<PAGE>
CONNING MONEY MARKET PORTFOLIO
[LOGO OF CONNING]
PROSPECTUS
November 6, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of the Portfolio or determined if this
prospectus is truthful or complete. Anyone who tells you otherwise is
committing a criminal offense.
<PAGE>
Conning Money Market Portfolio Contents
Risk/Return Summary
- ---------------------------------------
[GRAPHIC]
1 Risk/Return Summary
4 Additional Information on Risk
Your Account
- ---------------------------------------
[GRAPHIC]
5 Explanation of Sales Price
5 How to Buy Shares
5 How to Sell Shares
6 Shareholder Services Fees
6 General Transaction Policies
Distributions and Taxes
- ---------------------------------------
[GRAPHIC]
6 Dividends and Distributions
6 Taxation
Management of the Fund
- ---------------------------------------
[GRAPHIC]
8 The Adviser
8 The Sub-Adviser
Financial Highlights
- ---------------------------------------
[GRAPHIC]
9 Introduction
9 Conning Money Market Portfolio
<PAGE>
Risk/Return Summary
[GRAPHIC]
- --------------------------------------------------------------------------------
Money Market Instruments are short-term obligations issued by banks,
corporations, the U.S. Government and state and local governments. Money market
instruments purchased by the Portfolio must meet strict requirements as to
investment quality, maturity and diversification. The Portfolio generally does
not invest in securities with maturities of more than 397 days and the average
maturity of all securities held by the Portfolio must be 90 days or less. Prior
to purchasing a money market instrument for the Portfolio, the Portfolio's sub-
adviser must determine that the instrument carries very little credit risk.
- --------------------------------------------------------------------------------
Investment Objective
The investment objective of the Conning Money Market Portfolio
(the "Portfolio") is to seek current income with liquidity and
stability of principal.
The investment objective of the Portfolio, which is an
investment portfolio of Mercantile Mutual Funds, Inc. (the
"Fund"), can be changed by the Fund's Board of Directors
without shareholder approval. Shareholders will be given at
least 30 days' written notice before any such change occurs.
Principal Investment Strategies
The Portfolio invests substantially all (but not less than
80%) of its total assets in a broad range of U.S. dollar-
denominated money market instruments, including commercial
paper, notes and bonds issued by U.S. and foreign
corporations, obligations issued by the U.S. Government and
its agencies and instrumentalities, and obligations issued by
U.S. and foreign banks, such as certificates of deposit,
letters of credit, bankers' acceptances and time deposits.
The Portfolio will only buy a money market instrument if it
has the highest short-term rating from at least two nationally
recognized statistical rating organizations, such as Standard
& Poor's Ratings Group or Moody's Investors Service, Inc., or
only one such rating if only one organization has rated the
instrument. If the money market instrument is not rated, the
Portfolio's sub-adviser must determine that it is of
comparable quality to eligible rated instruments.
Principal Risk Considerations
The yield paid by the Portfolio will vary with short-term
interest rates.
Although credit risk is very low because the Portfolio only
invests in high quality obligations, if an issuer fails to pay
interest or repay principal, the value of your investment
could decline.
The Portfolio's sub-adviser evaluates the rewards and risks
presented by all securities purchased by the Portfolio and how
they may advance the Portfolio's investment objective. It is
possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Portfolio will be able to preserve
the value of your investment at $1.00 per share.
An investment in the Portfolio is not a Mercantile Bank
deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Although the Portfolio seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Portfolio.
1
<PAGE>
Risk/Return Summary
[GRAPHIC]
Return History
The Portfolio does not have a long-term performance record
because it has been in operation for less than one calendar
year.
2
<PAGE>
Risk/Return Summary
[GRAPHIC]
- --------------------------------------------------------------------------------
The table on the right shows the fees and expenses that you pay if you buy and
hold shares of the Portfolio.
This example will help you compare the cost of investing in the Portfolio with
the cost of investing in other mutual funds. The example assumes that you
invest $10,000 for the time periods shown and then sell all of your shares at
the end of those periods. The example also assumes that your investment has a
5% return each year and the Portfolio's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
- --------------------------------------------------------------------------------
Fees and Expenses
Annual Portfolio
Operating Expenses
(expenses that are
deducted from the
Portfolio's assets)
Management Fees .40%/1/
-------------------------------------------------------
Distribution (12b-1) Fees None
-------------------------------------------------------
Other Expenses 1.03%/1/,/2/
-------------------------------------------------------
Total Annual Portfolio Operating Expenses 1.43%/1/
-------------------------------------------------------
/1/Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses for the current fiscal year are expected
to be less than the amounts shown above because certain of
the Portfolio's service providers are voluntarily waiving a
portion of their fees and/or reimbursing the Portfolio for
certain other expenses. These fee waivers and/or
reimbursements are being made in order to keep the annual
fees and expenses for the Portfolio at a certain level.
Management Fees, Other Expenses and Total Annual Portfolio
Operating Expenses, after taking these fee waivers and
expense reimbursements into account, are expected to be
.17%, .83% and 1.00%, respectively. These fee waivers and
expense reimbursements may be revised or cancelled at any
time.
