, which included some indiscriminate selling in August,
allowed us to purchase high-quality stocks at attractive prices. Throughout the
period, we focused on large companies in four broad sectors: technology, health
care, financial services and consumer goods. These sectors offered predictable
and stable earnings growth in an otherwise uncertain environment.
The demand for increased office productivity and personal computers drove the
technology sector. Technology stocks that especially benefited the Portfolio
included Microsoft (3.6% of the Portfolio's net assets, up 72% for the year),
Intel (2.7%, up 39%) and Ascend Communications (2.4%). The aging population
supported earnings growth for drug manufacturers such as
Schering-Plough (4.1%, up 70%) and Merck (4.1%, up 63%). We also held shares of
consumer goods companies that we think can deliver consistent earnings growth;
they include WalMart (3.1%, up 89%) and Home Depot (2.3%, up 78%).*
Q. What changes did you make to the Fund's portfolio during the period?
A. We increased our exposure to the technology sector from 17% at the
beginning of the period to 21% at the end of the period. In the beginning of
the period, the Asian crisis hurt the sector by causing pricing pressures,
inventory concerns and declining demand. Depressed technology stock prices
presented an opportunity to add new positions to our portfolio and to add to
core holdings in the sector.
We held 3.8% of the Portfolio's assets in the energy sector at the beginning
of the period. During the period, a sharper than expected drop in oil prices
led us to sell off the Portfolio's entire stake in energy stocks. We will look
for opportunities to get back into the energy sector once pricing conditions
improve.
Q. What's your outlook for the market and the Portfolio?
A. It seems likely that many companies may continue to post relatively
sluggish earnings. This could fuel further demand for shares of large companies
that can deliver consistent profit growth. Currently, we believe the Portfolio
is well positioned for such an environment, so we do not expect to make major
changes.
- -----
* Portfolio composition is subject to change.
80
<PAGE>
The ARCH Growth Equity Portfolio+
[ARCH GROWTH EQUITY PORTFOLIO+ CHART APPEARS HERE]
<TABLE>
<CAPTION>
Value of a $10,000 Investment
Investor A Investor A Investor B Investor B S&P 500
(No Load) (Load)* (No CDSC) (CDSC)* Stock Index
--------- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
- -
1/4/93 10,000 9,551 10,000 10,000 10,000
Nov-93 9,870 9,427 9,870 9,378 10,787
Nov-94 9,643 9,287 9,725 9,342 10,903
Nov-95 14,179 13,655 14,296 13,996 14,926
Nov-96 17,086 16,455 17,225 16,925 19,084
Nov-97 20,440 19,685 20,621 20,421 24,531
May-98 23,226 22,183 23,174 23,074 28,227
Nov-98 25,254 24,120 25,113 25,013 28,874
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent
deferred sales charge. (Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (1/4/93)+
------ ------ ---------
Investor A (No Load) 22.53% 20.67% 16.99%
Investor A* 16.99% 19.57% 16.08%
Investor B (No CDSC) 21.78% 20.54% 16.88%
Investor B (CDSC)** 16.78% 20.44% 16.80%
[ARCH GROWTH EQUITY PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Trust Institutional S&P 500
----- ------------- -------
1/4/93 10,000 10,000 10,000
Nov-93 9,870 9,870 10,787
Nov-94 9,724 9,725 10,903
Nov-95 14,297 14,296 14,926
Nov-96 17,228 17,226 19,084
Nov-97 20,610 20,610 24,531
May-98 23,233 23,221 28,227
Nov-98 25,338 25,263 28,874
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (1/4/93)
------ ------ --------
Trust 22.94% 20.75% 17.05%
Institutional 22.58% 20.68% 17.00%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Growth Equity Portfolio is measured against the
Standard & Poor's 500 Stock Index, an unmanaged index generally representative
of the U.S. stock market. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
+ The portfolio commenced operations as a portfolio of Arrow Equity Portfolio
("the Predecessor Portfolio "). On November 24, 1997, the Predecessor
Portfolio was reorganized as a new portfolio of the ARCH Fund, Inc.
Performance figures for periods prior to November 24, 1997 represent the
performance for the Predecessor Portfolio.
Institutional shares were initially offered on November 24, 1997, with the
first initial public investment on December 2, 1997. The performance figures
for Institutional shares for periods prior to the initial offering date
represent the performance for the Arrow Equity Portfolio. The performance
figures for the period between initial offering and initial public investment
dates represent the performance for the Trust Shares of the Portfolio.
Trust shares were initially offered on November 24, 1997. The performance
figures for Trust shares for periods prior to such date represent the
performance of the Arrow Equity Portfolio.
Investor B shares were initially offered on November 24, 1997, with the first
initial public investment on February 23, 1998. The performance figures for
Investor B shares for periods prior to the initial offering date represent the
performance for the Arrow Equity Fund, which has been restated to reflect the
contingent deferred sales charges payable by holders of Investor B shares who
redeem within six years of the date of purchase. The performance figures for
the period between initial offering and initial public investment dates
represent the performance for the Trust Shares of the portfolio. Investor B
shares are also subject to distribution and service fees at a maximum annual
rate of 1.00%. Had these distribution and service fees been reflected,
performance would have been reduced.
81
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Growth Equity Portfolio November 30, 1998
Commercial Paper (3.5%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Finance (3.5%):
American General Finance, 5.37%, 12/1/98.............. $3,296,000 $ 3,296,000
-----------
TOTAL COMMERCIAL PAPER 3,296,000
-----------
Common Stocks (93.2%):
Banking (3.9%):
BankAmerica Corp. .................................... 30,553 1,991,661
Wells Fargo & Co. .................................... 45,000 1,620,000
-----------
3,611,661
-----------
Beverages (2.9%):
Coca-Cola Co. ........................................ 20,000 1,401,250
PepsiCo, Inc. ........................................ 33,500 1,296,031
-----------
2,697,281
-----------
Chemicals (0.8%):
Avery Dennison Corp. ................................. 16,000 767,000
-----------
Commercial Services (1.0%):
H & R Block, Inc. .................................... 20,000 898,750
-----------
Computer Software (5.7%):
Microsoft Corp.(b).................................... 28,000 3,416,000
Network Associates, Inc.(b)(c)........................ 37,500 1,907,813
-----------
5,323,813
-----------
Computers (4.2%):
Compaq Computer Corp. ................................ 53,000 1,722,500
EMC Corp.(b).......................................... 15,000 1,087,500
Hewlett-Packard Co. .................................. 17,200 1,079,300
-----------
3,889,300
-----------
Cosmetics (2.4%):
Estee Lauder Cos., Class A(c)......................... 30,000 2,251,875
-----------
Electrical & Electronic (3.7%):
General Electric Co. ................................. 38,600 3,493,300
-----------
Financial Services (12.3%):
Citigroup, Inc. ...................................... 41,508 2,083,182
Fannie Mae............................................ 26,000 1,891,500
Freddie Mac........................................... 46,500 2,813,249
Heller Financial, Inc. ............................... 35,000 916,563
Household International, Inc. ........................ 45,300 1,772,363
MBNA Corp. ........................................... 91,050 2,065,697
-----------
11,542,554
-----------
Food Products & Services (0.7%):
Kellogg Co. .......................................... 12,000 439,500
Sara Lee Corp. ....................................... 4,000 233,500
-----------
673,000
-----------
Insurance (2.1%):
American International Group, Inc. ................... 20,812 1,956,328
-----------
Leisure & Recreation/Gaming (1.0%):
Carnival Corp. ....................................... 26,000 897,000
-----------
</TABLE>
<TABLE>
Common Stock, continued:
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Manufacturing (2.3%):
Illinois Tool Works, Inc. ............................. 34,200 $ 2,173,838
-----------
Medical Equipment & Supplies (3.1%):
Medtronic, Inc. ....................................... 43,000 2,910,563
-----------
Pharmaceuticals (20.6%):
Abbott Laboratories.................................... 62,000 2,976,000
Amgen, Inc.(b)......................................... 19,600 1,474,900
Bristol-Myers Squibb Co. .............................. 15,000 1,838,438
Eli Lilly & Co. ....................................... 18,000 1,614,375
Johnson & Johnson...................................... 12,000 975,000
Merck & Co., Inc. ..................................... 25,000 3,871,874
Pfizer, Inc. .......................................... 25,000 2,790,625
Schering-Plough Corp. ................................. 36,000 3,829,500
-----------
19,370,712
-----------
Printing & Publishing (1.2%):
Tribune Co. ........................................... 18,000 1,154,250
-----------
Retail Stores (9.9%):
Bed, Bath & Beyond, Inc.(b)............................ 40,000 1,247,500
Dollar General Corp.(c)................................ 25,390 604,599
Fred Meyer, Inc.(b).................................... 16,000 814,000
Home Depot, Inc. ...................................... 43,000 2,139,249
Office Depot, Inc.(b).................................. 17,000 552,500
Safeway, Inc.(b)....................................... 19,000 1,003,438
Wal-Mart Stores, Inc. ................................. 38,200 2,876,937
-----------
9,238,223
-----------
Semiconductors (7.4%):
Applied Materials, Inc.(b)............................. 56,000 2,170,000
Intel Corp. ........................................... 23,500 2,529,187
KLA-Tencor Corp.(b).................................... 65,000 2,214,063
-----------
6,913,250
-----------
Telecommunications (2.4%):
Ascend Communications, Inc.(b)(c)...................... 40,000 2,247,500
-----------
Tobacco (3.8%):
Philip Morris Companies, Inc. ......................... 63,000 3,524,063
-----------
Wholesale Distribution (1.8%):
Sysco Corp. ........................................... 64,000 1,724,000
-----------
TOTAL COMMON STOCKS 87,258,261
-----------
Short-Term Securities Held as Collateral (4.4%):
Repurchase agreements (4.4%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,383,736,
collateralized by $1,719,633 various U.S. Government
Agency securities, 0.00%-8.50%, 12/3/98-9/11/28,
market value $1,410,914).............................. $1,383,519 1,383,519
</TABLE>
Continued
82
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Growth Equity Portfolio November 30, 1998
Short-Term Securities Held as Collateral, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Nationsbanc Montgomery Securities, Inc., 5.68%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity $157,244,
collateralized by $176,371 various U.S. Government
Agency mortgages, 0.00%-10.50%, 5/1/00-12/1/28, market
value $160,363)........................................ $ 157,220 $ 157,220
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $691,865, collateralized
by $3,514,754 various U.S. Government Agency mortgages,
0.00%-8.00%, 10/25/99-8/1/28, market value $705,595)... 691,760 691,760
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $465,520, collateralized
by $545,882 various U.S. Treasury Notes, 3.63%-8.75%,
10/31/99-11/15/28, market value $474,760).............. 465,451 465,451
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,383,724,
collateralized by $1,655,503 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$1,411,190)............................................ 1,383,520 1,383,520
-----------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 4,081,470
-----------
TOTAL INVESTMENTS
(Cost $50,558,810)(a) (101.1%)................................... 94,635,731
Liabilities in excess of other assets (-1.1%)..................... (1,001,101)
-----------
TOTAL NET ASSETS (100.0%)......................................... $93,634,630
===========
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation... $44,110,810
Unrealized depreciation... (33,889)
-----------
Net unrealized apprecia-
tion..................... $44,076,921
===========
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
See notes to financial statements
83
<PAGE>
THE ARCH FUND, INC.
Growth Equity Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $46,477,340)............... $90,554,261
Repurchase agreements, at value (cost $4,081,470)...... 4,081,470
-----------
Total Investments..................................... 94,635,731
Cash................................................... 652
Interest and dividends receivable...................... 41,424
Receivable for capital shares issued .................. 17,822
Receivable for investments sold........................ 3,094,678
Prepaid expenses and other assets...................... 1,425
-----------
Total Assets.......................................... 97,791,732
Liabilities:
Payable for capital shares redeemed.................... $ 452
Payable for return of collateral received.............. 4,081,470
Accrued expenses and other payables:
Investment advisory fees.............................. 57,562
Administration fees................................... 1,857
Distribution and administrative services fees......... 3,204
Custodian fees........................................ 6,610
Other liabilities..................................... 5,947
----------
Total Liabilities..................................... 4,157,102
-----------
Net Assets:
Capital................................................ 40,172,364
Accumulated net realized gains from investment
transactions.......................................... 9,385,345
Net unrealized appreciation from investments........... 44,076,921
-----------
Net Assets............................................. $93,634,630
===========
Investor A Shares
Net Assets............................................ $ 4,831,601
Shares................................................ 242,503
Redemption price per share............................ $19.92
======
Maximum Sales Charge -- Investor A Shares.............. 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share...................................... $20.86
======
Investor B Shares
Net Assets............................................ $ 252,228
Shares................................................ 12,734
Offering price per share*............................. $19.81
======
Trust Shares
Net Assets............................................ $80,830,391
Shares................................................ 4,045,542
Offering and redemption price per share............... $19.98
======
Institutional Shares
Net Assets............................................ $ 7,720,410
Shares................................................ 387,665
Offering and redemption price per share............... $19.92
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income.......................................... $ 178,743
Dividend income.......................................... 832,119
Income from securities lending........................... 7,515
-----------
Total Income............................................ 1,018,377
Expenses:
Investment advisory fees................................. $702,080
Administration fees...................................... 187,222
Distribution and services fees, Investor A Shares........ 11,503
Distribution and services fees, Investor B Shares........ 874
Administrative services fees, Trust Shares............... 251,109
Administrative services fees, Institutional Shares....... 17,958
Accounting fees.......................................... 3,617
Custodian fees........................................... 29,330
Directors' fees and expenses............................. 1,683
Transfer agent fees...................................... 21,717
Other fees............................................... 123,340
--------
Total expenses before voluntary fee reductions.......... 1,350,433
Expenses voluntarily reduced............................ (344,718)
-----------
Net expenses............................................ 1,005,715
-----------
Net investment income.................................... 12,662
-----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions.......... 9,413,747
Net change in unrealized appreciation from investments... 9,044,230
-----------
Net realized/unrealized gains from investments........... 18,457,977
-----------
Change in net assets resulting from operations........... $18,470,639
===========
</TABLE>
See notes to financial statements
84
<PAGE>
THE ARCH FUND, INC
Growth Equity Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the For the
year ended period ended year ended
November 30, November 30, September 30,
1998 1997 (a) 1997 (b)
------------ ------------ -------------
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income (loss).......... $ 12,662 $ (30,253) $ 275,232
Net realized gains from investment
transactions......................... 9,413,747 3,407,020 4,917,751
Net change in unrealized appreciation
from investments..................... 9,044,230 (4,228,822) 13,265,621
----------- ----------- -----------
Change in net assets resulting from
operations............................ 18,470,639 (852,055) 18,458,604
----------- ----------- -----------
Distributions to Investor A
Shareholders:
From net investment income............ -- -- (330,048)
In excess of net investment income.... (685) -- --
From net realized gains from
investment transactions.............. -- (8,120,294) (3,886,419)
Distributions to Trust Shareholders:
From net investment income............ (42,786) -- --
In excess of net investment income.... (2,177) -- --
Distributions to Institutional
Shareholders:
In excess of net investment income.... (2,352) -- --
----------- ----------- -----------
Change in net assets from shareholder
distributions......................... (48,000) (8,120,294) (4,216,467)
----------- ----------- -----------
Change in net assets from capital
transactions.......................... 7,958,982 7,260,241 (849,772)
----------- ----------- -----------
Change in net assets................... 26,381,621 (1,712,108) 13,392,365
Net Assets:
Beginning of period................... 67,253,009 68,965,117 55,572,752
----------- ----------- -----------
End of period......................... $93,634,630 $67,253,009 $68,965,117
=========== =========== ===========
</TABLE>
- -----
(a) Period commenced October 1, 1997.
(b) Formerly the Arrow Equity Portfolio.
See notes to financial statements
85
<PAGE>
THE ARCH FUND, INC.
Growth Equity Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
-------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income.......................................... $ 12,662
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities.................................. (778,727,014)
Proceeds from disposition of investment securities............. 795,683,970
Cost of investments purchased with cash collateral from
securities lending............................................ (4,081,470)
Decrease in dividends and interest receivable.................. 16,323
Increase in payable for return of collateral received from
securities lending............................................ 4,081,470
Increase in accrued expenses................................... 58,552
Increase in prepaid expenses................................... (1,425)
Net amortization/accretion from investments.................... (178,744)
-------------
Net cash provided by operating activities...................... 16,864,324
-------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................... 14,726,029
Cost of shares redeemed........................................ (31,548,416)
Cash distributions paid........................................ (41,487)
-------------
Net cash used in financing activities.......................... (16,863,874)
-------------
Increase in cash................................................ 450
Cash:
Beginning balance.............................................. 202
-------------
Ending balance................................................. $ 652
=============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income of $6,513 and converted common trust
assets of $24,902,526.
See notes to financial statements
86
<PAGE>
THE ARCH FUND, INC.
Growth Equity Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the For the years ended September
year ended October 1, 1997 30,
November 30, to November 30, -------------------------------------
1998 1997 (a) 1997 1996 1995 1994
------------ --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $16.26 $18.75 $ 15.06 $ 13.80 $ 9.74 $ 10.02
------ ------ ------- ------- ------- -------
Investment Activities
Net investment income
(loss)................ (0.04) (0.01) 0.08 0.12 0.10 0.07
Net realized and
unrealized gains
(losses) from
investments........... 3.70 (0.24) 4.75 1.32 4.05 (0.25)
------ ------ ------- ------- ------- -------
Total from Investment
Activities............ 3.66 (0.25) 4.83 1.44 4.15 (0.18)
------ ------ ------- ------- ------- -------
Distributions
Net investment income.. -- -- (0.09) (0.11) (0.09) (0.07)
Net realized gains..... -- (2.24) (1.05) (0.07) -- (0.03)
------ ------ ------- ------- ------- -------
Total Distributions.... -- (2.24) (1.14) (0.18) (0.09) (0.10)
------ ------ ------- ------- ------- -------
Net Asset Value, End of
Period................. $19.92 $16.26 $ 18.75 $ 15.06 $ 13.80 $ 9.74
====== ====== ======= ======= ======= =======
Total Return (excludes
sales charge).......... 22.53 % (1.25)%(b) 33.85 % 10.48 % 42.90 % (1.84)%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $4,832 $3,467 $68,965 $55,573 $43,708 $30,282
Ratio of expenses to
average net assets..... 1.35 % 1.17 %(c) 1.14 % 1.17 % 1.28 % 1.36 %
Ratio of net investment
income (loss) to
average net assets..... (0.26)% (0.27)%(c) 0.44 % 0.86 % 0.90 % 0.74 %
Ratio of expenses to
average net assets*.... 1.45 % 1.42 %(c) 1.39 % 1.45 % 1.58 % 1.64 %
Portfolio turnover**.... 54.33 % 24.45 % 42.00 % 45.00 % 45.00 % 127.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Upon
reorganizing as a Portfolio of the Arch Fund, Inc., the Arrow Equity Portfolio
became the Growth Equity Portfolio and changed its year-end to November 30.
Financial Highlights for the periods prior to November 24, 1997 represent
financial highlights of the Arrow Equity Portfolio. (b) Not Annualized. (c)
Annualized.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
February 23, 1998
to
November 30, 1998 (a)
---------------------
<S> <C>
Net Asset Value, Beginning of Period...................... $16.27
------
Investment Activities
Net investment loss...................................... (0.07)
Net realized and unrealized gains from investments....... 3.61
------
Total from Investment Activities......................... 3.54
------
Net Asset Value, End of Period............................ $19.81
======
Total Return (excludes sales charge)...................... 9.87 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)......................... $ 252
Ratio of expenses to average net assets................... 2.11 %(c)
Ratio of net investment loss to average net assets........ (1.08)%(c)
Ratio of expenses to average net assets*.................. 2.22 %(c)
Portfolio turnover**...................................... 54.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
initial public investment. (b) Not annualized. (c) Annualized.
87
<PAGE>
THE ARCH FUND, INC.
Growth Equity Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
November 24,
For the 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period............... $ 16.26 $ 16.44
------- -------
Investment Activities
Net investment income (loss)...................... 0.01 (0.01)
Net realized and unrealized gains (losses) from
investments...................................... 3.72 (0.17)
------- -------
Total from Investment Activities.................. 3.73 (0.18)
------- -------
Distributions
Net investment income............................. (0.01) --
------- -------
Total Distributions............................... (0.01) --
------- -------
Net Asset Value, End of Period..................... $ 19.98 $ 16.26
======= =======
Total Return....................................... 22.94 % (1.09)%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).................. $80,830 $63,786
Ratio of expenses to average net assets............ 1.04 % 1.24 %(c)
Ratio of net investment income (loss) to average
net assets........................................ 0.05 % (0.15)%(c)
Ratio of expenses to average net assets*........... 1.44 % 1.34 %(c)
Portfolio turnover**............................... 54.33 % 0.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
December 2, 1997
to
November 30, 1998 (a)
---------------------
<S> <C>
Net Asset Value, Beginning of Period...................... $16.27
------
Investment Activities
Net investment loss...................................... (0.04)
Net realized and unrealized gains from investments....... 3.70
------
Total from Investment Activities......................... 3.66
------
Distributions
In excess of net investment income....................... (0.01)
------
Total Distributions...................................... (0.01)
------
Net Asset Value, End of Period............................ $19.92
======
Total Return.............................................. 19.56 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)......................... $7,720
Ratio of expenses to average net assets................... 1.36 %(c)
Ratio of net investment loss to average net assets........ (0.28)%(c)
Ratio of expenses to average net assets*.................. 1.46 %(c)
Portfolio turnover**...................................... 54.33 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
initial public investment. (b) Not annualized. (c) Annualized.
88
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
89
<PAGE>
The ARCH Balanced Portfolio
Q. What were the conditions in the financial markets during the 12-month
period ended November 30, 1998?
A. Stocks posted strong gains during the first half of the year before
slumping sharply during the summer. The decline occurred in part because
investors worried that global economic weakness would slow the U.S. economy.
But the Federal Reserve Board's decision to reduce short-term rates three times
during the fall helped stimulate a strong rebound in the stock market. The bond
market also performed well in an environment of low inflation and falling
interest rates, with high-quality issues such as Treasuries delivering the
strongest gains. The yield on the 30-year Treasury bond declined from 6.0% at
the start of the period to 5.0% on November 30, 1998.
Q. How did you divide the Portfolio's assets among stocks, bonds and cash in
that environment?
A. The Portfolio typically invests 50% to 60% of its assets in stocks, with
the rest in fixed-income investments. During the period, we increased the
Portfolio's stock allocation from 57% at the beginning of the period to 58% by
the end. That left 37% of the Portfolio's assets in bonds.*
Q. What types of stocks did you favor?
A. Shares of health-care, financial and retail companies did well during the
first half of the year. We reduced our exposure in all three areas in August
after those shares' valuations increased, and we began buying stocks of
companies whose profits are closely tied to the performance of the economy. We
were encouraged to invest in those stocks by Federal Reserve Chairman Alan
Greenspan's announcement that he would reduce interest rates, creating a more
positive environment for the economy and for many cyclical stocks.
We sold shares of some large companies during the second half of the year,
including Ascend Communications (1.0%) which had exceeded our price targets.
But we continued to invest in technology stocks such as Applied Materials
(1.6%) and Microsoft (1.2%), as well as shares of large drug manufacturers such
as Bristol Myers Squibb Co. (1.6%) and Merck & Co. (1.5%).*
Q. What types of bonds did you favor?
A. The bond portion of the Portfolio is designed to follow the Lehman
Brothers Aggregate Bond Index. The Portfolio primarily held high-quality
Treasury and mortgage-backed bonds, along with select corporate issues. We will
likely continue to increase our exposure to corporate issues going forward
because their yields at present are attractive relative to Treasuries.
Q. How will you manage the Portfolio going forward?
A. We do not try to guess what the markets are going to do. Instead, we
attempt to identify and invest in the most attractive valuations in the
financial markets. Thus, we will continue to invest in neglected stocks of
solid companies we believe possess good growth prospects. We think there could
be especially good opportunities in market sectors that have been under
pressure, such as energy. At the same time, the Portfolio will hold fixed-
income securities that we believe offer good value and attractive yields for
the risks they carry. We believe such an approach should lead to solid risk-
adjusted performance for the Portfolio and its shareholders.
- -----
* Portfolio composition is subject to change.
90
<PAGE>
The ARCH Balanced Portfolio
[ARCH BALANCED PORTFOLIO CHART APPEARS HERE]
<TABLE>
<CAPTION>
Value of a $10,000 Investment
Investor A Investor A Investor B Investor B S & P 500 Lehman Brothers Aggregate
(No Load) (Load)* (No CDSC) (CDSC)** Index Bond Index
--------- ------- --------- -------- --------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
4/1/93 10,000 9,551 10,000 10,000 10,000 10,000
Nov-93 10,386 9,920 10,674 10,174 10,421 10,529
Nov-94 10,188 9,730 10,335 9,950 10,536 10,207
Nov-95 12,719 12,148 12,806 12,506 14,433 12,007
Nov-96 14,640 13,983 14,434 14,134 18,477 12,736
Nov-97 16,892 16,134 16,537 16,339 23,745 13,698
May-98 18,149 17,334 17,706 17,606 27,323 14,258
Nov-98 18,483 17,653 17,963 17,863 28,874 14,992
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (4/1/93)
------ ------ --------
Investor A (No Load) 9.43% 12.22% 11.45%
Investor A* 4.54% 11.20% 10.55%
Investor B (No CDSC) 8.63% 11.58% 10.89%
Investor B (CDSC)** 3.88% 11.45% 10.78%
[ARCH BALANCED PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Brothers
Trust Institutional S & P 500 Index Aggregate Bond Index
----- ------------- --------------- -------------------
4/1/93 10,000 10,000 10,000 10,000
Nov-93 10,387 10,386 10,421 10,529
Nov-94 10,199 10,179 10,536 10,207
Nov-95 12,744 12,690 14,433 12,007
Nov-96 14,727 14,601 18,477 12,736
Nov-97 17,054 16,868 23,745 13,698
May-98 18,348 18,128 27,323 14,258
Nov-98 18,714 18,448 28,874 14,992
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year 5 Year (4/1/93)
------ ------ --------
Trust 9.75% 12.50% 11.70%
Institutional 9.38% 12.18% 11.41%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Balanced Portfolio is measured against the
Standard & Poor's 500 Stock Index, an unmanaged index generally representative
of the U.S. stock market, and the Lehman Brothers Aggregate Bond Index, an
unmanaged Index comprised of the Lehman Brothers Government/Corporate Bond
Index and two Lehman Brothers asset-backed securities indices. Investors are
unable to purchase any of these Indices directly, although they can invest in
the underlying securities. The performance of the indices does not reflect the
deduction of expenses associated with a mutual fund, such as investment
management and fund accounting fees. By contrast, the performance of the
Portfolio shown on the graph reflects the deduction of these value-added
services, as well as the deduction of a 4.50% sales charge on Investor A shares
and the applicable contingent deferred sales charge (CDSC) on Investor B
shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares, which has been restated to reflect the
contingent deferred sales charges payable by shareholders of Investor B shares
who redeem within six years of the date of purchase. Investor B shares are also
subject to distribution and service fees at a maximum annual rate of 1.00%. Had
these distribution and service fees been reflected, performance would have been
reduced.
Institutional shares were initially offered on January 3, 1994. The
performance figures for Institutional shares for periods prior to such date
represent the performance for Investor A shares of the Portfolio.
91
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Balanced Portfolio November 30, 1998
Commercial Paper (4.8%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ----------
<S> <C> <C>
Finance (4.8%):
American General Finance,
5.37%, 12/1/98.......................................... $6,115,000 $6,115,000
----------
TOTAL COMMERCIAL PAPER 6,115,000
----------
Common Stocks (57.7%):
Banking (3.9%):
Bank One Corp. .......................................... 31,213 1,601,617
Chase Manhattan Corp. ................................... 26,000 1,649,375
First Union Corp. ....................................... 28,524 1,732,832
----------
4,983,824
----------
Beverages (1.2%):
PepsiCo, Inc. ........................................... 40,200 1,555,238
----------
Building Products (2.0%):
Masco Corp. ............................................. 53,000 1,530,375
Sherwin-Williams Co. .................................... 33,650 954,819
----------
2,485,194
----------
Business Services (0.9%):
First Data Corp. ........................................ 41,200 1,099,525
----------
Chemicals (3.0%):
Avery Dennison Corp. .................................... 31,152 1,493,349
Millipore Corp. ......................................... 32,300 908,438
Solutia, Inc. ........................................... 63,000 1,409,625
----------
3,811,412
----------
Computer Software (3.0%):
Adaptec, Inc.(b)......................................... 66,500 1,080,625
Microsoft Corp.(b)....................................... 12,800 1,561,600
Network Associates, Inc.(b)(c)........................... 23,250 1,182,844
----------
3,825,069
----------
Consumer Goods & Services (1.2%):
Newell Co. .............................................. 35,000 1,548,750
----------
Containers & Packaging (1.3%):
Crown Cork & Seal Co., Inc. ............................. 25,100 847,125
Sealed Air Corp.(b)(c) .................................. 19,500 860,438
----------
1,707,563
----------
Cosmetics (0.8%):
Estee Lauder Cos., Class A(c)............................ 13,000 975,813
----------
Electrical & Electronic (3.1%):
Analog Devices(b)........................................ 38,200 780,713
General Electric Co. .................................... 19,880 1,799,139
W.W. Grainger, Inc. ..................................... 32,600 1,377,350
----------
3,957,202
----------
Financial Services (3.1%):
Heller Financial, Inc. .................................. 30,000 785,625
MBNA Corp. .............................................. 64,650 1,466,747
SLM Holding Corp. ....................................... 38,111 1,676,884
----------
3,929,256
----------
</TABLE>
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ----------
<S> <C> <C>
Food Products & Services (1.2%):
IBP, Inc. ................................................ 59,000 $1,497,125
----------
Health Care (1.4%):
C.R. Bard, Inc. .......................................... 20,400 934,575
Columbia/HCA Healthcare Corp. ............................ 32,000 788,000
----------
1,722,575
----------
Oil & Exploration, Production & Services (2.5%):
Murphy Oil Corp. ......................................... 32,500 1,295,937
Ocean Energy, Inc.(b)..................................... 78,000 633,750
Vastar Resources, Inc. ................................... 29,800 1,208,763
----------
3,138,450
----------
Oil & Gas Equipment/Services (0.9%):
Baker Hughes, Inc. ....................................... 59,300 1,085,931
----------
Oil Companies--Integrated (1.8%):
Atlantic Richfield Co. ................................... 17,700 1,177,050
USX-Marathon Group........................................ 37,000 1,049,875
----------
2,226,925
----------
Paper & Related (0.6%):
Mead Corp. ............................................... 23,500 712,344
----------
Pharmaceuticals (7.4%):
Allergan, Inc. ........................................... 23,000 1,400,125
Bristol-Myers Squibb Co. ................................. 16,940 2,076,208
Eli Lilly & Co. .......................................... 19,350 1,735,453
Merck & Co., Inc. ........................................ 12,500 1,935,938
Schering-Plough Corp. .................................... 20,644 2,196,005
----------
9,343,729
----------
Printing & Publishing (0.5%):
Tribune Co. .............................................. 10,600 679,725
----------
Restaurants (0.9%):
Tricon Global Restaurants, Inc.(b)........................ 26,205 1,193,965
----------
Retail Stores (5.2%):
Consolidated Stores Corp.(b).............................. 39,650 852,475
Dillards, Inc., Class A................................... 31,800 1,093,125
Office Depot, Inc.(b)..................................... 40,000 1,300,000
Pep Boys--Manny, Moe, & Jack.............................. 53,000 748,625
Wal-Mart Stores, Inc. .................................... 35,193 2,650,472
----------
6,644,697
----------
Semiconductors (3.0%):
Applied Materials, Inc.(b)................................ 51,100 1,980,125
KLA-Tencor Corp.(b)....................................... 53,700 1,829,156
----------
3,809,281
----------
Telecommunications (1.2%):
Ascend Communications, Inc.(b)(c)......................... 12,800 719,200
Ciena Corp.(b)............................................ 15,000 255,000
Frontier Corp. ........................................... 19,495 587,287
----------
1,561,487
----------
</TABLE>
<TABLE>
Tobacco (1.5%):
<S> <C> <C>
Philip Morris Companies, Inc. ............................ 33,800 1,890,688
----------
</TABLE>
Continued
92
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Balanced Portfolio November 30, 1998
Common Stocks, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ----------
<S> <C> <C>
Transportation & Shipping (1.2%):
Burlington Northern Santa Fe............................ 45,900 $1,560,600
----------
Utilities--Gas & Electric (2.4%):
CINergy Corp. .......................................... 26,423 913,245
Consolidated Natural Gas Co. ........................... 24,800 1,346,950
New Century Energies, Inc. ............................. 16,000 769,000
----------
3,029,195
----------
Utilities--Telephone (1.1%):
GTE Corp. .............................................. 23,000 1,426,000
----------
Wholesale Distribution (1.4%):
Sysco Corp. ............................................ 65,338 1,760,042
----------
TOTAL COMMON STOCKS 73,161,605
----------
Corporate Bonds (2.4%):
Automotive (1.5%):
General Motors Acceptance Corp., 6.60%, 1/17/01, MTN.... $1,000,000 1,022,500
General Motors Acceptance Corp., 6.85%, 4/17/01, MTN.... 890,000 916,700
----------
1,939,200
----------
Brokerage (0.9%):
Merrill Lynch & Co., Inc., Series B, 7.15%, 7/30/12,
MTN, Callable on 7/30/02 @ 100......................... 1,100,000 1,141,250
----------
TOTAL CORPORATE BONDS 3,080,450
----------
U.S. Government Agencies (17.9%):
Federal Farm Credit Bank (1.6%):
5.15%, 12/1/98.......................................... 2,000,000 2,000,000
----------
Federal Home Loan Bank (1.6%):
5.35%, 2/7/01, MTN...................................... 2,000,000 2,019,080
----------
Federal Home Loan Mortgage Corp. (6.0%):
6.50%, 4/1/08, Gold Pool #E00225........................ 398,347 404,693
7.00%, 4/1/08, Gold Pool #E46076........................ 102,630 105,068
7.00%, 4/1/08, Gold Pool #E46044........................ 200,141 204,895
6.50%, 1/1/09, Gold Pool #E55696........................ 549,876 558,636
6.50%, 1/1/18, Gold Pool #G30098........................ 2,853,935 2,877,993
6.00%, 4/1/18, Gold Pool #C90214........................ 3,445,505 3,405,639
----------
7,556,924
----------
Federal National Mortgage Assoc. (1.1%):
6.00%, 3/1/13, Pool #418297............................. 550,094 550,953
6.00%, 5/1/13, Pool #425391............................. 409,579 410,218
6.00%, 6/1/13, Pool #251760............................. 239,756 240,130
7.00%, 2/1/16, Pool #303725............................. 243,468 248,717
----------
1,450,018
----------
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Agencies, continued:
Shares
or
Security Principal Market
Description Amount Value
----------- --------- -----------
Government National Mortgage Assoc. (7.6%):
<S> <C> <C>
7.00%, 7/15/09, Pool #364246.......................... $ 307,094 $ 316,113
6.50%, 10/20/10, Pool #2108........................... 385,821 390,520
6.50%, 7/15/11, Pool #436630.......................... 1,612,192 1,643,919
8.50%, 6/15/17, Pool #217380.......................... 11,009 11,652
8.00%, 7/15/22, Pool #328848.......................... 314,802 327,787
7.00%, 11/15/22, Pool #337961......................... 201,791 206,771
7.00%, 11/15/22, Pool #341287......................... 275,479 282,277
7.50%, 3/15/23, Pool #331533.......................... 486,388 502,954
8.50%, 3/15/23, Pool #350083.......................... 6,472 6,850
7.50%, 4/15/23, Pool #343195.......................... 243,059 251,338
8.50%, 8/15/24, Pool #365113.......................... 374,423 396,300
8.50%, 9/15/24, Pool #353354.......................... 342,383 362,388
8.50%, 9/15/24, Pool #375056.......................... 98,843 104,619
8.50%, 1/15/25, Pool #400165.......................... 94,649 100,179
8.50%, 2/15/25, Pool #406286.......................... 75,638 80,058
8.50%, 3/15/25, Pool #384593.......................... 250,510 265,147
8.50%, 4/15/25, Pool #346295.......................... 54,052 57,211
8.00%, 8/15/25, Pool #389312.......................... 225,841 235,157
7.50%, 9/15/25, Pool #394485.......................... 19,873 20,550
7.50%, 9/15/25, Pool #384783.......................... 16,670 17,237
7.50%, 10/15/25, Pool #416975......................... 17,471 18,066
7.50%, 10/15/25, Pool #409725......................... 764,565 790,606
7.50%, 10/15/25, Pool #400096......................... 27,712 28,655
7.50%, 10/15/25, Pool #246633......................... 833,563 861,954
6.50%, 1/15/26, Pool #385123.......................... 141,732 143,281
6.50%, 1/15/26, Pool #417525.......................... 660,269 667,486
6.50%, 3/15/26, Pool #417294.......................... 22,325 22,570
6.50%, 4/15/26, Pool #422323.......................... 431,830 436,550
6.50%, 4/15/26, Pool #408279.......................... 418,626 423,202
6.50%, 4/15/26, Pool #421399.......................... 447,829 452,724
6.50%, 5/15/26, Pool #430798.......................... 167,355 169,185
-----------
9,593,306
-----------
TOTAL U.S. GOVERNMENT AGENCIES 22,619,328
-----------
U.S. Treasury Bonds (8.4%):
10.75%, 8/15/05(c).................................... 300,000 401,280
12.00%, 8/15/13, Callable on 8/15/08 @ 100(c)......... 2,750,000 4,207,335
8.13%, 5/15/21........................................ 1,000,000 1,361,780
8.13%, 8/15/21........................................ 1,000,000 1,363,790
8.00%, 11/15/21....................................... 1,200,000 1,619,400
6.25%, 8/15/23........................................ 1,500,000 1,690,395
-----------
TOTAL U.S. TREASURY BONDS 10,643,980
-----------
U.S. Treasury Notes (8.2%):
7.50%, 5/15/02(c)..................................... 3,000,000 3,267,960
6.38%, 8/15/02(c)..................................... 3,000,000 3,170,910
6.25%, 2/15/03........................................ 1,000,000 1,059,230
7.00%, 7/15/06........................................ 2,500,000 2,844,025
-----------
TOTAL U.S. TREASURY NOTES 10,342,125
-----------
</TABLE>
Continued
93
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Balanced Portfolio November 30, 1998
Investment Companies (0.4%):
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ---------
<S> <C> <C>
Cash Assets Trust Money Market Fund....................... 500,000 $ 500,000
---------
TOTAL INVESTMENT COMPANIES 500,000
---------
Short-Term Securities Held as Collateral (4.0%):
Repurchase agreements (4.0%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,699,031, collateralized
by $2,111,463 various U.S. Government Agency securities,
0.00%-8.50%, 12/3/98-9/11/28, market value $1,732,400)... $1,698,764 1,698,764
Nationsbanc Montgomery Securities, Inc., 5.68%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity $193,073,
collateralized by $216,559 various U.S. Government Agency
mortgages, 0.00%-10.50%, 5/1/00-12/1/28, market value
$196,903)................................................ 193,042 193,042
Greenwich Capital, 5.45%, 12/1/98 (Purchased on 11/30/98,
proceeds at maturity $849,511, collateralized by
$4,315,614 various U.S. Government Agency mortgages,
0.00%-8.00%, 10/25/99-8/1/28, market value $866,370)..... 849,382 849,382
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $571,592, collateralized
by $670,265 various U.S. Treasury Notes, 3.63%-8.75%,
10/31/99-11/15/28, market value $582,937)................ 571,507 571,507
Short-Term Securities Held as Collateral, continued:
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- --------- ------------
<S> <C> <C>
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $1,699,014,
collateralized by $2,032,721 various U.S.
Treasury Notes, 0.00%-8.88%, 12/10/98-4/15/28,
market value $1,732,739)......................... $1,698,765 $ 1,698,765
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL.... $ 5,011,460
------------
TOTAL INVESTMENTS
(Cost $112,515,766) (a) (103.8%)............................ 131,473,948
------------
Liabilities in excess of other assets (-3.8%)................ (4,791,970)
------------
TOTAL NET ASSETS--100.0%..................................... $126,681,978
------------
</TABLE>
- -----
(a) Represents cost for financial reporting purposes and differs from cost
basis for federal income tax purposes by the amount of losses recognized
for financial reporting in excess of federal income tax reporting of
$838,197. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation... $22,870,934
Unrealized depreciation... (4,750,949)
-----------
Net unrealized apprecia-
tion..................... $18,119,985
===========
</TABLE>
(b) Represents non-income producing securities.
(c) A portion of this security was loaned as of November 30, 1998.
MTN Medium Term Note
See notes to financial statements
94
<PAGE>
THE ARCH FUND, INC.
Balanced Portfolio
Statement of
Assets and
Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $107,504,306).............. $126,462,488
Repurchase agreements, at value
(cost $5,011,460)..................................... 5,011,460
------------
Total investments..................................... 131,473,948
Cash................................................... 876
Interest and dividends receivable...................... 594,453
Receivable for capital shares issued................... 4,370
Prepaid expenses and other assets...................... 1,161
------------
Total Assets.......................................... 132,074,808
Liabilities:
Dividends payable...................................... $ 248,402
Payable for capital shares redeemed.................... 4,693
Payable for return of collateral received.............. 5,011,460
Accrued expenses and other payables:
Investment advisory fees.............................. 78,142
Administration fees................................... 2,466
Distribution and administrative services fees......... 21,226
Custodian fees........................................ 10,084
Other liabilities..................................... 16,357
---------
Total Liabilities..................................... 5,392,830
------------
Net Assets:
Capital................................................ 99,685,204
Undistributed net investment income.................... 28,180
Accumulated net realized gains on investment
transactions.......................................... 8,010,412
Net unrealized appreciation from investments........... 18,958,182
------------
Net Assets............................................. $126,681,978
============
Investor A Shares
Net Assets............................................ $ 10,658,767
Shares................................................ 843,829
Redemption price per share............................ $12.63
======
Maximum Sales Charge--Investor A Shares................ 4.50%
Maximum Offering Price (100%/(100%--Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share...................................... $13.23
======
Investor B Shares
Net Assets............................................ $ 1,285,178
Shares................................................ 102,781
Offering price per share* ............................ $12.50
======
Trust Shares
Net Assets............................................ $ 43,776,072
Shares................................................ 3,463,927
Offering and redemption price per share............... $12.64
Institutional Shares
Net Assets............................................ $ 70,961,961
Shares................................................ 5,635,340
Offering and redemption price per share............... $12.59
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest income..................................... $ 3,341,674
Dividend income..................................... 1,037,246
Income from securities lending...................... 17,006
-----------
Total Income....................................... 4,395,926
Expenses:
Investment advisory fees............................ $944,822
Administration fees................................. 251,953
Distribution and services fees, Investor A Shares... 31,399
Distribution and services fees, Investor B Shares... 8,134
Administrative services fees, Trust Shares.......... 141,447
Administrative services fees, Institutional Shares.. 202,643
Accounting fees..................................... 16,565
Custodian fees...................................... 40,550
Directors' fees and expenses........................ 1,622
Transfer agent fees................................. 33,422
Other fees.......................................... 42,790
--------
Total expenses before voluntary fee reductions..... 1,715,347
Expenses voluntarily reduced....................... (267,420)
-----------
Net Expenses....................................... 1,447,927
-----------
Net investment income............................... 2,947,999
-----------
Realized/Unrealized Gains from Investments:
---
Net realized gains from investment transactions..... 8,092,471
Net change in unrealized appreciation from
investments........................................ 429,152
-----------
Net realized/unrealized gains from investments...... 8,521,623
-----------
Change in net assets resulting from operations...... $11,469,622
===========
</TABLE>
See notes to financial statements
95
<PAGE>
THE ARCH FUND, INC
Balanced Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 2,947,999 $ 3,173,268
Net realized gains from investment transactions... 8,092,471 14,346,475
Net change in unrealized appreciation/depreciation
from investments................................. 429,152 (420,214)
------------ ------------
Change in net assets resulting from operations..... 11,469,622 17,099,529
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (239,659) (303,011)
In excess of net investment income................ -- (1,886)
From net realized gains from investment transac-
tions............................................ (1,098,018) (528,296)
Distributions to Investor B Shareholders:
From net investment income........................ (14,866) (8,541)
In excess of net investment income................ -- (1,786)
From net realized gains from investment transac-
tions............................................ (58,233) (18,182)
Distributions to Trust Shareholders:
From net investment income........................ (1,205,632) (1,722,814)
From net realized gains from investment transac-
tions............................................ (5,997,694) (3,475,261)
Distributions to Institutional Shareholders:
From net investment income........................ (1,551,106) (1,749,881)
In excess of net investment income................ -- (126,370)
From net realized gains from investment transac-
tions............................................ (6,839,335) (3,086,347)
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (17,004,543) (11,022,375)
------------ ------------
Change in net assets from capital transactions..... 5,817,522 (5,878,946)
------------ ------------
Change in net assets............................... 282,601 198,208
Net Assets:
Beginning of period............................... 126,399,377 126,201,169
------------ ------------
End of period..................................... $126,681,978 $126,399,377
============ ============
</TABLE>
See notes to financial statements
96
<PAGE>
THE ARCH FUND, INC.
Balanced Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
---------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income........................................ $ 2,947,999
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities................................ (1,528,275,253)
Proceeds from disposition of investment securities........... 1,536,852,988
Cost of investments purchased with cash collateral from
securities lending.......................................... (5,011,460)
Decrease in dividends and interest receivable................ 37,883
Increase in payable for return of collateral received from
securities lending.......................................... 5,011,460
Increase in accrued expenses................................. 11,483
Amortization expense on organizational cost.................. 1,899
Decrease in prepaid expenses................................. 87
Net amortization/accretion from investments.................. (434,996)
---------------
Net cash provided by operating activities.................... 11,142,090
---------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................. 28,550,094
Cost of shares redeemed...................................... (39,283,208)
Cash distributions paid...................................... (408,214)
---------------
Net cash used in financing activities........................ (11,141,328)
---------------
Increase in cash.............................................. 762
Cash:
Beginning balance............................................ 114
---------------
Ending balance............................................... $ 876
===============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $16,583,638.
See notes to financial statements
97
<PAGE>
THE ARCH FUND, INC.
Balanced Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
-----------------------------------------
1998 1997 1996 1995 1994 (a)
------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 13.26 $12.58 $11.65 $ 9.61 $10.22
------- ------ ------ ------ ------
Investment Activities
Net investment income.............. 0.28 0.32 0.32 0.32 0.28
Net realized and unrealized gains
(losses) from investments......... 0.84 1.47 1.34 2.02 (0.47)
------- ------ ------ ------ ------
Total from Investment Activities... 1.12 1.79 1.66 2.34 (0.19)
------- ------ ------ ------ ------
Distributions
Net investment income.............. (0.28) (0.40) (0.31) (0.30) (0.29)
Net realized gains................. (1.47) (0.71) (0.42) -- --
In excess of net realized gains.... -- -- -- -- (0.13)
------- ------ ------ ------ ------
Total Distributions................ (1.75) (1.11) (0.73) (0.30) (0.42)
------- ------ ------ ------ ------
Net Asset Value, End of Period...... $ 12.63 $13.26 $12.58 $11.65 $ 9.61
======= ====== ====== ====== ======
Total Return (excludes sales
charge)............................ 9.43% 15.38% 15.10% 24.85% (1.91%)
Ratios/Supplementary Data:
Net Assets at end of period (000)... $10,659 $9,923 $9,328 $8,348 $7,321
Ratio of expenses to average net
assets............................. 1.26% 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets................. 2.23% 2.57% 2.79% 2.98% 2.77%
Ratio of expenses to average net
assets*............................ 1.36% 1.37% 1.37% 1.37% 1.39%
Portfolio turnover**................ 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On
September 27, 1994, the Portfolio redesignated the Investor Shares as
"Investor A" Shares, and authorized the issuance of a series of shares
designated as "Investor B" Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the years ended March 1,
November 30, 1995 to
---------------------- November 30,
1998 1997 1996 1995 (a)
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $13.15 $12.49 $11.59 $10.13
------ ------ ------ ------
Investment Activities
Net investment income.................. 0.21 0.25 0.25 0.22
Net realized and unrealized gains from
investments........................... 0.81 1.43 1.33 1.44
------ ------ ------ ------
Total from Investment Activities....... 1.02 1.68 1.58 1.66
------ ------ ------ ------
Distributions
Net investment income.................. (0.20) (0.26) (0.26) (0.20)
In excess of net investment income..... -- (0.05) -- --
Net realized gains..................... (1.47) (0.71) (0.42) --
------ ------ ------ ------
Total Distributions.................... (1.67) (1.02) (0.68) (0.20)
------ ------ ------ ------
Net Asset Value, End of Period.......... $12.50 $13.15 $12.49 $11.59
====== ====== ====== ======
Total Return (excludes sales charge).... 8.63% 14.57% 14.35% 23.92%(b)
Ratios/Supplementary Data:
Net Assets at end of period (000)....... $1,285 $ 522 $ 321 $ 36
Ratio of expenses to average net
assets................................. 1.96% 1.96% 1.96% 1.93%(c)
Ratio of net investment income to
average net assets..................... 1.57% 1.85% 2.09% 2.28%(c)
Ratio of expenses to average net
assets*................................ 2.06% 2.06% 2.06% 2.03%(c)
Portfolio turnover**.................... 47.79% 43.60% 85.16% 58.16%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
98
<PAGE>
THE ARCH FUND, INC.
Balanced Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 13.27 $ 12.58 $ 11.64 $ 9.62 $ 10.22
------- ------- ------- ------- -------
Investment Activities
Net investment income........... 0.32 0.38 0.37 0.34 0.29
Net realized and unrealized
gains (losses) from
investments.................... 0.84 1.45 1.34 2.02 (0.47)
------- ------- ------- ------- -------
Total from Investment
Activities..................... 1.16 1.83 1.71 2.36 (0.18)
------- ------- ------- ------- -------
Distributions
Net investment income........... (0.32) (0.43) (0.35) (0.34) (0.29)
Net realized gains.............. (1.47) (0.71) (0.42) -- --
In excess of net realized
gains.......................... -- -- -- -- (0.13)
------- ------- ------- ------- -------
Total Distributions............. (1.79) (1.14) (0.77) (0.34) (0.42)
------- ------- ------- ------- -------
Net Asset Value, End of Period... $ 12.64 $ 13.27 $ 12.58 $ 11.64 $ 9.62
======= ======= ======= ======= =======
Total Return..................... 9.75% 15.81% 15.56% 24.97% (1.81)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)........................... $43,776 $54,299 $61,821 $72,669 $65,288
Ratio of expenses to average net
assets.......................... 0.96% 0.97% 0.97% 0.98% 0.97%
Ratio of net investment income to
average net assets.............. 2.53% 2.87% 3.08% 3.29% 3.04%
Ratio of expenses to average net
assets*......................... 1.36% 1.37% 1.07% 1.08% 1.39%
Portfolio turnover**............. 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended November 30,
--------------------------------------------
1998 1997 1996 1995 1994 (a)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 13.23 $ 12.54 $ 11.62 $ 9.60 $ 10.22
------- ------- ------- ------- -------
Investment Activities
Net investment income........... 0.28 0.31 0.32 0.31 0.28
Net realized and unrealized
gains (losses) from
investments.................... 0.83 1.49 1.34 2.02 (0.48)
------- ------- ------- ------- -------
Total from Investment
Activities..................... 1.11 1.80 1.66 2.33 (0.20)
------- ------- ------- ------- -------
Distributions
Net investment income........... (0.28) (0.37) (0.32) (0.31) (0.29)
In excess of net investment
income......................... -- (0.03) -- -- --
Net realized gains.............. (1.47) (0.71) (0.42) -- --
In excess of net realized
gains.......................... -- -- -- -- (0.13)
------- ------- ------- ------- -------
Total Distributions............. (1.75) (1.11) (0.74) (0.31) (0.42)
------- ------- ------- ------- -------
Net Asset Value, End of Period... $ 12.59 $ 13.23 $ 12.54 $ 11.62 $ 9.60
======= ======= ======= ======= =======
Total Return..................... 9.38% 15.52% 15.08% 24.67% (2.00)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)........................... $70,962 $61,655 $54,731 $36,827 $22,723
Ratio of expenses to average net
assets.......................... 1.26% 1.27% 1.27% 1.27% 1.27%
Ratio of net investment income to
average net assets.............. 2.23% 2.56% 2.78% 2.97% 2.77%
Ratio of expenses to average net
assets*......................... 1.36% 1.37% 1.37% 1.37% 1.40%
Portfolio turnover**............. 47.79% 43.60% 85.16% 58.16% 49.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. On January 3, 1994, the Portfolio issued a new
series of shares designated as "Institutional" Shares. The financial
highlights presented for period prior to January 3, 1994 represent financial
highlights applicable to the Investor Shares.
99
<PAGE>
The ARCH Government & Corporate Bond Portfolio
Q. What were the conditions in the economy and the bond markets during the
12-month period ended November 30, 1998?
A. During the first part of the period, the inflationary pressure of strong
domestic growth was offset by the deflationary influence of the global economic
crisis. As a result, the Federal Reserve Board adopted a neutral monetary
policy. But the uncertainty of that environment led investors to seek safety
and liquidity in Treasury bonds, causing the yields on those issues to decline.
Meanwhile, corporate bonds suffered as investors feared that businesses might
have trouble paying their debts.
Later in the period, the Fed grew more concerned about problems in overseas
economies. Specifically, they worried that events such as Russia's default on
its short-term debt and the near-bankruptcy of Long-Term Capital Management, a
large hedge fund, might contribute to a global liquidity crisis. Therefore, the
Fed lowered interest rates three times, each time by 0.25 percentage points.
Those actions by the Fed caused yields on 30-year Treasuries to decline to as
low as 4.7% on October 5, 1998, down from 6.0% at the start of the period. The
yield on the 30-year Treasury bond then rebounded slightly to 5.0% on November
30, 1998.
Q. How did you manage the Portfolio in that environment?
A. During the first part of the period, we extended the Portfolio's average
maturity to as high as 9 years by buying long-term Treasuries, because we felt
that the global crisis would keep inflation in check. That approach allowed the
Portfolio to lock in relatively high yields when rates on long-term Treasury
securities dropped later in the period.
As yields on those longer issues fell, we found more opportunities in
intermediate-term bonds, especially intermediate-term Treasuries. The
Portfolio's investment in intermediates also paid off: The five-year Treasury
began the third quarter with an interest rate of 5.47% and ended the third
quarter at 4.22%.
During the third quarter of 1998, we moved some of the Portfolio's assets
from Treasury securities to corporate securities to lock in the extra yield
that corporate issues were offering. We also increased the Portfolio's
weighting in mortgage pass-through securities. Investors had feared increased
pre-payment risk in the mortgage sector, but we felt that interest rates were
so low that there was not much incentive for mortgage-holders to pay off their
mortgages ahead of time. Those changes left the Portfolio with 39.0% in
mortgage pass-throughs, 30.0% in corporate bonds and 27.0% in Treasuries at the
end of the period.*
Q. How did you manage the Portfolio's credit quality during the period?
A. The Portfolio's credit philosophy did not change. We kept the credit
quality of the Portfolio's holdings high, at AAA, by holding a large percentage
of the Portfolio in Treasury and agency securities.
Q. What is your outlook for the bond market and the Portfolio?
A. Our outlook for 1999 is positive, largely because we expect inflation to
stay very low. Low inflation could allow yields to continue to drop, pushing up
the prices of the securities in the Portfolio. The variety of issues available
in the bond markets allows us to find good investment opportunities. We will
not make significant changes to the investment strategy of the Portfolio.
However, we will look for opportunities to lock in additional yield for the
Portfolio's shareholders.
- -----
* Portfolio composition is subject to change.
100
<PAGE>
The ARCH Government & Corporate Bond Portfolio
[ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A Investor B Lehman Brothers Aggregate
(No Load) (Load)* (No CDSC) Bond Index
--------- ------ --------- ----------
11/30/88 10,000 9,550 10,000 10,000
11/30/89 11,170 10,667 11,170 11,435
11/30/90 11,724 11,196 11,724 12,299
11/30/91 13,220 12,625 13,220 14,072
11/30/92 14,249 13,607 14,249 15,319
11/30/93 15,703 14,996 15,703 16,988
11/30/94 15,182 14,499 15,182 16,468
11/30/95 17,603 16,811 17,496 19,374
11/30/96 18,396 17,568 18,158 20,547
11/30/97 19,462 18,586 19,115 22,103
11/30/98 21,839 20,858 21,319 24,191
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
1 Year 5 Year Year
------ ------ ----
Investor A (No Load) 9.31% 6.26% 7.84%
Investor A* 4.37% 5.29% 7.34%
Investor B (No CDSC) 8.65% 5.75% 7.58%
Investor B (CDSC)** 3.65% 5.59% 7.58%
[ARCH GOVERNMENT & CORPORATE BOND PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Brothers Aggregate
Trust Institutional Bond Index
----- ------------- ----------
11/30/88 10,000 10,000 10,000
11/30/89 11,170 11,170 11,435
11/30/90 11,724 11,724 12,299
11/30/91 13,249 13,041 14,072
11/30/92 14,322 14,249 15,319
11/30/93 15,831 15,703 16,988
11/30/94 15,352 15,183 16,468
11/30/95 17,850 17,604 19,374
11/30/96 18,709 18,396 20,547
11/30/97 19,891 19,501 22,103
11/30/98 22,385 21,881 24,191
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Year
------ ------ -------
Trust 9.63% 6.62% 8.11%
Institutional 9.30% 6.30% 7.86%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Government & Corporate Bond Portfolio is measured
against the Lehman Brothers Aggregate Bond Index, an unmanaged index comprised
of the Lehman Brothers Government/Corporate Bond index and two Lehman Brothers
asset-backed securities indices. Investors are unable to purchase the index
directly, although they can invest in the underlying securities. The
performance of the Indices does not reflect the deduction of expenses
associated with a mutual fund, such as investment management and fund
accounting fees. By contrast, the performance of the Portfolio shown on the
graph reflects the deduction of these value-added services, as well as the
deduction of a 4.50% sales charge on Investor A shares and the applicable
contingent deferred sales charge (CDSC) on Investor B shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares, which has been restated to reflect the
contingent deferred sales charges payable by shareholders of Investor B shares
who redeem within six years of the date of purchase. Investor B shares are also
subject to distribution and service fees at a maximum annual rate of 1.00%. Had
these distribution and service fees been reflected, performance would have been
reduced.
The Investor B (CDSC) is not included on the above graph due to the fact that
the performance is now over 6 years, and the CDSC charges no longer apply. The
performance for the Investor B (CDSC) will now mirror Investor B (No CDSC)
performance.
Institutional shares were initially offered on January 3, 1994. The
performance figures for Institutional shares for periods prior to such date
represent the performance for Investor A shares of the Portfolio.
101
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Government & Corporate Bond Portfolio November 30, 1998
<TABLE>
Corporate Bonds (29.6%):
<CAPTION>
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Automotive (4.2%):
Ford Motor Co., 6.63%, 2/15/28(b) ................... $ 1,000,000 $ 1,047,500
Ford Motor Credit Corp., 6.80%, 4/23/01, MTN ........ 1,850,000 1,907,813
Ford Motor Credit Corp., Global Bond, 6.50%,
2/28/02(b) ......................................... 3,194,000 3,297,804
General Motors Acceptance Corp., 6.85%, 4/17/01,
MTN ................................................ 1,000,000 1,030,000
General Motors Acceptance Corp., 6.70%, 4/30/01,
MTN ................................................ 1,400,000 1,438,500
------------
8,721,617
------------
Computer Software (2.6%):
IBM Corp., 6.45%, 8/1/07(b) ......................... 3,000,000 3,221,250
IBM Corp., 6.50%, 1/15/28 ........................... 2,000,000 2,125,000
------------
5,346,250
------------
Financial Services (11.9%):
BankAmerica Corp., 7.50%, 10/15/02 .................. 500,000 534,375
Citigroup Inc., 6.63%, 1/15/28 ...................... 2,000,000 2,040,000
General Electric Capital Corp., 8.75%, 3/14/03,
MTN ................................................ 1,000,000 1,131,250
General Electric Capital Corp., 8.75%, 5/21/07 ...... 3,250,000 3,936,563
Household Finance Corp., 8.38%, 11/15/01 ............ 5,000,000 5,362,499
Merrill Lynch & Co., Series B, 6.38%, 10/1/01, MTN .. 5,000,000 5,100,000
Salomon Smith Barney Holdings Inc., Series D, 7.00%,
3/4/02, MTN ........................................ 1,000,000 1,033,750
Traveler's Group, Inc., 7.30%, 5/15/02 .............. 2,000,000 2,087,500
Traveler's Group, Inc., 7.50%, 2/1/03 ............... 3,000,000 3,187,500
------------
24,413,437
------------
Food Products (1.0%):
H. J. Heinz Co., 6.38%, 7/15/28 ..................... 2,000,000 2,050,000
------------
Government Bond (0.3%):
Province of Ontario, Global Bond, 7.38%, 1/27/03 .... 500,000 538,750
------------
Industrial Goods & Services (3.7%):
E.I. duPont de Nemours & Co., 6.75%, 9/1/07(b) ...... 1,300,000 1,421,875
E.I. duPont de Nemours & Co., 6.50%, 1/15/28 ........ 2,000,000 2,105,000
Raytheon Co, 5.95%, 3/15/01 ......................... 2,500,000 2,518,750
Rockwell International Corp., 6.75%, 9/15/02 ........ 500,000 524,375
WMX Technologies, Inc., 7.13%, 6/15/01 .............. 1,000,000 1,038,750
------------
7,608,750
------------
</TABLE>
<TABLE>
<CAPTION>
Corporate Bonds , continued:
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Manufacturing--Consumer Goods (2.2%):
Texaco Capital, 6.95%, 10/15/01, MTN ................ $ 2,000,000 $ 2,097,500
Texaco Capital, 8.63%, 11/15/31 ..................... 1,750,000 2,351,563
------------
4,449,063
------------
Telecommunications (2.9%):
Southern New England Telecommunications Corp., Series
2, 6.50%, 2/15/02, MTN(b) .......................... 5,250,000 5,414,063
United Telephone--Florida, 7.25%, 12/15/04 .......... 500,000 541,875
------------
5,955,938
------------
Utilities (0.8%):
Laclede Gas Co., 7.50%, 11/1/07 ..................... 1,500,000 1,685,625
------------
TOTAL CORPORATE BONDS 60,769,430
------------
U.S. Government Agencies (39.1%)
Federal Home Loan Mortgage Corp. (7.2%):
8.50%, 5/1/01, Pool #200034.......................... 25,559 26,469
8.50%, 11/1/01, Pool #200058......................... 58,054 59,904
8.00%, 3/1/02, Pool #215507.......................... 62,622 64,070
7.50%, 4/1/02, Pool #200070.......................... 67,745 69,163
8.00%, 5/1/02, Pool #216910.......................... 21,594 22,093
8.00%, 6/1/02, Pool #218582.......................... 43,068 44,064
8.00%, 6/1/02, Pool #219187.......................... 7,214 7,381
8.00%, 6/1/02, Pool #218101.......................... 146,517 149,905
8.00%, 7/1/02, Pool #501214.......................... 95,889 98,106
8.00%, 7/1/02, Pool #217891.......................... 20,596 21,072
8.50%, 3/1/05, Pool #380084.......................... 61,483 63,443
8.50%, 4/1/05, Pool #380085.......................... 5,206 5,372
8.50%, 9/1/05, Pool #503592.......................... 12,581 12,982
8.50%, 4/1/06, Gold Pool #E00025..................... 23,245 24,211
5.75%, 4/15/08....................................... 1,500,000 1,548,120
6.00%, 2/1/11, Gold Pool #E62600..................... 499,336 500,739
7.00%, 7/1/11, Gold Pool #E20252..................... 922,130 944,030
6.50%, 1/1/12, Gold Pool #E00465..................... 809,213 822,104
6.00%, 2/1/12, Gold Pool #E00472..................... 2,436,585 2,443,433
8.00%, 1/1/23, Gold Pool #C00225..................... 1,494,412 1,548,106
8.00%, 1/1/23, Gold Pool #D29451..................... 216,878 224,671
6.00%, 12/1/25, Gold Pool #G00427.................... 3,252,453 3,214,823
6.00%, 9/1/27, Gold Pool #C00565..................... 2,904,500 2,870,896
------------
14,785,157
------------
</TABLE>
Continued
102
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Government & Corporate Bond Portfolio November 30, 1998
<TABLE>
U.S. Government Agencies, continued:
<CAPTION>
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Federal National Mortgage Assoc. (18.0%):
6.00%, 11/1/00, Pool #190070.......................... $ 860,703 $ 868,235
6.00%, 5/15/08(b)..................................... 3,600,000 3,790,872
7.00%, 7/1/11, Pool #351021........................... 3,374,274 3,453,333
6.50%, 12/1/11, Pool #367838.......................... 2,804,713 2,847,653
6.50%, 7/1/12, Pool #370716........................... 561,176 569,768
6.50%, 7/1/12, Pool #393667........................... 863,520 876,741
6.50%, 8/1/12, Pool #251165........................... 830,038 842,746
6.00% 1/1/13, Pool #251501............................ 5,588,022 5,596,739
5.50%, 4/1/13, Pool #424880........................... 239,297 235,782
5.50%, 4/1/13, Pool #424277........................... 976,700 962,353
5.50%, 9/1/13, Pool #251980........................... 623,969 614,803
5.50%, 9/1/13, Pool #440221........................... 382,006 376,395
5.50%, 9/1/13, Pool #436276........................... 705,902 695,533
5.50%, 9/1/13, Pool #433600........................... 1,083,195 1,067,283
5.50%, 10/1/13, Pool #443232.......................... 687,655 677,553
5.50%, 10/1/13, Pool #447342.......................... 318,561 313,881
5.50%, 12/1/13, Pool #445857.......................... 3,030,000 2,986,443
6.00%, 2/1/26, Pool #336918........................... 2,631,169 2,599,095
6.00%, 10/1/26, Pool #368935.......................... 1,384,019 1,367,148
6.50%, 8/1/27, Pool #395219........................... 1,979,036 1,993,879
6.50%, 8/1/27, Pool #397372........................... 1,873,668 1,887,721
6.50%, 9/1/27, Pool #399040........................... 2,203,187 2,219,710
------------
36,843,666
------------
Government National Mortgage Assoc. (14.0%):
9.50%, 2/15/01, Pool #149206.......................... 8,967 9,449
9.50%, 9/15/01, Pool #290435.......................... 29,104 30,669
8.00%, 1/15/02, Pool #188653.......................... 107,460 111,321
8.00%, 3/15/02, Pool #199167.......................... 10,496 10,873
8.00%, 4/15/02, Pool #180980.......................... 87,750 90,903
8.00%, 7/15/02, Pool #209779.......................... 82,917 85,896
9.50%, 10/15/02, Pool #232514......................... 30,731 32,382
6.50%, 9/15/03, Pool #2549............................ 183,085 185,086
9.50%, 1/15/06, Pool #298829.......................... 53,211 56,072
8.00%, 5/15/06, Pool #303851.......................... 86,530 89,639
9.50%, 7/15/07, Pool #331878.......................... 62,002 65,335
8.00%, 11/15/07, Pool #339329......................... 309,442 320,560
8.00%, 12/15/07, Pool #338551......................... 243,476 252,224
9.50%, 8/15/09, Pool #400219.......................... 499,310 526,148
9.50%, 9/15/09, Pool #377317.......................... 139,612 147,116
9.50%, 2/15/10, Pool #392932.......................... 386,761 407,550
8.00%, 5/15/10, Pool #398424.......................... 32,465 33,631
6.50%, 8/15/10, Pool #387094.......................... 150,956 153,927
8.00%, 11/15/10, Pool #414827......................... 264,154 273,645
8.00%, 11/15/10, Pool #410294......................... 842,779 873,060
8.00%, 11/15/10, Pool #405524......................... 174,149 180,406
6.50%, 3/15/11, Pool #408253.......................... 91,592 93,395
6.50%, 4/15/11, Pool #421831.......................... 394,077 401,833
</TABLE>
U.S. Government Agencies, continued:
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
6.50%, 4/15/11, Pool #418274.......................... $ 89,751 $ 91,517
6.50%, 4/15/11, Pool #402546.......................... 323,652 330,022
6.50%, 5/15/11, Pool #430822.......................... 71,799 73,212
6.50%, 5/15/11, Pool #408304.......................... 535,795 546,339
6.50%, 6/15/11, Pool #423833.......................... 279,781 285,287
6.50%, 6/15/11, Pool #345631.......................... 541,528 552,185
6.50%, 6/15/11, Pool #430820.......................... 644,020 656,695
6.50%, 6/15/11, Pool #421731.......................... 94,064 95,915
6.50%, 7/15/11, Pool #345749.......................... 301,973 307,916
6.50%, 8/15/11, Pool #426911.......................... 351,109 358,019
8.50%, 4/15/17, Pool #212112.......................... 1,575,072 1,667,104
8.00%, 4/15/22, Pool #320818.......................... 1,006,230 1,047,737
7.50%, 1/15/23, Pool #331839.......................... 2,704,454 2,796,567
8.00%, 1/15/23, Pool #331841.......................... 1,427,939 1,486,842
7.50%, 4/15/23, Pool #343195.......................... 729,177 754,013
9.00%, 3/15/25, Pool #404067.......................... 815,116 868,857
6.50%, 4/15/26, Pool #422323.......................... 921,066 931,133
6.50%, 4/15/26, Pool #415721.......................... 907,421 917,339
6.50%, 5/15/26, Pool #417388.......................... 881,063 890,693
6.50%, 6/15/26, Pool #423801.......................... 4,378,043 4,425,896
7.00%, 9/15/27, Pool #455304.......................... 391,034 400,684
6.50%, 10/15/28, Pool #434031......................... 695,385 702,985
6.50%, 10/15/28, Pool #482771......................... 4,062,235 4,106,636
------------
28,724,713
------------
TOTAL U.S. GOVERNMENT AGENCIES 80,353,536
------------
U.S. Treasury Bonds (13.8%):
7.50%, 11/15/16....................................... 3,000,000 3,758,340
8.75%, 5/15/17(b)..................................... 1,675,000 2,352,504
8.88%, 8/15/17........................................ 2,865,000 4,066,409
8.88%, 2/15/19(b)..................................... 4,150,000 5,956,080
8.75%, 8/15/20........................................ 2,183,000 3,132,605
8.00%, 11/15/21(b).................................... 6,700,000 9,041,650
------------
TOTAL U.S. TREASURY BONDS 28,307,588
------------
U.S. Treasury Notes (13.1%):
5.75%, 9/30/99(b)..................................... 11,350,000 11,449,539
6.25%, 8/31/02(b)..................................... 3,995,000 4,209,252
6.63%, 5/15/07(b)..................................... 5,845,000 6,566,098
6.13%, 8/15/07(b)..................................... 3,850,000 4,197,771
5.63%, 5/15/08(b)..................................... 500,000 531,825
------------
TOTAL U.S. TREASURY NOTES 26,954,485
------------
Investment Companies (3.9%):
Federated Money Market Trust.......................... 7,995,976 7,995,976
------------
TOTAL INVESTMENT COMPANIES 7,995,976
------------
</TABLE>
Continued
103
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Government & Corporate Bond Portfolio November 30, 1998
<TABLE>
Short-Term Securities Held as Collateral (10.5%):
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Repurchase agreements (10.5%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $7,293,560,
collateralized by $9,064,039 various U.S.
Government Agency securities, 0.00%-8.50%,
12/3/98-9/11/28, market value $7,436,805)...... $7,292,415 $ 7,292,415
Nationsbanc Montgomery Securities, Inc., 5.68%,
12/1/98 (Purchased on 11/30/98, proceeds at
maturity $828,819, collateralized by $929,639
various U.S. Government Agency mortgages,
0.00%-10.50%, 5/1/00-12/1/28, market value
$845,262)...................................... 828,688 828,688
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $3,646,760,
collateralized by $18,525,966 various U.S.
Government Agency mortgages, 0.00%-8.00%,
10/25/99-8/1/28, market value $3,719,132)...... 3,646,208 3,646,208
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $2,453,718,
collateralized by $2,877,298 various U.S.
Treasury Notes, 3.63%-8.75%, 10/31/99-11/15/28,
market value $2,502,420)....................... 2,453,353 2,453,353
Paribas Capital Markets, 5.30%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity
$7,293,489, collateralized by $8,726,017
various U.S. Treasury Notes, 0.00%-8.88%,
12/10/98-4/15/28, market value $7,438,264)..... 7,292,416 7,292,416
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL............. 21,513,080
------------
TOTAL INVESTMENTS
(Cost $218,397,288) (a) (110.0%).......................... 225,894,095
Liabilities in excess of other assets (-10.0%)............. (20,602,396)
------------
TOTAL NET ASSETS--100.0%................................... $205,291,699
============
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.... $7,835,922
Unrealized depreciation.... ( 339,115)
----------
Net unrealized apprecia-
tion...................... $7,496,807
==========
</TABLE>
(b) A portion of this security was loaned as of November 30, 1998.
MTN Medium Term Note
See notes to financial statements
104
<PAGE>
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $196,884,208) ........... $204,381,015
Repurchase agreements, at value
(cost $21,513,080).................................. 21,513,080
------------
Total Investments................................... 225,894,095
Interest and dividends receivable ................... 1,894,647
Receivable for capital shares issued ................ 11,753
Receivable for investments sold ..................... 69,537
Prepaid expenses and other assets ................... 1,730
------------
Total Assets ....................................... 227,871,762
Liabilities:
Payable to custodian for overdraft .................. $ 29
Dividends payable.................................... 943,731
Payable for capital shares redeemed ................ 620
Payable for return of collateral received ........... 21,513,080
Accrued expenses and other payables:
Investment advisory fees ........................... 75,663
Administration fees ................................ 3,921
Distribution and administrative services fees ...... 6,911
Custodian fees ..................................... 15,973
Other liabilities .................................. 20,135
-----------
Total Liabilities .................................. 22,580,063
------------
Net Assets:
Capital ............................................. 193,979,238
Undistributed net investment income ................. 273,847
Accumulated net realized gains from investment
transactions ....................................... 3,541,807
Net unrealized appreciation from investments ........ 7,496,807
------------
Net Assets .......................................... $205,291,699
============
Investor A Shares
Net Assets ......................................... $ 4,927,499
Shares ............................................. 459,506
Redemption price per share ......................... $10.72
======
Maximum Sales Charge -- Investor A Shares ........... 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share .................................... $11.23
======
Investor B Shares
Net Assets ......................................... $ 661,548
Shares ............................................. 61,567
Offering price per share* .......................... $10.75
======
Trust Shares
Net Assets ......................................... $178,867,776
Shares ............................................. 16,654,021
Offering and redemption price per share ............ $10.74
======
Institutional Shares
Net Assets ......................................... $ 20,834,876
Shares ............................................. 1,939,488
Offering and redemption price per share ............ $10.74
======
</TABLE>
- -----
* Redemption price of Investor B Shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income...................................... $12,783,826
Dividend income...................................... 93,018
Income from securities lending....................... 64,584
-----------
Total Income........................................ 12,941,428
Expenses:
Investment advisory fees............................. $913,543
Administration fees.................................. 406,019
Distribution and services fees,
Investor A
Shares.............................................. 14,237
Distribution and services fees,
Investor B
Shares.............................................. 5,811
Administrative services fees,
Trust Shares........................................ 534,815
Administrative services fees,
Institutional
Shares.............................................. 58,233
Accounting fees...................................... 27,233
Custodian fees....................................... 62,438
Directors' fees and expenses......................... 3,401
Transfer agent fees.................................. 53,233
Other fees........................................... 80,587
--------
Total expenses before voluntary
fee reductions..................................... 2,159,550
Expenses voluntarily reduced........................ (737,819)
-----------
Net Expenses........................................ 1,421,731
-----------
Net investment income................................ 11,519,697
-----------
Realized/Unrealized Gains from
Investments:
Net realized gains from investment
transactions........................................ 5,187,984
Net change in unrealized appreciation from
investments......................................... 1,941,908
-----------
Net
realized/unrealized gains from
investments......................................... 7,129,892
-----------
Change in net assets resulting
from operations..................................... $18,649,589
===========
</TABLE>
See notes to financial statements
105
<PAGE>
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 11,519,697 $ 9,597,659
Net realized gains (losses) from investment trans-
actions.......................................... 5,187,984 (18,762)
Net change in unrealized appreciation from invest-
ments............................................ 1,941,908 653,623
------------ ------------
Change in net assets resulting from operations..... 18,649,589 10,232,520
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (256,880) (259,040)
Distributions to Investor B Shareholders:
From net investment income........................ (27,341) (26,993)
Distributions to Trust Shareholders:
From net investment income........................ (10,184,841) (8,442,748)
Distributions to Institutional Shareholders:
From net investment income........................ (1,050,635) (868,878)
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (11,519,697) (9,597,659)
------------ ------------
Change in net assets from capital transactions..... 3,251,931 32,534,114
------------ ------------
Change in net assets............................... 10,381,823 33,168,975
Net Assets:
Beginning of period............................... 194,909,876 161,740,901
------------ ------------
End of period..................................... $205,291,699 $194,909,876
============ ============
</TABLE>
See notes to financial statements
106
<PAGE>
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
-------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income.......................................... $ 11,519,697
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Cost of investment securities.................................. (248,622,453)
Proceeds from disposition of investment securities............. 250,297,650
Cost of investments purchased with cash collateral from
securities lending............................................ (21,513,080)
Decrease in dividends and interest receivable.................. 150,659
Increase in payable for return of collateral received from
securities lending............................................ 21,513,080
Increase in accrued expenses................................... 21,561
Decrease in prepaid expenses................................... 4,073
-------------
Net cash provided by operating activities...................... 13,371,187
-------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................... 29,511,702
Cost of shares redeemed........................................ (36,921,815)
Cash distributions paid........................................ (5,961,553)
-------------
Net cash used in financing activities.......................... (13,371,666)
-------------
Decrease in cash................................................ (479)
Cash:
Beginning balance.............................................. 450
-------------
Ending balance................................................. $ (29)
=============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income of $5,464,042 and converted common trust
assets of $5,424,810.