/2/The Portfolio is new and the amount shown above for Other
Expenses represents an estimate for the current fiscal
year.
Example
Conning Money 1 3
Market year years
Portfolio
$146 $452
---------------------------------------------------------------
3
<PAGE>
Additional Information on Risk
[GRAPHIC]
The principal risks of investing in the Conning Money Market Portfolio are
described above. The following supplements that discussion.
Securities Lending
To obtain interest income, the Portfolio may lend its securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There is the risk that when
lending portfolio securities, the securities may not be available to the
Portfolio on a timely basis. Therefore, the Portfolio may lose the opportunity
to sell the securities at a desirable price. Additionally, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Temporary Defensive Positions
During unfavorable market conditions, the Portfolio may temporarily hold up to
100% of its total assets in cash (which will not earn any income) and short-
term obligations issued or guaranteed by the U.S. Government and its agencies
and instrumentalities. This strategy, which is not part of the Portfolio's main
investment strategy, could prevent the Portfolio from achieving its investment
objective.
Other Types of Investments
This prospectus describes the Portfolio's principal investment strategies and
the particular types of securities in which the Portfolio principally invests.
The Portfolio may, from time to time, make other types of investments and
pursue other investment strategies in support of its overall investment goal.
These supplemental investment strategies and the risks involved are described
in detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
As with other mutual funds, financial and business organizations and
individuals around the world, the Portfolio could be adversely affected if the
computer systems used by the Adviser and the Portfolio's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This possibility is commonly known as the
Year 2000 or "Y2K" problem. The Adviser is taking steps to address the Y2K
problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Portfolio's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Portfolio. The Y2K
problem could have a negative impact on the issuers of securities in which the
Portfolio invests, which could hurt the Portfolio's investment returns.
4
<PAGE>
Your Account
[GRAPHIC]
- --------------------------------------------------------------------------------
Business days defined
A business day is any day that both the New York Stock Exchange (NYSE) and the
Federal Reserve Bank of St. Louis are open for business. Currently, the Fund
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day
(observed), Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas.
- --------------------------------------------------------------------------------
Explanation of Sales Price
Shares of the Portfolio are sold at their net asset value
(NAV). The NAV for shares of the Portfolio is determined as of
12:00 noon (Eastern time) and as of the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m.
Eastern time) on every business day. The NAV is determined by
adding the value of the Portfolio's investments, cash and
other assets, subtracting the Portfolio's liabilities and then
dividing the result by the total number of shares of the
Portfolio that are outstanding.
. The Portfolio's investments are valued at amortized cost,
which is approximately equal to market value.
. A properly placed purchase order (see "How to Buy Shares"
below) that is delivered to the Fund by 2:00 p.m. (Eastern
time) on any business day receives the share price next
determined if the Fund receives payment in federal funds or
other immediately available funds by 4:00 p.m. (Eastern
time) that day. If payment is not received by that time, the
order will be cancelled. A properly placed purchase order
that is delivered to the Fund after 2:00 p.m. will be placed
the following business day.
How to Buy Shares
Shares of the Portfolio are sold without any sales charge
through broker-dealers or other financial advisers acting on
behalf of their customers. It is the responsibility of your
broker-dealer or financial adviser to transmit your purchase
order to the Fund on a timely basis.
The Fund does not have any minimum investment requirements for
shares of the Portfolio but your broker-dealer or financial
adviser may. They may also charge transaction fees and require
you to maintain a minimum account balance.
How to Sell Shares
Orders to sell or "redeem" shares of the Portfolio should be
placed with the same broker-dealer or financial adviser that
placed the original purchase order in accordance with the
procedures established by that broker-dealer or financial
adviser. Your broker-dealer or financial adviser is
responsible for sending your redemption order to the Fund on a
timely basis and for crediting your account with the
redemption proceeds. The Fund does not currently charge for
wiring redemption proceeds, but your broker-dealer or
financial adviser may.
The Fund's transfer agent may require a signature guarantee
unless the redemption proceeds are payable to the shareholder
of record and the proceeds are either mailed to the
shareholder's address of record or electronically transferred
to the account designated on the original account application.
A signature guarantee helps prevent fraud, and you may obtain
one from most banks and broker/dealers. Contact your broker-
dealer or financial adviser for more information on signature
guarantees.
5
<PAGE>
Your Account
[GRAPHIC]
- --------------------------------------------------------------------------------
Selling recently purchased shares
If you attempt to sell shares you recently purchased with a personal check, the
Fund may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing them with a
certified or bank check or via electronic transfer to avoid delay.
- --------------------------------------------------------------------------------
Shares of the Portfolio will be sold at the NAV next
determined after the Fund accepts an order (see previous
page). If the order to sell is received and accepted by the
Fund before 2:00 p.m. (Eastern time) on a business day the
proceeds are sent electronically the same day to the broker-
dealer or financial adviser that placed the order. If the
order to sell is received and accepted by the Fund after 2:00
p.m. (Eastern time) on a business day or on a non-business
day, the proceeds normally are sent electronically to the
broker-dealer or financial adviser on the next business day.