See notes to financial statements
107
<PAGE>
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
-------------------------------------------
1998 1997 1996 1995 1994(a)
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $10.35 $10.34 $10.53 $ 9.64 $10.65
------ ------ ------ ------ ------
Investment Activities
Net investment income............ 0.57 0.56 0.64 0.61 0.60
Net realized and unrealized gains
(losses) from investments....... 0.37 0.01 (0.19) 0.89 (0.94)
------ ------ ------ ------ ------
Total from Investment
Activities...................... 0.94 0.57 0.45 1.50 (0.34)
------ ------ ------ ------ ------
Distributions
Net investment income............ (0.57) (0.56) (0.64) (0.61) (0.60)
In excess of realized gains...... -- -- -- -- (0.07)
------ ------ ------ ------ ------
Total Distributions.............. (0.57) (0.56) (0.64) (0.61) (0.67)
------ ------ ------ ------ ------
Net Asset Value, End of Period.... $10.72 $10.35 $10.34 $10.53 $ 9.64
====== ====== ====== ====== ======
Total Return (excludes sales
charge).......................... 9.31 % 5.78 % 4.51 % 15.98 % (3.32)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)............................ $4,927 $4,774 $4,915 $5,496 $5,167
Ratio of expenses to average net
assets........................... 0.96 % 0.95 % 0.95 % 0.95 % 0.95 %
Ratio of net investment income to
average net assets............... 5.41 % 5.46 % 6.06 % 6.03 % 6.00 %
Ratio of expenses to average net
assets*.......................... 1.06 % 1.05 % 1.05 % 1.05 % 1.05 %
Portfolio turnover**.............. 91.14 % 140.72 % 149.20 % 59.32 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) On September 27,
1994, the Portfolio redesignated the Investor Shares as "Investor A" Shares,
and authorized the issuance of a series of shares designated as "Investor B"
Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the year ended March 1, 1995
November 30, to
------------------------ November 30,
1998 1997 1996 1995(a)
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $10.37 $10.34 $10.53 $ 9.92
------ ------ ------ ------
Investment Activities
Net investment income............... 0.50 0.49 0.57 0.38
Net realized and unrealized gains
(losses) from investments.......... 0.38 0.03 (0.19) 0.61
------ ------ ------ ------
Total from Investment Activities.... 0.88 0.52 0.38 0.99
------ ------ ------ ------
Distributions
Net investment income............... (0.50) (0.49) (0.57) (0.38)
------ ------ ------ ------
Total Distributions................. (0.50) (0.49) (0.57) (0.38)
------ ------ ------ ------
Net Asset Value, End of Period....... $10.75 $10.37 $10.34 $10.53
====== ====== ====== ======
Total Return (excludes sales
charge)............................. 8.65 % 5.26 % 3.79 % 15.27 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).... $ 662 $ 545 $ 511 $ 106
Ratio of expenses to average net
assets.............................. 1.66 % 1.65 % 1.65 % 1.65 %(c)
Ratio of net investment income to
average net assets.................. 4.70 % 4.84 % 5.37 % 5.19 %(c)
Ratio of expenses to average net
assets*............................. 1.76 % 1.75 % 1.75 % 1.75 %(c)
Portfolio turnover**................. 91.14 % 140.72 % 149.20 % 59.32 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
108
<PAGE>
THE ARCH FUND, INC.
Government & Corporate Bond Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 10.37 $ 10.34 $ 10.53 $ 9.64 $ 10.65
-------- -------- -------- -------- --------
Investment Activities
Net investment income.. 0.60 0.59 0.67 0.64 0.63
Net realized and
unrealized gains
(losses) from
investments........... 0.37 0.03 (0.19) 0.89 (0.94)
-------- -------- -------- -------- --------
Total from Investment
Activities............ 0.97 0.62 0.48 1.53 (0.31)
-------- -------- -------- -------- --------
Distributions
Net investment income.. (0.60) (0.59) (0.67) (0.64) (0.63)
In excess of realized
gains................. -- -- -- -- (0.07)
-------- -------- -------- -------- --------
Total Distributions.... (0.60) (0.59) (0.67) (0.64) (0.70)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 10.74 $ 10.37 $ 10.34 $ 10.53 $ 9.64
======== ======== ======== ======== ========
Total Return............ 9.63 % 6.32 % 4.82 % 16.31 % (3.03)%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $178,868 $172,637 $141,440 $127,741 $132,577
Ratio of expenses to
average net assets..... 0.66 % 0.65 % 0.65 % 0.65 % 0.65 %
Ratio of net investment
income to average net
assets................. 5.71 % 5.85 % 6.36 % 6.32 % 6.25 %
Ratio of expenses to
average net assets*.... 1.06 % 1.05 % 0.75 % 0.75 % 1.05 %
Portfolio turnover**.... 91.14 % 140.72 % 149.20 % 59.32 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 10.37 $ 10.34 $ 10.53 $ 9.64 $ 10.65
-------- -------- -------- -------- --------
Investment Activities
Net investment income.. 0.57 0.56 0.64 0.61 0.60
Net realized and
unrealized gains
(losses) from
investments........... 0.37 0.03 (0.19) 0.89 (0.94)
-------- -------- -------- -------- --------
Total from Investment
Activities............ 0.94 0.59 0.45 1.50 (0.34)
-------- -------- -------- -------- --------
Distributions
Net investment income.. (0.57) (0.56) (0.64) (0.61) (0.60)
In excess of realized
gains................. -- -- -- -- (0.07)
-------- -------- -------- -------- --------
Total Distributions.... (0.57) (0.56) (0.64) (0.61) (0.67)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 10.74 $ 10.37 $ 10.34 $ 10.53 $ 9.64
======== ======== ======== ======== ========
Total Return............ 9.30 % 6.00 % 4.51 % 15.98 % (3.32)%
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 20,835 $ 16,954 $ 14,875 $ 9,413 $ 5,965
Ratio of expenses to
average net assets..... 0.96 % 0.95 % 0.95 % 0.95 % 0.96 %
Ratio of net investment
income to average net
assets................. 5.41 % 5.55 % 6.06 % 6.01 % 6.03 %
Ratio of expenses to
average net assets*.... 1.06 % 1.05 % 1.05 % 1.05 % 1.07 %
Portfolio turnover**.... 91.14 % 140.72 % 149.20 % 59.32 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) On January 3, 1994,
the Portfolio issued a new series of shares which were designated as
"Institutional" Shares. The financial highlights presented for the period
prior to January 3, 1994 represent financial highlights applicable to the
Investor Shares.
109
<PAGE>
ARCH U.S. Government Securities Portfolio
Q. What were the conditions in the Treasury market during the recent 12-month
period ended November 30, 1998?
A. The Treasury market benefited from several factors during the period.
Investors concerned that the global economic crisis could worsen sought safety
and liquidity in Treasury securities. Moreover, fears that global economic
problems would dampen U.S. economic growth led the Federal Reserve Board to cut
interest rates three times late in the period. Those interest rate cuts helped
drive rates on the 30-year Treasury lower, from 6.0% at the beginning of the
period to 5.0% on November 30, 1998.
Q. How did you manage the Portfolio in those conditions?
A. We significantly increased the Portfolio's weightings in agency and
mortgage pass-through securities while reducing its weighting in Treasury
issues. We made those changes because investors' flight to high-quality issues
such as Treasuries led to higher relative yields on lower-rated bonds. At the
beginning of the period, we held 56.5% of the Portfolio's assets in Treasuries
and 41.4% in mortgage pass-throughs. We adjusted our weighting in those sectors
later in the period to 13.7% and 69.8%, respectively, and increased the
Portfolio's weighting in agency securities to 14.6%.*
Q. How did you manage the Portfolio's average maturity?
A. We extended the average maturity of the Portfolio's holdings to take
advantage of the higher yields on longer term issues. The Federal Reserve's
interest rate cuts indicated that the Fed does not expect inflation to rise,
which contributed to our decision to extend the maturity of the Portfolio. The
Portfolio's average maturity began the period at 3.9 years and finished the
period at 6.0 years.
Q. What is your outlook for the bond market and the economy during the
upcoming year?
A. We do not expect a recession. The Federal Reserve's rate cuts have added
liquidity to the market. Moreover, the Fed could lower rates further if the
deflationary environment overseas worsens and threatens the U.S. economy. We
will continue to move assets out of Treasuries and into agencies and mortgage
pass-throughs as long as we believe those securities offer good opportunities
to lock in more attractive yields for the Portfolio.
- -----
* Portfolio composition is subject to change.
110
<PAGE>
The ARCH U.S. Government Securities Portfolio
[ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Brothers
Intermediate
Investor A Invester A Investor B Government
(No Load) (Load)* (No CDSC) Bond Index
--------- ------ ---------- ----------
11/30/88 10,000 9,750 10,000 10,000
11/30/89 11,001 10,726 11,001 11,247
11/30/90 12,061 11,760 12,061 12,190
11/30/91 13,549 13,211 13,549 13,766
11/30/92 14,522 14,159 14,522 14,885
11/30/93 15,976 15,577 15,976 16,244
11/30/94 15,474 15,088 15,474 15,973
11/30/95 17,738 17,295 17,460 18,158
11/30/96 18,547 18,083 18,130 19,185
11/30/97 19,511 19,024 18,941 20,390
11/30/98 21,446 20,902 20,693 22,209
* Reflects 2.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
10
Years
1 Year 5 Year (6/2/88)
------ ------ --------
Investor A (No Load) 6.66% 5.43% 7.60%
Investor A* 4.02% 4.89% 7.34%
Investor B (No CDSC) 6.02% 4.68% 7.22%
Investor B (CDSC)** 1.02% 4.52% 7.22%
[ARCH U.S. GOVERNMENT SECURITIES PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Brothers Intermediate
Trust Institutional Goverment Bond Index
----- ------------- --------------------
11/30/88 10,000 10,000 10,000
11/30/89 11,001 11,001 11,247
11/30/90 12,061 12,061 12,190
11/30/91 13,580 13,549 13,766
11/30/92 14,598 14,522 14,885
11/30/93 16,107 15,976 16,244
11/30/94 15,647 15,424 15,973
11/30/95 17,990 17,685 18,158
11/30/96 18,866 18,487 19,185
11/30/97 19,906 19,430 20,390
11/30/98 21,946 21,358 22,209
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Years
------ ------ --------
Trust 6.98% 5.74% 7.85%
Institutional 6.67% 5.34% 7.56%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH U.S. Government Securities Portfolio is measured
against the unmanaged Lehman Brothers Intermediate Government Bond Index, which
is generally representative of the total return of intermediate-term U.S.
Government securities. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 2.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares, which has been restated to reflect the
contingent deferred sales charges payable by shareholders of Investor B shares
who redeem within six years of the date of purchase. Investor B shares are also
subject to distribution and service fees at a maximum annual rate of 1.00%. Had
these distribution and service fees been reflected, performance would have been
reduced.
The Investor B (CDSC) is not included on the above graph due to the fact that
the performance is now over 6 years, and the CDSC charges no longer apply. The
performance for the Investor B (CDSC) will now mirror Investor B (No CDSC)
performance.
Institutional shares were initially offered on June 7, 1994. The performance
figures for Institutional shares for periods prior to such date represent the
performance for Investor A shares of the Portfolio.
111
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
U.S. Government Securities Portfolio November 30, 1998
U.S. Government Agencies (84.3%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Federal Home Loan Bank (14.5%):
5.52%, 4/9/01, Series 3101........................ $5,000,000 $ 5,069,500
5.75%, 4/30/01, Series 4901....................... 3,000,000 3,058,590
5.13%, 9/15/03.................................... 5,000,000 5,023,800
5.67%, 9/11/08, Series KS08....................... 2,000,000 2,041,180
------------
15,193,070
------------
Federal Home Loan Mortgage Corp. (25.9%):
9.50%, 9/1/04, Pool #380053....................... 11,035 11,684
8.50%, 3/1/06, Gold Pool #E00022.................. 169,872 176,932
7.50%, 4/1/08, Gold Pool #E45929.................. 335,701 345,561
6.00%, 2/1/11, Gold Pool #E62600.................. 428,003 429,205
6.50%, 2/1/11, Gold Pool #E00419.................. 660,746 671,272
7.00%, 7/1/11, Gold Pool #E20252.................. 612,380 626,924
7.00%, 11/1/11, Gold Pool #E65619................. 388,988 398,227
6.50%, 1/1/12, Gold Pool #E00465.................. 817,306 830,325
6.00%, 2/1/12, Gold Pool #E66284.................. 1,204,537 1,207,921
6.50%, 2/1/12, Gold Pool #E66172.................. 569,684 578,760
6.50%, 2/1/12, Gold Pool #E66272.................. 669,184 679,844
6.00%, 3/1/12, Gold Pool #E66474.................. 934,295 936,921
7.50%, 9/1/12, Gold Pool #G10735.................. 3,451,839 3,553,219
5.50%, 12/1/12, Gold Pool #E68353................. 7,092,605 6,995,080
6.00%, 3/1/13, Gold Pool #E69338.................. 962,864 965,569
6.00%, 4/1/13, Pool #E00543....................... 1,922,754 1,928,157
6.00%, 4/1/13, Pool #E70028....................... 943,318 945,969
6.00%, 5/1/13, Gold Pool #E00549.................. 4,839,918 4,853,517
6.00%, 3/1/28, Gold Pool #D87129.................. 987,860 976,431
------------
27,111,518
------------
Federal National Mortgage Assoc. (34.3%):
6.11%, 9/20/00.................................... 4,000,000 4,084,240
6.00%, 11/1/00, Pool #190070...................... 430,352 434,117
5.36%, 2/16/01, MTN............................... 5,000,000 5,049,250
6.40%, 5/2/01, MTN (b)............................ 5,000,000 5,171,199
6.00%, 3/1/11, Pool #340503....................... 835,708 837,012
6.50%, 5/1/11, Pool #335713....................... 837,444 850,266
6.50%, 5/1/11, Pool #346276....................... 607,587 616,889
6.50%, 7/1/11, Pool #351761....................... 710,084 720,956
6.50%, 7/1/11, Pool #250613....................... 1,545,755 1,569,420
7.00%, 11/1/11, Pool #349630...................... 277,537 284,040
7.00%, 11/1/11, Pool #250738...................... 285,335 292,020
7.00%, 11/1/11, Pool #351122...................... 200,752 205,456
6.50%, 12/1/11, Pool #367868...................... 910,408 924,346
6.50%, 12/1/11, Pool #368127...................... 864,897 878,139
6.50%, 12/1/11, Pool #250781...................... 1,583,096 1,607,333
5.50%, 3/1/13, Pool #420158....................... 1,862,214 1,834,858
6.00%, 4/1/13, Pool #425550....................... 3,149,209 3,154,122
6.00%, 4/1/13, Pool #251656....................... 952,625 954,111
6.50%, 8/1/13, Pool #251901....................... 2,445,687 2,483,131
8.00%, 7/1/24, Pool #190264....................... 911,844 944,899
6.50%, 10/1/27, Pool #400141...................... 2,933,034 2,955,031
------------
35,850,835
------------
Government National Mortgage Assoc. (9.6%):
8.00%, 1/15/07, Pool #315126...................... 145,504 150,732
6.50%, 5/15/08, Pool #340791...................... 53,487 54,540
9.00%, 7/15/09, Pool #390782...................... 236,858 249,293
9.00%, 11/15/09, Pool #359559..................... 222,876 234,577
8.00%, 10/15/10, Pool #414750..................... 379,542 393,178
</TABLE>
U.S. Government Agencies, continued
<TABLE>
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Government National Mortgage Assoc., continued:
6.50%, 11/15/10, Pool #414786................... $ 95,124 $ 96,996
6.50%, 2/15/11, Pool #373569.................... 285,552 291,171
6.50%, 3/15/11, Pool #344973.................... 302,204 308,151
6.50%, 3/15/11, Pool #416179.................... 46,481 47,396
6.50%, 3/15/11, Pool #406466.................... 362,255 369,384
6.50%, 3/15/11, Pool #408253.................... 339,724 346,410
6.50%, 3/15/11, Pool #410935.................... 542,295 552,967
6.50%, 4/15/11, Pool #422652.................... 351,152 358,063
6.50%, 4/15/11, Pool #416060.................... 596,165 607,898
6.50%, 5/15/11, Pool #422814.................... 52,803 53,842
6.50%, 5/15/11, Pool #408304.................... 310,838 316,955
6.50%, 5/15/11, Pool #433036.................... 120,207 122,573
6.50%, 6/15/11, Pool #421731.................... 221,497 225,856
6.50%, 6/15/11, Pool #432993.................... 105,720 107,800
6.50%, 7/15/11, Pool #433088.................... 749,545 764,296
6.50%, 7/15/11, Pool #424521.................... 270,583 275,908
8.50%, 5/15/17, Pool #219152.................... 104,659 110,775
8.50%, 6/15/21, Pool #307921.................... 138,317 146,399
7.50%, 12/15/22, Pool #347332................... 1,039,979 1,075,402
8.00%, 5/15/23, Pool #352469.................... 434,602 452,530
9.50%, 1/15/25, Pool #384421.................... 111,588 120,479
9.50%, 2/15/25, Pool #401796.................... 160,223 172,990
9.50%, 2/15/25, Pool #365292.................... 397,891 429,595
9.50%, 2/15/25, Pool #392967.................... 2,276 2,457
9.50%, 3/15/25, Pool #407257.................... 121,334 131,002
9.50%, 4/15/25, Pool #386741.................... 122,332 132,079
7.00%, 9/15/27, Pool #455304.................... 293,275 300,513
7.00%, 8/15/28, Pool #482697.................... 997,329 1,021,943
------------
10,024,150
------------
TOTAL U.S. GOVERNMENT AGENCIES 88,179,573
------------
U.S. Treasury Notes (13.7%)
6.38%, 5/15/99(b)............................... 4,050,000 4,080,941
7.75%, 11/30/99(b).............................. 3,150,000 3,243,461
7.75%, 12/31/99(b).............................. 1,250,000 1,290,600
6.13%, 7/31/00.................................. 275,000 281,718
6.25%, 2/28/02(b)............................... 1,250,000 1,309,500
5.75%, 8/15/03(b)............................... 400,000 418,204
7.25%, 5/15/04.................................. 350,000 392,501
6.63%, 5/15/07(b)............................... 2,960,000 3,325,175
------------
TOTAL U.S. TREASURY NOTES 14,342,100
------------
Investment Companies (1.8%)
Federated Trust for U.S. Treasury Obligations... 1,924,300 1,924,300
------------
TOTAL INVESTMENT COMPANIES 1,924,300
------------
Short-Term Securities Held as Collateral (5.2%)
Repurchase agreements (5.2%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $1,828,095,
collateralized by $2,271,856 various U.S.
Government Agency securities, 0.00%-8.50%,
12/3/98-9/11/28, market value $1,863,998)...... 1,827,808 1,827,808
</TABLE>
Continued
112
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
U.S. Government Securities Portfolio November 30, 1998
Short-Term Securities Held as Collateral, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ----------- ------------
<S> <C> <C>
Nationsbanc Montgomery Securities, Inc., 5.68%,
12/1/98 (Purchased on 11/30/98, proceeds at
maturity $207,739, collateralized by $233,009
various U.S. Government Agency mortgages, 0.00%-
10.50%, 5/1/00-12/1/28, market value $211,861).... $ 207,706 $ 207,706
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $914,042,
collateralized by $4,643,441 various U.S.
Government Agency mortgages, 0.00%-8.00%,
10/25/99-8/1/28, market value $932,182)........... 913,904 913,904
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $615,012,
collateralized by $721,180 various U.S. Treasury
Notes, 3.63%-8.75%, 10/31/99-11/15/28, market
value $627,219)................................... 614,921 614,921
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $1,828,077,
collateralized by $2,187,133 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$1,864,364)....................................... 1,827,807 1,827,807
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 5,392,146
------------
TOTAL INVESTMENTS
(Cost $107,987,185)(a) (105.0%)............................... 109,838,119
Liabilities in excess of other assets (-5.0%).................. (5,202,675)
------------
TOTAL NET ASSETS (100.0%)...................................... $104,635,444
============
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.... $1,898,558
Unrealized depreciation.... (47,624)
----------
Net unrealized apprecia-
tion...................... $1,850,934
==========
</TABLE>
(b) A portion of this security was loaned as of November 30, 1998.
MTN--Medium Term Note.
See notes to financial statements
113
<PAGE>
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $102,595,039)............. $104,445,973
Repurchase agreements, at value
(cost $5,392,146).................................... 5,392,146
------------
Total investments.................................... 109,838,119
Cash.................................................. 788
Interest and dividends receivable..................... 714,657
Receivable for investments sold....................... 18,086
Prepaid expenses and other assets..................... 587
------------
Total Assets......................................... 110,572,237
Liabilities:
Dividends payable..................................... $ 467,995
Payable for capital shares redeemed................... 10,180
Payable for return of collateral received............. 5,392,146
Accrued expenses and other payables:
Investment advisory fees............................. 38,573
Administration fees.................................. 2,003
Distribution and administrative services fees........ 2,782
Custodian fees....................................... 8,205
Other liabilities.................................... 14,909
----------
Total Liabilities.................................... 5,936,793
------------
Net Assets:
Capital............................................... 103,146,785
Undistributed net investment income................... 331,917
Accumulated net realized losses from investment
transactions......................................... (694,192)
Net unrealized appreciation from investments.......... 1,850,934
------------
Net Assets............................................ $104,635,444
============
Investor A Shares
Net Assets........................................... $ 4,663,726
Shares............................................... 434,198
Redemption price per share........................... $10.74
======
Maximum Sales Charge--Investor A Shares............... 2.50%
Maximum Offering Price (100%/(100%-- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share..................................... $11.02
======
Investor B Shares
Net Assets........................................... $ 148,897
Shares............................................... 13,858
Offering price per share*............................ $10.74
======
Trust Shares
Net Assets........................................... $ 93,683,116
Shares............................................... 8,721,546
Offering and redemption price per share.............. $10.74
======
Institutional Shares
Net Assets........................................... $ 6,139,705
Shares............................................... 573,578
Offering and redemption price per share.............. $10.70
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $6,367,129
Dividend income........................................... 52,866
Income from securities lending............................ 30,730
----------
Total Income............................................. 6,450,725
Expenses:
Investment advisory fees.................................. $459,828
Administration fees....................................... 204,368
Distribution and services fees, Investor A Shares......... 14,554
Distribution and services fees, Investor B Shares......... 3,933
Administrative services fees, Trust Shares................ 271,444
Administrative services fees, Institutional Shares........ 19,374
Accounting fees........................................... 18,533
Custodian fees............................................ 31,466
Directors' fees and expenses.............................. 1,338
Transfer agent fees....................................... 27,456
Other fees................................................ 44,313
--------
Total expenses before voluntary fee reductions........... 1,096,607
Expenses voluntarily reduced............................. (373,625)
----------
Net Expenses............................................. 722,982
----------
Net investment income..................................... 5,727,743
----------
Realized/Unrealized Gains (Losses) from Investments:
Net realized losses from investment transactions.......... (15,513)
Net change in unrealized appreciation from investments.... 1,182,911
----------
Net realized/unrealized gains from investments............ 1,167,398
----------
Change in net assets resulting from operations............ $6,895,141
==========
</TABLE>
See notes to financial statements
114
<PAGE>
THE ARCH FUND, INC
U.S. Government Securities Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income.............................. $ 5,727,743 $ 4,610,849
Net realized losses from investment transactions... (15,513) (202,303)
Net change in unrealized appreciation from invest-
ments............................................. 1,182,911 17,120
------------ -----------
Change in net assets resulting from operations...... 6,895,141 4,425,666
------------ -----------
Distributions to Investor A Shareholders:
From net investment income......................... (259,301) (323,804)
Distributions to Investor B Shareholders:
From net investment income......................... (18,379) (21,080)
Distributions to Trust Shareholders:
From net investment income......................... (5,105,111) (3,973,203)
Distributions to Institutional Shareholders:
From net investment income......................... (344,952) (292,762)
------------ -----------
Change in net assets from shareholder distribu-
tions.............................................. (5,727,743) (4,610,849)
------------ -----------
Change in net assets from capital transactions...... 18,019,409 15,810,160
------------ -----------
Change in net assets................................ 19,186,807 15,624,977
Net Assets:
Beginning of period................................ 85,448,637 69,823,660
------------ -----------
End of period...................................... $104,635,444 $85,448,637
============ ===========
</TABLE>
See notes to financial statements
115
<PAGE>
THE ARCH FUND, INC
U.S. Government Securities Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
-------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income.......................................... $ 5,727,743
Adjustments to reconcile net investment income to net cash used
in operating activities:
Cost of investment securities.................................. (123,385,470)
Proceeds from disposition of investment securities............. 105,062,393
Cost of investments purchased with cash collateral from securi-
ties lending.................................................. (5,392,146)
Decrease in dividends and interest receivable.................. 201,214
Increase in payable for return of collateral received from se-
curities lending.............................................. 5,392,146
Increase in accrued expenses................................... 20,497
Decrease in prepaid expenses................................... 3,065
-------------
Net cash used in operating activities.......................... (12,370,558)
-------------
Cash Flows from Financing Activities:
Proceeds from shares issued.................................... 32,177,947
Cost of shares redeemed........................................ (16,745,084)
Cash distributions paid........................................ (3,061,729)
-------------
Net cash provided by financing activities...................... 12,371,134
-------------
Increase in cash................................................ 576
Cash:
Beginning balance.............................................. 212
-------------
Ending balance................................................. $ 788
=============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income of $2,596,726.
See notes to financial statements
116
<PAGE>
THE ARCH FUND, INC
U.S. Government Securities Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended November 30,
--------------------------------------------
1998 1997 1996 1995 1994 (a)
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $10.62 $10.67 $10.85 $10.05 $11.20
------ ------ ------ ------ ------
Investment Activities
Net investment income........... 0.57 0.60 0.62 0.64 0.63
Net realized and unrealized
gains (losses) from
investments.................... 0.12 (0.07) (0.15) 0.80 (0.97)
------ ------ ------ ------ ------
Total from Investment
Activities..................... 0.69 0.53 0.47 1.44 (0.34)
------ ------ ------ ------ ------
Distributions
Net investment income........... (0.57) (0.58) (0.62) (0.64) (0.63)
In excess of net realized
gains.......................... -- -- (0.03) -- (0.18)
------ ------ ------ ------ ------
Total Distributions............. (0.57) (0.58) (0.65) (0.64) (0.81)
------ ------ ------ ------ ------
Net Asset Value, End of Period... $10.74 $10.62 $10.67 $10.85 $10.05
====== ====== ====== ====== ======
Total Return (excludes sales
charge)......................... 6.66 % 5.20 % 4.57 % 14.66 % (3.14)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)........................... $4,664 $5,181 $7,153 $8,179 $9,631
Ratio of expenses to average net
assets.......................... 0.97 % 0.97 % 0.97 % 0.97 % 0.96 %
Ratio of net investment income to
average net assets.............. 5.35 % 5.56 % 5.82 % 6.05 % 5.98 %
Ratio of expenses to average net
assets*......................... 1.07 % 1.07 % 1.07 % 1.07 % 1.06 %
Portfolio turnover**............. 54.57 % 100.33 % 53.76 % 93.76 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On September
27, 1994, the Portfolio redesignated the Investor Shares as "Investor A"
Shares, and authorized the issuance of a series of shares designated as
"Investor B" Shares.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the years ended March 1, 1995
November 30, to
-------------------------- November 30,
1998 1997 1996 1995 (a)
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $10.61 $10.66 $10.84 $10.34
------ ------ ------ ------
Investment Activities
Net investment income............. 0.50 (d) 0.51 0.55 0.31
Net realized and unrealized gains
(losses) from investments........ 0.13 (0.05) (0.15) 0.50
------ ------ ------ ------
Total from Investment Activities.. 0.63 0.46 0.40 0.81
------ ------ ------ ------
Distributions
Net investment income............. (0.50) (0.51) (0.55) (0.31)
In excess of net realized gains... -- -- (0.03) --
------ ------ ------ ------
Total Distributions............... (0.50) (0.51) (0.58) (0.31)
------ ------ ------ ------
Net Asset Value, End of Period..... $10.74 $10.61 $10.66 $10.84
====== ====== ====== ======
Total Return (excludes sales
charge)........................... 6.02 % 4.47 % 3.85 % 12.85 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).. $ 149 $ 466 $ 359 $ 41
Ratio of expenses to average net
assets............................ 1.67 % 1.67 % 1.66 % 1.68 %(c)
Ratio of net investment income to
average net assets................ 4.67 % 4.84 % 5.06 % 5.37 %(c)
Ratio of expenses to average net
assets*........................... 1.77 % 1.77 % 1.76 % 1.78 %(c)
Portfolio turnover**............... 54.57 % 100.33 % 53.76 % 93.76 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Represents total return for the Investor A
Shares from December 1, 1994 to February 28, 1995 plus the total return for
the Investor B Shares from March 1, 1995 to November 30, 1995. (c) Annualized.
(d) Per share net investment income has been calculated using the daily
average share method.
117
<PAGE>
THE ARCH FUND, INC.
U.S. Government Securities Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended November 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 10.62 $ 10.67 $ 10.85 $ 10.05 $ 11.20
------- ------- ------- ------- -------
Investment Activities
Net investment income....... 0.60 0.61 0.66 0.67 0.66
Net realized and unrealized
gains (losses) from
investments................ 0.12 (0.05) (0.15) 0.80 (0.97)
------- ------- ------- ------- -------
Total from Investment
Activities................. 0.72 0.56 0.51 1.47 (0.31)
------- ------- ------- ------- -------
Distributions
Net investment income....... (0.60) (0.61) (0.66) (0.67) (0.66)
In excess of net realized
gains...................... -- -- (0.03) -- (0.18)
------- ------- ------- ------- -------
Total Distributions......... (0.60) (0.61) (0.69) (0.67) (0.84)
------- ------- ------- ------- -------
Net Asset Value, End of
Period...................... $ 10.74 $ 10.62 $ 10.67 $ 10.85 $ 10.05
======= ======= ======= ======= =======
Total Return................. 6.98 % 5.51 % 4.88 % 15.00 % (2.85)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)....................... $93,683 $72,753 $60,079 $45,513 $33,166
Ratio of expenses to average
net assets.................. 0.67 % 0.67 % 0.67 % 0.67 % 0.66 %
Ratio of net investment
income to average net
assets...................... 5.64 % 5.84 % 6.10 % 6.36 % 6.25 %
Ratio of expenses to average
net assets*................. 1.07 % 1.07 % 0.77 % 0.77 % 1.06 %
Portfolio turnover**......... 54.57 % 100.33 % 53.76 % 93.76 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the years ended November 30,
--------------------------------------------
1998 1997 1996 1995 1994 (a)
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $10.58 $10.64 $10.82 $10.02 $11.20
------ ------ ------ ------ ------
Investment Activities
Net investment income........... 0.57 0.56 0.62 0.63 0.61
Net realized and unrealized
gains (losses) from
investments.................... 0.12 (0.04) (0.15) 0.80 (1.00)
------ ------ ------ ------ ------
Total from Investment
Activities..................... 0.69 0.52 0.47 1.43 (0.39)
------ ------ ------ ------ ------
Distributions
Net investment income........... (0.57) (0.58) (0.62) (0.63) (0.61)
In excess of net realized
gains.......................... -- -- (0.03) -- (0.18)
------ ------ ------ ------ ------
Total Distributions............. (0.57) (0.58) (0.65) (0.63) (0.79)
------ ------ ------ ------ ------
Net Asset Value, End of Period... $10.70 $10.58 $10.64 $10.82 $10.02
====== ====== ====== ====== ======
Total Return..................... 6.67 % 5.10 % 4.55 % 14.69 % (3.46)%
Ratios/Supplementary Data:
Net Assets at end of period
(000)........................... $6,140 $7,049 $2,232 $ 667 $ 51
Ratio of expenses to average net
assets.......................... 0.97 % 0.97 % 0.96 % 0.97 % 0.95 %
Ratio of net investment income to
average net assets.............. 5.34 % 5.52 % 5.75 % 5.91 % 6.54 %
Ratio of expenses to average net
assets*......................... 1.07 % 1.07 % 1.06 % 1.07 % 1.16 %
Portfolio turnover**............. 54.57 % 100.33 % 53.76 % 93.76 % 50.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On June 7,
1994, the Portfolio issued a new series of shares designated
as'"Institutional" Shares. The financial highlights presented for the period
prior to June 7, 1994 represent financial highlights applicable to the
Investor Shares.
118
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
119
<PAGE>
The ARCH Short-Intermediate Municipal Portfolio
Q. What were conditions like in the economy during the 12 months through
November 30, 1998?
A. Early in the period, investors worried that the Federal Reserve would
raise interest rates to keep the economy from overheating. But evidence that
the Asian economic crisis might dampen U.S. exports and that a strong U.S.
dollar might hurt U.S. companies' profits overseas allowed the Fed to refrain
from such a rate hike.
Concerns that global economic weakness would hurt the U.S. economy increased
during the second half of the period. Two events particularly worried
investors: The Russian government defaulted on its short-term debt, and a large
hedge fund, Long Term Capital Management, nearly went bankrupt. Investors
feared these events would contribute to a global liquidity crisis. In response,
the Federal Reserve increased the money supply by lowering short-term interest
rates three times, each time dropping the federal funds rate one quarter point.
Q. How did the municipal bond market perform in that environment?
A. Municipal bonds outperformed Treasuries during the first half of the
period, but lagged taxable bonds during the most recent six months. There are
several reasons for that drop-off in performance. For one, the supply of
municipal bonds in 1998 was very heavy, which helped drive down muni bonds'
prices. Furthermore, investors flocked to U.S. Treasury bonds in the wake of
stock market fluctuations and continued uncertainty about the health of global
economies. Although municipal yields were high relative to taxable yields, they
were low on an absolute basis.
Q. How did you manage the Portfolio in that environment?
A. The Portfolio's average maturity was around 4.5 years at the beginning of
the period, and we increased it to 4.69 years. That approach benefited the
Portfolio's performance, as bonds with relatively long maturities outperformed
short-term bonds during the period.*
Q. What was the Portfolio's average credit rating?
A. The Portfolio's credit rating was very high at AA1. It is our view that
issues with strong credit quality offer the best trade-off between potential
risk and return. That philosophy worked well during the period: Investors
continued to favor bonds with good credit quality, reflecting the fact that
yields on lower quality issues weren't high enough to justify their additional
risk.*
Q. What is your outlook going forward?
A. We expect that the U.S. economy could grow very slowly and that inflation
may remain low. In that environment, interest rates may decline further, and
the Federal Reserve could continue to reduce short-term rates. It is likely
that municipal bonds will trade in a relatively narrow range in the coming
months.
Q. How will you manage the Portfolio going forward?
A. We will maintain the Portfolio's relatively long average maturity of
around five years. We also will continue to hold revenue and general obligation
bonds with very strong credit quality. We believe that lower-quality issues at
this time do not offer enough extra yield to compensate for their risk. In
particular, we look for opportunities to purchase revenue bonds from sectors
such as education, water and sewer, and electrical, which historically are very
dependable issues.
- -----
* Portfolio composition is subject to change.
120
<PAGE>
The ARCH Short-Intermediate Municipal Portfolio
[ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A Lehman Municipal Bond
(No Load) (Load)* Index-3 year
---------- ---------- ---------------------
7/10/95 10,000 9,747 10,000
11/95 10,080 9,825 10,220
11/96 10,485 10,220 10,713
11/97 10,918 10,641 11,229
05/98 11,171 10,888 11,512
11/98 11,481 11,191 11,836
* Reflects 2.50% sales charge.