Shareholder Services Fees
The Portfolio can pay for shareholder liaison and/or
administrative support services at the annual rates of up to
.25% and .50%, respectively, of the Portfolio's average daily
net assets. These fees are paid to broker-dealers and
financial advisers that provide such services to their
customers who own shares of the Portfolio. The Portfolio does
not intend to pay more than .67% of average daily net assets
in the aggregate for shareholder liaison and/or administrative
support services during the current fiscal year.
General Transaction Policies
The Fund reserves the right to:
. Refuse any order to buy shares.
. Send redemption proceeds within seven days after receiving a
request, if an earlier payment could adversely affect a
Portfolio.
. Make a "redemption in kind." Under abnormal conditions that
may make payment in cash unwise, the Fund may offer partial
or complete payment in portfolio securities rather than cash
at such securities' then-market-value equal to the
redemption price. In such cases, a shareholder may incur
brokerage costs in converting these securities to cash.
6
<PAGE>
Distributions and Taxes
[GRAPHIC]
- --------------------------------------------------------------------------------
You will be advised at least annually regarding the federal income tax
treatment of dividends and distributions made to you. You should save your
account statements because they contain information you will need to calculate
your capital gains or losses upon your ultimate sale of shares in the
Portfolio.
- --------------------------------------------------------------------------------
Dividends and Distributions
The Portfolio declares dividends from net investment income
daily and pays them monthly. Shares of the Portfolio begin
earning dividends on the day the purchase order is received by
the Fund's transfer agent through the day before the
redemption order for such shares is received. Although the
Portfolio does not expect to realize net long-term capital
gains, any capital gains realized would be distributed at
least annually.
All of your dividends and capital gains distributions will be
reinvested in additional shares of the Portfolio unless you
instruct otherwise on your account application or have
redeemed all shares you held in the Portfolio. In such cases,
dividends and distributions will be paid in cash.
Taxation
As with any investment, you should consider the tax
implications of an investment in the Portfolio. The following
is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its
shareholders under current law, which may be subject to change
in the future. Consult your tax adviser with specific
reference to your own tax situation.
. Federal Taxes
Dividends you receive from the Portfolio, whether paid in
cash or reinvested in additional shares, are generally
considered taxable. Dividends from the Portfolio's long-term
capital gains are taxable as capital gains. Dividends from
other sources are generally taxable as ordinary income. It is
anticipated that substantially all of the dividends from the
Portfolios will be taxable as ordinary income and not capital
gains.
. State and Local Taxes
Dividends paid by the Portfolio may be taxable to investors
under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest
on obligations which, if realized directly, would be exempt
from such taxes.
For more information regarding the taxation of the Portfolio,
consult the SAI under the heading "Additional Information
Concerning Taxes." You also should consult your tax adviser
for information regarding state and local tax consequences
with respect to your specific situation.
7
<PAGE>
Management of the Fund
[GRAPHIC]
The Adviser
Mississippi Valley Advisors Inc. ("MVA" or the "Adviser") serves as the
investment adviser to the Portfolio. Founded in 1987, MVA is a subsidiary of
Firstar Corporation, a banking and financial services organization, and has its
main office at One Mercantile Center, Seventh and Washington Streets, St.
Louis, Missouri 63101. As of June 30, 1999, MVA had approximately $9.8 billion
in assets under management, including the Fund's assets, which were
approximately $4.3 billion.
MVA, subject to the general supervision of the Fund's Board of Directors, is
responsible for the day-to-day management of the Portfolio in accordance with
the Portfolio's investment objective and policies. This includes making
investment decisions, buying and selling securities and overseeing the
administration and recordkeeping for the Portfolio.
In exchange for these services, MVA is entitled to receive investment advisory
fees, which are calculated daily and paid monthly, at the annual rate of .40%
of the first $1.5 billion of the Portfolio's average daily net assets, .35% of
the next $1.0 billion of net assets and .25% of net assets in excess of $2.5
billion. MVA currently receives advisory fees (after waivers) at the annual
rate of .17% of the Portfolio's average daily net assets.
The Sub-Adviser
Conning Asset Management Company ("Conning") serves as sub-adviser to the
Portfolio and is responsible for the management of the Portfolio's assets.
Conning manages the Portfolio under the direction and guidance of MVA and
according to its sub-advisory agreement with MVA. For its services, Conning
receives a monthly fee from MVA based on a percentage of the Portfolio's
average daily net assets.
Conning, with principal offices located at 700 Market Street, St. Louis,
Missouri 63101, is an indirect subsidiary of GenAmerica Corporation, a
financial services holding company. Founded in 1912, Conning has extensive
investment management experience and as of June 30, 1999 had approximately $32
billion in assets under management.
8
<PAGE>
Financial Highlights
[GRAPHIC]
Introduction
The financial highlights table presented below is intended to help you
understand the financial performance of the Portfolio for the period from its
commencement of operations on February 16, 1999 through May 31, 1999. Certain
information reflects the financial results for a single share in the Portfolio.
The total return in the table represents the rate that an investor would have
earned on an investment in the Portfolio assuming reinvestment of all dividends
and distributions. The financial highlights, along with the Portfolio's
financial statements, are included in the Portfolio's Semi-Annual Report to
Shareholders dated May 31, 1999 and are incorporated by reference into the SAI.