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (7/10/95)
------ ---------
Investor A (No Load) 5.16% 4.16%
Investor A* 2.53% 3.37%
[ARCH SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Municipal Bond
Trust Index-3-Year
----- ---------------------
7/10/95 10,000 10,000
11/95 10,213 10,220
11/96 10,636 10,713
11/97 11,103 11,229
05/98 11,375 11,512
11/98 11,697 11,836
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (7/10/95)
------ ---------
Trust 5.36% 4.73%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Short-Intermediate Municipal Portfolio is
measured against the Lehman Brothers Municipal Bond Index-3 year, an unmanaged
index representative of the total return of municipal bonds with remaining
maturities of 3 years or less. Investors are unable to purchase the index
directly, although they can invest in the underlying securities. The
performance of the index does not reflect the deduction of expenses associated
with a mutual fund, such as investment management and fund accounting fees. By
contrast, the performance of the Portfolio shown on the graph reflects the
deduction of these value-added services, as well as the deduction of a 2.50%
sales charge on Investor A shares.
The Portfolio may be subject to certain state and local taxes and, depending
on an investor's tax status, the federal alternative minimum tax.
121
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Short-Intermediate Municipal Portfolio November 30, 1998
Municipal Bonds (97.4%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Alabama (2.4%):
Alabama State Public School & College Authority, 4.40%,
12/1/00............................................... $1,000,000 $ 1,017,500
-----------
Colorado (4.2%):
El Paso County School District No. 020, G.O., 5.15%,
12/15/99.............................................. 720,000 734,148
Jefferson County School District No. R-001, Series A,
G.O., 5.25%, 12/15/11, Callable on 12/15/08 @101 (FGIC
Insured).............................................. 1,000,000 1,070,000
-----------
1,804,148
-----------
Hawaii (3.8%):
Hawaii State Highway Revenue, 4.80%, 7/1/03............ 600,000 622,500
Hawaii State, Series CI, G.O., 4.10%, 11/1/01.......... 1,000,000 1,008,750
-----------
1,631,250
-----------
Illinois (8.6%):
Chicago Metropolitan Water Reclamation District, G.O.,
4.70%, 12/1/99........................................ 500,000 507,970
Chicago, G.O., 5.50%, 1/1/13
(FSA Insured)......................................... 1,000,000 1,086,250
Du Page County, Forest Preservation District, G.O.,
5.90%, 11/1/01........................................ 500,000 530,000
Illinois State Toll Highway Authority, Toll Highway
Priority Revenue, Series A, 4.75%, 1/1/02............. 750,000 766,875
Illinois State, G.O., 5.60%, 10/1/99................... 400,000 408,092
Illinois State, G.O., 5.25%, 4/1/01.................... 400,000 414,000
-----------
3,713,187
-----------
Indiana (3.5%):
Muncie School Building Corp., 4.95%, 1/15/02 (MBIA
Insured)... 500,000 517,500
St. Joseph County Hospital Authority, Memorial Health
System, 4.75%, 8/15/12, Callable on 2/15/08 @ 101
(MBIA Insured)........................................ 1,000,000 1,003,750
-----------
1,521,250
-----------
Iowa (1.0%):
Ottumwa Community School District, G.O., 5.10%, 6/1/01
(FSA Insured)......................................... 425,000 439,875
-----------
Kansas (2.5%):
Kansas State Department of Transportation, Highway
Revenue, 5.50%, 9/1/10................................ 1,000,000 1,090,000
-----------
Kentucky (0.9%):
Kenton County Water District No. 001, Waterworks
Revenue, Series B, 5.60%, 2/1/99 (FGIC Insured)....... 380,000 381,512
-----------
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Maine (1.9%):
Maine Municipal Bond Bank, Series A, 4.90%, 11/1/02..... $ 800,000 $ 833,000
-----------
Maryland (2.1%):
Maryland State, Department of Transportation, 2nd Issue,
4.10%, 12/15/00........................................ 400,000 405,500
Washington Suburban Sanitation District, Sewer Disposal
Revenue, G.O., 5.00%, 6/1/00........................... 500,000 511,875
-----------
917,375
-----------
Massachusetts (5.0%):
Massachusetts State Health & Educational Facilities,
Harvard Pilgrim Health Care, Hospital & Nursing Home
Revenue, Series A, 4.13%, 7/1/02 (FSA Insured)......... 1,000,000 1,010,000
Massachusetts State Port Authority Revenue, Series A,
5.75%, 7/1/12.......................................... 1,000,000 1,115,000
-----------
2,125,000
-----------
Michigan (6.4%):
Chelsea School District, G.O., 5.25%, 5/1/01 (FGIC Q-
SBLF Insured).......................................... 400,000 415,000
Eaton Rapids Public Schools, G.O., 5.38%, 5/1/07,
Callable on 5/1/04 @ 101 (MBIA Q-SBLF Insured)......... 1,000,000 1,068,750
Kent County Building Authority, G.O., 4.50%, 12/1/01.... 800,000 820,000
Oakland County Building Authority, 4.75%, 4/1/00,
Callable on 4/1/99 @ 101.5............................. 450,000 457,313
-----------
2,761,063
-----------
Minnesota (3.3%):
Duluth, Series A, G.O., 4.65%, 2/1/02 (FSA Insured)..... 365,000 375,950
Faribault Independent School District, G.O., 4.63%,
6/1/10, Callable on 6/1/08 @ 100 (FSA Insured)......... 1,000,000 1,022,500
-----------
1,398,450
-----------
Mississippi (1.2%):
Mississippi State, Capital Improvement, Series B, G.O.,
5.00%, 8/1/99.......................................... 500,000 505,820
-----------
Missouri (0.8%):
Jefferson County School District, G.O., 4.70%, 3/1/01
(MBIA Insured)......................................... 320,000 329,200
-----------
Nevada (3.4%):
Sparks, G.O., 4.80%, 3/1/04, Callable on 3/1/01 @ 101
(AMBAC Insured)........................................ 900,000 922,500
Washoe County School District, G.O., 5.30%, 8/1/00 (MBIA
Insured)............................................... 500,000 515,000
-----------
1,437,500
-----------
</TABLE>
Continued
122
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Short-Intermediate Municipal Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
New Mexico (2.5%):
Albuquerque, Water & Sewer Revenue, 4.40%, 7/1/00...... $ 345,000 $ 350,175
New Mexico State, Capital Projects, G.O., 4.60%,
8/1/00................................................ 700,000 711,739
-----------
1,061,914
-----------
New York (2.4%):
New York State, Environmental Facilities Revenue,
5.05%, 1/15/13, Callable on 7/15/08 @ 102............. 1,000,000 1,028,750
-----------
North Carolina (2.3%):
North Carolina Medical Care Community, Pitt County
Memorial Hospital, Hospital & Nursing Home Revenue,
Series A, 4.00%, 12/1/01.............................. 1,000,000 1,005,000
-----------
Ohio (2.3%):
Ohio State Building Authority, 4.75%, 10/1/17, Callable
on 10/1/08 @ 101...................................... 1,000,000 975,000
-----------
Oklahoma (2.4%):
Oklahoma State Capital Improvement Authority, Highway
Improvement Revenue, 4.00%, 12/1/01 (MBIA Insured).... 1,000,000 1,011,250
-----------
Pennsylvania (0.9%):
Delaware County, G.O., 4.35%, 10/1/00 (Municipal
Government Guaranteed)................................ 400,000 406,000
-----------
Rhode Island (2.2%):
Rhode Island State, Series A, G.O., 4.60%, 11/1/03,
Callable on 11/1/02 @ 102............................. 900,000 925,875
-----------
South Carolina (0.9%):
Charleston County School District, Series B, G.O.,
4.50%, 2/1/00 (SCSDE Insured)......................... 400,000 405,000
-----------
South Dakota (1.6%):
South Dakota State Building Authority, Building
Revenue, Series A, 5.00%, 9/1/02 (FSA Insured)........ 640,000 668,000
-----------
Texas (13.2%):
Brazos River Authority, Pollution Control Revenue,
Series A, Texas Utilities Electric Co., 3.35%*,
12/1/98, AMT (MBIA Insured)........................... 1,500,000 1,499,999
Dallas Water Works & Sewer System Revenue, 4.60%,
4/1/01................................................ 450,000 460,125
Houston, Series C, G.O., 5.50%, 4/1/01................. 800,000 834,000
Plano Independent School District, G.O., 4.70%,
2/15/13, Callable on 2/15/08 @ 100 (PSF Guaranteed)... 1,000,000 1,001,250
San Antonio, G.O., 4.88%, 8/1/99....................... 400,000 404,488
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Texas, continued:
Tarrant County Water Control and Improvement District
No. 001, Water Revenue, 5.60%, 3/1/00................. $ 450,000 $ 461,813
University of Texas Permanent University Fund, College
& University Revenue, 5.00%, 7/1/14, Callable on
7/1/08 @ 100 (PUFG Guaranteed)........................ 1,000,000 1,026,250
-----------
5,687,925
-----------
Utah (3.0%):
Box Elder County School District, G.O., 4.80%, 6/15/01
(AMBAC Insured)....................................... 675,000 694,406
North Davis County Sewer District, G.O., 5.70%, 3/1/02
(FGIC Insured)........................................ 560,000 593,600
-----------
1,288,006
-----------
Vermont (0.6%):
Vermont Municipal Bond Bank, Series 2, 4.50%, 12/1/01
(AMBAC Insured)....................................... 270,000 276,413
-----------
Virginia (3.4%):
Loudoun County, Series A, G.O., 5.00%, 12/1/02......... 1,000,000 1,048,750
Virginia State Public Building Authority, Building
Revenue, Series A, 5.70%, 8/1/00...................... 400,000 414,500
-----------
1,463,250
-----------
Washington (7.0%):
Clark County Public Utilities District No. 001,
Electric Revenue, 4.60%, 1/1/01 (FGIC Insured)........ 500,000 510,000
Grant County Public Utilities District No. 002,
Electric Revenue, Series F, 4.80%, 1/1/04 (MBIA
Insured).............................................. 500,000 519,375
King County School District No. 414, G.O., 5.00%,
12/1/08............................................... 1,000,000 1,065,000
Seattle Municipal Light & Power Revenue, 4.80%,
5/1/02................................................ 600,000 619,500
Washington State, Series R-92C, G.O., 5.75%, 9/1/02.... 250,000 267,813
-----------
2,981,688
-----------
Wisconsin (1.7%):
Brown County, Series A, G.O., 4.80%, 11/1/01, Callable
on 11/1/00 @ 100...................................... 325,000 331,500
Milwaukee County, Series A, G.O., 5.25%, 9/1/00........ 380,000 391,875
-----------
723,375
-----------
TOTAL MUNICIPAL BONDS 41,813,576
===========
</TABLE>
Continued
123
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Short-Intermediate Municipal Portfolio November 30, 1998
Investment Companies (1.4%)
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- ------- -----------
<S> <C> <C>
Federated Tax-Free Fund.................................. 200,000 $ 200,000
Nuveen Tax Exempt Fund................................... 380,000 380,000
-----------
TOTAL INVESTMENT COMPANIES 580,000
-----------
TOTAL INVESTMENTS
(Cost $41,564,677)(a) (98.8%)................................... 42,393,576
Other assets in excess of liabilities (1.2%)..................... 499,795
-----------
TOTAL NET ASSETS (100.0%)........................................ $42,893,371
===========
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation...... $828,899
Unrealized depreciation...... --
--------
Net unrealized appreciation.. $828,899
========
</TABLE>
* Variable rate investments. The rate presented on the Schedule of Portfolio
Investments is the rate in effect at November 30, 1998.
AMBAC AMBAC Indemnity Corp.
AMT Alternative Minimum Tax
FGIC Financial Guaranty Insurance Corp.
FSA Financial Securities Assurance, Inc.
G.O. General Obligation
MBIA Municipal Bond Insurance Association
PSF Permanent School Fund
PUFG Permanent University Fund Guarantee
Q-SBLF Qualified-School Bond Loan Fund
SCSDE South Carolina School District Enhancement
See notes to financial statements
124
<PAGE>
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $41,564,677)................. $42,393,576
Interest and dividends receivable........................ 678,349
-----------
Total Assets............................................ 43,071,925
Liabilities:
Payable to custodian..................................... $ 433
Dividends payable........................................ 128,364
Payable for capital shares redeemed...................... 239
Accrued expenses and other payables:
Investment advisory fees................................ 19,304
Administration fees..................................... 821
Distribution and administrative services fees........... 4
Custodian fees.......................................... 3,284
Other liabilities....................................... 26,105
--------
Total Liabilities....................................... 178,554
-----------
Net Assets:
Capital.................................................. 42,048,467
Accumulated net realized gains from investment
transactions............................................ 16,005
Net unrealized appreciation from investments............. 828,899
-----------
Net Assets............................................... $42,893,371
===========
Investor A Shares
Net Assets.............................................. $ 31,661
Shares.................................................. 3,085
Redemption price per share.............................. $10.26
======
Maximum Sales Charge -- Investor A Shares................ 2.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share........................................ $10.52
======
Trust Shares
Net Assets.............................................. $42,861,710
Shares.................................................. 4,180,858
Offering and redemption price per share................. $10.25
======
</TABLE>
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $1,695,295
Dividend income........................................... 27,664
----------
Total Income............................................. 1,722,959
Expenses:
Investment advisory fees.................................. $215,778
Administration fees....................................... 78,465
Distribution and services fees, Investor A Shares......... 47
Administrative services fees, Trust Shares................ 117,650
Accounting fees........................................... 8,566
Custodian fees............................................ 12,055
Directors' fees and expenses.............................. 392
Transfer agent fees....................................... 8,822
Other fees................................................ 29,983
--------
Total expenses before voluntary fee reductions........... 471,758
Expenses voluntarily reduced............................. (219,312)
----------
Net Expenses............................................. 252,446
----------
Net investment income..................................... 1,470,513
----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions........... 16,005
Net change in unrealized appreciation from investments.... 556,532
----------
Net realized/unrealized gains from investments............ 572,537
----------
Change in net assets resulting from operations............ $2,043,050
==========
</TABLE>
See notes to financial statements
125
<PAGE>
THE ARCH FUND, INC.
Short-Intermediate Municipal Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the year ended
For the year ended November 30,
November 30, 1998 1997
------------------ ------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income................... $ 1,470,513 $ 1,165,256
Net realized gains from investment
transactions........................... 16,005 --
Net change in unrealized appreciation
from investments ...................... 556,532 64,888
----------- -----------
Change in net assets resulting from oper-
ations.................................. 2,043,050 1,230,144
----------- -----------
Distributions to Investor A Shareholders:
From net investment income.............. (559) (2,039)
Distributions to Trust Shareholders:
From net investment income.............. (1,469,954) (1,163,217)
----------- -----------
Change in net assets from shareholder
distributions........................... (1,470,513) (1,165,256)
----------- -----------
Change in net assets from capital trans-
actions................................. 11,850,687 882,174
----------- -----------
Change in net assets..................... 12,423,224 947,062
Net Assets:
Beginning of period..................... 30,470,147 29,523,085
----------- -----------
End of period........................... $42,893,371 $30,470,147
=========== ===========
</TABLE>
See notes to financial statements
126
<PAGE>
THE ARCH FUND, INC
Short-intermediate Municipal Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years ended
November 30, July 10, 1995 to
------------------------ November 30,
1998 1997 1996 1995 (a)
------ ------ ------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $10.11 $10.08 $10.08 $10.00
------ ------ ------ ------
Investment Activities
Net investment income............ 0.35 0.37 0.40 --
Net realized and unrealized gains
from investments................ 0.15 0.03 -- 0.08
------ ------ ------ ------
Total from Investment
Activities...................... 0.50 0.40 0.40 0.08
------ ------ ------ ------
Distributions
Net investment income............ (0.35) (0.37) (0.40) --
------ ------ ------ ------
Total Distributions.............. (0.35) (0.37) (0.40) --
------ ------ ------ ------
Net Asset Value, End of Period.... $10.26 $10.11 $10.08 $10.08
====== ====== ====== ======
Total Return (excludes sales
charge).......................... 5.16 % 4.12 % 4.02 % 0.80 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000)............................ $ 32 $ 16 $ 51 $ -- (c)
Ratio of expenses to average net
assets........................... 0.89 % 0.62 % 0.56 % 0.00 %(d)
Ratio of net investment income to
average net assets............... 3.54 % 3.78 % 3.83 % 0.00 %(d)
Ratio of expenses to average net
assets*.......................... 1.21 % 1.32 % 1.26 % 0.00 %(d)
Portfolio turnover**.............. 18.58 % 0.00 % 0.00 % 0.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Only one Investor A Share,
worth $10.08, was outstanding as of November 30, 1995. (d) Annualized.
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years ended
November 30, July 10, 1995 to
--------------------------- November 30,
1998 1997 1996 1995 (a)
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 10.10 $ 10.07 $ 10.07 $ 10.00
------- ------- ------- -------
Investment Activities
Net investment income......... 0.38 0.40 0.41 0.14
Net realized and unrealized
gains from investments....... 0.15 0.03 -- 0.07
------- ------- ------- -------
Total from Investment
Activities................... 0.53 0.43 0.41 0.21
------- ------- ------- -------
Distributions
Net investment income......... (0.38) (0.40) (0.41) (0.14)
------- ------- ------- -------
Total Distributions........... (0.38) (0.40) (0.41) (0.14)
------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 10.25 $ 10.10 $ 10.07 $ 10.07
======= ======= ======= =======
Total Return................... 5.36 % 4.39 % 4.15 % 2.15 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000)......................... $42,862 $30,454 $29,472 $23,754
Ratio of expenses to average
net assets.................... 0.64 % 0.38 % 0.31 % 0.47 %(c)
Ratio of net investment income
to average net assets......... 3.75 % 4.00 % 4.07 % 3.81 %(c)
Ratio of expenses to average
net assets*................... 1.20 % 1.33 % 0.96 % 1.12 %(c)
Portfolio turnover**........... 18.58 % 0.00 % 0.00 % 0.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
127
<PAGE>
The ARCH Missouri Tax-Exempt Bond Portfolio+
Q. What were the conditions in the Missouri municipal bond market during the
12 months through November 30, 1998?
A. The Missouri municipal market was affected by the overall environment in
the bond market. Investors, early in the period, worried that the Federal
Reserve would raise interest rates to keep the economy from overheating and
triggering higher inflation. But those fears were replaced by concerns that the
continuing global economic crisis would hurt the U.S. economy. Investors were
particularly worried by the Russian government's default on its short-term
debt, and the near-bankruptcy of a large hedge fund, Long-Term Capital
Management. As a result, the Federal Reserve increased the money supply by
lowering short-term interest rates three times. Each time, the Fed dropped the
federal funds rate one quarter of a percentage point.
Falling rates helped the bond market as a whole. The Missouri municipal
market also benefited from a very limited supply of new issues and solid
investor demand. At the same time, that scarcity made it difficult to find
opportunities in the muni market, since there are relatively few big, liquid
deals.
Q. How did you structure the Portfolio in that environment?
A. We were able to find attractive opportunities in the Missouri market
despite low supplies. We purchased bonds with maturities of roughly 15 to 20
years to increase the Portfolio's average maturity.*
Q. What was the average credit rating of the Portfolio's holdings?
A. The Portfolio's average credit rating remained AA1. We invest in high-
quality issues as a matter of policy. Moreover, lower-rated securities offered
relatively modest yield advantages over higher quality bonds. The low-quality
issues did not offer sufficient additional yield to compensate for their risk.*
Q. What is your outlook for the Missouri municipal bond market going forward?
A. Low inflation and slow economic growth as well as relatively low supplies
of municipal issues in the Missouri market should continue to benefit
performance. We will invest new cash in longer-term issues to boost the
Portfolio's average maturity in that environment. And we will, as always,
invest in high-quality issues to help protect shareholders from credit risk.
- -----
* Portfolio composition is subject to change.
+ Regional investing may involve additional risks since investments are limited
to one geographical area.
128
<PAGE>
The ARCH Missouri Tax-Exempt Bond Portfolio+
[ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Investor A Investor A Investor B Lehman Brothers Municipal
(No Load) (Load)* (No CDSC) Bond Index
--------- ------- ---------- ----------
Nov-88 10,000 9,550 10,000 10,000
Nov-89 11,039 10,542 11,042 11,102
Nov-90 11,701 11,174 11,705 11,958
Nov-91 12,810 12,233 12,817 13,184
Nov-92 14,078 13,444 14,089 14,508
Nov-93 15,557 14,857 15,572 16,115
Nov-94 14,601 13,944 14,616 15,268
Nov-95 17,285 16,507 17,188 18,155
Nov-96 18,045 17,234 17,786 19,221
Nov-97 19,177 18,314 18,752 20,603
Nov-98 21,453 20,490 20,811 22,203
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Years
------ ------ --------
Investor A (No Load) 6.31% 5.56% 7.38%
Investor A* 1.52% 4.59% 6.89%
Investor B (No CDSC) 5.47% 4.90% 7.06%
Investor B (CDSC)** 0.47% 4.73% 7.06%
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
[ARCH MISSOURI TAX-EXEMPT BOND PORTFOLIO+ CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Brothers Municipal
Trust Bond Index
----- ----------
Nov-88 10,000 10,000
Nov-89 11,039 11,102
Nov-90 11,732 11,958
Nov-91 12,860 13,184
Nov-92 14,155 14,508
Nov-93 15,673 16,115
Nov-94 14,740 15,268
Nov-95 17,482 18,155
Nov-96 18,287 19,221
Nov-97 19,473 20,603
Nov-98 21,827 22,203
Average Annual Total Return
as of 11/30/98
1 Year 5 Year 10 Years
------ ------ --------
Trust 6.52% 5.76% 7.57%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so shares of a particular class, when redeemed,
may be worth more or less than their original cost.
The fund's income may be subject to certain state and local taxes and,
depending on your tax status, the federal alternative minimum tax.
The performance of the ARCH Missouri Tax-Exempt Bond Portfolio is measured
against the Lehman Brothers Municipal Bond Index, an unmanaged index
representative of the total return of municipal bonds. Investors are unable to
purchase the index directly, although they can invest in the underlying
securities. The performance of the index does not reflect the deduction of
expenses associated with a mutual fund, such as investment management and fund
accounting fees. By contrast, the performance of the Portfolio shown on the
graph reflects the deduction of these value-added services, as well as the
deduction of a 4.50% sales charge on Investor A shares and the applicable
contingent deferred sales charge (CDSC) on Investor B shares.
The Portfolio may be subject to certain state and local taxes and, depending
on an investor's tax status, the federal alternative minimum tax.
Investor B shares were initially offered on March 1, 1995. The performance
figures for Investor B shares for periods prior to such date represent the
performance for Investor A shares, which has been restated to reflect the
contingent deferred sales charges payable by shareholders of Investor B shares
who redeem within six years of the date of purchase. Investor B shares are also
subject to distribution and service fees at a maximum annual rate of 1.00%. Had
these distribution and service fees been reflected, performance would have been
reduced.
The Investor B (CDSC) is not included on the above graph due to the fact that
the performance is now over 6 years, and the CDSC charges no longer apply. The
performance for the Investor B (CDSC) will now mirror Investor B (No CDSC)
performance.
129
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Missouri Tax-Exempt Bond Portfolio November 30, 1998
Municipal Bonds (91.8%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Missouri (85.4%):
Clayton School District, G.O., 5.00%, 3/1/17, Callable
on 3/1/07 @ 101...................................... $3,325,000 $ 3,374,874
Columbia, G.O., 5.50%, 10/1/03........................ 1,255,000 1,335,006
Columbia, Water & Electrical Revenue, Series A, 6.13%,
10/1/12, Prerefunded on 10/1/02 @ 102................ 1,000,000 1,103,750
Franklin County Reorganized School District, No. R-XI,
G.O., 5.75%, 3/1/13, Callable on 3/1/03 @ 100 (FGIC
Insured)............................................. 750,000 796,875
Hazelwood School District, G.O., 5.85%, 3/1/09,
Callable on 3/1/04 @ 100............................. 1,000,000 1,090,000
Jackson County School District, G.O., 4.85%, 3/1/13,
Callable 3/1/08 @ 100................................ 2,000,000 2,035,000
Jefferson City School District, Series A, 6.70%,
3/1/11............................................... 1,000,000 1,218,750
Kansas City School District Building, Capital
Improvement Project, 5.00%, 2/1/14, Callable on
2/1/04 @ 102 (FGIC Insured).......................... 2,230,000 2,246,725
Kansas City School District Building, Capital
Improvement Project, 5.15%, 2/1/08, Callable on
2/1/04 @ 102 (FGIC Insured).......................... 2,415,000 2,550,844
Kansas City School District Building, Elementary
School Project, Series D, 5.00%, 2/1/14, Callable on
2/1/04 @ 102 (FGIC Insured).......................... 1,000,000 1,007,500
Kansas City School District Building, Series C, 5.38%,
7/1/05, Callable on 7/1/03 @ 101 (FGIC Insured)...... 1,000,000 1,066,250
Kansas City Sewer Revenue, 5.75%, 3/1/01.............. 1,000,000 1,042,500
Kansas City Water Revenue, Series B, 5.00%, 12/1/16,
Callable on 12/1/06 @ 101............................ 2,200,000 2,260,500
Kansas City, Series A, G.O., 5.25%, 9/1/12, Callable
on 3/1/08 @ 101...................................... 3,980,000 4,208,849
Lincoln County Industrial Development Authority,
Industrial Development Revenue, Monsanto Co. Project,
7.50%, 5/1/05, Callable on 1/19/99 @ 102............. 700,000 716,625
Mehlville School District No. 09, G.O., 6.00%,
2/15/13, Callable on 2/15/03 @ 102 (MBIA Insured).... 1,500,000 1,655,625
Missouri Health & Educational Facilities Authority,
Health Facilities Revenue, Nurshome Hospital, 5.00%,
5/15/28, Callable on 5/15/08 @ 101................... 3,105,000 3,019,613
Missouri Southern State College Revenue, 5.25%,
12/1/12, Callable on 12/1/02 @ 100 (MBIA Insured).... 750,000 794,063
Missouri State Board of Public Buildings, 6.40%,
12/1/09, Callable on 12/1/01 @ 100................... 1,500,000 1,595,625
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Missouri, continued:
Missouri State Environmental Improvement & Energy
Resources Authority, Water Pollution Control Revenue,
Series A, 6.55%, 7/1/14, Callable on 7/1/02 @ 102.... $ 500,000 $ 546,875
Missouri State Environmental Improvement & Energy
Resources Authority, Water Pollution Control Revenue,
Series A, 6.45%, 7/1/08, Callable on 7/1/02 @ 102.... 1,000,000 1,101,250
Missouri State Environmental Improvement & Energy
Resources Authority, Water Pollution Control Revenue,
Series A, 6.88%, 6/1/14, Callable on 12/1/01 @ 102... 1,100,000 1,201,750
Missouri State Environmental Improvement & Energy
Resources Authority, Water Pollution Control Revenue,
Series D, 5.88%, 1/1/15, Callable on 1/1/06 @ 101.... 1,000,000 1,077,500
Missouri State Environmental Improvement & Energy
Resources Authority, Water Pollution Control Revenue,
Series E, 5.63%, 7/1/16, Callable on 7/1/06 @ 101.... 1,250,000 1,323,438
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Barnes
Hospital, 7.13%, 12/15/12, Prerefunded 12/15/00
@ 102................................................ 500,000 546,250
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Barnes-Jewish
Inc., Series A, 5.25%, 5/15/21, Callable on 5/15/03 @
102.................................................. 2,500,000 2,531,250
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Bethesda Eye
Institute, 6.63%, 11/1/09, Callable on 11/1/01 @ 102
(LOC-Credit Local de France)......................... 600,000 661,500
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, BJC Health
Systems, Series A, 6.75%, 5/15/12.................... 1,000,000 1,225,000
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Children's
Mercy Hospital Projects, 5.63%, 5/15/12, Callable on
5/15/03 @ 101 (MBIA Insured)......................... 1,200,000 1,263,000
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Freeman
Hospital Project, Series A, 5.38%, 2/15/14, Callable
on 2/15/04 @ 102 (FSA Insured)....................... 1,000,000 1,032,500
</TABLE>
Continued
130
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Missouri Tax-Exempt Bond Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Missouri, continued:
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, Sisters of
Mercy Health System, Series A, 6.25%, 6/1/15,
Callable on 6/1/02 @ 102 (MBIA Insured).............. $ 750,000 $ 801,563
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, SSM Health Care
System, Series A, 5.00%, 6/1/18, Callable 6/1/08 @
101 (MBIA Insured)................................... 3,895,000 3,865,787
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, SSM Health Care
System, Series AA, 6.25%, 6/1/16, Prerefunded 6/1/02
@ 102 (MBIA Insured)................................. 390,000 430,463
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, SSM Health Care
System, Series AA, 6.25%, 6/1/16, Callable 6/1/02 @
102 (MBIA Insured)................................... 1,610,000 1,746,850
Missouri State Health & Educational Facilities
Authority, Health Facilities Revenue, St. Luke's
Health System, 5.10%, 11/15/13, Callable on 11/15/03
@ 102 (MBIA Insured)................................. 2,000,000 2,032,500
Missouri State Higher Education Loan Authority,
Student Loan Revenue, Series A, 5.75%, 2/15/02....... 1,000,000 1,040,000
Missouri State Housing Development Revenue, 6.60%,
7/1/24, Callable on 1/1/03 @ 100 (FHA Insured)....... 910,000 957,775
Missouri State Housing Development Revenue, Series B,
7.00%, 9/1/10, Callable on 9/1/01 @ 102 (FHA
Insured)............................................. 500,000 532,500
Missouri State Housing Development Revenue, Series C,
6.90%, 7/1/18, Callable on 1/1/02 @102............... 455,000 481,731
Missouri State Water Pollution Control Revenue, Series
A, G.O., 5.75%, 8/1/12, Callable on 8/1/02 @ 100..... 1,000,000 1,051,250
Missouri State Water Pollution Control Revenue, Series
A, G.O., 5.75%, 8/1/18, Callable on 8/1/06 @ 100..... 2,085,000 2,254,406
Missouri State, Fourth Street Building, Series A,
G.O., 5.40%, 8/1/09, Callable on 8/1/06 @ 100........ 2,000,000 2,157,500
Missouri State, Third Street Building, Series A, G.O.,
5.25%, 8/1/08, Callable on 8/1/02 @ 100.............. 1,000,000 1,042,500
Missouri Western State College Revenue, 5.40%,
10/1/16, Callable on 10/1/03 @ 102 (MBIA Insured).... 1,000,000 1,030,000
Missouri, Series A, G.O., 5.13%, 8/1/09, Callable on
8/1/02 @ 100......................................... 1,000,000 1,033,750
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Missouri, continued:
O'Fallon, G.O., 5.75%, 3/1/10, Callable on 3/1/01 @
100 (MBIA Insured)................................... $ 570,000 $ 586,388
Phelps County Hospital Revenue, Phelps County Regional
Medical Center, 8.20%, 3/1/05, Prerefunded on 3/1/00
@ 102................................................ 600,000 648,000
Sikeston Electric Revenue, 6.25%, 6/1/22, Prerefunded
on 6/1/02 @ 102 (MBIA Insured)....................... 1,000,000 1,102,500
Sikeston Electric Revenue, 5.00%, 6/1/22, Callable on
6/1/06 @ 101 (MBIA Insured).......................... 1,000,000 998,750
Southeast Missouri Correctional Facilities Revenue,
5.75%, 10/15/16, Callable on 10/15/02 @ 100.......... 500,000 518,750
Southeast Missouri Correctional Facilities Revenue,
5.75%, 10/15/08, Callable on 10/15/00 @ 102.......... 500,000 521,250
Springfield School District No. R-12, Series A, G.O.,
5.25%, 3/1/11, Callable on 3/1/03 @ 100 (MBIA
Insured)............................................. 2,000,000 2,057,500
Springfield Water Works Revenue, Series A, 5.60%,
5/1/23, Callable on 5/1/03 @ 102..................... 2,000,000 2,185,000
St. Charles County Community College, G.O., 6.00%,
2/15/09, Callable on 2/15/01 @ 102 (AMBAC Insured)... 1,000,000 1,056,250
St. Charles County Public Facilities Authority,
Leasehold Revenue, 6.38%, 3/15/07, Callable on
3/15/02 @ 102 (FGIC Insured)......................... 500,000 544,375
St. Louis County Industrial Development Authority,
Health Facility Revenue, Lutheran Health Care
Association, Series A, 7.38%, 2/1/14, Callable on
2/1/02 @ 100......................................... 800,000 902,000
St. Louis County Industrial Development Authority,
Pollution Control Revenue, Anheuser-Busch Co.
Project, 6.65%, 5/1/16............................... 400,000 477,500
St. Louis County, Pattonville R-3 School District,
G.O., 6.25%, 2/1/10, Prerefunded on 2/1/02 @ 100
(FGIC Insured)....................................... 750,000 808,125
St. Louis County, Rockwood School District No. R-6,
G.O., 5.00%, 2/1/04, Callable on 2/1/02 @ 101........ 1,000,000 1,035,000
St. Louis County, Series B, G.O., 5.50%, 2/1/13,
Callable on 2/1/03 @ 100............................. 2,500,000 2,650,000
St. Louis Water Revenue, 6.00%, 7/1/14, Callable on
7/1/04 @ 102 (FGIC Insured).......................... 500,000 549,375
St. Peters, G.O., 5.80%, 1/1/09, Callable on 1/1/02 @
102.................................................. 1,740,000 1,853,100
St. Peters, G.O., 5.85%, 1/1/13, Callable on 1/1/02 @
102.................................................. 1,065,000 1,134,225
</TABLE>
Continued
131
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Missouri Tax-Exempt Bond Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Missouri, continued:
University City Industrial Development Authority,
Multifamily Housing Revenue, Series A, 5.95%,
12/20/25, Callable on 12/20/05 @ 102.................. $1,400,000 $ 1,484,000
University Health Facilities Revenue, University of
Missouri Health System, Series A, 5.60%, 11/1/26,
Callable on 11/1/06 @ 102 (AMBAC Insured)............. 3,000,000 3,176,250
University of Missouri, University Revenue, 5.50%,
11/1/23, Callable on 11/1/03 @ 101.................... 2,000,000 2,062,500
University of Missouri, University Revenue, 5.80%,
11/1/27, Callable on 11/1/07 @ 101.................... 3,000,000 3,217,500
University of Missouri, University Revenue, 5.50%,
11/1/21, Callable on 11/1/07 @ 101.................... 3,000,000 3,146,250
University of Missouri, University Revenue, Series A,
6.50%, 11/1/11, Prerefunded on 11/1/00 @ 102 (AMBAC
Insured).............................................. 925,000 995,531
Wentzville School District No. R-4, G.O., 5.10%,
3/1/18, Callable on 3/1/08 @ 100 (FSA Insured)........ 3,000,000 3,030,000
------------
102,827,981
Puerto Rico (6.4%):
Puerto Rico Commonwealth, 6.45%, 7/1/17, Callable on
7/1/04 @ 101.5........................................ 500,000 570,625
Puerto Rico Commonwealth, Series A, G.O., 6.00%,
7/1/06, Callable on 7/1/02 @ 101.5.................... 1,000,000 1,071,250
Puerto Rico Public Buildings Authority, Public
Education and Health Facilities Revenue, Series B,
5.00%, 7/1/27, Callable 7/1/07 @ 101.5 (AMBAC
Insured).............................................. 4,000,000 4,025,000
Puerto Rico Public Buildings Authority, Public
Education and Health Facilities Revenue, Series M,
5.50%, 7/1/21, Callable on 7/1/03 @ 101.5............. 2,000,000 2,085,000
------------
7,751,875
------------
TOTAL MUNICIPAL BONDS 110,579,856
------------
</TABLE>
Investment Companies (7.2%):
<TABLE>
<CAPTION>
Security Market
Description Shares Value
----------- --------- ------------
<S> <C> <C>
Federated Tax-Free Fund................................. 5,317,000 $ 5,317,000
Nuveen Tax Exempt Fund.................................. 3,357,000 3,357,000
------------
TOTAL INVESTMENT COMPANIES 8,674,000
------------
TOTAL INVESTMENTS
(Cost $113,355,047) (a)--99.0%................................... 119,253,856
Other assets in excess of liabilities--1.0%....................... 1,255,048
------------
TOTAL NET ASSETS--100.0%.......................................... $120,508,904
============
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes
and differs from value by net unrealized appreciation of securities as
follows:
<TABLE>
<S> <C>
Unrealized appreciation.... $5,898,809
Unrealized depreciation.... --
----------
Net unrealized apprecia-
tion...................... $5,898,809
==========
</TABLE>
AMBAC AMBAC Indemnity Corp.
FGIC Financial Guaranty Insurance Corp.
FHA Federal Housing Administration
FSA Financial Securities Assurance, Inc.