The financial highlights and the financial statements included in the Semi-
Annual Report have not been audited.
Conning Money Market Portfolio
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
February 16, 1999
to
May 31, 1999(a)
(Unaudited)
-----------------
<S> <C>
Net Asset Value, Beginning of Period.......................... $ 1.00
------
Investment Activities
Net investment income....................................... 0.012
Net realized loss from investment transactions.............. -- (b)
------
Total from Investment Activities............................ 0.012
Distributions
Net investment income....................................... (0.012)
------
Total Distributions......................................... (0.012)
------
Net Asset Value, End of Period.............................. $ 1.00
======
Total Return................................................ 1.16 %(c)
Ratios/Supplementary Data:
Net Assets at end of period (000)........................... $5,041
Ratio of expenses to average net assets..................... 0.96 %(d)
Ratio of net investment income to average net assets........ 4.00 %(d)
Ratio of expenses to average net assets*.................... 2.21 %(d)
</TABLE>
- ------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Net realized loss per share was less than $0.005.
(c) Not annualized.
(d) Annualized.
9
<PAGE>
Where to find more information
You'll find more information about the Conning Money Market Portfolio in the
following documents:
Annual and semi-annual reports
The Portfolio's annual and semi-annual reports contain more information about
the Portfolio and its performance.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Portfolio and its policies. By
law, it's incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Portfolio and make shareholder inquiries by calling the Fund at 1-800-232-9091
or by writing to:
Conning Money Market Portfolio
Attn: Transfer Agency
3435 Stelzer Road, Suite 1000
Columbus, OH 43219
If you buy your shares through a broker-dealer or financial adviser, you may
contact your broker-dealer or financial adviser for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Portfolios, including
the SAI. They'll charge you a fee for this service. You can also visit the SEC
Public Reference Room and copy the documents while you're there. For
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-0102
1-202-942-8090
Reports and other information about the Conning Money Market Portfolio are also
available on the EDGAR Database on the SEC's website at http://www.sec.gov.
Copies of this information may also be obtained, after paying a duplicating
fee, by electronic request to the SEC's E-mail address at [email protected].
The Fund's Investment Company Act file No. is 811-3567.
<PAGE>
Statement of Additional Information
for
Conning Money Market Portfolio
of
Mercantile Mutual Funds, Inc.
(formerly known as The ARCH Fund(R), Inc.)
November 6, 1999
This Statement of Additional Information, which provides supplemental
information applicable to the Conning Money Market Portfolio (the "Portfolio")
of Mercantile Mutual Funds, Inc. (the "Fund"), is not a prospectus. No
investment in the Portfolio should be made without reading the applicable
prospectus. The prospectus for the Portfolio dated November 6, 1999, as it may
be supplemented or revised from time to time (the "Prospectus"), as well as the
Portfolio's Semi-Annual Report to Shareholders dated May 31, 1999 (the "Semi-
Annual Report"), may be obtained, without charge, by writing:
Conning Money Market Portfolio
Attn: Transfer Agency
3435 Stelzer Road, Suite 1000
Columbus, OH 43219
or by calling 1-800-232-9091. Copies of the Prospectus and Semi-Annual Report
may also be obtained by contacting your broker-dealer or financial adviser.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION......................................................... 1
DESCRIPTION OF MERCANTILE MUTUAL FUNDS, INC................................. 1
DESCRIPTION OF SHARES....................................................... 1
INVESTMENT STRATEGIES, POLICIES AND RISKS................................... 3
PRICING OF SHARES........................................................... 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 16
YIELD INFORMATION........................................................... 17
ADDITIONAL INFORMATION CONCERNING TAXES..................................... 19
MANAGEMENT OF THE FUND...................................................... 21
INDEPENDENT AUDITORS........................................................ 29
COUNSEL..................................................................... 29
MISCELLANEOUS............................................................... 29
FINANCIAL STATEMENTS........................................................ 29
APPENDIX A.................................................................. A-1
</TABLE>
<PAGE>
GENERAL INFORMATION
This Statement of Additional Information relates to the Prospectus dated
November 6, 1999 (the "Prospectus") for the Conning Money Market Portfolio (the
"Portfolio"), a diversified portfolio, and should be read in conjunction with
the Prospectus. This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. No investment in the Portfolio
should be made without reading the Prospectus.
Shares of the Portfolio are not deposits or obligations of, or
guaranteed or endorsed by, Mercantile Bank National Association, Mercantile
Trust Company National Association, Mississippi Valley Advisors Inc., or any of
their respective affiliates. Portfolio Shares also are not federally insured
by, guaranteed by, obligations of or otherwise supported by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other government agency. An investment in the Portfolio involves investment
risks, including possible loss of the principal amount invested. There is no
assurance that the Portfolio will be able to maintain a stable net asset value
of $1.00 per Share.
DESCRIPTION OF MERCANTILE MUTUAL FUNDS, INC.
Mercantile Mutual Funds, Inc. (the "Fund"), formerly known as The ARCH
Fund, Inc., is an open-end management investment company. The Fund was organized
on September 9, 1982 as a Maryland corporation. The Fund also offers shares
representing interests in other investment portfolios, which are described in
separate Prospectuses and a separate Statement of Additional Information.