G.O. General Obligation
LOC Letter of Credit
MBIA Municipal Bond Insurance Association
See notes to financial statements
132
<PAGE>
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $113,355,047)............... $119,253,856
Cash.................................................... 41
Interest and dividends receivable....................... 1,745,858
Receivable for capital shares issued.................... 14,624
Prepaid expenses and other assets....................... 828
------------
Total Assets........................................... 121,015,207
Liabilities:
Dividends payable....................................... $430,307
Accrued expenses and other payables:
Investment advisory fees............................... 44,212
Administration fees.................................... 2,304
Distribution and administrative services fees.......... 5,855
Custodian fees......................................... 9,135
Other liabilities...................................... 14,490
--------
Total Liabilities...................................... 506,303
------------
Net Assets:
Capital................................................. 114,447,063
Accumulated net realized gains from investment
transactions........................................... 163,032
Net unrealized appreciation from investments............ 5,898,809
------------
Net Assets.............................................. $120,508,904
============
Investor A Shares
Net Assets............................................. $ 23,610,806
Shares................................................. 1,955,140
Redemption price per share............................. $12.08
======
Maximum Sales Charge--Investor A Shares................ 4.50%
Maximum Offering Price (100%/(100%-- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share....................................... $12.65
======
Investor B Shares
Net Assets............................................. $ 2,495,891
Shares................................................. 206,792
Offering price per share*.............................. $12.07
======
Trust Shares
Net Assets............................................. $ 94,402,207
Shares................................................. 7,815,139
Offering and redemption price per share................ $12.08
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income........................................... $5,454,718
Dividend income........................................... 174,747
----------
Total Income............................................. 5,629,465
Expenses:
Investment advisory fees.................................. $484,087
Administration fees....................................... 215,150
Distribution and services fees, Investor A Shares......... 72,300
Distribution and services fees, Investor B Shares......... 19,661
Administrative services fees, Trust Shares................ 244,526
Accounting fees........................................... 13,430
Custodian fees............................................ 33,205
Directors' fees and expenses.............................. 1,460
Transfer agent fees....................................... 31,474
Other fees................................................ 39,978
--------
Total expenses before voluntary fee reductions........... 1,155,271
Expenses voluntarily reduced............................. (376,197)
----------
Net Expenses............................................. 779,074
----------
Net investment income..................................... 4,850,391
----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions........... 281,600
Net change in unrealized appreciation from investments.... 1,598,199
----------
Net realized/unrealized gains from investments............ 1,879,799
----------
Change in net assets resulting from operations............ $6,730,190
==========
</TABLE>
See notes to financial statements
133
<PAGE>
THE ARCH FUND, INC
Missouri Tax-Exempt Bond Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 4,850,391 $ 4,330,896
Net realized gains (losses) from investment trans-
actions.......................................... 281,600 (31)
Net change in unrealized appreciation from invest-
ments............................................ 1,598,199 1,604,104
------------ ------------
Change in net assets resulting from operations..... 6,730,190 5,934,969
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (1,054,885) (1,104,237)
Distributions to Investor B Shareholders:
From net investment income........................ (70,214) (36,663)
Distributions to Trust Shareholders:
From net investment income........................ (3,725,292) (3,189,996)
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (4,850,391) (4,330,896)
------------ ------------
Change in net assets from capital transactions..... 18,078,730 17,222,577
------------ ------------
Change in net assets............................... 19,958,529 18,826,650
Net Assets:
Beginning of period............................... 100,550,375 81,723,725
------------ ------------
End of period..................................... $120,508,904 $100,550,375
============ ============
</TABLE>
See notes to financial statements
134
<PAGE>
THE ARCH FUND, INC
Missouri Tax-Exempt Bond Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the
Six Months For the years
For the years ended November 30, Ended ended May 31,
------------------------------------ November 30, ------------------
1998 1997 1996 1995 (d) 1995 (a) 1994
---------- ---------- ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
---------- ---------- ---------- ------- ------- -------
Investment Activities
Net investment income.. 0.52 0.53 0.55 0.27 0.55 0.55
Net realized and
unrealized gains
(losses) from
investments........... 0.21 0.18 (0.05) 0.22 0.40 (0.37)
---------- ---------- ---------- ------- ------- -------
Total from Investment
Activities............ 0.73 0.71 0.50 0.49 0.95 0.18
---------- ---------- ---------- ------- ------- -------
Distributions
Net investment income.. (0.52) (0.53) (0.55) (0.27) (0.55) (0.55)
Net realized gains..... -- -- -- -- (0.01) (0.04)
---------- ---------- ---------- ------- ------- -------
Total Distributions.... (0.52) (0.53) (0.55) (0.27) (0.56) (0.59)
---------- ---------- ---------- ------- ------- -------
Net Asset Value, End of
Period................. $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
========== ========== ========== ======= ======= =======
Total Return (excludes
sales charge).......... 6.31 % 6.27 % 4.41 % 4.32 %(b) 8.91 % 1.53 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 23,611 $ 23,722 $ 25,144 $24,726 $24,318 $27,919
Ratio of expenses to
average net assets..... 0.86 % 0.86 % 0.85 % 0.95 %(c) 0.84 % 0.65 %
Ratio of net investment
income to average net
assets................. 4.38 % 4.57 % 4.75 % 4.64 %(c) 5.02 % 4.75 %
Ratio of expenses to
average net assets*.... 1.06 % 1.06 % 1.05 % 1.18 %(c) 1.18 % 1.12 %
Portfolio turnover**.... 6.14 % 3.50 % 3.66 % 1.55 % -- 20.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On September
27, 1994, the Portfolio redesignated the Investor Shares as "Investor A"
Shares, and authorized the issuance of a series of shares designated as
"Investor B" Shares. (b) Not annualized. (c) Annualized. (d) Upon reorganizing
as a Portfolio of the ARCH Fund, Inc., the Missouri Tax-Exempt Bond Portfolio
changed its fiscal year end from May 31 to November 30.
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the
Six Months
For the years ended November 30, Ended March 1, 1995
------------------------------------ November 30, to May 31,
1998 1997 1996 1995 (e) 1995 (a)
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.86 $ 11.68 $ 11.74 $11.52 $11.19
---------- ---------- ---------- ------ ------
Investment Activities
Net investment income.. 0.43 0.44 0.45 0.22 0.11
Net realized and
unrealized gains
(losses) from
investments........... 0.21 0.18 (0.06) 0.22 0.33
---------- ---------- ---------- ------ ------
Total from Investment
Activities............ 0.64 0.62 0.39 0.44 0.44
---------- ---------- ---------- ------ ------
Distributions
Net investment income.. (0.43) (0.44) (0.45) (0.22) (0.11)
---------- ---------- ---------- ------ ------
Total Distributions.... (0.43) (0.44) (0.45) (0.22) (0.11)
---------- ---------- ---------- ------ ------
Net Asset Value, End of
Period................. $ 12.07 $ 11.86 $ 11.68 $11.74 $11.52
========== ========== ========== ====== ======
Total Return (excludes
sales charge).......... 5.47 % 5.43 % 3.48 % 3.88 %(b) 8.61 %(c)
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $ 2,496 $ 1,398 $ 675 $ 433 $ 94
Ratio of expenses to
average net assets..... 1.66 % 1.66 % 1.65 % 1.77 %(d) 1.76 %(d)
Ratio of net investment
income to average net
assets................. 3.57 % 3.76 % 3.96 % 3.82 %(d) 4.00 %(d)
Ratio of expenses to
average net assets*.... 1.76 % 1.76 % 1.75 % 1.87 %(d) 1.88 %(d)
Portfolio turnover**.... 6.14 % 3.50 % 3.66 % 1.55 % --
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) On September
27, 1994, the Portfolio redesignated Investor shares as "Investor A" shares
and authorized the issuance of a third series of shares designated as
"Investor B" shares. These financial highlights of Investor B shares cover the
period from March 1, 1995 (commencement of operations) through May 31, 1995.
(b) Not annualized. (c) Represents total return for the Investor A Shares from
June 1, 1994 to February 28, 1995, plus the total return for the Investor B
Shares for the period from March 1, 1995 to May 31, 1995. (d) Annualized. (e)
Upon reorganizing as a Portfolio of the ARCH Fund, Inc., the Missouri Tax-
Exempt Bond Portfolio changed its fiscal year end from May 31 to November 30.
135
<PAGE>
THE ARCH FUND, INC.
Missouri Tax-Exempt Bond Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the For the
For the years ended Six Months years ended
November 30, Ended May 31,
--------------------------- November 30, -----------------
1998 1997 1996 1995 (c) 1995 1994
------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13 $ 11.54
------- ------- ------- ------- ------- -------
Investment Activities
Net investment income.. 0.55 0.56 0.57 0.28 0.57 0.58
Net realized and
unrealized gains
(losses) from
investments........... 0.21 0.18 (0.05) 0.22 0.40 (0.37)
------- ------- ------- ------- ------- -------
Total from Investment
Activities............ 0.76 0.74 0.52 0.50 0.97 0.21
------- ------- ------- ------- ------- -------
Distributions
Net investment income.. (0.55) (0.56) (0.57) (0.28) (0.57) (0.58)
Net realized gains..... -- -- -- -- (0.01) (0.04)
------- ------- ------- ------- ------- -------
Total Distributions.... (0.55) (0.56) (0.57) (0.28) (0.58) (0.62)
------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period................. $ 12.08 $ 11.87 $ 11.69 $ 11.74 $ 11.52 $ 11.13
======= ======= ======= ======= ======= =======
Total Return............ 6.52 % 6.48 % 4.62 % 4.41 %(a) 9.12 % 1.73 %
Ratios/Supplementary
Data:
Net Assets at end of
period (000)........... $94,402 $75,431 $55,905 $47,773 $44,336 $47,743
Ratio of expenses to
average net assets..... 0.66 % 0.66 % 0.65 % 0.78 %(b) 0.64 % 0.45 %
Ratio of net investment
income to average net
assets................. 4.57 % 4.76 % 4.95 % 4.83 %(b) 5.22 % 4.96 %
Ratio of expenses to
average net assets*.... 1.06 % 1.06 % 0.75 % 0.88 %(b) 1.16 % 1.13 %
Portfolio turnover**.... 6.14 % 3.50 % 3.66 % 1.55 % -- 20.00 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Not
annualized. (b) Annualized. (c) Upon reorganizing as a Portfolio of the ARCH
Fund, Inc., the Missouri Tax-Exempt Bond Portfolio changed its fiscal year end
from May 31 to November 30.
136
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
137
<PAGE>
The ARCH National Municipal Bond Portfolio
Q. What were the conditions in the economy and the municipal bond market
during the 12 months through November 30, 1998?
A. Investors early in the period worried that the Federal Reserve would raise
interest rates to keep the economy from overheating and triggering higher
inflation. But later they began to worry that weak global economies might
dampen U.S. exports and that a strong U.S. dollar might hurt U.S. companies'
profits overseas. Such concerns increased during the second half of the period,
when the Russian government defaulted on its short-term debt, and a large hedge
fund, Long Term Capital Management, nearly went bankrupt. Investors worried
that these events would contribute to a global liquidity crisis.
In response, the Federal Reserve increased the money supply by lowering
short-term interest rates three times, boosting bond prices.
Q. How did the municipal bond market react in that environment?
A. Municipal bonds with relatively long maturities outperformed shorter-term
municipals as well as longer-term Treasuries early in the period. But municipal
bonds underperformed taxable bonds in the second half of the year. In part,
that reflected a heavy supply of municipal issues that kept prices from rising
as sharply as Treasury prices. Moreover, investors favored U.S. Treasury bonds
in the wake of stock market fluctuations and continued uncertainty about the
health of global economies. Muni yields became quite high as a percentage of
taxable yields, but were still low.
Q. How did you manage the Portfolio in that environment?
A. We maintained the Portfolio's average maturity at around 10 to 12 years.
That approach benefited the Portfolio, as intermediate-term municipal bonds
with maturities of around 15 years performed strongly during the period. As a
result, the Portfolio's performance for the period ended November 30, 1998 was
ranked 41 out of 240 municipal bond funds tracked by Lipper, Inc./1/
Q. What was the average credit rating of the Portfolio's holdings?
A. The average credit rating of the Portfolio remained AA1. The Portfolio
maintains a high average credit rating as a matter of policy, and that approach
benefited the Portfolio during the period as investors favored high-quality
issues due to the continuing global economic crisis.*
Q. What is your strategy going forward?
A. We do not see the need to significantly alter the structure of the
Portfolio, as it currently is positioned to benefit from the slow economic
growth and low inflation environment we believe we are likely to see in the
coming months. Therefore, we will continue to look for opportunities among
longer-term issues, and we will seek to maintain the Portfolio's average
maturity at around 10 years. At the same time, we will continue to invest in
securities we believe to be backed by financially strong issuers, so that we
can reduce the potential for losses related to credit risk.
- -----
* Portfolio composition is subject to change.
138
<PAGE>
The ARCH National Municipal Bond Portfolio
[ARCH NATIONAL MUNICIPAL BOND PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
<TABLE>
<CAPTION>
Investor A Investor A Investor B Investor B Lehman Municipal Bond
(No Load) (Load)* (No CDSC)+ (CDSC)** Index-10 year
---------- ----------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
18-Nov-96 10,000 9,551 10,000 9,500 10,000
30-Nov-96 10,073 9,620 10,070 9,570 10,566
30-Nov-97 10,839 10,352 10,775 10,275 11,311
31-May-98 11,257 10,751 11,145 10,745 11,741
Nov-98 11,658 11,135 11,496 11,196 12,192
</TABLE>
* Reflects 4.50% sales charge.
** Reflects applicable contingent deferred sales charge.
(Maximum 5.00%)
Average Annual Total Return
as of 11/30/98
Since
1 Year Inception
------ ---------
Investor A (No Load) 7.56% 7.84%
Investor A* 2.76% 5.43%
Investor B (No CDSC)+ 6.69% 7.10%
Investor B (CDSC)** 1.71% 5.71%
[ARCH NATIONAL MUNICIPAL BOND PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
Lehman Municipal Bond
Trust Index 10-Year
----- ---------------------
11/18/96 10,000 10,000
11/30/96 10,074 10,566
11/30/97 10,876 11,311
5/31/98 11,306 11,741
Nov-98 11,720 12,192
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (11/18/96)
------ ---------
Trust 7.76% 8.12%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
/1/The ARCH National Municipal Bond Portfolio ranked 41 out of 240 bond funds
as reported by Lipper, Inc. for the one-year period ended November 30, 1998.
The Portfolio was not ranked for three, five- and ten-year performance.
Lipper Rankings are based on total return and do not include the effect of a
sales charge.
The performance of the ARCH National Municipal Bond Portfolio is measured
against the Lehman Brothers Municipal Bond Index--10 year, an unmanaged index
representative of the total return of municipal bonds with remaining maturities
of 10 years or less. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 4.50% sales charge on
Investor A shares and the applicable contingent deferred sales charge (CDSC) on
Investor B shares.
The Portfolio may be subject to certain state and local taxes and, depending
on an investor's tax status, the federal alternative minimum tax.
+The Investor B share class (no CDSC) does not reflect a sales charge, but does
reflect a higher 12b-1 fee than the Investor A share class.
139
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
National Municipal Bond Portfolio November 30, 1998
Municipal Bonds (98.1%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Alaska (0.3%):
Alaska State, Housing Finance Corp., Series A, 5.70%,
12/1/11, Callable on 12/1/05 @ 102 (MBIA Insured)..... $1,000,000 $ 1,060,000
------------
California (5.6%):
Sacramento Municipal Utility District, Electric Power &
Light Revenue, Series L, 5.10%, 7/1/13, Callable on
7/1/07 @ 102 (AMBAC Insured).......................... 9,000,000 9,371,250
San Francisco Bay Area Rapid Transit Tax Revenue, 5.25%
7/1/17, Callable on 7/1/08 @ 101...................... 5,000,000 5,193,750
Southern California Public Power Authority, Electric
Power & Light Revenue, Palo Verde, Series A, 5.00%,
7/1/15, Callable on 7/1/03 @ 102 (AMBAC-TCRS
Insured).............................................. 7,000,000 7,070,000
------------
21,635,000
------------
Colorado (5.6%):
Adams County School District No. 012, G.O., 5.40%,
12/15/13, Callable on 12/15/07 @ 101 (FGIC Insured)... 6,655,000 7,070,938
Colorado Springs, Utilities Revenue, System
Improvement, Series A, 5.25%, 11/15/22, Callable on
11/15/07 @ 100........................................ 6,160,000 6,314,000
Jefferson County School District No. R-001, G.O.,
5.00%, 12/15/12, Callable on 12/15/07 @ 101........... 8,000,000 8,300,000
------------
21,684,938
------------
Connecticut (3.5%):
Connecticut State, Clean Water Foundation Revenue,
5.25%, 3/1/20, Callable on 3/1/08 @ 101............... 4,360,000 4,458,100
Connecticut State, Series A, G.O., 5.25%, 3/1/13,
Callable on 3/1/07 @ 101.............................. 8,785,000 9,191,306
------------
13,649,406
------------
Delaware (1.1%):
Delaware State, Series A, G.O., 4.60%, 2/1/10, Callable
on 2/1/08 @ 100....................................... 4,315,000 4,390,513
------------
District of Columbia (1.4%):
District of Columbia Water & Sewer Authority Revenue,
5.50%, 10/1/18, Callable on 4/1/09 @ 160 (FSA
Insured).............................................. 5,000,000 5,437,500
------------
Florida (5.0%):
Florida State Department of Environmental Preservation
2000, General Services Revenue, Series A, 5.50%,
7/1/13, Callable on 7/1/06 @ 101 (MBIA Insured)....... 5,000,000 5,343,750
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Florida, continued:
Florida State Department of Transportation, G.O.,
5.25%, 7/1/17, Callable on 7/1/06 @ 101............... $5,525,000 $ 5,690,750
Palm Beach County, Park & Recreational Facilities
Revenue, 5.25%, 11/1/16, Callable on 11/1/06 @ 102
(FSA Insured)......................................... 5,000,000 5,256,250
Palm Beach County, Solid Waste Authority Revenue,
Series B, 5.38%, 10/1/11, Callable on 10/1/06 @ 101
(AMBAC Insured)....................................... 3,000,000 3,195,000
------------
19,485,750
------------
Hawaii (5.2%):
Hawaii State, Series CN, G.O., 5.50%, 3/1/14, Callable
on 3/1/07 @ 102 (FGIC Insured)........................ 8,000,000 8,500,000
Hawaii State, Series CR, G.O., 5.00%, 4/1/16, Callable
on 4/1/08 @ 101 (MBIA Insured)........................ 5,000,000 5,031,250
Honolulu City & County, Series A, G.O., 6.00%, 1/1/09.. 5,815,000 6,614,563
------------
20,145,813
------------
Illinois (9.9%):
Chicago Metropolitan Water Reclamation District, G.O.,
5.25%, 12/1/14, Callable on 12/1/08 @ 102............. 5,000,000 5,231,250
Cook County, Series A, G.O., 6.25%, 11/15/12 (MBIA
Insured).............................................. 9,090,000 10,646,662
Cook County, Series B, G.O., 5.13%, 11/15/16, Callable
on 11/15/07 @ 101 (MBIA Insured)...................... 6,000,000 6,090,000
Illinois Health Facility Authority Revenue, Loyola
University Health System, Series A, 5.38%, 7/1/17,
Callable on 7/1/07 @ 101 (MBIA Insured)............... 7,000,000 7,262,500
Illinois State, G.O., 5.25%, 2/1/13, Callable on 2/1/07
@ 101 (FGIC Insured).................................. 8,400,000 8,725,500
------------
37,955,912
------------
Indiana (1.0%):
Indiana Transportation Finance Authority, Highway
Revenue, Series A, 5.75%, 6/1/12 (AMBAC Insured)...... 3,500,000 3,876,250
------------
Maryland (1.9%):
Maryland State and Local Facilities, 2nd Series, G.O.,
5.00%, 8/1/08, Callable on 8/1/07 @ 101............... 7,000,000 7,507,500
------------
Massachusetts (5.1%):
Massachusetts Bay Transportation Authority, Series A,
5.00%, 3/1/12, Callable on 3/1/07 @ 101 (FGIC
Insured).............................................. 5,795,000 5,976,094
</TABLE>
Continued
140
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
National Municipal Bond Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Massachusetts, continued:
Massachusetts Bay Transportation Authority, Series A,
5.13%, 3/1/17, Callable on 3/1/07 @ 101 (FGIC
Insured)............................................. $6,165,000 $ 6,218,944
Massachusetts State Water Pollution Abatement Trust,
Series 3, 5.63%, 2/1/15, Callable on 2/1/07 @ 101.... 7,115,000 7,568,581
------------
19,763,619
------------
Minnesota (4.3%):
Minnesota State, G.O., 4.90%, 8/1/14, Callable on
8/1/07 @ 100......................................... 5,000,000 5,087,500
Monticello Independent School District No. 882, G.O.,
5.40%, 2/1/15, Callable on 2/1/06 @ 100.............. 6,000,000 6,255,000
Rochester Health Care Facilities, Mayo Foundation,
Series A, 5.38%, 11/15/18, Callable on 5/15/08 @101.. 5,000,000 5,200,000
------------
16,542,500
------------
Mississippi (1.8%):
Mississippi State, Series A, G.O., 5.13%, 7/1/14,
Callable on 7/1/07 @ 100............................. 6,835,000 6,997,331
------------
Nevada (6.3%):
Clark County Flood Control, Series F, 5.00%, 11/1/12,
Callable on 11/1/08 @ 101 (FGIC Insured)............. 6,460,000 6,669,950
Clark County School District, Series B, G.O., 5.50%,
6/15/11, Callable on 6/15/07 @ 101 (FGIC Insured).... 5,000,000 5,381,250
Nevada State, 5.00%, 5/15/15.......................... 6,745,000 6,837,743
Nevada State, Series A, G.O., 5.13%, 9/1/11, Callable
on 3/1/07 @ 101...................................... 5,000,000 5,231,250
------------
24,120,193
------------
New Jersey (5.8%):
Camden County, Municipal Utilities Authority Sewer
Revenue, Series C, 5.10%, 7/15/12, Callable on
7/15/08 @ 101 (FGIC Insured)......................... 5,000,000 5,231,250
New Jersey State Transportation System, Series A,
5.00%, 6/15/14, Callable on 6/15/08 @100............. 7,500,000 7,575,000
New Jersey State, Series E, G.O., 6.00%, 7/15/09 ..... 8,000,000 9,220,000
------------
22,026,250
------------
New York (1.3%):
New York State Thruway Authority, Series A, 5.25%,
4/1/14, Callable on 4/1/07 @ 102 (AMBAC Insured)..... 5,000,000 5,200,000
------------
North Carolina (2.2%):
North Carolina State, Series A, G.O., 5.20%, 3/1/13,
Callable on 3/1/07 @ 102............................. 8,000,000 8,450,000
------------
</TABLE>
Municipal Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
North Dakota (1.4%):
Fargo Water Revenue, 5.13%, 1/1/17, Callable on 1/1/08
@ 100 (MBIA Insured).................................. $5,250,000 $ 5,361,563
------------
Ohio (2.0%):
Ohio State Building Authority, 4.75%, 10/1/17, Callable
on 10/1/08 @ 101...................................... 8,000,000 7,800,000
------------
Oregon (1.8%):
Washington County, Unified Sewer Agency, Sewer Revenue,
Series 1, 5.75%, 10/1/10 (FGIC Insured)............... 6,110,000 6,942,488
------------
Pennsylvania (2.4%):
Pennsylvania State, G.O., 5.13%, 9/15/11, Callable on
3/15/07 @ 101.5 (AMBAC Insured)....................... 9,000,000 9,438,750
------------
Rhode Island (1.4%):
Rhode Island State, Series A, G.O., 5.13%, 8/1/12,
Callable on 8/1/07 @ 101 (MBIA Insured)............... 5,055,000 5,269,838
------------
Texas (10.9%):
Harris County Health Facilities Development Revenue,
Memorial Hospital Systems Project, Series A, 5.50%,
6/1/17, Callable on 6/1/07 @ 102 (MBIA Insured)....... 8,000,000 8,429,999
San Antonio Independent School District, G.O., 5.13%,
8/15/14, Callable on 8/15/08 @ 100 (PSF Guaranteed)... 6,000,000 6,165,000
San Antonio, Series A, G.O., 5.00%, 8/1/11, Callable on
8/1/06 @ 100.......................................... 5,000,000 5,187,500
Texas State, G.O., 5.40%, 8/1/21, Callable on 8/1/06 @
100................................................... 6,750,000 6,935,625
University of Texas Permanent University Fund, College
& University Revenue, 5.00%, 7/1/14, Callable on
7/1/08 @ 100 (PUFG Guaranteed)........................ 7,060,000 7,245,325
University of Texas, College & University Revenue,
Series B, 5.10%, 8/15/13, Callable on 8/15/06 @ 102... 7,500,000 7,715,625
------------
41,679,074
------------
Utah (1.7%):
Utah State, Series F, G.O., 5.00%, 7/1/09, Callable on
7/1/07 @ 100.......................................... 6,200,000 6,556,500
------------
Virginia (1.3%):
Virginia State Transportation Board, Transportation
Contract Revenue, U.S. Route 58 Corridor, Series B,
5.13%, 5/15/12, Callable on 5/15/06 @ 101............. 4,920,000 5,092,200
------------
Washington (5.7%):
King County School District No. 415, G.O., 5.35%,
12/1/16, Callable on 12/1/07 @ 100 (MBIA Insured)..... 4,050,000 4,196,813
</TABLE>
Continued
141
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
National Municipal Bond Portfolio November 30, 1998
Municipal Bonds, continued
<TABLE>
<CAPTION>
Shares
or
Security Principal
Description Amount Market Value
----------- ---------- ------------
<S> <C> <C>
Washington, continued:
King County, Series F, G.O., 5.13%, 12/1/14, Callable
on 12/1/07 @ 100...................................... $5,000,000 $ 5,150,000
Washington State Motor Vehicle Fuel Tax, Series D,
G.O., 5.38%, 1/1/22, Callable on 1/1/07 @ 100 (FGIC
Insured).............................................. 8,000,000 8,189,999
Washington State, Series C, G.O., 5.50%, 1/1/17,
Callable on 1/1/07 @ 100.............................. 4,190,000 4,383,788
------------
21,920,600
------------
West Virginia (2.2%):
West Virginia School Building Authority Revenue, 5.40%,
7/1/10, Callable on 7/1/07 @ 102 (AMBAC Insured)...... 7,940,000 8,595,050
------------
TOTAL MUNICIPAL BONDS 378,584,538
------------
Investment Companies (0.8%)
Federated Tax-Free Fund................................ 980,000 980,000
Nuveen Tax Exempt Fund................................. 2,179,000 2,179,000
------------
TOTAL INVESTMENT COMPANIES 3,159,000
------------
TOTAL INVESTMENTS
(Cost $362,269,066)(a) (98.9%)................................... 381,743,538
Other assets in excess of liabilities (1.1%)...................... 4,438,795
------------
TOTAL NET ASSETS (100.0%)......................................... $386,182,333
============
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation... $19,474,472
Unrealized depreciation... --
-----------
Net unrealized apprecia-
tion..................... $19,474,472
===========
</TABLE>
AMBAC AMBAC Indemnity Corp.
FGIC Financial Guaranty Insurance Corp.
FSA Financial Securities Assurance, Inc.
G.O. General Obligation
MBIA Municipal Bond Insurance Association
PSF Permanent School Fund
PUFG Permanent University Fund Guarantee
TCRS Transferrable Custodial Receipts
See notes to financial statements
142
<PAGE>
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value (cost $362,269,066)............. $381,743,538
Cash.................................................. 444
Interest and dividends receivable..................... 6,022,548
Receivable for capital shares issued.................. 4,244
Deferred organization costs........................... 21,533
------------
Total Assets......................................... 387,792,307
Liabilities:
Dividends payable..................................... $1,346,922
Payable for capital shares redeemed................... 6,830
Accrued expenses and other payables:
Investment advisory fees............................. 175,140
Administration fees.................................. 7,388
Distribution and administrative services fees........ 1,081
Custodian fees....................................... 30,495
Other liabilities.................................... 42,118
----------
Total Liabilities.................................... 1,609,974
------------
Net Assets:
Capital............................................... 363,111,691
Accumulated net realized gains from investment
transactions......................................... 3,596,170
Net unrealized appreciation from investments.......... 19,474,472
------------
Net Assets............................................ $386,182,333
============
Investor A Shares
Net Assets........................................... $ 1,161,747
Shares............................................... 113,630
Redemption price per share........................... $10.22
======
Maximum Sales Charge -- Investor A Shares............. 4.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share..................................... $10.70
======
Investor B Shares
Net Assets........................................... $ 502,888
Shares............................................... 49,106
Offering price per share*............................ $10.24
======
Trust Shares
Net Assets........................................... $384,517,698
Shares............................................... 37,569,182
Offering and redemption price per share.............. $10.23
======
</TABLE>
- -----
* Redemption price of Investor B shares varies based on length of time held.
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income....................................... $18,746,468
Dividend income....................................... 184,424
-----------
Total Income......................................... 18,930,892
Expenses:
Investment advisory fees.............................. $2,052,457
Administration fees................................... 746,348
Distribution and services fees, Investor A Shares..... 4,954
Distribution and services fees, Investor B Shares..... 4,115
Administrative services fees, Trust Shares............ 1,113,333
Accounting fees....................................... 11,885
Custodian fees........................................ 114,791
Directors' fees and expenses.......................... 4,988
Transfer agent fees................................... 119,812
Other fees............................................ 160,919
----------
Total expenses before voluntary fee reductions........ 4,333,602
Expenses voluntarily reduced.......................... (2,241,858)
-----------
Net Expenses......................................... 2,091,744
-----------
Net investment income................................. 16,839,148
-----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions....... 3,596,137
Net change in unrealized appreciation from
investments.......................................... 7,680,490
-----------
Net realized/unrealized gains from investments........ 11,276,627
-----------
Change in net assets resulting from operations........ $28,115,775
===========
</TABLE>
See notes to financial statements
143
<PAGE>
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended year ended
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 16,839,148 $ 17,725,009
Net realized gains from investment transactions... 3,596,137 12,555,443
Net change in unrealized appreciation from invest-
ments............................................ 7,680,490 (4,335,052)
------------ ------------
Change in net assets resulting from operations..... 28,115,775 25,945,400
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (68,990) (22,941)
From net realized gains from investment transac-
tions............................................ (24,447) (183)
Distributions to Investor B Shareholders:
From net investment income........................ (14,432) (2,703)
From net realized gains from investment transac-
tions............................................ (13,927) (25)
Distributions to Trust Shareholders:
From net investment income........................ (16,755,726) (17,699,373)
From net realized gains from investment transac-
tions............................................ (12,517,074) (115,079)
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (29,394,596) (17,840,304)
------------ ------------
Change in net assets from capital transactions..... 19,447,068 49,494,347
------------ ------------
Change in net assets............................... 18,168,247 57,599,443
Net Assets:
Beginning of period............................... 368,014,086 310,414,643
------------ ------------
End of period..................................... $386,182,333 $368,014,086
============ ============
</TABLE>
See notes to financial statements
144
<PAGE>
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the years
ended November 30, November 18, 1996
--------------------- to
1998 1997 November 30, 1996 (a)
--------- --------- ---------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 10.27 $ 10.05 $10.00
--------- --------- ------
Investment Activities
Net investment income.......... 0.44 0.52 0.02
Net realized and unrealized
gains from investments........ 0.30 0.22 0.05
--------- --------- ------
Total from Investment
Activities.................... 0.74 0.74 0.07
--------- --------- ------
Distributions
Net investment income.......... (0.44) (0.52) (0.02)
Net realized gains............. (0.35) -- --
--------- --------- ------
Total Distributions............ (0.79) (0.52) (0.02)
--------- --------- ------
Net Asset Value, End of Period.. $ 10.22 $ 10.27 $10.05
========= ========= ======
Total Return (excludes sales
charge)........................ 7.56 % 7.61 % 0.73 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000).......................... $ 1,162 $ 717 $ 1
Ratio of expenses to average net
assets......................... 0.85 % 0.35 % 0.37 %(c)
Ratio of net investment income
to average net assets.......... 4.18 % 4.71 % 9.08 %(c)
Ratio of expenses to average net
assets*........................ 1.16 % 1.17 % 1.07 %(c)
Portfolio turnover**............ 18.30 % 83.94 % --
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
</TABLE>
Financial Highlights, Investor B Shares
<TABLE>
<CAPTION>
For the years
ended November 30, November 18, 1996
------------------ to
1998 1997 November 30, 1996 (a)
--------- --------- ---------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 10.29 $ 10.05 $10.00
--------- --------- ------
Investment Activities
Net investment income.......... 0.36 0.44 0.02
Net realized and unrealized
gains from investments........ 0.30 0.24 0.05
--------- --------- ------
Total from Investment
Activities.................... 0.66 0.68 0.07
--------- --------- ------
Distributions
Net investment income.......... (0.36) (0.44) (0.02)
Net realized gains............. (0.35) -- --
--------- --------- ------
Total Distributions............ (0.71) (0.44) (0.02)
--------- --------- ------
Net Asset Value, End of Period.. $ 10.24 $ 10.29 $10.05
========= ========= ======
Total Return (excludes sales
charge)........................ 6.69 % 7.01 % 0.70 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000).......................... $ 503 $ 408 $ 1
Ratio of expenses to average net
assets......................... 1.56 % 1.17 % 1.10 %(c)
Ratio of net investment income
to average net assets.......... 3.51 % 4.08 % 8.35 %(c)
Ratio of expenses to average net
assets*........................ 1.86 % 1.89 % 1.80 %(c)
Portfolio turnover**............ 18.30 % 83.94 % --
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
145
<PAGE>
THE ARCH FUND, INC.
National Municipal Bond Portfolio
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the years
ended November 30, November 18, 1996
--------------------- to
1998 1997 November 30, 1996 (a)
--------- --------- ---------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 10.28 $ 10.05 $ 10.00
--------- --------- --------
Investment Activities
Net investment income.......... 0.46 0.54 0.02
Net realized and unrealized
gains from investments........ 0.30 0.23 0.05
--------- --------- --------
Total from Investment
Activities.................... 0.76 0.77 0.07
--------- --------- --------
Distributions
Net investment income.......... (0.46) (0.54) (0.02)
Net realized gains............. (0.35) -- --
--------- --------- --------
Total Distributions............ (0.81) (0.54) (0.02)
--------- --------- --------
Net Asset Value, End of Period.. $ 10.23 $ 10.28 $ 10.05
========= ========= ========
Total Return.................... 7.76 % 7.97 % 0.74 %(b)
Ratios/Supplementary Data:
Net Assets at end of period
(000).......................... $ 384,518 $ 366,889 $310,413
Ratio of expenses to average net
assets......................... 0.56 % 0.14 % 0.12 %(c)
Ratio of net investment income
to average net assets.......... 4.52 % 5.38 % 5.77 %(c)
Ratio of expenses to average net
assets*........................ 1.16 % 1.17 % 0.82 %(c)
Portfolio turnover**............ 18.30 % 83.94 % --
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated. **
Portfolio turnover is calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
146
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
147
<PAGE>
The ARCH Intermediate Corporate Bond Portfolio
Q. What economic and market factors affected intermediate-term bonds during
the 12-month period ended November 30, 1998?
A. Interest rates on Treasury securities declined throughout most of the
period. For example, the yield on the 10-year Treasury bond fell from 5.9% to
4.7% during the last 12-month period. Those declines came primarily as a result
of Federal Reserve policy.
At the beginning of the period, investors were worried that the Fed might
raise rates to ward off inflation. But those fears waned as weakness in
overseas economies kept inflation in check; thus, rates on Treasury securities
fell. Later in the period, the Federal Reserve Board lowered short-term
interest rates three times to offset the impact of the global economic crisis
on the domestic economy. That easing monetary policy caused Treasury yields to
fall further. Toward the end of the period, rates inched upwards because of
investor expectations that the Fed would not lower rates further.
The uncertainty of the economic environment caused investors to flee lower-
quality bonds, forcing up interest rates on many of those issues. That trend
led to buying opportunities among lower-quality corporate bonds.
Q. How did you structure the Portfolio in that environment?
A. We bought lower-quality debt because we felt that investors had
unreasonably abandoned those securities, and as a result yields on those issues
had become very attractive. Our strategy of locking in high yields from lower-
quality securities lowered the credit quality of the Portfolio's holdings
slightly, from AA2 to AA3.
We also lowered the Portfolio's stake in Treasury
securities, from approximately 6% of the Portfolio at the end of 1997 to about
2.6% as of November 30, 1998. The Portfolio holds Treasuries to ensure
liquidity. We sold some of the Portfolio's stake in those securities to finance
purchases of attractive corporate issues.*
Q. How did you structure the Portfolio's duration and average maturity?
A. During the first half of the period, we did not make significant changes
to the Portfolio's average maturity. For example, after the first six months of
the period, the average maturity decreased from 6.6 to 6.5 years. During the
second half of the period, we focused on buying longer-term securities in order
to lock in the extra yield that such issues offered. However, average maturity
of the Portfolio's holdings actually declined, because those issues were not
sufficient to offset the remaining maturity periods of the existing securities
in the Portfolio. As of November 30, the Portfolio's average maturity stood at
5.8 years.
Q. What is your outlook for the Portfolio and the corporate bond market going
forward?
A. We generally do not try to forecast interest rate changes, so we do not
foresee making any major adjustments to the Portfolio's average maturity and
duration. We will continue to seek out opportunities to lock in high yields for
the Portfolio by buying securities that we feel have been unreasonably
overlooked. We do not expect to lower the Portfolio's stake in Treasuries
further, so that we can continue to provide liquidity in the Portfolio.
- -----
* Portfolio composition is subject to change.
148
<PAGE>
The ARCH Intermediate Corporate Bond Portfolio
[ARCH INTERMEDIATE CORPORATE BOND PORTFOLIO CHART APPEARS HERE]
Value of a $10,000 Investment
<TABLE>
<CAPTION>
Lehman Intermediate Corporate
Investor A (No Load) Investor A (Load)* Trust Institutional Bond Index
-------------------- ----------------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C>
Feb-97 10,000 9,551 10,000 10,000 10,000
Nov-97 10,648 10,170 10,665 10,660 10,711
May-98 11,062 10,566 11,097 11,086 11,132
Nov-98 11,639 11,117 11,682 11,653 11,636
</TABLE>
* Reflects 4.50% sales charge.
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (2/10/97)
------ ---------
Investor A (No Load) 9.32% 8.78%
Investor A* 4.36% 6.05%
Trust 9.53% 9.00%
Institutional 9.32% 8.86%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Intermediate Corporate Bond Portfolio is measured
against the Lehman Brothers Intermediate Corporate Bond Index, an unmanaged
index comprised of the Lehman Brothers Intermediate Index, including
intermediate and long-term components, and sub-indices covering AAA Corporates,
AA Corporates, A Corporates and BAA Corporates, each of which also includes
intermediate and long-term components. Investors are unable to purchase the
index directly, although they can invest in the underlying securities. The
performance of the index does not reflect the deduction of expenses associated
with a mutual fund, such as investment management and fund accounting fees. By
contrast, the performance of the Portfolio shown on the graph reflects the
deduction of these value-added services, as well as the deduction of a 4.50%
sales charge on Investor A shares.