DESCRIPTION OF SHARES
The Fund's Articles of Incorporation authorize the Board of Directors
to issue up to twenty billion full and fractional shares of capital stock, and
to classify or reclassify any unissued shares of the Fund into one or more
additional classes or by setting or changing in any one or more respects, their
respective preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. Pursuant to such authority the Fund's Board of Directors has
authorized the issuance of sixty-five classes of shares representing interests
in one of twenty investment portfolios: the Treasury Money Market, Money Market,
Tax-Exempt Money Market, Conning Money Market, U.S. Government Securities,
Intermediate Corporate Bond, Bond Index, Government & Corporate Bond, Short-
Intermediate Municipal, Missouri Tax-Exempt Bond, Kansas Tax-Exempt Bond,
National Municipal Bond, Equity Income, Equity Index, Growth & Income Equity,
Growth Equity, Small Cap Equity, Small Cap Equity Index, International Equity
and Balanced Portfolios. This Statement of Additional Information relates only
to the shares of the Conning Money Market Portfolio. Trust Shares, Institutional
Shares, Trust II Shares, Investor A Shares and/or Investor B Shares in each of
the Fund's other portfolios are offered through separate prospectuses to
different categories of investors.
<PAGE>
In the event of a liquidation or dissolution of the Fund, shares of
the Portfolio are entitled to receive the assets available for distribution
belonging to the Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective portfolios of the Fund, of any general
assets not belonging to any particular portfolio which are available for
distribution. Shareholders of the Portfolio are entitled to participate equally
in the net distributable assets of the Portfolio on liquidation.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Holders of all
outstanding shares of the Portfolio will vote together in the aggregate.
Further, shareholders of all of the Fund's portfolios, irrespective of class,
will vote in the aggregate and not separately on a portfolio-by-portfolio basis,
except as otherwise required by law or when the Board of Directors determines
that the matter to be voted upon affects only the interests of the shareholders
of a particular portfolio or class of shares. Rule 18f-2 under the Investment
Company Act of 1940, as amended (the "1940 Act") provides that any matter
required to be submitted to the holders of the outstanding voting securities of
a "series" investment company such as the Fund shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series (portfolio) affected by the matter. A
portfolio is considered to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of the portfolio. Under the Rule, the approval of an
investment advisory (or sub-advisory) agreement, the approval of a Rule 12b-1
distribution plan or any change in a fundamental investment objective or
investment policy would be effectively acted upon with respect to a portfolio
only if approved by a majority of the outstanding shares of that portfolio.
However, the Rule also provides that the ratification of the appointment of
independent auditors, the approval of principal underwriting contracts, and the
election of directors may be effectively acted upon by shareholders of the
Fund's portfolios voting without regard to portfolio or class.
The Fund is not required, and currently does not intend, to hold
annual meetings except as required by the 1940 Act or other applicable law. Upon
the written request of the holders of 10% or more of the outstanding shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Fund's portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding shares
(irrespective of portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in the
Prospectus and this Statement of Additional Information, shares of the Portfolio
will be fully paid and nonassessable. Shares of the Portfolio will be issued
without certificates.
Miscellaneous
As used in this Statement of Additional Information, a "vote of a
majority of the outstanding shares" of the Portfolio means, with respect to the
approval of the Portfolio's investment advisory or sub-advisory agreement or a
change in a fundamental investment policy
-2-
<PAGE>
of the Portfolio, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of the Portfolio or (b) 67% or more of the shares of the
Portfolio present at a meeting if more than 50% of the outstanding shares of the
Portfolio are represented at the meeting in person or by proxy.
INVESTMENT STRATEGIES, POLICIES AND RISKS
The following discussion supplements the description of the investment
objective and policies of the Portfolio described in the Prospectus. Although
management will use its best efforts to achieve the investment objective of the
Portfolio, there can be no assurance that it will be able to do so.
Conning Asset Management Company, the Portfolio's sub-adviser (the
"Sub-Adviser") makes investment decisions with respect to the Portfolio in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") for money market funds. The following descriptions
illustrate the types of instruments in which the Portfolio invests.
Banking Obligations. The Portfolio may purchase obligations of
issuers in the banking industry, such as certificates of deposit, letters of
credit, bankers' acceptances and time deposits, including U.S. dollar-
denominated instruments issued or supported by the credit of U.S. or foreign
banks or savings institutions having total assets at the time of purchase in
excess of $1 billion. The Portfolio may invest in obligations of foreign banks
or foreign branches of U.S. banks in amounts not in excess of 25% of its assets
where the Sub-Adviser deems the instrument to present minimal credit risks.
(See "Special Risk Considerations -- Risks Associated with Foreign Securities"
below.) The Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of the value of its
total assets.
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits.