149
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Intermediate Corporate Bond Portfolio November 30, 1998
Corporate Bonds (77.4%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Automotive (3.4%):
Ford Motor Credit, 7.50%, 1/15/03(b)................... $ 800,000 $ 864,000
General Motors Acceptance Corp., 8.50%, 2/4/02, MTN.... 500,000 541,875
General Motors Acceptance Corp., Global Bond, 6.75%,
2/7/02................................................ 500,000 516,875
-----------
1,922,750
-----------
Banking (8.1%):
Banc One Dayton, N.A., 6.63%, 4/15/03.................. 50,000 52,375
BankAmerica Corp., 8.13%, 2/1/02(b).................... 200,000 215,500
Bankers Trust New York, 7.25%, 1/15/03................. 500,000 518,125
Chase Manhattan Corp., 7.13%, 3/1/05................... 500,000 535,000
National Westminster Bank -- NY, 9.45%, 5/1/01......... 145,000 156,600
NationsBank Corp., 8.63%, 11/15/03..................... 400,000 461,000
NationsBank Corp., 7.75%, 8/15/04...................... 500,000 558,125
NationsBank Corp., 6.88%, 2/15/05...................... 600,000 640,500
Norwest Corp., 6.25%, 3/15/01, MTN..................... 85,000 86,913
Toronto-Dominion Bank-NY, 7.88%, 8/15/04............... 750,000 761,250
United Postal Savings, 9.00%, 7/26/99.................. 300,000 307,500
Wells Fargo & Co., 8.38%, 5/15/02...................... 300,000 328,875
-----------
4,621,763
-----------
Beverages (6.0%):
Anheuser-Busch Cos., Inc., 8.75%, 12/1/99.............. 200,000 206,750
Anheuser-Busch Cos., Inc., 6.75%, 8/1/03............... 1,000,000 1,067,500
Brown-Forman, Corp., 7.38%, 5/10/05, MTN............... 1,000,000 1,106,250
PepsiCo Inc., 5.75%, 1/15/08(b)........................ 1,000,000 1,012,500
-----------
3,393,000
-----------
Consumer Goods & Services (0.3%):
Clorox Co., 8.80%, 7/15/01(b).......................... 100,000 108,625
Procter & Gamble, Inc., 8.00%, 11/15/03................ 50,000 56,250
-----------
164,875
-----------
Entertainment (1.9%):
Walt Disney Co., Global Bond, Series B, 6.75%,
3/30/06............................................... 1,000,000 1,081,250
-----------
Financial Services (16.2%):
Ameritech Capital Funding, 6.15%, 1/15/08(b)........... 2,000,000 2,082,499
Associates Corp., N.A., 6.88%, 2/1/03.................. 50,000 52,554
Associates Corp., N.A., 7.23%, 5/17/06, MTN............ 1,000,000 1,092,500
Bear Stearns Co., Inc., 8.25%, 2/1/02.................. 500,000 533,125
CIT Group Holdings, 6.80%, 4/17/00, MTN................ 1,000,000 1,018,750
General Electric Capital Corp., 7.13%, 12/15/98, MTN... 100,000 100,080
</TABLE>
Corporate Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Financial Services, continued:
General Electric Capital Corp., 7.66%, 8/2/04, MTN.... $1,000,000 $ 1,115,000
General Electric Capital Corp., 8.30%, 9/20/09........ 745,000 897,725
Merrill Lynch & Co., 7.75%, 3/1/99.................... 300,000 301,215
Merrill Lynch & Co., 8.00%, 6/1/07.................... 500,000 575,625
Norwest Financial Inc., 6.13%, 8/1/03................. 50,000 51,563
Pitney Bowes Credit, 8.63%, 2/15/08................... 1,000,000 1,221,249
St. Paul Companies, Inc., 7.60%, 4/22/99, MTN......... 70,000 70,640
St. Paul Companies, Inc., 7.49%, 11/6/02, MTN......... 25,000 26,754
St. Paul Companies, Inc., 7.50%, 12/20/02, MTN........ 50,000 53,563
-----------
9,192,842
-----------
Food Products (4.9%):
Campbell Soup Co., 6.90%, 10/15/06.................... 1,000,000 1,096,250
General Mills, 8.47%, 12/15/98, MTN................... 200,000 200,216
General Mills, 8.90%, 3/15/06, MTN.................... 1,000,000 1,208,749
Quaker Oats Co., 9.00%, 12/7/01, MTN.................. 150,000 164,586
Quaker Oats Co., 9.00%, 12/10/01, MTN................. 125,000 137,188
-----------
2,806,989
-----------
Food Service (0.9%):
McDonald's Corp., 6.50%, 8/1/07, MTN.................. 500,000 537,500
-----------
Industrial Goods & Services (2.4%):
E.I. duPont de Nemours & Co., 8.50%, 2/15/03.......... 200,000 213,750
E.I. duPont de Nemours & Co., 8.13%, 3/15/04.......... 1,000,000 1,131,250
-----------
1,345,000
-----------
Manufacturing (0.1%):
Elf Aquitaine, 7.75%, 5/1/99.......................... 50,000 50,500
-----------
Oil & Exploration, Production & Services (2.8%):
BP America, Inc., 9.38%, 11/1/00...................... 150,000 162,000
BP America, Inc., 8.50%, 4/15/01...................... 200,000 215,500
Exxon Capital Corp., 6.63%, 8/15/02................... 100,000 104,750
Texaco Capital, 7.09%, 2/1/07(b)...................... 1,000,000 1,105,000
-----------
1,587,250
-----------
Paper & Related (2.5%):
International Paper Co., 7.00%, 6/1/01................ 1,000,000 1,035,000
Kimberly-Clark, 8.63%, 5/1/01......................... 350,000 378,000
-----------
1,413,000
-----------
Pharmaceuticals (4.2%):
Eli Lilly & Co., 6.75%, 11/15/99...................... 150,000 152,250
Eli Lilly & Co., 8.38%, 12/1/06....................... 1,000,000 1,187,500
SmithKline Beecham Corp., 6.63%, 10/1/01, MTN......... 1,000,000 1,043,750
-----------
2,383,500
-----------
Printing & Publishing (0.5%):
Gannett Co., 5.85%, 5/1/00............................ 300,000 304,125
-----------
</TABLE>
Continued
150
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Intermediate Corporate Bond Portfolio November 30, 1998
Corporate Bonds, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Retail Stores (5.3%):
Dillards, Inc., 5.79%, 11/15/01......................... $ 450,000 $ 446,063
J. C. Penney Inc., 7.60%, 4/1/07........................ 1,000,000 1,087,499
Wal-Mart Stores, Inc., 8.63%, 4/1/01.................... 650,000 699,563
Wal-Mart Stores, Inc., 6.50%, 6/1/03.................... 100,000 104,875
Wal-Mart Stores, Inc., 7.50%, 5/15/04................... 600,000 662,250
-----------
3,000,250
-----------
Technology (2.0%):
Motorola, Inc., 7.60%, 1/1/07........................... 1,000,000 1,130,000
-----------
Telecommunications (10.2%):
AT&T Corp., 7.13%, 1/15/02.............................. 50,000 52,563
AT&T Corp., 6.75%, 4/1/04(b)............................ 1,150,000 1,230,500
AT&T Corp., 7.00%, 5/15/05.............................. 100,000 108,250
GTE California, 6.70%, 9/1/09........................... 1,000,000 1,090,000
Lucent Technologies, Inc., 7.25%, 7/15/06............... 1,000,000 1,113,750
SBC Communications, Inc., 7.25%, 7/1/02................. 1,065,000 1,128,900
Southwestern Bell Telephone, 6.56%, 11/15/05, MTN....... 1,000,000 1,062,500
-----------
5,786,463
-----------
Transportation & Shipping (0.4%):
Union Pacific Co., 7.88%, 2/15/02....................... 200,000 212,750
-----------
Utilities (5.3%):
Laclede Gas Co., 7.50%, 11/1/07......................... 1,500,000 1,685,625
National Rural Utilities, 6.45%, 4/1/01................. 100,000 103,125
National Rural Utilities, 6.65%, 10/1/05................ 100,000 107,000
Pacific Gas & Electric, 6.25%, 8/1/03................... 50,000 52,438
Southern California Edison, 6.75%, 1/15/00.............. 170,000 172,975
Wisconsin Power & Light, 7.00%, 6/15/07................. 810,000 895,050
-----------
3,016,213
-----------
TOTAL CORPORATE BONDS 43,950,020
-----------
U.S. Government Agencies (16.4%)
Federal Farm Credit Bank (1.1%):
8.95%, 6/1/06........................................... 500,000 610,700
-----------
Federal Home Loan Mortgage Corp. (4.5%):
6.00%, 2/1/11, Gold Pool #E62600........................ 428,003 429,205
6.50%, 1/1/12, Gold Pool #E00465........................ 1,618,427 1,644,209
6.50%, 6/1/12, Pool #E67059............................. 450,020 457,189
-----------
2,530,603
-----------
Federal National Mortgage Assoc. (5.4%):
7.00%, 11/1/10, Pool #328614............................ 656,498 671,880
7.00%, 6/1/11, Pool #349980............................. 833,038 852,556
6.50%, 3/1/12, Pool #372719............................. 819,608 832,156
6.50%, 3/1/12, Pool #372705............................. 712,902 723,816
-----------
3,080,408
-----------
U.S. Government Agencies, continued
<CAPTION>
Shares
or
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Government National Mortgage Assoc. (5.4%):
6.00%, 4/15/26, Pool #345610......................... $ 913,910 $ 906,480
7.00%, 1/15/27, Pool #442297......................... 834,964 855,571
6.50%, 1/15/27, Pool #439817......................... 987,327 998,118
7.00%, 9/15/27, Pool #455304......................... 293,275 300,513
-----------
3,060,682
-----------
TOTAL U.S. GOVERNMENT AGENCIES 9,282,393
-----------
U.S. Treasury Notes (2.6%)
5.75%, 8/15/03....................................... 50,000 52,276
5.88%, 11/15/05(b)................................... 725,000 775,909
6.63%, 5/15/07(b).................................... 600,000 674,022
-----------
TOTAL U.S. TREASURY NOTES 1,502,207
-----------
Investment Companies (2.7%)
Federated Money Market Trust......................... 1,509,674 1,509,674
-----------
TOTAL INVESTMENT COMPANIES 1,509,674
-----------
Short-Term Securities Held as Collateral (11.3%)
Repurchase agreements (11.3%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $2,172,882,
collateralized by $2,700,339 various U.S. Government
Agency securities, 0.00%-8.50%, 12/3/98-9/11/28,
market value $2,215,557)............................ 2,172,541 2,172,541
Nationsbanc Montgomery Securities, Inc., 5.68%,
12/1/98 (Purchased on 11/30/98, proceeds at maturity
$246,920, collateralized by $276,956 various U.S.
Government Agency mortgages, 0.00%-10.50%, 5/1/00-
12/1/28, market value $251,819)..................... 246,880 246,880
Greenwich Capital, 5.45%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $1,086,434,
collateralized by $5,519,216 various U.S. Government
Agency mortgages, 0.00%-8.00%, 10/25/99-8/1/28,
market value $1,107,996)............................ 1,086,270 1,086,270
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $731,006,
collateralized by $857,198 various U.S. Treasury
Notes, 3.63%-8.75%, 10/31/99-11/15/28, market value
$745,516)........................................... 730,898 730,898
</TABLE>
Continued
151
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Intermediate Corporate Bond Portfolio November 30, 1998
Short-Term Securities Held as Collateral, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $2,172,860,
collateralized by $2,599,636 various U.S. Treasury
Notes, 0.00%-8.88%, 12/10/98-4/15/28, market value
$2,215,991)......................................... $2,172,541 $ 2,172,541
-----------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 6,409,130
-----------
TOTAL INVESTMENTS
(Cost $59,921,651)(a) (110.4%)................................. 62,653,424
Liabilities in excess of other assets. (-10.4%)................. (5,907,801)
-----------
TOTAL NET ASSETS -- 100.0%...................................... $56,745,623
===========
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.... $2,740,014
Unrealized depreciation.... (8,241)
----------
Net unrealized apprecia-
tion...................... $2,731,773
==========
</TABLE>
(b) All or a portion of this security was loaned as of November 30, 1998.
MTN Medium Term Note
See notes to financial statements
152
<PAGE>
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets
Investments, at value (cost $53,512,521)................ $56,244,294
Repurchase agreements at value (cost $6,409,130)........ 6,409,130
-----------
Total investments...................................... 62,653,424
Cash.................................................... 901
Interest and dividends receivable....................... 834,338
Deferred organization costs............................. 15,321
-----------
Total Assets........................................... 63,503,984
Liabilities
Dividends payable....................................... $ 275,702
Payable for capital shares redeemed..................... 12,121
Payable for return of collateral received............... 6,409,130
Accrued expenses and other payables:
Investment advisory fees............................... 25,392
Administration fees.................................... 1,084
Distribution and administrative services fees.......... 356
Custodian fees......................................... 4,381
Other liabilities...................................... 30,195
---------
Total Liabilities...................................... 6,758,361
-----------
Net Assets:
Capital................................................. 53,928,192
Undistributed net investment income..................... 16,970
Accumulated net realized gains on investment
transactions........................................... 68,688
Net unrealized appreciation from investments............ 2,731,773
-----------
Net Assets.............................................. $56,745,623
===========
Investor A Shares
Net Assets............................................. $ 283,962
Shares................................................. 27,575
Redemption price per share............................. $10.30
======
Maximum Sales Charge -- Investor A Shares............... 4.50%
Maximum Offering Price (100%/(100%-- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share....................................... $10.79
======
Trust Shares
Net Assets............................................. $55,337,196
Shares................................................. 5,376,783
Offering and redemption price per share................ $10.29
======
Institutional Shares
Net Assets............................................. $ 1,124,465
Shares................................................. 109,235
Offering and redemption price per share................ $10.29
======
Statement of Operations
<CAPTION>
For the year ended November 30, 1998
<S> <C> <C>
Investment Income:
Interest income........................................... $3,600,366
Dividend income........................................... 40,647
Income from securities lending............................ 10,037
----------
Total Income............................................. 3,651,050
Expenses:
Investment advisory fees.................................. $294,401
Administration fees....................................... 107,055
Distribution and services fees, Investor A Shares......... 800
Administrative services fees, Trust Shares................ 157,889
Administrative services fees, Institutional Shares........ 1,893
Accounting fees........................................... 15,096
Custodian fees............................................ 16,423
Directors' fees and expenses.............................. 573
Transfer agent fees....................................... 39
Other fees................................................ 43,804
--------
Total expenses before voluntary fee reductions........... 637,973
Expenses voluntarily reduced............................. (315,256)
----------
Net Expenses............................................. 322,717
----------
Net investment income..................................... 3,328,333
----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions........... 78,258
Net change in unrealized appreciation from investments.... 1,517,181
----------
Net realized/unrealized gains from investments............ 1,595,439
----------
Change in net assets resulting from operations............ $4,923,772
==========
</TABLE>
See notes to financial statements
153
<PAGE>
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended period ended
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................... $ 3,328,333 $ 2,185,317
Net realized gains from investment transactions..... 78,258 502,907
Net change in unrealized appreciation from invest-
ments.............................................. 1,517,181 (131,490)
----------- -----------
Change in net assets resulting from operations....... 4,923,772 2,556,734
----------- -----------
Distributions to Investor A Shareholders:
From net investment income.......................... (15,794) (7,181)
From net realized gains from investment transac-
tions.............................................. (3,101) --
Distributions to Trust Shareholders:
From net investment income.......................... (3,276,426) (2,177,609)
From net realized gains from investment transac-
tions.............................................. (497,257) --
Distributions to Institutional Shareholders:
From net investment income.......................... (36,113) (527)
From net realized gains from investment transac-
tions.............................................. (309) --
----------- -----------
Change in net assets from shareholder distributions.. (3,829,000) (2,185,317)
----------- -----------
Change in net assets from capital transactions....... 10,903,630 44,375,804
----------- -----------
Change in net assets................................. 11,998,402 44,747,221
Net Assets:
Beginning of period................................. 44,747,221 --
----------- -----------
End of period....................................... $56,745,623 $44,747,221
=========== ===========
</TABLE>
- -----
(a) Period commenced February 10, 1997.
See notes to financial statements
154
<PAGE>
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income........................................... $ 3,328,333
Adjustments to reconcile net investment income to net cash used
in operating activities:
Cost of investment securities................................... (24,776,481)
Proceeds from disposition of investment securities.............. 18,867,997
Cost of investments purchased with cash collateral from securi-
ties lending................................................... (6,409,130)
Increase in dividends and interest receivable................... (182,790)
Increase in payable for return of collateral received from secu-
rities lending................................................. 6,409,130
Increase in accrued expenses.................................... 22,026
Amortization expense on organizational costs.................... 2,920
Net amortization/accretion from investments..................... (36,881)
------------
Net cash used in operating activities........................... (2,774,876)
------------
Cash Flows from Financing Activities:
Proceeds from shares issued..................................... 12,094,256
Cost of shares redeemed......................................... (5,788,023)
Cash distributions paid......................................... (3,530,649)
------------
Net cash provided by financing activities....................... 2,775,584
------------
Increase in cash................................................ 708
Cash:
Beginning balance............................................... 193
------------
Ending balance.................................................. $ 901
============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $267,065 and converted common trust assets of $4,766,780.
See notes to financial statements
155
<PAGE>
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........... $10.11 $10.00
------ ------
Investment Activities
Net investment income......................... 0.60 0.52
Net realized and unrealized gains from
investments.................................. 0.30 0.11
------ ------
Total from Investment Activities.............. 0.90 0.63
------ ------
Distributions
Net investment income......................... (0.60) (0.52)
Net realized gains............................ (0.11) --
------ ------
Total Distributions........................... (0.71) (0.52)
------ ------
Net Asset Value, End of Period................ $10.30 $10.11
====== ======
Total Return (excludes sales charge)........... 9.32 % 6.48 % (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).............. $ 284 $ 277
Ratio of expenses to average net assets........ 0.89 % 0.58 % (c)
Ratio of net investment income to average net
assets........................................ 5.92 % 6.52 % (c)
Ratio of expenses to average net assets*....... 1.19 % 1.31 % (c)
Portfolio turnover**........................... 9.65 % 61.98 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period.......... $ 10.11 $ 10.00
------- -------
Investment Activities
Net investment income........................ 0.63 0.53
Net realized and unrealized gains from
investments................................. 0.29 0.11
------- -------
Total from Investment Activities............. 0.92 0.64
------- -------
Distributions
Net investment income........................ (0.63) (0.53)
Net realized gains........................... (0.11) --
------- -------
Total Distributions.......................... (0.74) (0.53)
------- -------
Net Asset Value, End of Period................ $ 10.29 $ 10.11
======= =======
Total Return.................................. 9.53 % 6.65 % (b)
Ratios/Supplementary Data:
Net Assets at end of period (000)............. $55,337 $44,443
Ratio of expenses to average net assets....... 0.60 % 0.29 % (c)
Ratio of net investment income to average net
assets....................................... 6.23 % 6.90 % (c)
Ratio of expenses to average net assets*...... 1.19 % 1.32 % (c)
Portfolio turnover**.......................... 9.65 % 61.98 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
156
<PAGE>
THE ARCH FUND, INC.
Intermediate Corporate Bond Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........... $10.11 $10.00
------ ------
Investment Activities
Net investment income......................... 0.61 0.53
Net realized and unrealized gains from
investments.................................. 0.29 0.11
------ ------
Total from Investment Activities.............. 0.90 0.64
------ ------
Distributions
Net investment income......................... (0.61) (0.53)
Net realized gains............................ (0.11) --
------ ------
Total Distributions........................... (0.72) (0.53)
------ ------
Net Asset Value, End of Period................. $10.29 $10.11
====== ======
Total Return................................... 9.32 % 6.60 % (b)
Ratios/Supplementary Data:
Net Assets at end of period (000).............. $1,124 $ 27
Ratio of expenses to average net assets........ 1.07 % 0.29 % (c)
Ratio of net investment income to average net
assets........................................ 5.72 % 7.06 % (c)
Ratio of expenses to average net assets*....... 1.18 % 1.31 % (c)
Portfolio turnover**........................... 9.65 % 61.98 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
157
<PAGE>
The ARCH Bond Index Portfolio
Q. What were the conditions in the bond market during the 12 months ended
November 30, 1998?
A. During the first six months of the period, investors worried that strong
U.S. economic growth would force the Federal Reserve Board to raise interest
rates to curb inflation, boosting bond yields and causing bond prices to fall.
But global economic weakness threatened to slow the U.S. economy's growth, and
the Fed did not raise rates.
Concerns that the global economic crisis would hurt the U.S. economy
increased during the second half of the period. In response, the Federal
Reserve increased the money supply by lowering short-term interest rates three
times, each time dropping the federal funds rate one quarter of a percentage
point. With the rate cuts, the yield on the 30-year Treasury bond fell to as
low as 4.7%, but toward the end of the period, it inched back up and stood at
5.0% as of November 30, 1998.
Meanwhile, however, interest rates on intermediate- and long-term corporate
securities increased relative to rates on Treasuries. Issues of bank and
finance companies were especially hurt, as investors worried that such
companies would be adversely affected by global economic problems. Spreads
between the rates of agency debt and Treasuries also increased as investors
sought safety and liquidity in the highest quality securities.
Q. How did the Portfolio perform during the period?
A. The Portfolio holds roughly 125 securities across market sectors and
maturities, using the same percentage weightings as the Lehman Brothers
Aggregate Bond Index. Our objective is to track the performance of that index,
and we did so during the recent period. By contrast, actively managed funds'
performances depend upon the investment decisions of their portfolio managers,
and those funds' returns may be considerably higher or lower than the returns
of the Index.*
Q. What is the outlook for the bond market and the Portfolio?
A. The recent rise in interest rates indicates that the market does not
expect the Federal Reserve to cut short-term rates again soon. However, the Fed
could again cut rates if inflation stays low and the U.S. economy shows signs
of weakening. Regardless of short-term fluctuations, we will continue to track
any changes in the sector or maturity components of our benchmark to help
ensure that we fulfill the Portfolio's long-term objective.
- -----
* Portfolio composition is subject to change.
158
<PAGE>
The ARCH Bond Index Portfolio
[ARCH BOND INDEX PORTFOLIO CHART APPEARS HERE]
<TABLE>
<CAPTION>
Value of a $10,000 Investment
Investor A (No Load) Investor A (Load)* Trust Institutional Lehman Aggregate Bond Index
-------------------- ----------------- ----- ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Feb-97 10,000 9,747 10,000 10,000 10,000
Nov-97 10,693 10,422 10,715 10,720 10,823
May-98 11,109 10,828 11,149 11,146 11,266
Nov-98 11,695 11,398 11,754 11,733 11,846
</TABLE>
* Reflects 2.50% sales charge.
Average Annual Total Return
as of 11/30/98
Since
Inception
1 Year (2/10/97)
------ ---------
Investor A (No Load) 9.36% 9.07%
Investor A* 6.64% 7.53%
Trust 9.69% 9.38%
Institutional 9.47% 9.27%
Past performance is not predictive of future results. Investment return and
principal value will fluctuate, so that shares of a particular class, when
redeemed, may be worth more or less than their original cost.
The performance of the ARCH Bond Index Portfolio is measured against the
Lehman Brothers Aggregate Bond Index, an unmanaged index comprised of the
Lehman Brothers Government/Corporate Bond Index and two Lehman Brothers asset-
backed securities indices. Investors are unable to purchase the index directly,
although they can invest in the underlying securities. The performance of the
index does not reflect the deduction of expenses associated with a mutual fund,
such as investment management and fund accounting fees. By contrast, the
performance of the Portfolio shown on the graph reflects the deduction of these
value-added services, as well as the deduction of a 2.50% sales charge on
Investor A shares.
159
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Bond Index Portfolio November 30, 1998
Corporate Bonds (27.9%)
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Automotive (3.1%):
Ford Motor Credit Co., 7.75%, 11/15/02.............. $1,000,000 $ 1,078,750
Ford Motor Credit Co., Global Bond,
7.00%, 9/25/01..................................... 2,000,000 2,082,500
General Motors Corp., 8.88%, 5/15/03................ 2,000,000 2,260,000
------------
5,421,250
------------
Beverages (1.7%):
PepsiCo, Inc., 6.80%, 5/15/00, MTN.................. 3,000,000 3,078,750
------------
Consumer Goods & Services (0.6%):
Motorola, Inc., 6.50%, 11/15/28..................... 1,000,000 1,032,500
------------
Entertainment (1.2%):
Walt Disney Co., Global Bond, Series A, 6.38%,
3/30/01............................................ 1,000,000 1,027,500
Walt Disney Co., Global Bond, Series B, 6.75%,
3/30/06 (b)........................................ 1,000,000 1,081,250
------------
2,108,750
------------
Financial Services (9.7%):
American Express Credit, 6.50%, 8/1/00 (b).......... 1,800,000 1,840,500
CIT Group Holdings, 5.85%, 4/9/01, MTN.............. 3,000,000 3,022,500
Dean Witter Discover & Co.,
6.25%, 3/15/00..................................... 1,000,000 1,015,000
Dean Witter Discover & Co.,
6.75%, 8/15/00..................................... 1,500,000 1,541,250
General Electric Capital Corp.,
8.85%, 4/1/05...................................... 2,000,000 2,357,500
General Electric Capital Corp.,
8.50%, 7/24/08..................................... 1,000,000 1,220,000
Household Finance Corp., 7.45%, 4/1/00, Guaranteed
by Household International......................... 1,000,000 1,025,000
Household Finance Corp., 8.38%, 11/15/01............ 1,000,000 1,072,500
Household Finance Corp., 6.88%, 3/1/07.............. 1,000,000 1,051,250
Merrill Lynch & Co., 6.70%, 8/1/00.................. 2,000,000 2,042,500
Merrill Lynch & Co., 8.00%, 2/1/02.................. 1,000,000 1,068,750
------------
17,256,750
------------
Food Products (2.3%):
Sara Lee, 5.75%, 7/14/00, MTN....................... 4,000,000 4,050,000
------------
Industrial Goods & Services (0.6%):
E.I. duPont de Nemours & Co., 6.75%, 9/1/07 (b)..... 1,000,000 1,093,750
------------
Oil & Exploration, Production & Services (0.9%):
Texaco Capital, 9.45%, 3/1/00....................... 1,500,000 1,580,625
------------
Paper & Related (1.2%):
International Paper Co., 7.00%, 6/1/01.............. 2,000,000 2,070,000
------------
Retail Stores (2.9%):
Dillards, Inc., 5.79%, 11/15/01..................... 3,000,000 2,973,750
Wal-Mart Stores, Inc., 9.10%, 7/15/00............... 2,000,000 2,127,500
------------
5,101,250
------------
Corporate Bonds, continued
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
Telecommunications (3.7%):
Bell Telephone Co. of Pennsylvania,
8.75%, 8/15/31......................................... $1,000,000 $ 1,351,250
Lucent Technologies, Inc., 6.90%,
7/15/01 (b)............................................ 3,000,000 3,142,500
Northern Telecom Ltd., 6.88%, 10/1/02 (b)............... 1,000,000 1,050,000
SBC Communications, Inc., 7.25%, 7/1/02................. 1,000,000 1,060,000
------------
6,603,750
------------
TOTAL CORPORATE BONDS................................... 49,397,375
------------
U.S. Government Agencies (38.2%)
Federal Home Loan Bank (5.2%):
5.52%, 4/9/01, Series 3101.............................. 4,000,000 4,055,600
5.75%, 4/30/01, Series 4901............................. 1,000,000 1,019,530
6.67%, 1/8/07, Series I-07.............................. 1,000,000 1,087,530
5.67%, 9/11/08, Series KS08............................. 3,000,000 3,061,770
------------
9,224,430
------------
Federal Home Loan Mortgage Corp. (14.5%):
8.50%, 10/1/01, Pool #200055............................ 26,675 27,525
9.00%, 3/1/03, Pool #380019............................. 109,536 114,088
9.00%, 5/1/03, Pool #380021............................. 37,396 38,950
7.50%, 11/1/09, Gold Pool #M30082....................... 1,855,441 1,909,936
7.00%, 11/1/10, Gold Pool #E20202....................... 282,513 289,223
7.00%, 11/1/10, Gold Pool #E62010....................... 365,351 374,028
6.00%, 2/1/11, Gold Pool #E62600........................ 428,003 429,205
6.00%, 3/1/11, Gold Pool #E63503........................ 813,148 815,433
6.00%, 4/1/11, Gold Pool #E63515........................ 790,593 792,815
6.00%, 6/1/11, Gold Pool #E00439........................ 799,175 801,420
7.00%, 7/1/11, Gold Pool #E20252........................ 840,242 860,198
6.00%, 3/1/12, Gold Pool #E66538........................ 1,304,900 1,308,567
7.50%, 9/1/12, Gold Pool #G10735........................ 1,931,357 1,988,081
6.00%, 3/1/13, Gold Pool #E69338........................ 962,864 965,569
6.00%, 3/1/13, Pool #E69425............................. 937,715 940,350
6.00%, 4/1/13, Pool #E70028............................. 943,318 945,969
6.00%, 4/1/13, Pool #E00543............................. 1,922,754 1,928,157
5.50%, 11/1/13, Gold Pool #E72928....................... 1,000,000 986,250
5.50%, 11/1/13, Gold Pool #E73355....................... 990,001 976,388
5.50%, 12/1/13, Gold Pool #E73342....................... 1,000,000 986,250
6.00%, 2/1/26, Gold Pool #D68286........................ 209,366 206,943
6.00%, 3/1/26, Gold Pool #C80393........................ 2,105,301 2,080,944
6.00%, 4/1/26, Gold Pool #C80395........................ 106,115 104,887
6.00%, 4/1/26, Gold Pool #D70772........................ 390,094 385,581
6.00%, 4/1/26, Gold Pool #D70405........................ 318,779 315,090
8.00%, 11/1/26, Gold Pool #D76134....................... 254,875 264,032
6.00%, 12/1/26, Gold Pool #C80465....................... 811,683 802,291
6.00%, 12/1/26, Gold Pool #D76870....................... 25,160 24,869
8.00%, 12/1/26, Gold Pool #D76530....................... 584,341 605,336
8.00%, 12/1/26, Gold Pool #D76906....................... 324,297 335,949
7.00%, 1/1/27, Gold Pool #D77720........................ 1,756,902 1,794,781
7.00%, 1/1/27, Gold Pool #D77743........................ 740,248 756,208
8.00%, 1/1/27, Gold Pool #C00490........................ 581,533 602,427
------------
25,757,740
------------
</TABLE>
Continued
160
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Bond Index Portfolio November 30, 1998
U.S. Government Agencies, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- -----------
<S> <C> <C>
Federal National Mortgage Assoc. (10.7%):
8.35%, 11/10/99....................................... $ 500,000 $ 515,195
6.00%, 11/1/00, Pool #190070.......................... 430,352 434,117
7.50%, 2/11/02........................................ 4,970,000 5,335,146
6.00%, 5/1/11, Pool #337194........................... 794,627 795,867
6.00%, 2/1/12, Pool #250917........................... 878,501 879,872
6.00%, 3/1/12, Pool #359504........................... 865,205 866,555
6.00%, 3/1/12, Pool #374638........................... 801,228 802,478
6.00%, 3/1/12, Pool #373131........................... 890,172 891,561
7.50%, 3/1/12, Pool #250858........................... 1,760,405 1,811,562
6.00%, 4/1/13, Pool #414671........................... 968,235 969,745
5.50%, 11/1/13, Pool #449032.......................... 1,000,000 985,625
6.00%, 10/1/26, Pool #368935.......................... 1,384,019 1,367,149
9.00%, 10/1/26, Pool #358137.......................... 130,182 137,179
9.00%, 10/1/26, Pool #353671.......................... 299,552 315,653
9.00%, 10/1/26, Pool #361800.......................... 128,554 135,463
9.00%, 11/1/26, Pool #364453.......................... 415,118 437,431
9.00%, 11/1/26, Pool #358703.......................... 126,532 133,333
9.00%, 12/1/26, Pool #368686.......................... 152,976 161,198
6.00%, 1/1/28, Pool #398195........................... 976,309 964,407
6.00%, 1/1/28, Pool #402874........................... 943,489 931,988
-----------
18,871,524
-----------
Government National Mortgage Assoc. (7.8%):
7.50%, 4/15/02, Pool #210173.......................... 128,338 132,789
7.50%, 7/15/02, Pool #216193.......................... 19,346 20,017
7.50%, 7/15/08, Pool #349404.......................... 314,685 325,598
7.50%, 8/15/10, Pool #413412.......................... 102,414 105,966
7.50%, 9/15/10, Pool #413117.......................... 79,184 81,930
7.50%, 11/15/10, Pool #415775......................... 292,206 302,340
6.00%, 3/15/11, Pool #425964.......................... 47,675 47,929
6.50%, 3/15/11, Pool #419123.......................... 20,799 21,208
6.00%, 4/15/11, Pool #429397.......................... 445,257 447,621
6.00%, 4/15/11, Pool #421800.......................... 55,929 56,226
6.00%, 4/15/11, Pool #393849.......................... 403,084 405,225
6.00%, 5/15/11, Pool #345647.......................... 46,418 46,665
6.00%, 5/15/11, Pool #421871.......................... 555,275 558,224
6.00%, 5/15/11, Pool #432659.......................... 459,868 462,310
6.50%, 5/15/11, Pool #412598.......................... 500,940 510,798
6.50%, 5/15/11, Pool #432640.......................... 314,804 321,000
6.00%, 6/15/11, Pool #423828.......................... 284,795 286,307
6.00%, 6/15/11, Pool #406582.......................... 250,620 251,951
6.50%, 6/15/11, Pool #426173.......................... 467,328 476,525
6.50%, 8/15/11, Pool #421746.......................... 299,468 305,362
6.50%, 2/15/12, Pool #393334.......................... 367,941 375,182
6.50%, 3/15/12, Pool #399161.......................... 397,096 404,911
7.50%, 7/15/12, Pool #447382.......................... 1,039,696 1,075,753
8.50%, 11/15/21, Pool #297863......................... 165,268 174,924
8.00%, 5/15/23, Pool #350495.......................... 278,922 290,428
9.00%, 5/15/25, Pool #386743.......................... 350,784 373,911
9.00%, 5/15/25, Pool #401372.......................... 175,040 186,581
9.50%, 8/15/25, Pool #414557.......................... 109,541 118,269
7.50%, 10/15/25, Pool #366152......................... 352,125 364,118
7.50%, 10/15/25, Pool #366154......................... 425,955 440,463
6.50%, 3/15/26, Pool #419578.......................... 69,292 70,049
6.50%, 4/15/26, Pool #422656.......................... 894,896 904,677
6.50%, 5/15/26, Pool #428852.......................... 79,870 80,743
6.50%, 6/15/26, Pool #423801.......................... 736,396 744,445
7.00%, 8/20/26, Pool #2266............................ 518,692 529,227
9.50%, 9/15/26, Pool #438724.......................... 222,970 240,736
9.50%, 10/15/26, Pool #438728......................... 168,946 182,407
U.S. Government Agencies, continued:
<CAPTION>
Shares or
Security Principal Market
Description Amount Value
----------- --------- -----------
<S> <C> <C>
Government National Mortgage Assoc., continued
9.50%, 10/15/26, Pool #436991............................ $ 56,109 $ 60,579
9.50%, 11/15/26, Pool #438731............................ 260,802 281,583
9.50%, 11/15/26, Pool #436994............................ 158,466 171,092
7.00%, 9/15/27, Pool #455304............................. 488,792 500,856
7.00%, 8/15/28, Pool #482697............................. 997,329 1,021,943
-----------
13,758,868
-----------
TOTAL U.S. GOVERNMENT AGENCIES 67,612,562
-----------
U.S. Treasury Bonds (18.1%)
12.00%, 8/15/13, Callable on 8/15/08
@ 100 (b)............................................... 2,055,000 3,144,027
7.50%, 11/15/16.......................................... 1,250,000 1,565,975
8.75%, 5/15/17 (b)....................................... 1,500,000 2,106,720
8.13%, 8/15/19 (b)....................................... 6,000,000 8,077,620
8.75%, 8/15/20........................................... 2,000,000 2,870,000
7.63%, 11/15/22 (b)...................................... 4,600,000 6,018,732
6.00%, 2/15/26 (b)....................................... 7,500,000 8,251,125
-----------
TOTAL U.S. TREASURY BONDS 32,034,199
-----------
U.S. Treasury Notes (14.6%):
6.00%, 10/15/99 (b)...................................... 400,000 404,496
6.13%, 7/31/00 (b)....................................... 200,000 204,886
5.75%, 10/31/00 (b)...................................... 1,000,000 1,021,160
5.50%, 12/31/00 (b)...................................... 9,000,000 9,162,180
6.38%, 9/30/01 (b)....................................... 4,000,000 4,182,800
5.88%, 9/30/02 (b)....................................... 2,100,000 2,188,389
5.75%, 8/15/03 (b)....................................... 2,930,000 3,063,344
7.25%, 5/15/04 (b)....................................... 2,190,000 2,455,932
6.63%, 5/15/07 (b)....................................... 2,750,000 3,089,268
-----------
TOTAL U.S. TREASURY NOTES................................ 25,772,455
-----------
Investment Companies (0.5%)
Federated Money Market Trust............................. 798,841 798,841
-----------
TOTAL INVESTMENT COMPANIES 798,841
-----------
Short-Term Securities Held as Collateral (12.8%):
</TABLE>
<TABLE>
<S> <C> <C>
Repurchase agreements (12.8%):
Lehman Brothers, Inc., 5.66%, 12/1/98 (Purchased on
11/30/98, proceeds at maturity $7,643,024,
collateralized by $9,498,332 various U.S. Government
Agency securities, 0.00%-8.50%, 12/3/98-9/11/28, market
value $7,793,132)....................................... 7,641,823 7,641,823
Nationsbanc Montgomery Securities, Inc., 5.68%, 12/1/98
(Purchased on 11/30/98, proceeds at maturity $868,530, collateralized
by $974,181 various U.S. Government Agency mortgages,
0.00%-10.50%, 5/1/00-12/1/28, market value $885,761).... 868,394 868,394
Greenwich Capital, 5.45%, 12/1/98 (Purchased on 11/30/98,
proceeds at maturity $3,821,490, collateralized by
$19,413,617 various U.S. Government Agency mortgages,
0.00%-8.00%, 10/25/99-8/1/28, market value $3,897,330).. 3,820,912 3,820,912
</TABLE>
Continued
161
<PAGE>
THE ARCH FUND, INC. Schedule of Portfolio Investments
Bond Index Portfolio November 30, 1998
Short-Term Securities Held as Collateral, continued
<TABLE>
<CAPTION>
Security Principal Market
Description Amount Value
----------- ---------- ------------
<S> <C> <C>
HSBC Securities, Inc., 5.35%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $2,571,285,
collateralized by $3,015,161 various U.S.
Treasury Notes, 3.63%-8.75%, 10/31/99-11/15/28,
market value $2,622,321)......................... $2,570,903 $ 2,570,903
Paribas Capital Markets, 5.30%, 12/1/98 (Purchased
on 11/30/98, proceeds at maturity $7,642,949,
collateralized by $9,144,115 various U.S.
Treasury Notes, 0.00%-8.88%, 12/10/98-4/15/28,
market value $7,794,660)......................... 7,641,823 7,641,823
------------
TOTAL SHORT-TERM SECURITIES HELD AS COLLATERAL 22,543,855
------------
TOTAL INVESTMENTS
(Cost $189,684,645) (a) (112.1%)................. 198,159,287
Liabilities in excess of other assets (-12.1%) (21,372,980)
------------
TOTAL NET ASSETS -- 100.0% $176,786,307
============
</TABLE>
- -----
(a) Represents cost for federal income tax and financial reporting purposes and
differs from value by net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.... $8,591,071
Unrealized depreciation.... (116,429)
----------
Net unrealized apprecia-
tion...................... $8,474,642
==========
</TABLE>
(b) All or a portion of this security was loaned as of November 30, 1998.
MTN Medium Term Note
See notes to financial statements
162
<PAGE>
THE ARCH FUND, INC.
Bond Index Portfolio
Statement of Assets and Liabilities
November 30, 1998
<TABLE>
<S> <C> <C>
Assets:
Investments, at value
(cost $167,140,790)................................. $175,615,432
Repurchase agreements, at value (cost $22,543,855)... 22,543,855
------------
Total Investments................................... 198,159,287
Cash................................................. 30,649
Interest and dividends receivable.................... 2,037,484
Receivable for investments sold...................... 20,478
Deferred organization costs.......................... 9,277
------------
Total Assets........................................ 200,257,175
Liabilities:
Dividends payable.................................... $ 840,724
Payable for capital shares redeemed.................. 434
Payable for return of collateral received............ 22,543,855
Accrued expenses and other payables:
Investment advisory fees............................ 43,174
Administration fees................................. 3,373
Distribution and administrative services fees....... 1,766
Custodian fees...................................... 13,192
Other liabilities................................... 24,350
-----------
Total Liabilities................................... 23,470,868
------------
Net Assets:
Capital.............................................. 167,452,212
Accumulated net realized gains from investment
transactions........................................ 859,453
Net unrealized appreciation from investments......... 8,474,642
------------
Net Assets........................................... $176,786,307
============
Investor A Shares
Net Assets.......................................... $ 364,223
Shares.............................................. 34,853
Redemption price per share.......................... $10.45
======
Maximum Sales Charge -- Investor A Shares............ 2.50%
Maximum Offering Price (100%/(100% -- Maximum Sales
Charge) of net asset value adjusted to the nearest
cent) per share.................................... $10.72
======
Trust Shares
Net Assets.......................................... $169,388,240
Shares.............................................. 16,224,907
Offering and redemption price per share............. $10.44
======
Institutional Shares
Net Assets.......................................... $ 7,033,844
Shares.............................................. 673,131
Offering and redemption price per share............. $10.45
======
</TABLE>
Statement of Operations
For the year ended November 30, 1998
<TABLE>
<S> <C> <C>
Investment Income:
Interest income.......................................... $10,316,643
Dividend income.......................................... 63,755
Income from securities lending........................... 43,499
-----------
Total Income............................................ 10,423,897
Expenses:
Investment advisory fees................................. $472,393
Administration fees...................................... 314,929
Distribution and services fees, Investor A Shares........ 531
Administrative services fees, Trust Shares............... 458,936
Administrative services fees, Institutional Shares....... 12,927
Accounting fees.......................................... 25,638
Custodian fees........................................... 48,101
Directors' fees and expenses............................. 1,941
Transfer agent fees...................................... 47,447
Other fees............................................... 74,155
--------
Total expenses before voluntary fee reductions.......... 1,456,998
Expenses voluntarily reduced............................ (774,182)
-----------
Net Expenses............................................ 682,816
-----------
Net investment income.................................... 9,741,081
-----------
Realized/Unrealized Gains from Investments:
Net realized gains from investment transactions.......... 1,044,169
Net change in unrealized appreciation from investments... 3,948,766
-----------
Net realized/unrealized gains from investments........... 4,992,935
-----------
Change in net assets resulting from operations........... $14,734,016
===========
</TABLE>
See notes to financial statements
163
<PAGE>
THE ARCH FUND, INC.
Bond Index Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the
year ended period ended
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income............................. $ 9,741,081 $ 7,163,574
Net realized gains from investment transactions... 1,044,169 279,085
Net change in unrealized appreciation from invest-
ments............................................ 3,948,766 1,574,992
------------ ------------
Change in net assets resulting from operations..... 14,734,016 9,017,651
------------ ------------
Distributions to Investor A Shareholders:
From net investment income........................ (10,279) (1,698)
From net realized gains from investment transac-
tions............................................ (187) --
Distributions to Trust Shareholders:
From net investment income........................ (9,482,085) (7,161,244)
From net realized gains from investment transac-
tions............................................ (472,456) --
Distributions to Institutional Shareholders:
From net investment income........................ (248,717) (632)
From net realized gains from investment transac-
tions............................................ (94) --
------------ ------------
Change in net assets from shareholder distribu-
tions............................................. (10,213,818) (7,163,574)
------------ ------------
Change in net assets from capital transactions..... 33,865,038 136,546,994
------------ ------------
Change in net assets............................... 38,385,236 138,401,071
Net Assets:
Beginning of period............................... 138,401,071 --
------------ ------------
End of period..................................... $176,786,307 $138,401,071
============ ============
</TABLE>
- -----
(a)Period commenced February 10, 1997.
See notes to financial statements
164
<PAGE>
THE ARCH FUND, INC.
Bond Index Portfolio
Statement of Cash Flows
<TABLE>
<CAPTION>
For the
year ended
November 30,
1998
------------
<S> <C>
Cash Flows from Operating Activities:
Net investment income........................................... $ 9,741,081
Adjustments to reconcile net investment income to net cash used
in operating activities:
Cost of investment securities................................... (125,449,980)
Proceeds from disposition of investment securities.............. 92,748,653
Cost of investments purchased with cash collateral from securi-
ties lending................................................... (22,543,855)
Increase in dividends and interest receivable................... (672,426)
Increase in payable for return of collateral received from secu-
rities lending................................................. 22,543,855
Increase in accrued expenses.................................... 42,445
Amortization expense on organizational costs.................... 5,108
Decrease in prepaid expenses.................................... 8,832
Net amortization/accretion from investments..................... (133,451)
------------
Net cash used in operating activities........................... (23,709,738)
------------
Cash Flows from Financing Activities:
Proceeds from shares issued..................................... 51,413,136
Cost of shares redeemed......................................... (17,960,393)
Cash distributions paid......................................... (9,712,447)
------------
Net cash provided by financing activities....................... 23,740,296
------------
Increase in cash................................................. 30,558
Cash:
Beginning balance............................................... 91
------------
Ending balance.................................................. $ 30,649
============
</TABLE>
Non-cash financing activities not included herein consist of reinvestment of
dividends from net investment income and distributions of net realized capital
gains of $412,729.
See notes to financial statements
165
<PAGE>
THE ARCH FUND, INC.
Bond Index Portfolio
Financial Highlights, Investor A Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........... $10.17 $10.00
------ ------
Investment Activities
Net investment income......................... 0.61 0.50
Net realized and unrealized gains from
investments.................................. 0.31 0.17
------ ------
Total from Investment Activities.............. 0.92 0.67
------ ------
Distributions
Net investment income......................... (0.61) (0.50)
Net realized gains............................ (0.03) --
------ ------
Total Distributions........................... (0.64) (0.50)
------ ------
Net Asset Value, End of Period................. $10.45 $10.17
====== ======
Total Return (excludes sales charge)........... 9.36 % 6.93 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).............. $ 364 $ 55
Ratio of expenses to average net assets........ 0.77 % 0.54 %(c)
Ratio of net investment income to average net
assets........................................ 5.81 % 6.71 %(c)
Ratio of expenses to average net assets*....... 0.93 % 0.95 %(c)
Portfolio turnover**........................... 33.37 % 46.16 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
Financial Highlights, Trust Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997 (a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........... $ 10.16 $ 10.00
-------- --------
Investment Activities
Net investment income......................... 0.65 0.53
Net realized and unrealized gains from
investments.................................. 0.30 0.16
-------- --------
Total from Investment Activities.............. 0.95 0.69
-------- --------
Distributions
Net investment income......................... (0.64) (0.53)
Net realized gains............................ (0.03) --
-------- --------
Total Distributions........................... (0.67) (0.53)
-------- --------
Net Asset Value, End of Period................. $ 10.44 $ 10.16
======== ========
Total Return................................... 9.69 % 7.15 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).............. $169,388 $138,319
Ratio of expenses to average net assets........ 0.42 % 0.23 %(c)
Ratio of net investment income to average net
assets........................................ 6.20 % 6.92 %(c)
Ratio of expenses to average net assets*....... 0.93 % 0.94 %(c)
Portfolio turnover**........................... 33.37 % 46.16 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
166
<PAGE>
THE ARCH FUND, INC.
Bond Index Portfolio
Financial Highlights, Institutional Shares
<TABLE>
<CAPTION>
For the February 10, 1997
year ended to
November 30, November 30,
1998 1997(a)
------------ -----------------
<S> <C> <C>
Net Asset Value, Beginning of Period........... $10.17 $10.00
------ ------
Investment Activities
Net investment income......................... 0.62 0.53
Net realized and unrealized gains from
investments.................................. 0.31 0.17
------ ------
Total from Investment Activities.............. 0.93 0.70
------ ------
Distributions
Net investment income......................... (0.62) (0.53)
Net realized gains............................ (0.03) --
------ ------
Total Distributions........................... (0.65) (0.53)
------ ------
Net Asset Value, End of Period................. $10.45 $10.17
====== ======
Total Return................................... 9.47 % 7.20 %(b)
Ratios/Supplementary Data:
Net Assets at end of period (000).............. $7,034 $ 27
Ratio of expenses to average net assets........ 0.79 % 0.24 %(c)
Ratio of net investment income to average net
assets........................................ 5.77 % 7.09 %(c)
Ratio of expenses to average net assets*....... 0.91 % 0.95 %(c)
Portfolio turnover**........................... 33.37 % 46.16 %
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued. (a) Period from
commencement of operations. (b) Not annualized. (c) Annualized.
167
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements
November 30, 1998
1.Organization
The ARCH Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company. As of November 30, 1998, the Fund offered shares in the
following investment portfolios: Money Market, Treasury Money Market, Tax-
Exempt Money Market, Growth & Income Equity, Small Cap Equity, International
Equity, Equity Income, Equity Index, Growth Equity, Balanced, Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond, National Municipal Bond, Intermediate Corporate
Bond and Bond Index Portfolios (referred to individually as a "Portfolio"
and collectively as the "Portfolios"). The Fund was organized as a Maryland
corporation on September 9, 1982. As of the date of this report, the Kansas
Tax-Exempt Bond, Small Cap Equity Index and Conning Money Market Portfolios
had not yet commenced operations.
The Portfolio's investment objectives are as follows:
Money Market Portfolio -- To seek current income with liquidity and
stability of principal. In pursuing its investment objective, the Portfolio
invests substantially all of its assets in a broad range of money market
instruments.
Treasury Money Market Portfolio -- To seek a high level of current income
exempt from state income tax consistent with liquidity and security of
principal. In pursuing its investment objective, the Portfolio invests in
selected money market obligations issued by the U.S. Government (or its
agencies and instrumentalities) that are guaranteed as to principal and
interest by the U.S. Government.
Tax-Exempt Money Market Portfolio -- To seek as high a level of current
interest income exempt from federal income tax as is consistent with
liquidity and stability of principal. The Portfolio invests substantially
all of its assets in short-term obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities ("Municipal Obligations").
Growth & Income Equity Portfolio -- To provide long-term capital growth,
with income a secondary consideration. In pursuing its investment objective,
the Portfolio normally invests substantially all of its assets in common
stock, preferred stock, rights, warrants and securities convertible into
common stock.
Small Cap Equity Portfolio -- To seek capital appreciation. Current income
is an incidental consideration in the selection of portfolio securities. In
pursuing its investment objective, the Portfolio normally invests at least
65% of its total assets in common stock of emerging or established small- to
medium-sized companies with above-average potential for price appreciation.
International Equity Portfolio -- To provide capital growth consistent with
reasonable investment risk. The Portfolio seeks to achieve this objective by
investing principally in foreign equity securities, most of which will be
denominated in foreign currencies.
Equity Income Portfolio -- To seek to provide an above-average level of
income consistent with long-term capital appreciation. In pursuing its
investment objective, the Portfolio normally invests substantially all of
its assets in common stock, preferred stock, rights, warrants, and
securities convertible into common stock.
Equity Index Portfolio -- To seek to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance
of U.S. publicly traded common stocks with large stock market
capitalizations, as represented by the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). The Portfolio will invest substantially all of
its assets in securities listed in the S&P 500.
Growth Equity Portfolio -- To seek capital appreciation. In pursuing its
investment objective, the Portfolio invests primarily in equity securities
of companies selected on the basis of assessment of earnings and the risk
and volatility of each company's business.
Balanced Portfolio -- To maximize total return through a combination of
growth of capital and current income consistent with the preservation of
capital. The Portfolio seeks to achieve its objective by using a disciplined
approach of allocating assets primarily among three major asset groups, i.e.
equity securities, fixed income securities and cash equivalents.
Government & Corporate Bond Portfolio -- To seek the highest level of
current income consistent with conservation of capital. In pursuing its
investment objective, the Portfolio normally invests substantially all of
its assets in a broad range of investment grade debt securities, including
bonds, notes, debentures and securities convertible into or exchangeable for
common stock.
Continued
168
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
U.S. Government Securities Portfolio -- To seek a high rate of current
income that is consistent with relative stability of principal. In pursuing
its investment objective, the Portfolio invests in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
normally having remaining maturities of 1 to 30 years and repurchase
agreements relating to such obligations.
Short-Intermediate Municipal Portfolio -- To seek as high a level of current
income, exempt from regular federal income tax, as is consistent with
preservation of capital. The Portfolio seeks to achieve its objective by
investing substantially all of its assets in investment grade Municipal
Obligations. Under normal market conditions, the Portfolio's average
weighted maturity will be between two and five years.
Missouri Tax-Exempt Bond Portfolio -- To seek as high a level of interest
income exempt from federal income tax as is consistent with conservation of
capital. In pursuing its investment objective, the Portfolio invests
substantially all of its assets in investment grade Missouri Municipal
Obligations, that are also exempt, to the extent possible, from Missouri
income tax.
National Municipal Bond Portfolio -- To seek as high a level of current
interest income exempt from federal income tax as is consistent with
conservation of capital. In pursuing its investment objective, the Portfolio
normally invests substantially all of its assets in investment grade
Municipal Obligations.
Intermediate Corporate Bond Portfolio -- To seek as high a level of current
income as is consistent with preservation of capital. In pursuing its
investment objective, the Portfolio will invest, under normal market and
economic conditions, at least 65% of its total assets in non-convertible
corporate debt obligations. Under normal market conditions, the Portfolio's
average weighted maturity will be between three and ten years.
Bond Index Portfolio -- To seek to provide investment results that, before
deduction of operating expenses, approximate the price and yield performance
of U.S. Government, mortgage-backed, asset-backed and corporate debt
securities as represented by the Lehman Brothers Aggregate Bond Index (the
"Lehman Aggregate"). The Portfolio will invest substantially all of its
assets in securities listed in the Lehman Aggregate.
2.Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses for
the period. Actual results could differ from these estimates.
Securities valuation:
The securities of the Money Market, Treasury Money Market and Tax-Exempt
Money Market Portfolios (collectively, "the money market portfolios") are
valued at amortized cost. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the market value of the instrument.
The securities of the Growth & Income Equity, Small Cap Equity,
International Equity, Equity Income, Equity Index, Growth Equity, Balanced,
Government & Corporate Bond, U.S. Government Securities, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Intermediate
Corporate Bond and Bond Index Portfolios (collectively, "the variable net
asset value portfolios") that are traded on a recognized exchange are valued
at the last sale price on the national securities market. Securities traded
only on over-the-counter markets are valued on the basis of market value
when available. Securities for which there were no transactions are valued
at the mean of the most recent bid and asked prices. Securities maturing in
60 days or less are valued at amortized cost. Securities, including
restricted securities, for which market quotations are not readily
available, are valued at fair market value by the investment adviser (or the
sub-investment adviser) in accordance with guidelines approved by the Fund's
Board of Directors. Quotations of foreign securities in foreign currency are
converted to the U.S. dollar equivalent at the prevailing exchange rate on
the date of conversion. Investments in investment companies are valued at
their respective net asset values as reported by such companies. The
differences between cost and market values of the investments of the
variable net asset value portfolios are reflected as unrealized appreciation
or depreciation.
Repurchase agreements:
The Portfolios may engage in repurchase agreement transactions. Under the
terms of a typical repurchase agreement, a Portfolio takes possession of an
underlying debt obligation subject to an obligation of the seller to
repurchase, and the Portfolio
Continued
169
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
to resell, the obligation at an agreed upon price and time, thereby
determining the yield during the Portfolio's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the
collateral exceeds at all times the total amount of the repurchase
obligation, including accrued interest. In the event of counterparty
default, the Portfolio has the right to use the collateral to offset losses
incurred. There is potential for loss to the Portfolio in the event the
Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period while the Portfolio
seeks to assert its rights. The Portfolios' investment adviser, acting under
the supervision of the Board of Directors, reviews the value of the
collateral and the creditworthiness of those banks and dealers with which
the Portfolios enter into repurchase agreements to evaluate potential risks.
Securities transactions and investment income:
Securities transactions are recorded on the trade date. Realized gains and
losses on investments sold are recorded on the identified cost basis.
Interest income, including accretion of discount and amortization of premium
on investments (where applicable), is accrued on a daily basis. Dividend
income is recorded on the ex-dividend date. Realized and unrealized gains
and losses are allocated based upon the relative net assets of each class of
shares.
Foreign currency translation:
The market value of investment securities, other assets and liabilities of
the International Equity, Equity Index and Growth Equity Portfolios
denominated in a foreign currency are translated into U.S. dollars at the
current exchange rate. Purchases and sales of securities, income receipts
and expense payments are translated into U.S. dollars at the exchange rate
on the dates of the transactions.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of foreign securities, sales of foreign currencies, currency
exchange fluctuations between the trade and settlement dates on securities
transactions, and the difference between the amount of assets and
liabilities recorded and the U.S. dollar equivalent of the amounts actually
received or paid. Net unrealized foreign exchange gains and losses arise
from changes in the value of assets and liabilities, including investments
in securities, resulting from changes in exchange rates.
Risks associated with foreign securities and currencies:
Investments in securities of foreign issuers carry certain risks not
ordinarily associated with investments in securities of domestic issuers.
Such risks include future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental laws
and restrictions. In addition, with respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political
or social instability or diplomatic developments which could adversely
affect investments in those countries.
Certain countries may also impose substantial restrictions on investments in
their capital markets by foreign entities, including restrictions on
investments in issuers of industries deemed sensitive to relevant national
interests. These factors may limit the investment opportunities available to
the International Equity, Equity Index and Growth Equity Portfolio or result
in a lack of liquidity and high price volatility with respect to securities
of issuers from developing countries.
Forward currency exchange contracts:
The International Equity Portfolio may enter into forward foreign currency
exchange contracts ("forwards"). A forward is an agreement between two
parties to buy and sell a currency at a set price on a future date. The
market value of the forward fluctuates with changes in currency exchange
rates. The forward is marked-to-market daily and the change in market value
is recorded by the Portfolio as unrealized appreciation or depreciation.
When the forward is closed, the Portfolio records a realized gain or loss
equal to the fluctuation in value during the period the forward was opened.
The Portfolio could be exposed to risk if a counterparty is unable to meet
the terms of a forward or if the value of the currency changes unfavorably.
The International Equity Portfolio may buy and sell securities denominated
in currencies other than the U.S. dollar, and receive interest, dividends
and sale proceeds in currencies other than the U.S. dollar. The Portfolio
may from time to time enter into foreign currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Portfolio may enter into
currency exchange transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or use forward
currency contracts to purchase or sell foreign currencies. Losses may arise
from changes in the value of the foreign currency or if the counterparties
do not perform under the contracts' terms.
Continued
170
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
Securities lending:
To increase return, Money Market, Treasury Money Market, Growth & Income
Equity, Small Cap Equity, International Equity, Equity Income, Equity Index,
Growth Equity, Balanced, Government & Corporate Bond, U.S. Government
Securities, Short-Intermediate Municipal, National Municipal Bond,
Intermediate Corporate Bond and Bond Index Portfolios may, from time to
time, lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities pursuant to agreements requiring that the loans be
continuously secured by collateral equal, at all times, in value to at least
the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. Government, or its agencies or
instrumentalities, irrevocable letters of credit, or any combination
thereof. The collateral must be valued daily and, should the market value of
the loaned securities increase, the borrower must furnish additional
collateral to the lending Portfolio. By lending its securities, a Portfolio
can increase its income by continuing to receive interest or dividends on
the loaned securities as well as either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. Government securities are used as collateral. Loans
are subject to termination by the Portfolio or the borrower at any time. The
risks to the Portfolios of securities lending are that the borrower may not
provide additional collateral when required or return the securities when
due. In addition, if cash collateral invested by a Portfolio is less than
the amount required to be returned to the borrower as a result of a decrease
in the value of the cash collateral investments, the Portfolio must
compensate the borrower for the deficiency. According to generally accepted
accounting principles, a statement of cash flows is presented if the
Portfolio lent, on average, more than 10% of net assets during the year. A
statement of cash flows is presented for each of the Portfolios listed
below. At November 30, 1998, the following Portfolios had securities with
the following market values on loan:
<TABLE>
<CAPTION>
Market Value of Market Value of
Portfolio Collateral Loaned Securities
--------- --------------- -----------------
<S> <C> <C>
Growth & Income Equity Portfolio.......... $39,888,900 $37,954,644
Small Cap Equity Portfolio................ 38,293,400 35,619,837
International Equity Portfolio............ 1,304,985 1,187,655
Equity Income Portfolio................... 3,586,300 3,480,564
Equity Index Portfolio.................... 783,372 747,965
Growth Equity Portfolio................... 4,081,470 3,960,721
Balanced Portfolio........................ 10,888,242 10,717,900
Government & Corporate Bond Portfolio..... 43,115,177 42,485,029
U.S. Government Securities Portfolio...... 17,353,589 17,053,547
Intermediate Corporate Bond Portfolio..... 6,409,130 6,380,380
Bond Index Portfolio...................... 45,597,230 44,687,782
</TABLE>
The loaned securities were fully collateralized by cash and U.S. Government
securities.
Dividends and distributions to shareholders:
Dividends on each share of the Portfolios are determined in the same manner,
irrespective of class, except that shares of each class may bear separate
fees under either a Distribution and Services Plan or an Administrative
Services Plan adopted for each class and enjoy certain exclusive voting
rights on matters relating to these fees. It is the policy of the Money
Market, Treasury Money Market, Tax-Exempt Money Market, Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond, National Municipal Bond, Intermediate Corporate
Bond, and Bond Index Portfolios to declare dividends daily from net
investment income and to pay such dividends no later than five business days
after the end of the month. Net investment income for the Growth & Income
Equity, Equity Income, Equity Index, Growth Equity and Balanced Portfolios
is declared and paid monthly as a dividend to shareholders of record. The
Small Cap Equity and International Equity Portfolios declare and pay
dividends from net investment income quarterly. Net realized capital gains
for each Portfolio, if any, are distributed at least annually. Additional
distributions of net investment income and capital gains may be made at the
discretion of the Board of Directors in order to avoid the 4% excise tax to
which a Portfolio is subject with respect to certain undistributed amounts
of net investment income and capital gains.
Distributions from net investment income and from net realized capital gains
are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are
reclassified within the composition of net assets based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Distributions to shareholders which exceed net investment income and net
realized capital gains for financial
Continued
171
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
reporting purposes but not for tax purposes are reported as distributions in
excess of net investment income or net realized gains. To the extent they
exceed net investment income and net realized gains for tax purposes, they
are reported as distributions of capital.
As of November 30, 1998, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to
capital:
<TABLE>
<CAPTION>
Undistributed
(distribution Accumulated
in excess) Net Realized
Net Investment Gain/(Loss)
Income On Investments
-------------- --------------
<S> <C> <C>
Growth & Income Equity Portfolio............... $ (147) $ 147
Small Cap Equity Portfolio..................... 518,575 --
International Equity Portfolio................. 219,469 (219,469)
Equity Income Portfolio........................ 5 (5)
Equity Index Portfolio......................... 2 (2)
Growth Equity Portfolio........................ 35,338 (28,402)
Balanced Portfolio............................. 38,469 (38,469)
Government & Corporate Bond Portfolio.......... 198,828 (198,828)
U.S. Government Securities Portfolio........... 73,916 (73,916)
Intermediate Corporate Bond Portfolio.......... 9,571 (9,571)
Bond Index Portfolio........................... 184,726 (184,726)
</TABLE>
Federal income taxes:
It is the policy of each of the Portfolios to continue to qualify as a
regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of net investment income
and net realized capital gains sufficient to relieve it from all, or
substantially all, federal income taxes.
For federal income tax purposes, the following Portfolios had capital loss
carryforwards as of November 30, 1998, which are available to offset future
capital gains, if any:
<TABLE>
<CAPTION>
Portfolio Amount Expires
--------- -------- -------
<S> <C> <C>
Money Market Portfolio...................................... $ 4,876 2003
========
U.S. Government Securities Portfolio........................ $325,257 2004
279,506 2005
89,429 2006
--------
$694,192
========
</TABLE>
Organization costs:
The Portfolios bear all costs in connection with their organization,
including the fees and expenses of registering and qualifying shares for
distribution under federal and state securities laws. All such costs are
amortized using the straight-line method over a period of five years from
the date each Portfolio commenced operations: from April 4, 1994 for the
International Equity Portfolio, from February 27, 1997 for the Equity Income
Portfolio, from May 1, 1997 for the Equity Index Portfolio, from November
18, 1996 for the National Municipal Bond Portfolio, and from February 10,
1997 for the Intermediate Corporate Bond Portfolio and the Bond Index
Portfolio. As of November 30, 1998, all costs were fully amortized for the
Money Market, Treasury Money Market, Tax-Exempt Money Market, Growth &
Income Equity, Small Cap Equity, Growth Equity, Balanced, Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
and Missouri Tax-Exempt Bond Portfolios.
Other:
Operating expenses of the Fund not directly attributable to a Portfolio or
to any class of shares of a Portfolio are prorated among the Portfolios
based on the relative net assets of each Portfolio or another appropriate
basis. Operating expenses directly attributable to a Portfolio or class are
charged directly to that Portfolio's or class' operations. Fees paid under
either a Distribution and Services Plan or an Administrative Services Plan
are borne by the specific class of shares to which such a Plan applies.
Continued
172
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
3.Shares of Common Stock
The Fund is authorized to issue five classes of shares in each Portfolio
(except as noted): Investor A Shares, Investor B Shares (except the Treasury
Money Market, Tax-Exempt Money Market, Equity Index, Short-Intermediate
Municipal, Intermediate Corporate Bond, Bond Index and Small Cap Equity
Index Portfolios), Trust Shares, Institutional Shares (except the Tax-Exempt
Money Market, Short-Intermediate Municipal, Missouri Tax-Exempt Bond,
National Municipal Bond and Kansas Tax-Exempt Bond Portfolios), and Trust II
Shares (except the Growth & Income Equity, Small Cap Equity, International
Equity, Equity Income, Equity Index, Growth Equity, Balanced, Government &
Corporate Bond, U.S. Government Securities, Short-Intermediate Municipal,
Missouri Tax-Exempt Bond, National Municipal Bond, Intermediate Corporate
Bond, Bond Index and Small Cap Equity Index Portfolios). Investor A shares
of the variable net asset value portfolios are sold with front-end sales
charges. Investor B Shares of the variable net asset value portfolios and
the Money Market Portfolio may be subject to contingent deferred sales
charges ("CDSC") on redemption based on the lesser of the net asset value of
the shares on the redemption date or the original cost of the shares
redeemed. The following table sets forth the time schedule of redemptions of
Investor B Shares subject to CDSC:
<TABLE>
<CAPTION>
CDSC
(percentage of
Number of Years amount subject
Elapsed Since Purchase to the charge)
---------------------- --------------
<S> <C>
One or less................................................... 5.0%
More than one, but less than two.............................. 4.0%
Two, but less than three...................................... 3.0%
Three, but less than four..................................... 3.0%
Four, but less than five...................................... 2.0%
Five, and up to and including six............................. 1.0%
More than six................................................. None
</TABLE>
Investor B Shares of the Money Market Portfolio are available for purchase
only by those investors participating in the ARCH Asset Advisor Program or
through exchanges of Investor B Shares of the variable net asset value
portfolios.
Each class of shares in a Portfolio has identical rights and privileges
except with respect to the fees that may be paid by a class under either a
Distribution and Services Plan or an Administrative Services Plan, expenses
allocable exclusively to each class of shares, voting rights on matters
affecting a single class of shares, the exchange privilege of each class of
shares, and the automatic conversion of Investor B Shares of a Portfolio
into Investor A Shares of that Portfolio eight years after purchase.
4.Capital Share Transactions
As of November 30, 1998, the Fund's Articles of Incorporation authorize the
Board of Directors, in its discretion, to issue up to twenty billion full
and fractional shares of capital stock, $.001 par value per share, and to
classify or reclassify any unissued shares of the Fund into one or more
additional classes.
Continued
173
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
Transactions in portfolio shares of the Fund were as follows:
<TABLE>
<CAPTION>
Money Market Treasury Money
Portfolio Market Portfolio
-------------------------------- ------------------------------
For the For the For the For the
year ended year ended year ended year ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 369,131,165 $ 309,755,097 $ 48,161,504 $ 18,452,906
Dividends reinvested... 8,108,346 5,145,284 585,498 276,548
Cost of shares
redeemed.............. (338,433,452) (241,289,100) (31,490,665) (17,987,741)
--------------- --------------- --------------- -------------
Investor A capital
transactions.......... $ 38,806,059 $ 73,611,281 $ 17,256,337 $ 741,713
--------------- --------------- --------------- -------------
Investor B Shares:
Proceeds from shares
issued................ $ 28,315 $ 46,996 $ -- $ --
Dividends reinvested... 2,973 2,791 -- --
Cost of shares
redeemed.............. (19,653) (18,022) -- --
--------------- --------------- --------------- -------------
Investor B capital
transactions.......... $ 11,635 $ 31,765 $ -- $ --
--------------- --------------- --------------- -------------
Trust Shares:
Proceeds from shares
issued................ $ 4,791,160,032 $ 4,112,502,624 $ 1,122,533,053 $ 974,965,197
Dividends reinvested... 23,556,177 15,379,414 3,790,157 3,220,851
Cost of shares
redeemed.............. (4,484,663,869) (3,802,997,661) (1,089,996,912) (825,860,764)
Cost of shares
exchanged to Trust II
Class................. (551,280,807) -- (74,019,033) --
--------------- --------------- --------------- -------------
Trust capital
transactions.......... $ (221,228,467) $ 324,884,377 $ (37,692,735) $ 152,325,284
--------------- --------------- --------------- -------------
Institutional Shares:
Proceeds from shares
issued................ $ 103,979,653 $ 70,987,898 $ 104,256 $ 714,908
Dividends reinvested... 90,233 45,325 -- 276
Cost of shares
redeemed.............. (97,556,608) (64,931,657) (100,839) (781,277)
--------------- --------------- --------------- -------------
Institutional capital
transactions.......... $ 6,513,278 $ 6,101,566 $ 3,417 $ (66,093)
--------------- --------------- --------------- -------------
Trust II Shares:
Proceeds from shares
issued................ $ 34,554,346 $ -- $ 14,518,252 $ --
Proceeds from shares
exchanged from Trust
Class................. 551,280,807 -- 74,019,033 --
Cost of shares
redeemed.............. (95,815,233) -- (11,538,744) --
--------------- --------------- --------------- -------------
Trust II capital
transactions.......... $ 490,019,920 $ -- $ 76,998,541 $ --
--------------- --------------- --------------- -------------
Total net increase from
capital transactions... $ 314,122,425 $ 404,628,989 $ 56,565,560 $ 153,000,904
=============== =============== =============== =============
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 369,131,165 309,755,097 48,161,504 18,452,906
Reinvested............. 8,108,346 5,145,284 585,498 276,548
Redeemed............... (338,433,452) (241,289,100) (31,490,665) (17,987,741)
--------------- --------------- --------------- -------------
Change in Investor A
Shares................ 38,806,059 73,611,281 17,256,337 741,713
--------------- --------------- --------------- -------------
Investor B Shares:
Issued................. 28,315 46,996 -- --
Reinvested............. 2,973 2,791 -- --
Redeemed............... (19,653) (18,022) -- --
--------------- --------------- --------------- -------------
Change in Investor B
Shares................ 11,635 31,765 -- --
--------------- --------------- --------------- -------------
Trust Shares:
Issued................. 4,791,160,032 4,112,502,624 1,122,533,053 974,965,197
Reinvested............. 23,556,177 15,379,414 3,790,157 3,220,851
Redeemed............... (4,484,663,869) (3,802,997,661) (1,089,996,912) (825,860,764)
Exchanged to Trust II.. (551,280,807) -- (74,019,033) --
--------------- --------------- --------------- -------------
Change in Trust
Shares................ (221,228,467) 324,884,377 (37,692,735) 152,325,284
--------------- --------------- --------------- -------------
Institutional Shares:
Issued................. 103,979,653 70,987,898 104,256 714,908
Reinvested............. 90,233 45,325 -- 276
Redeemed............... (97,556,608) (64,931,657) (100,839) (781,277)
--------------- --------------- --------------- -------------
Change in Institutional
Shares................ 6,513,278 6,101,566 3,417 (66,093)
--------------- --------------- --------------- -------------
Trust II Shares:
Issued................. 34,554,346 -- 14,518,252 --
Exchanged from Trust... 551,280,807 -- 74,019,033 --
Redeemed............... (95,815,233) -- (11,538,744) --
--------------- --------------- --------------- -------------
Change in Trust II
Shares................ 490,019,920 -- 76,998,541 --
--------------- --------------- --------------- -------------
Total net increase from
share transactions..... 314,122,425 404,628,989 56,565,560 153,000,904
=============== =============== =============== =============
</TABLE>
Continued
174
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Tax-Exempt Money Growth & Income
Market Portfolio Equity Portfolio
---------------------------- ---------------------------
For the For the For the For the
year ended year ended year ended year ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 12,090,297 $ 42,324,801 $ 8,253,738 $ 6,774,856
Dividends reinvested... 377,754 463,949 7,873,832 3,288,711
Cost of shares
redeemed.............. (14,276,326) (44,984,145) (9,602,068) (7,579,480)
------------- ------------- ------------ -------------
Investor A capital
transactions.......... $ (1,808,275) $ (2,195,395) $ 6,525,502 $ 2,484,087
------------- ------------- ------------ -------------
Investor B Shares:
Proceeds from shares
issued................ $ -- $ -- $ 3,007,678 $ 2,201,422
Dividends reinvested... -- -- 1,071,581 296,096
Cost of shares
redeemed.............. -- -- (863,083) (415,984)
------------- ------------- ------------ -------------
Investor B capital
transactions.......... $ -- $ -- $ 3,216,176 $ 2,081,534
------------- ------------- ------------ -------------
Trust Shares:
Proceeds from shares
issued................ $ 464,895,774 $ 335,656,279 $ 33,917,244 $ 68,543,364
Dividends reinvested... 594,675 377,277 32,021,641 22,757,271
Cost of shares
redeemed.............. (449,390,916) (288,242,067) (61,216,142) (151,166,803)
Cost of shares
exchanged to Trust II
Class................. (122,075,517) -- -- --
------------- ------------- ------------ -------------
Trust capital
transactions.......... $(105,975,984) $ 47,791,489 $ 4,722,743 $ (59,866,168)
------------- ------------- ------------ -------------
Institutional Shares:
Proceeds from shares
issued................ $ -- $ -- $ 23,093,110 $ 16,152,636
Dividends reinvested... -- -- 16,261,081 6,370,055
Cost of shares
redeemed.............. -- -- (16,890,600) (14,151,970)
------------- ------------- ------------ -------------
Institutional capital
transactions.......... $ -- $ -- $ 22,463,591 $ 8,370,721
------------- ------------- ------------ -------------
Trust II Shares:
Proceeds from shares
issued................ $ 7,223,254 $ -- $ -- $ --
Proceeds from shares
exchanged from Trust
Class................. 122,075,517 -- -- --
Cost of shares
redeemed.............. (7,188,947) -- -- --
------------- ------------- ------------ -------------
Trust II capital
transactions.......... $ 122,109,824 $ -- $ -- $ --
------------- ------------- ------------ -------------
Total net increase
(decrease) from capital
transactions........... $ 14,325,565 $ 45,596,094 $ 36,928,012 $ (46,929,826)
============= ============= ============ =============
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 12,090,297 42,324,801 436,393 358,479
Reinvested............. 377,754 463,949 439,721 191,757
Redeemed............... (14,276,326) (44,984,145) (517,451) (402,496)
------------- ------------- ------------ -------------
Change in Investor A
Shares................ (1,808,275) (2,195,395) 358,663 147,740
------------- ------------- ------------ -------------
Investor B Shares:
Issued................. -- -- 162,335 116,804
Reinvested............. -- -- 60,550 17,441
Redeemed............... -- -- (47,550) (21,377)
------------- ------------- ------------ -------------
Change in Investor B
Shares................ -- -- 175,335 112,868
------------- ------------- ------------ -------------
Trust Shares:
Issued................. 464,895,774 335,656,279 1,839,159 3,808,036
Reinvested............. 594,675 377,277 1,779,849 1,324,519
Redeemed............... (449,390,916) (288,242,067) (3,254,921) (8,530,932)
Exchanged to Trust II.. (122,075,517) -- -- --
------------- ------------- ------------ -------------
Change in Trust
Shares................ (105,975,984) 47,791,489 364,087 (3,398,377)
------------- ------------- ------------ -------------
Institutional Shares:
Issued................. -- -- 1,227,134 845,760
Reinvested............. -- -- 908,077 371,256
Redeemed............... -- -- (915,773) (744,988)
------------- ------------- ------------ -------------
Change in Institutional
Shares................ -- -- 1,219,438 472,028
------------- ------------- ------------ -------------
Trust II Shares:
Issued................. 7,223,254 -- -- --
Exchanged from Trust... 122,075,517 -- -- --
Redeemed............... (7,188,947) -- -- --
------------- ------------- ------------ -------------
Change in Trust II
Shares................ 122,109,824 -- -- --
------------- ------------- ------------ -------------
Total net increase
(decrease) from share
transactions........... 14,325,565 45,596,094 2,117,523 (2,665,741)
============= ============= ============ =============
</TABLE>
Continued
175
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Small Cap International
Equity Portfolio Equity Portfolio
-------------------------- --------------------------
For the For the For the For the
year ended year ended year ended year ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 62,836,410 $ 8,477,400 $ 669,346 $ 713,643
Dividends reinvested... 1,205,204 843,177 115,278 77,495
Cost of shares
redeemed.............. (63,487,066) (10,564,564) (793,880) (510,586)
------------ ------------ ------------ -----------
Investor A capital
transactions.......... $ 554,548 $ (1,243,987) $ (9,256) $ 280,552
------------ ------------ ------------ -----------
Investor B Shares:
Proceeds from shares
issued................ $ 270,135 $ 299,657 $ 82,490 $ 203,253
Dividends reinvested... 121,308 78,176 21,431 12,225
Cost of shares
redeemed.............. (238,491) (299,685) (103,597) (83,552)
------------ ------------ ------------ -----------
Investor B capital
transactions.......... $ 152,952 $ 78,148 $ 324 $ 131,926
------------ ------------ ------------ -----------
Trust Shares:
Proceeds from shares
issued................ $ 33,509,356 $ 31,937,921 $ 9,713,711 $ 8,443,834
Dividends reinvested... 14,925,021 9,158,530 1,287,283 829,252
Cost of shares
redeemed.............. (84,328,666) (23,554,423) (11,380,648) (6,194,325)
------------ ------------ ------------ -----------
Trust capital
transactions.......... $(35,894,289) $ 17,542,028 $ (379,654) $ 3,078,761
------------ ------------ ------------ -----------
Institutional Shares:
Proceeds from shares
issued................ $ 6,699,479 $ 7,060,546 $ 1,608,783 $ 2,118,356
Dividends reinvested... 2,804,840 1,847,189 284,724 182,813
Cost of shares
redeemed.............. (11,894,695) (8,516,957) (1,367,826) (1,491,470)
------------ ------------ ------------ -----------
Institutional capital
transactions.......... $ (2,390,376) $ 390,778 $ 525,681 $ 809,699
------------ ------------ ------------ -----------
Total net increase
(decrease) from capital
transactions........... $(37,577,165) $ 16,766,967 $ 137,095 $ 4,300,938
============ ============ ============ ===========
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 4,479,389 562,627 53,156 59,032
Reinvested............. 86,209 66,550 9,678 6,635
Redeemed............... (4,532,914) (719,822) (63,267) (41,200)
------------ ------------ ------------ -----------
Change in Investor A
Shares................ 32,684 (90,645) (433) 24,467
------------ ------------ ------------ -----------
Investor B Shares:
Issued................. 19,015 21,436 6,571 16,938
Reinvested............. 8,861 6,249 1,838 1,068
Redeemed............... (18,329) (21,821) (8,070) (6,957)
------------ ------------ ------------ -----------
Change in Investor B
Shares................ 9,547 5,864 339 11,049
------------ ------------ ------------ -----------
Trust Shares:
Issued................. 2,367,416 2,220,381 735,639 687,342
Reinvested............. 1,057,013 718,294 106,889 70,409
Redeemed............... (6,589,617) (1,691,027) (867,651) (510,626)
------------ ------------ ------------ -----------
Change in Trust
Shares................ (3,165,188) 1,247,648 (25,123) 247,125
------------ ------------ ------------ -----------
Institutional Shares:
Issued................. 497,497 517,342 123,011 171,752
Reinvested............. 201,352 146,372 23,946 15,683
Redeemed............... (875,928) (620,536) (106,702) (123,206)
------------ ------------ ------------ -----------
Change in Institutional
Shares................ (177,079) 43,178 40,255 64,229
------------ ------------ ------------ -----------
Total net increase
(decrease) from share
transactions........... (3,300,036) 1,206,045 15,038 346,870
============ ============ ============ ===========
</TABLE>
Continued
176
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Equity Income Equity Index
Portfolio Portfolio
-------------------------- --------------------------
For the February 27, For the May 1,
year ended 1997 to year ended 1997 to
November 30, November 30, November 30, November 30,
1998 1997 (a) 1998 1997 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 1,761,480 $ 191,357 $ 1,026,183 $ 203,713
Dividends reinvested... 18,088 556 3,332 113
Cost of shares
redeemed.............. (250,017) (35,756) (421,139) (3,426)
------------ ------------ ----------- -----------
Investor A capital
transactions.......... $ 1,529,551 $ 156,157 $ 608,376 $ 200,400
------------ ------------ ----------- -----------
Investor B Shares:
Proceeds from shares
issued................ $ 390,433 $ 131,061 $ -- $ --
Dividends reinvested... 11,692 216 -- --
Cost of shares
redeemed.............. (1,176) (2,752) -- --
------------ ------------ ----------- -----------
Investor B capital
transactions.......... $ 400,949 $ 128,525 $ -- $ --
------------ ------------ ----------- -----------
Trust Shares:
Proceeds from shares
issued................ $ 20,648,865 $125,128,668 $11,679,817 $26,727,245
Dividends reinvested... 716,518 40,883 429,831 204,335
Cost of shares
redeemed.............. (26,119,236) (11,607,549) (1,325,214) (49,547)
------------ ------------ ----------- -----------
Trust capital
transactions.......... $ (4,753,853) $113,562,002 $10,784,434 $26,882,033
------------ ------------ ----------- -----------
Institutional Shares:
Proceeds from shares
issued................ $ 32,901 $ 1,000 $12,290,722 $ 7,400
Dividends reinvested... 354 17 36,633 21
Cost of shares
redeemed.............. (689) -- (2,130,758) --
------------ ------------ ----------- -----------
Institutional capital
transactions.......... $ 32,566 $ 1,017 $10,196,597 $ 7,421
------------ ------------ ----------- -----------
Total net increase
(decrease) from capital
transactions........... $ (2,790,787) $113,847,701 $21,589,407 $27,089,854
============ ============ =========== ===========
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 174,550 18,368 76,360 17,532
Reinvested............. 1,867 51 257 10
Redeemed............... (24,476) (3,415) (31,001) (294)
------------ ------------ ----------- -----------
Change in Investor A
Shares................ 151,941 15,004 45,616 17,248
------------ ------------ ----------- -----------
Investor B Shares:
Issued................. 38,340 11,596 -- --
Reinvested............. 1,215 19 -- --
Redeemed............... (120) (232) -- --
------------ ------------ ----------- -----------
Change in Investor B
Shares................ 39,435 11,383 -- --
------------ ------------ ----------- -----------
Trust Shares:
Issued................. 2,045,276 12,516,793 855,554 2,648,917
Reinvested............. 74,222 3,805 33,350 18,011
Redeemed............... (2,609,855) (1,110,408) (98,535) (4,260)
------------ ------------ ----------- -----------
Change in Trust
Shares................ (490,357) 11,410,190 790,369 2,662,668
------------ ------------ ----------- -----------
Institutional Shares:
Issued................. 3,338 100 902,102 667
Reinvested............. 37 2 2,765 2
Redeemed............... (63) -- (152,943) --
------------ ------------ ----------- -----------
Change in Institutional
Shares................ 3,312 102 751,924 669
------------ ------------ ----------- -----------
Total net increase
(decrease) from share
transactions........... (295,669) 11,436,679 1,587,909 2,680,585
============ ============ =========== ===========
</TABLE>
- -----
(a) Period from commencement of operations.