Obligations of foreign banks and foreign branches of U.S. banks may
include Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-
denominated certificates of deposit issued by offices of foreign and domestic
banks located outside the United States; Eurodollar Time Deposits ("ETDs"),
which are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or
a foreign bank; Canadian Time Deposits ("CTDs"), which are essentially the same
as ETDs except they are issued by Canadian offices of major Canadian banks;
Schedule Bs, which are obligations issued by Canadian branches of foreign or
domestic
-3-
<PAGE>
banks; Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-
denominated certificates of deposit issued by a U.S. branch of a foreign bank
and held in the United States; and Yankee Bankers' Acceptances ("Yankee BAs"),
which are U.S. dollar-denominated bankers' acceptances issued by a U.S. branch
of a foreign bank and held in the United States.
Commercial Paper and Variable and Floating Rate Instruments. The
Portfolio may invest in commercial paper, including asset-backed commercial
paper representing interests in a pool of corporate receivables, dollar-
denominated obligations issued by domestic and foreign bank holding companies,
and corporate bonds. Commercial paper represents short-term unsecured promissory
notes issued in bearer form by banks or bank holding companies, corporations and
finance companies.
Instruments purchased by the Portfolio must meet the quality and
maturity requirements of Rule 2a-7 under the 1940 Act as described in the
Prospectus. The Portfolio may also invest in variable or floating rate notes
that may have a stated maturity in excess of thirteen months but will, in any
event, permit the Portfolio to demand payment of the principal of the instrument
at least once every thirteen months upon no more than 30 days' notice (unless
the instrument is guaranteed by the U.S. Government or an agency or
instrumentality thereof). Such instruments may include variable amount master
demand notes, which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. Unrated variable and floating rate instruments will be determined
by the Sub-Adviser (under the supervision of the Board of Directors) to be of
comparable quality at the time of purchase to First Tier Eligible Securities as
(defined in Rule 2a-7). There may be no active secondary market in the
instruments, which could make it difficult for the Portfolio to dispose of an
instrument in the event the issuer were to default on its payment obligation or
during periods that the Portfolio could not exercise its demand rights. The
Portfolio could, for these or other reasons, suffer a loss with respect to such
instruments. Variable and floating rate instruments held by the Portfolio will
be subject to the Portfolio's 10% limitation on illiquid investments when the
Portfolio may not demand payment of the principal amount within seven days and a
liquid trading market is absent.
Funding Agreements. The Portfolio may invest in short-term funding
agreements. A funding agreement is a contract between an issuer and a purchaser
that obligates the issuer to pay a guaranteed rate of interest on a principal
sum deposited by the purchaser. Funding agreements will also guarantee the
return of principal and may guarantee a stream of payments over time. A funding
agreement has a fixed maturity and may have either a fixed rate or a variable or
floating interest rate that is based on an index and guaranteed for a set time
period. Because there is no secondary market for these investments, any funding
agreement purchased by the Portfolio will be regarded as illiquid. Funding
agreements, together with other illiquid securities, will not constitute more
than 10% of the Portfolio's net assets.
Government Obligations. The Portfolio may invest in obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities. In
addition, the Portfolio may, when deemed appropriate by the Sub-Adviser, invest
in short-term obligations issued by state and local governmental issuers
("municipal obligations") that meet the quality requirements
-4-
<PAGE>
described in the Prospectus and, as a result of the Tax Reform Act of 1986,
carry yields that are competitive with those of other types of money market
instruments of comparable quality.
Special Risk Considerations
Interest Rate Risk. Generally, the market value of fixed income
securities, including municipal obligations, held by the Portfolio can be
expected to vary inversely to changes in prevailing interest rates. During
periods of declining interest rates, the market value of investment portfolios
comprised primarily of fixed income securities will tend to increase, and during
periods of rising interest rates, the market value will tend to decrease. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also offset the
value of these investments. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not offset cash income from such
securities but will be reflected in the Portfolio's net asset value.
Risks Associated with Foreign Securities. The Portfolio may acquire
U.S. dollar-denominated securities of foreign corporations and certain types of
bank instruments issued or supported by the credit of foreign banks or foreign
branches of domestic banks where the Sub-Adviser deems the investments to
present minimal credit risks. 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 or restrictions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign
securities markets, while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S.-based companies. There is generally less government supervision
and regulation of foreign exchanges, brokers and issuers than there is in the
United States. In the event of a default by the issuer of a foreign security,
it may be more difficult to obtain or enforce a judgment against such issuer
than it would be against a domestic issuer. In addition, foreign banks and
foreign branches of U.S. banks are subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and recordkeeping
standards than those applicable to domestic branches of U.S. banks.
-5-
<PAGE>
Other Investment Policies and Risk Considerations
The investment policies described in the Prospectus and this Statement
of Additional Information are among those which the Portfolio has the ability to
utilize. Some of these policies may be employed on a regular basis; others may
not be used at all. Accordingly, reference to any particular policy, method or
technique carries no implication that it will be utilized or, if it is, that it
will be successful.
Municipal Obligations. Subject to its investment policies and
limitations, the Portfolio may invest in municipal obligations. Municipal
obligations include debt obligations issued by governmental entities which
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities.
The two principal classifications of municipal obligations are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed.
Municipal obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
There are, of course, variations in the quality of municipal
obligations both within a particular classification and between classifications,
and the yields on municipal obligations depend upon a variety of factors,
including general conditions of the money market and/or the municipal bond
market, the financial condition of the issuer, the size of a particular
offering, the maturity of the obligation and the rating of the issue. The
ratings of rating agencies, such as Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Ratings Group ("S&P"), represent their opinions as to the
quality of municipal obligations. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and municipal obligations
with the same maturity, interest rate and rating may have different yields while
municipal obligations of the same maturity and interest rate with different
ratings may have the same yield.
The payment of principal and interest on most municipal securities
purchased by the Portfolio will depend upon the ability of the issuers to meet
their obligations. An issuer's obligations under its municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the federal bankruptcy code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal
-6-
<PAGE>
of its municipal obligations may be materially adversely affected by litigation
or other conditions. The District of Columbia, each state, each of their
political subdivisions, agencies, instrumentalities and authorities and each
multi-state agency of which a state is a member is a separate "issuer" as that
term is used in this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
The Portfolio may also purchase general obligation notes, tax
anticipation notes, bond anticipation notes, revenue anticipation notes, tax-
exempt commercial paper, construction loan notes and other tax-exempt loans.
Such instruments are issued in anticipation of the receipt of tax funds, the
proceeds of bond placements, or other revenues.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide, among other things, privately
operated housing facilities, pollution control facilities, convention or trade
show facilities, mass transit, airport, port or parking facilities and certain
local facilities for water supply, gas, electricity or sewage or solid waste
disposal. Private activity bonds are also issued to privately held or publicly
owned corporations in the financing of commercial or industrial facilities.
State and local governments are authorized in most states to issue private
activity bonds for such purposes in order to encourage corporations to locate
within their communities. The principal and interest on these obligations are
not payable from the unrestricted revenues of the issuer but rather from the
general revenues of the users of such facilities. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved. Furthermore, payment of
principal and interest on municipal obligations of certain projects may be
secured by mortgages or deeds of trust. In the event of a default, enforcement
of the mortgages or deeds of trust will be subject to statutory enforcement
procedures and limitations, including rights of redemption and limitations on
obtaining deficiency judgments. In the event of a foreclosure, collection of the
proceeds of the foreclosure may be delayed, and the amount of proceeds from the
foreclosure may not be sufficient to pay the principal of and accrued interest
on the defaulted municipal obligations. Interest on private activity bonds,
although free of regular federal income tax, may be an item of tax preference
for purposes of the federal alternative minimum tax.
Dividends paid by the Portfolio that are derived from interest on
municipal obligations would be taxable to shareholders for federal income tax
purposes.
Variable and Floating Rate Instruments. As previously stated, the
Portfolio may purchase variable and floating rate obligations. The Sub-Adviser
will consider the earning power, cash flows and other liquidity ratios of the
issuers and guarantors of such obligations and, for obligations subject to a
demand feature, will monitor their financial status to meet payment on demand.
The Portfolio will invest in such instruments only when the Sub-Adviser believes
that any risk of loss due to issuer default is minimal. In determining average
weighted portfolio maturity, a variable or floating rate instrument issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or a
variable or floating rate instrument scheduled on its face to be paid in 397
days or less, will be deemed to have a maturity equal to the period remaining
until the obligation's next interest rate adjustment. Other variable or floating
rate notes will be
-7-
<PAGE>
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time the Portfolio can recover payment of
principal as specified in the instrument.
Variable or floating rate obligations held by the Portfolio may have
maturities of more than 397 days provided that: (i) the Portfolio is entitled to
payment of principal at any time upon not more than 30 days' notice or at
specified intervals not exceeding 397 days (upon not more than 30 days' notice);
(ii) the rate of interest on a variable rate instrument is adjusted
automatically on set dates not exceeding 397 days, and the instrument, upon
adjustment, can reasonably be expected to have a market value that approximates
its par value; and (iii) the rate of interest on a floating rate instrument is
adjusted automatically whenever a specified interest rate changes and the
instrument, at any time, can reasonably be expected to have a market value that
approximates its par value.
Illiquid and Restricted Securities. The Portfolio will not invest more
than 10% of the value of its net assets in illiquid securities. Repurchase
agreements that do not provide for settlement within seven days, time deposits
maturing in more than seven days, and securities that are not registered under
the Securities Act of 1933, as amended (the "1933 Act") but that may be
purchased by institutional buyers pursuant to Rule 144A are subject to the 10%
limit (unless the Sub-Adviser, pursuant to guidelines established by the Board
of Directors, determines that a liquid market exists). The SEC has adopted Rule
144A which allows for a broader institutional trading market for securities
otherwise subject to restrictions on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for the resale of certain securities to qualified institutional buyers. The
purchase of securities which can be sold under Rule 144A could have the effect
of increasing the level of illiquidity in the Portfolio to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these restricted securities.
The Sub-Adviser monitors the liquidity of restricted securities in the
Portfolio under the supervision of the Board of Directors. In reaching liquidity
decisions, the Sub-Adviser may consider the following factors, although such
factors may not necessarily be determinative: (1) the unregistered nature of a
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (4) the trading markets for the security; (5) dealer
undertakings to make a market in the security; and (6) the nature of the
security and the nature of the marketplace trades (including the time needed to
dispose of the security, methods of soliciting offers, and mechanics of
transfer).