Continued
177
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Growth Equity Balanced
Portfolio Portfolio
----------------------------------------- --------------------------
Year October 1, Year Year Year
Ended 1997 to Ended Ended Ended
November 30, November 30, September 30, November 30, November 30,
1998 1997 1997 (a) 1998 1997
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 1,408,296 $ 994,408 $ 15,587,127 $ 1,952,086 $ 1,537,501
Dividends reinvested... 670 8,110,971 407,045 1,321,383 806,963
Cost of shares
redeemed.............. (851,631) (1,988,138) (16,843,944) (2,087,639) (2,329,861)
Cost of shares
exchanged to Trust
Class................. -- (63,119,438) -- -- --
------------ ------------ ------------ ------------ ------------
Investor A capital
transactions.......... $ 557,335 $(56,002,197) $ (849,772) $ 1,185,830 $ 14,603
------------ ------------ ------------ ------------ ------------
Investor B Shares:
Proceeds from shares
issued................ $ 233,145 $ 10 $ -- $ 896,972 $ 194,146
Dividends reinvested... -- -- -- 63,058 24,803
Cost of shares
redeemed.............. (672) -- -- (168,036) (51,667)
------------ ------------ ------------ ------------ ------------
Investor B capital
transactions.......... $ 232,473 $ 10 $ -- $ 791,994 $ 167,282
------------ ------------ ------------ ------------ ------------
Trust Shares:
Proceeds from shares
issued................ $ 30,607,289 $ 142,980 $ -- $ 5,005,922 $ 11,210,581
Proceeds from shares
exchanged from
Investor A Class...... -- 63,119,438 -- -- --
Dividends reinvested... 3,491 -- -- 6,833,201 4,843,545
Cost of shares
redeemed.............. (30,091,260) -- -- (20,235,380) (25,276,653)
------------ ------------ ------------ ------------ ------------
Trust capital
transactions.......... $ 519,520 $ 63,262,418 $ -- $ (8,396,257) $ (9,222,527)
------------ ------------ ------------ ------------ ------------
Institutional Shares:
Proceeds from shares
issued................ $ 7,252,607 $ 10 $ -- $ 20,666,805 $ 13,196,103
Dividends reinvested... 2,352 -- -- 8,365,996 4,854,948
Cost of shares
redeemed.............. (605,305) -- -- (16,796,846) (14,889,355)
------------ ------------ ------------ ------------ ------------
Institutional capital
transactions.......... $ 6,649,654 $ 10 $ -- $ 12,235,955 $ 3,161,696
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from capital
transactions........... $ 7,958,982 $ 7,260,241 $ (849,772) $ 5,817,522 $ (5,878,946)
============ ============ ============ ============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 76,996 53,783 993,820 155,857 126,661
Reinvested............. 40 502,850 26,717 110,135 67,585
Redeemed............... (47,765) (108,433) (1,032,878) (170,222) (187,760)
Exchanged to Trust..... -- (3,913,170) -- -- --
------------ ------------ ------------ ------------ ------------
Change in Investor A
Shares................ 29,271 (3,464,970) (12,341) 95,770 6,486
------------ ------------ ------------ ------------ ------------
Investor B Shares:
Issued................. 12,745 1 -- 71,467 15,906
Reinvested............. -- -- -- 5,311 2,094
Redeemed............... (12) -- -- (13,695) (4,025)
------------ ------------ ------------ ------------ ------------
Change in Investor B
Shares................ 12,733 1 -- 63,083 13,975
------------ ------------ ------------ ------------ ------------
Trust Shares:
Issued................. 1,790,724 8,833 -- 405,688 881,762
Exchanged from Investor
A..................... -- 3,913,170 -- -- --
Reinvested............. 209 -- -- 569,093 405,996
Redeemed............... (1,667,394) -- -- (1,602,992) (2,111,332)
------------ ------------ ------------ ------------ ------------
Change in Trust
Shares................ 123,539 3,922,003 -- (628,211) (823,574)
------------ ------------ ------------ ------------ ------------
Institutional Shares:
Issued................. 420,420 1 -- 1,641,322 1,083,548
Reinvested............. 141 -- -- 699,538 407,674
Redeemed............... (32,897) -- -- (1,366,437) (1,193,788)
------------ ------------ ------------ ------------ ------------
Change in Institutional
Shares................ 387,664 1 -- 974,423 297,434
------------ ------------ ------------ ------------ ------------
Total net increase
(decrease) from share
transactions........... 553,207 457,035 (12,341) 505,065 (505,679)
============ ============ ============ ============ ============
</TABLE>
- -----
(a) Formerly the Arrow Equity Portfolio.
Continued
178
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Government & Corporate U.S. Government
Bond Portfolio Securities Portfolio
-------------------------- --------------------------
For the For the For the For the
year ended year ended year ended year ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 1,073,322 $ 27,165,642 $ 598,045 $ 168,375
Dividends reinvested... 195,042 209,221 216,677 283,177
Cost of shares
redeemed.............. (1,272,958) (27,531,566) (1,384,902) (2,371,476)
------------ ------------ ------------ ------------
Investor A capital
transactions.......... $ (4,594) $ (156,703) $ (570,180) $ (1,919,924)
------------ ------------ ------------ ------------
Investor B Shares:
Proceeds from shares
issued................ $ 263,150 $ 83,288 $ 86,346 $ 135,748
Dividends reinvested... 23,945 21,312 13,439 17,529
Cost of shares
redeemed.............. (192,748) (74,060) (420,240) (46,020)
------------ ------------ ------------ ------------
Investor B capital
transactions.......... $ 94,347 $ 30,540 $ (320,455) $ 107,257
------------ ------------ ------------ ------------
Trust Shares:
Proceeds from shares
issued................ $ 24,828,565 $ 51,290,657 $ 30,579,477 $ 23,128,193
Dividends reinvested... 4,210,194 4,152,833 2,016,378 2,017,395
Cost of shares
redeemed.............. (29,074,053) (24,790,124) (12,702,582) (12,278,294)
------------ ------------ ------------ ------------
Trust capital
transactions.......... $ (35,294) $ 30,653,366 $ 19,893,273 $ 12,867,294
------------ ------------ ------------ ------------
Institutional Shares:
Proceeds from shares
issued................ $ 8,543,150 $ 3,950,530 $ 914,079 $ 6,239,041
Dividends reinvested... 1,034,861 864,537 350,232 271,123
Cost of shares
redeemed.............. (6,380,539) (2,808,156) (2,247,540) (1,754,631)
------------ ------------ ------------ ------------
Institutional capital
transactions.......... $ 3,197,472 $ 2,006,911 $ (983,229) $ 4,755,533
------------ ------------ ------------ ------------
Total net increase from
capital transactions... $ 3,251,931 $ 32,534,114 $ 18,019,409 $ 15,810,160
============ ============ ============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 100,976 2,622,237 55,916 15,979
Reinvested............. 18,575 20,596 20,307 26,840
Redeemed............... (121,166) (2,657,122) (130,027) (225,337)
------------ ------------ ------------ ------------
Change in Investor A
Shares................ (1,615) (14,289) (53,804) (182,518)
------------ ------------ ------------ ------------
Investor B Shares:
Issued................. 24,974 8,280 8,112 12,926
Reinvested............. 2,273 2,096 1,262 1,663
Redeemed............... (18,261) (7,198) (39,439) (4,364)
------------ ------------ ------------ ------------
Change in Investor B
Shares................ 8,986 3,178 (30,065) 10,225
------------ ------------ ------------ ------------
Trust Shares:
Issued................. 2,368,897 4,998,391 2,865,536 2,196,909
Reinvested............. 400,135 408,777 188,932 191,147
Redeemed............... (2,765,360) (2,438,301) (1,185,489) (1,166,692)
------------ ------------ ------------ ------------
Change in Trust
Shares................ 3,672 2,968,867 1,868,979 1,221,364
------------ ------------ ------------ ------------
Institutional Shares:
Issued................. 812,395 388,441 85,774 599,173
Reinvested............. 98,298 85,077 32,938 25,777
Redeemed............... (606,407) (277,121) (211,334) (168,592)
------------ ------------ ------------ ------------
Change in Institutional
Shares................ 304,286 196,397 (92,622) 456,358
------------ ------------ ------------ ------------
Total net increase from
share transactions..... 315,329 3,154,153 1,692,488 1,505,429
============ ============ ============ ============
</TABLE>
Continued
179
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Short-Intermediate Missouri Tax-Exempt
Municipal Portfolio Bond Portfolio
-------------------------- --------------------------
For the For the For the For the
year ended year ended year ended year ended
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 91,194 $ 205,699 $ 8,058,003 $ 1,499,109
Dividends reinvested... 695 1,147 664,422 789,615
Cost of shares
redeemed.............. (76,439) (240,296) (9,227,642) (4,057,694)
----------- ----------- ------------ -----------
Investor A capital
transactions.......... $ 15,450 $ (33,450) $ (505,217) $(1,768,970)
----------- ----------- ------------ -----------
Investor B Shares:
Proceeds from shares
issued................ $ -- $ -- $ 1,092,950 $ 789,463
Dividends reinvested... -- -- 40,473 20,926
Cost of shares
redeemed.............. -- -- (67,539) (111,171)
----------- ----------- ------------ -----------
Investor B capital
transactions.......... $ -- $ -- $ 1,065,884 $ 699,218
----------- ----------- ------------ -----------
Trust Shares:
Proceeds from shares
issued................ $17,180,260 $ 5,241,935 $ 29,963,656 $23,929,592
Dividends reinvested... 41,199 43,196 293,425 330,429
Cost of shares
redeemed.............. (5,386,222) (4,369,507) (12,739,018) (5,967,692)
----------- ----------- ------------ -----------
Trust capital
transactions.......... $11,835,237 $ 915,624 $ 17,518,063 $18,292,329
----------- ----------- ------------ -----------
Total net increase from
capital transactions... $11,850,687 $ 882,174 $ 18,078,730 $17,222,577
=========== =========== ============ ===========
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 8,936 20,507 670,226 128,988
Reinvested............. 69 114 55,450 67,767
Redeemed............... (7,537) (24,107) (768,730) (349,719)
----------- ----------- ------------ -----------
Change in Investor A
Shares................ 1,468 (3,486) (43,054) (152,964)
----------- ----------- ------------ -----------
Investor B Shares:
Issued................. -- -- 91,170 67,907
Reinvested............. -- -- 3,378 1,790
Redeemed............... -- -- (5,627) (9,625)
----------- ----------- ------------ -----------
Change in Investor B
Shares................ -- -- 88,921 60,072
----------- ----------- ------------ -----------
Trust Shares:
Issued................. 1,690,577 521,384 2,498,522 2,053,156
Reinvested............. 4,053 4,303 24,481 28,328
Redeemed............... (529,634) (436,228) (1,061,071) (510,882)
----------- ----------- ------------ -----------
Change in Trust
Shares................ 1,164,996 89,459 1,461,932 1,570,602
----------- ----------- ------------ -----------
Total net increase from
share transactions..... 1,166,464 85,973 1,507,799 1,477,710
=========== =========== ============ ===========
</TABLE>
Continued
180
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
National Municipal Intermediate Corporate
Bond Portfolio Bond Portfolio
-------------------------- --------------------------
For the For the For the February 10,
year ended year ended year ended 1997 to
November 30, November 30, November 30, November 30,
1998 1997 1998 1997 (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares
issued................ $ 5,610,776 $ 13,770,069 $ 126,081 $ 270,045
Dividends reinvested... 30,349 3,680 8,954 2,019
Cost of shares
redeemed.............. (5,146,749) (13,076,003) (131,756) --
------------ ------------ ----------- -----------
Investor A capital
transactions.......... $ 494,376 $ 697,746 $ 3,279 $ 272,064
------------ ------------ ----------- -----------
Investor B Shares:
Proceeds from shares
issued................ $ 155,450 $ 411,518 $ -- $ --
Dividends reinvested... 28,030 1,479 -- --
Cost of shares
redeemed.............. (87,475) (6,295) -- --
------------ ------------ ----------- -----------
Investor B capital
transactions.......... $ 96,005 $ 406,702 $ -- $ --
------------ ------------ ----------- -----------
Trust Shares:
Proceeds from shares
issued................ $ 50,829,327 $ 60,718,167 $15,273,048 $47,591,097
Dividends reinvested... 66,825 10,473 226,772 96,442
Cost of shares
redeemed.............. (32,039,465) (12,338,741) (5,668,388) (3,610,853)
------------ ------------ ----------- -----------
Trust capital
transactions.......... $ 18,856,687 $ 48,389,899 $ 9,831,432 $44,076,686
------------ ------------ ----------- -----------
Institutional Shares:
Proceeds from shares
issued................ $ -- $ -- $ 1,037,580 $ 26,700
Dividends reinvested... -- -- 31,339 354
------------ ------------ ----------- -----------
Institutional capital
transactions.......... $ -- $ -- $ 1,068,919 $ 27,054
------------ ------------ ----------- -----------
Total net increase from
capital transactions... $ 19,447,068 $ 49,494,347 $10,903,630 $44,375,804
============ ============ =========== ===========
SHARE TRANSACTIONS:
Investor A Shares:
Issued................. 546,540 1,349,188 12,264 27,183
Reinvested............. 3,011 366 883 201
Redeemed............... (505,742) (1,279,833) (12,956) --
------------ ------------ ----------- -----------
Change in Investor A
Shares................ 43,809 69,721 191 27,384
------------ ------------ ----------- -----------
Investor B Shares:
Issued................. 15,272 40,048 -- --
Reinvested............. 2,789 144 -- --
Redeemed............... (8,630) (617) -- --
------------ ------------ ----------- -----------
Change in Investor B
Shares................ 9,431 39,575 -- --
------------ ------------ ----------- -----------
Trust Shares:
Issued................. 5,033,227 6,018,490 1,515,729 4,752,205
Reinvested............. 6,637 1,035 22,405 9,712
Redeemed............... (3,162,200) (1,229,913) (559,371) (363,897)
------------ ------------ ----------- -----------
Change in Trust
Shares................ 1,877,664 4,789,612 978,763 4,398,020
------------ ------------ ----------- -----------
Institutional Shares:
Issued................. -- -- 103,447 2,678
Reinvested............. -- -- 3,075 35
------------ ------------ ----------- -----------
Change in Institutional
Shares................ -- -- 106,522 2,713
------------ ------------ ----------- -----------
Total net increase from
share transactions..... 1,930,904 4,898,908 1,085,476 4,428,117
============ ============ =========== ===========
</TABLE>
- -----
(a) Period from commencement of operations.
Continued
181
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
<TABLE>
<CAPTION>
Bond Index
Portfolio
--------------------------
For the February 10,
year ended 1997 to
November 30, November 30,
1998 1997 (a)
------------ ------------
<S> <C> <C>
CAPITAL TRANSACTIONS:
Investor A Shares:
Proceeds from shares issued........................ $ 364,368 $ 249,869
Dividends reinvested............................... 1,014 878
Cost of shares redeemed............................ (62,757) (198,047)
------------ ------------
Investor A capital transactions.................... $ 302,625 $ 52,700
------------ ------------
Trust Shares:
Proceeds from shares issued........................ $ 43,217,137 $141,965,580
Dividends reinvested............................... 194,002 64,546
Cost of shares redeemed............................ (16,708,602) (5,562,846)
------------ ------------
Trust capital transactions......................... $ 26,702,537 $136,467,280
------------ ------------
Institutional Shares:
Proceeds from shares issued........................ $ 7,831,631 $ 36,865
Dividends reinvested............................... 217,713 454
Cost of shares redeemed............................ (1,189,468) (10,305)
------------ ------------
Institutional capital transactions................. $ 6,859,876 $ 27,014
------------ ------------
Total net increase from capital transactions........ $ 33,865,038 $136,546,994
============ ============
SHARE TRANSACTIONS:
Investor A Shares:
Issued............................................. 35,481 25,427
Reinvested......................................... 98 89
Redeemed........................................... (6,103) (20,139)
------------ ------------
Change in Investor A Shares........................ 29,476 5,377
------------ ------------
Trust Shares:
Issued............................................. 4,219,358 14,163,934
Reinvested......................................... 18,881 6,471
Redeemed........................................... (1,627,721) (556,016)
------------ ------------
Change in Trust Shares............................. 2,610,518 13,614,389
------------ ------------
Institutional Shares:
Issued............................................. 765,633 3,679
Reinvested......................................... 21,111 45
Redeemed........................................... (116,316) (1,021)
------------ ------------
Change in Institutional Shares..................... 670,428 2,703
------------ ------------
Total net increase from share transactions.......... 3,310,422 13,622,469
============ ============
</TABLE>
- -----
(a) Period from commencement of operations.
Continued
182
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
5.Purchases and Sales of Investment Securities
Purchases and sales of securities (excluding short-term securities) during
the year ended November 30, 1998 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales
--------- --------
<S> <C> <C>
Growth & Income Equity................................... $407,767 $450,287
Small Cap Equity......................................... 157,821 225,875
International Equity..................................... 61,927 61,807
Equity Income............................................ 107,406 133,051
Equity Index............................................. 28,078 6,845
Growth Equity............................................ 47,682 56,708
Balanced................................................. 56,254 56,984
Government & Corporate Bond.............................. 181,352 174,210
U.S. Government Securities............................... 82,024 48,247
Short-Intermediate Municipal............................. 15,248 6,827
Missouri Tax-Exempt Bond................................. 19,359 6,201
National Municipal Bond.................................. 67,006 71,998
Intermediate Corporate Bond.............................. 12,583 5,009
Bond Index............................................... 84,440 51,847
</TABLE>
6.Related Party Transactions
Investment advisory services are provided to the Fund by Mississippi Valley
Advisors Inc. ("MVA"), a wholly-owned subsidiary of Mercantile Bank National
Association ("Mercantile"), which in turn is a wholly-owned subsidiary of
Mercantile Bancorporation Inc. Under the terms of the investment advisory
agreement, MVA is entitled to receive fees from each Portfolio based on a
percentage of the average daily net assets of that Portfolio. Mercantile
serves as custodian for the Fund. Under the terms of the custodian
agreement, Mercantile receives fees computed at .03% (.0125% for the Money
Market Portfolios) of the average daily net assets of each Portfolio.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
is an Ohio limited partnership. BISYS Fund Services Ohio, Inc. (the
"Company") and BISYS are subsidiaries of The BISYS Group, Inc.
The Company, with whom certain officers of the Fund are affiliated, serves
the Fund as administrator. Such officers are paid no fees directly by the
Portfolios for serving as officers of the Fund. Under the terms of the
administration agreement, the Company receives fees computed at 0.20% (0.10%
for the Tax-Exempt Money Market Portfolio) of the average daily net assets
of each Portfolio. The Company also serves as transfer agent to the Fund.
BISYS serves as the Fund's distributor and is entitled to receive
commissions on sales of Investor A Shares and Investor B Shares of the
variable net asset value portfolios. For the period ended November 30, 1998,
BISYS received approximately $395,404 commissions earned on sales of
Investor A Shares and $233,997 from commissions earned on redemptions of
Investor B Shares. BISYS re-allowed $578,041 to dealers of the Fund's
shares.
With respect to Investor A Shares of the Portfolios, the Fund has adopted a
Distribution and Services Plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. Under the Plan, each Portfolio may pay (i) up to 0.10% of the
average daily net assets of each Portfolio's outstanding Investor A Shares
to BISYS or another organization for distribution services performed and
expenses assumed relating to the Portfolio's Investor A shares and (ii) up
to 0.20% (0.15% for the money market portfolios) of the average daily net
assets of each Portfolio's outstanding Investor A Shares to broker-dealers
and other organizations for shareholder administrative services provided
pursuant to servicing agreements under the Plan.
Similarly, with respect to Investor B Shares, the Fund has adopted a
Distribution and Services Plan (the "Plan B") pursuant to Rule 12b-1 under
the 1940 Act. Under Plan B, a Portfolio may pay (i) up to 0.75% of the
average daily net assets of the Portfolio's outstanding Investor B Shares to
BISYS or another organization for distribution services performed and
expenses assumed relating to the Portfolio's Investor B Shares and (ii) up
to 0.25% of the average daily net assets of the Portfolio's Investor B
Shares to broker-dealers and other organizations for shareholder
administrative services provided pursuant to servicing agreements under Plan
B.
With respect to Trust and Institutional Shares of the Portfolios, the Fund
has adopted separate Administrative Services Plans pursuant to which a
Portfolio may pay banks and other financial institutions, which have agreed
to provide certain shareholder
Continued
183
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
administrative services for their clients or account holders, servicing fees
of up to 0.30% (0.25% for the money market portfolios) of the average daily
net assets of the Portfolio's outstanding Trust or Institutional Shares,
respectively.
Fees may be voluntarily reduced to assist the Portfolios in maintaining more
competitive expense ratios.
Information regarding these transactions is as follows for the year ended
November 30, 1998:
<TABLE>
<CAPTION>
Administrative
Services
Investment Advisory Administration Custodian Fees -- Trust
Fees Fees Fees Shares
--------------------- -------------- ---------- --------------
Annual
fee before
voluntary Voluntary Voluntary Voluntary Voluntary
fee fee fee fee fee
reductions reductions reductions reductions reductions
---------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Money Market Portfolio.. 0.40% $690,964 $1,381,778 $ -- $1,449,922
Treasury Money Market
Portfolio.............. 0.40% 140,506 280,909 -- 416,134
Tax-Exempt Money Market
Portfolio.............. 0.40% 85,029 -- -- 299,701
Growth & Income Equity
Portfolio.............. 0.55% -- 471,900 -- 939,960
Small Cap Equity
Portfolio.............. 0.75% -- 236,844 -- 572,617
International Equity
Portfolio.............. 1.00% -- 73,109 55,732 185,195
Equity Income
Portfolio.............. 0.75% 280,161 131,138 11,205 339,199
Equity Index Portfolio.. 0.30% 35,308 46,633 3,531 119,561
Growth Equity
Portfolio.............. 0.75% -- 93,608 -- 251,110
Balanced Portfolio...... 0.75% -- 125,973 -- 141,447
Government & Corporate
Bond Portfolio......... 0.45% -- 203,004 -- 534,815
U.S. Government
Securities Portfolio... 0.45% -- 102,181 -- 271,444
Short-Intermediate
Municipal Portfolio.... 0.55% 62,423 39,231 -- 117,650
Missouri Tax-Exempt Bond
Portfolio.............. 0.45% -- 107,572 -- 244,526
National Municipal Bond
Portfolio.............. 0.55% 663,264 427,432 36,178 1,113,333
Intermediate Corporate
Bond Portfolio......... 0.55% 91,356 61,001 4,982 157,889
Bond Index Portfolio.... 0.30% 142,709 157,460 14,270 458,936
</TABLE>
Additionally, the distributor voluntarily waived distribution and services
fees for the Investor A Shares in the amount of $8 for the Short-
Intermediate Municipal Portfolio, $24,099 for the Missouri Tax-Exempt Bond
Portfolio and $1,651 for the National Municipal Bond Portfolio. The
distributor also voluntarily waived administrative services fees for the
Institutional Shares in the amounts of $1, $633, $28 and $807, for the
Equity Income Portfolio, the Equity Index Portfolio, the Intermediate
Corporate Bond Portfolio and Bond Index Portfolio, respectively. Other
voluntary fee reductions include $27 for the Money Market Portfolio.
7.Concentration of Credit Risk
The Missouri Tax-Exempt Bond Portfolio invests a substantial proportion of
its assets in debt obligations issued by the State of Missouri and its
political subdivisions, agencies and public authorities. The Portfolio is
more susceptible to factors adversely affecting issuers of Missouri
municipal securities than a fund that is not concentrated in these issuers
to the same extent.
Continued
184
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
The Tax-Exempt Money Market Portfolio, Short-Intermediate Municipal
Portfolio, Missouri Tax-Exempt Bond Portfolio and National Municipal Bond
Portfolio had the following concentrations by industry sector at November
30, 1998 (as a percentage of total investments):
<TABLE>
<CAPTION>
Short- Missouri National
Tax-Exempt Intermediate Tax-Exempt Municipal
Money Market Municipal Bond Bond
Portfolio Portfolio Portfolio Portfolio
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Airport....................... 7.50% -- -- --
Bond Bank..................... -- 2.62% -- --
Commercial Paper.............. 4.96% -- -- --
Development................... 6.38% -- 0.60% --
Education..................... 2.47% 1.22% 4.87% 2.25%
Environmental................. -- -- -- 1.40%
Facilities.................... -- 5.93% 7.33% 2.04%
General Obligation............ 13.95% 29.28% 18.45% 46.42%
Higher Education.............. 7.45% 4.82% 8.60% 3.92%
Medical....................... 17.72% 7.12% 20.11% 5.47%
Multifamily Housing........... -- -- 2.05% --
Mutual Funds.................. 1.68% 1.37% 7.27% 0.83%
Nursing Homes................. -- -- 0.76% --
Parks & Recreation............ -- -- -- 1.38%
Pollution..................... 32.11% 3.54% 4.80% 2.82%
Power......................... -- 2.66% 1.76% 4.31%
School District............... 0.99% 20.66% 15.69% 9.79%
Single Family Housing......... -- -- 0.85% 0.28%
Student Loan.................. -- -- 0.87% --
Transportation................ 4.79% 11.82% -- 7.06%
Utilities..................... -- 4.54% 1.80% 9.46%
Water......................... -- 4.42% 4.19% 2.57%
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
</TABLE>
8.Conversion of Common Trust Funds
On December 8, 1997, the Growth Equity Portfolio issued Trust Shares to
acquire all of the assets and liabilities of certain common trust funds of
Mercantile Bank National Association and its affiliates. On December 15,
1997, the Government & Corporate Bond and Intermediate Corporate Bond
Portfolios issued Trust Shares to acquire all of the assets and liabilities
of certain common trust funds of Mercantile Bank National Association and
its affiliates. The following is a summary of shares issued, net assets
converted, net asset values per share, and unrealized appreciation as of the
respective conversion dates (amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
Net Asset
Value Unrealized
Shares Net Assets Per Share Appreciation
------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Growth Equity Portfolio........... 1,469 $24,903 $16.95 $13,748
Government & Corporate Bond
Portfolio........................ 521 5,425 10.42 41
Intermediate Corporate Bond
Portfolio........................ 474 4,767 10.05 65
</TABLE>
Continued
185
<PAGE>
THE ARCH FUND, INC.
Notes to Financial Statements, Continued
November 30, 1998
9.Federal Income Tax Information (Unaudited)
During the year ended November 30, 1998, the Portfolios declared long-term
capital gain (20%) distributions in the following amounts.
<TABLE>
<S> <C>
Growth & Income Equity Portfolio................................ $65,283,019
Small Cap Equity Portfolio...................................... 8,393,185
International Equity Portfolio.................................. 2,333,107
Equity Income Portfolio......................................... 24,559,629
Growth Equity Portfolio......................................... 28,402
Balanced Portfolio.............................................. 11,502,834
National Municipal Bond Portfolio............................... 11,864,123
Intermediate Corporate Bond Portfolio........................... 500,666
Bond Index Portfolio............................................ 452,135
</TABLE>
For the taxable year ended November 30, 1998, the following percentages of
income dividends paid by the Portfolios qualify for the dividends received
deduction available to corporations:
<TABLE>
<CAPTION>
Qualified
Dividend Income
---------------
<S> <C>
Growth & Income Equity Portfolio............................. 46.56%
Small Cap Equity Portfolio................................... 10.53%
Equity Income Portfolio...................................... 74.22%
Equity Index Portfolio....................................... 64.32%
Growth Equity Portfolio...................................... 100.00%
Balanced Portfolio........................................... 18.43%
</TABLE>
During the year ended November 30, 1998, the following Portfolios paid tax-
exempt income in the following amounts:
<TABLE>
<S> <C>
Tax-Exempt Money Market Portfolio............................... $ 5,037,374
Short-Intermediate Municipal Portfolio.......................... 1,436,930
Missouri Tax-Exempt Bond Portfolio.............................. 4,794,528
National Municipal Bond Portfolio............................... 16,938,472
</TABLE>
10.Subsequent Events
At a meeting held on November 23, 1998, the Board of Directors of the Fund
approved changing the name of the Fund to Mercantile Mutual Funds, Inc.,
projected for change on April 1, 1999.
186
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
The ARCH Fund, Inc.:
We have audited the accompanying statements of assets and liabilities of The
ARCH Fund, Inc.--Money Market Portfolio, Treasury Money Market Portfolio, Tax-
Exempt Money Market Portfolio, Growth & Income Equity Portfolio, Small Cap
Equity Portfolio, International Equity Portfolio, Equity Income Portfolio,
Equity Index Portfolio, Growth Equity Portfolio, Balanced Portfolio,
Government & Corporate Bond Portfolio, U.S. Government Securities Portfolio,
Short-Intermediate Municipal Portfolio, Missouri Tax-Exempt Bond Portfolio,
National Municipal Bond Portfolio, Intermediate Corporate Bond Portfolio, and
Bond Index Portfolio including the schedules of portfolio investments, as of
November 30, 1998, and the related statements of operations and cash flows,
statements of changes in net assets and the financial highlights for each of
the periods indicated herein. These financial statements and the financial
highlights are the responsibility of The ARCH Fund, Inc.'s management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification of securities
owned as of November 30, 1998, by examination, correspondence with 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
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The ARCH Fund, Inc. as of November 30,
1998, the results of their operations and their cash flows, the changes in
their net assets and the financial highlights for each of the periods
indicated herein, in conformity with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
January 20, 1999
187
<PAGE>
[GRAPHIC APPEARS HERE]
INVESTMENT ADVISER
Mississippi Valley Advisors Inc.
One Mercantile Center
Seventh & Washington Streets
St. Louis, Missouri 63101
DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
------------- AUDITORS
BULK RATE KPMG Peat Marwick LLP
U.S. POSTAGE Two Nationwide Plaza
PAID Columbus, Ohio 43215
LANCASTER, PA
PERMIT 1793 LEGAL COUNSEL
------------- Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
TRANSFER AGENT
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
This report is submitted for the general information of the shareholders of The
ARCH Funds, Inc. It is not authorized for distribution to prospective investors
unless accompanied or preceded by effective prospectuses for the Funds, which
contain information concerning the Funds' investment policies and expenses as
well as other pertinent information.