U.S. Government Obligations. Securities issued or guaranteed by the
U.S. Government, its agencies and instrumentalities have historically involved
little risk of loss of principal if held to maturity. However, due to
fluctuations in interest rates, the market value of such securities may vary
during the period a shareholder owns shares of the Portfolio. Certain U.S.
Government securities held by the Portfolio may have remaining maturities
exceeding thirteen months if such securities provide for adjustments in their
interest rates no less frequently than every thirteen months.
-8-
<PAGE>
Examples of the types of U.S. Government obligations that may be held
by the Portfolio include, in addition to U.S. Treasury bills, notes and bonds
(including zero coupon bonds), the obligations of Federal Home Loan Banks,
Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration, Resolution Trust Corporation, and International Bank for
Reconstruction and Development.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Federal Home Loan Mortgage Corporation, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
Stripped U.S. Government Obligations. The Portfolio may hold stripped
U.S. Treasury securities, including (1) coupons that have been stripped from
U.S. Treasury bonds, which are held through the Federal Reserve Bank's book-
entry system called "Separate Trading of Registered Interest and Principal of
Securities" ("STRIPS"), (2) through a program entitled "Coupon Under Book-Entry
Safekeeping" ("CUBES") or (3) other stripped securities issued directly by
agencies or instrumentalities of the U.S. Government. STRIPS and CUBES represent
either future interest or principal payments and are direct obligations of the
U.S. Government that clear through the Federal Reserve System. The Portfolio may
also purchase U.S. Treasury and agency securities that are stripped by brokerage
firms and custodian banks and resold in custodial receipt programs with a number
of different names, including "Treasury Income Growth Receipts" ("TIGRS") and
"Certificates of Accrual on Treasury Securities" ("CATS"). Such securities may
not be as liquid as STRIPS and CUBES and are not viewed by the staff of the SEC
as U.S. Government securities for purposes of the 1940 Act.
The stripped coupons are sold separately from the underlying
principal, which is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. Purchasers of stripped principal-
only securities acquire, in effect, discount obligations that are economically
identical to the zero coupon securities that the Treasury Department sells
itself. In the case of bearer securities (i.e., unregistered securities which
are owned ostensibly by the bearer or holder), the underlying U.S. Treasury
bonds and notes themselves are held in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that, in their opinion, purchasers of the
stripped securities, such as the Portfolio, most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
and securities law purposes.
-9-
<PAGE>
The U.S. Government does not issue stripped Treasury securities
directly. The STRIPS program, which is ongoing, is designed to facilitate the
secondary market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
For custodial receipts, the underlying debt obligations are held
separate from the general assets of the custodian and nominal holder of such
securities, and are not subject to any right, charge, security interest, lien or
claim of any kind in favor of or against the custodian or any person claiming
through the custodian. The custodian is also responsible for applying all
payments received on those underlying debt obligations to the related receipts
or certificates without making any deductions other than applicable tax
withholding. The custodian is required to maintain insurance for the protection
of holders of receipts or certificates in customary amounts against losses
resulting from the custody arrangement due to dishonest or fraudulent action by
the custodian's employees. The holders of receipts or certificates, as the real
parties in interest, are entitled to the rights and privileges of the underlying
debt obligations, including the right, in the event of default in payment of
principal or interest, to proceed individually against the issuer without acting
in concert with other holders of those receipts or certificates or the
custodian.
Stripped securities are issued at a discount to their "face value" and
may exhibit greater price volatility than ordinary debt securities because of
the manner in which principal and interest is returned to investors. The Sub-
Adviser will consider the liquidity needs of the Portfolio when any investments
in zero coupon obligations or other principal-only obligations are made.
Securities Lending. To increase return or offset expenses, the
Portfolio may from time to time, lend its portfolio securities to broker-
dealers, banks or institutional borrowers pursuant to agreements requiring that
the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. Collateral for such loans
may include cash, securities of the U.S. Government, or its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank that has
at least $1.5 billion in total assets, or any combination thereof. The
collateral must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Portfolio. By lending its securities, the Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when U.S. Government securities are
used as collateral. In accordance with current SEC policies, the Portfolio is
currently limiting its securities lending to 331/3% of the value of its total
assets (including the value of the collateral for the loans) at the time of the
loan. Loans are subject to termination by the Portfolio or a borrower at any
time.
-10-
<PAGE>
While the Portfolio would not have the right to vote securities on
loan, the Portfolio intends to terminate the loan and regain the right to vote
should this be considered important with respect to the investment. When the
Portfolio lends its securities, it continues to receive interest or dividends on
the securities loaned and may simultaneously earn interest on the investment of
the cash collateral which will be invested in readily marketable, high quality,
short-term obligations.
Securities of Other Investment Companies. The Portfolio may invest in
securities issued by other investment companies which invest in securities in
which the Portfolio is permitted to invest and which determine their net asset
value per share based on the amortized cost or penny-rounding method. The
Portfolio may invest in securities issued by other investment companies within
the limits prescribed by the 1940 Act so that, as determined immediately after a
securities purchase is made: (a) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (b) not
more than 10% of the value of its total assets will be invested in the aggregate
in securities of investment companies as a group; (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio; and (d) not more than 10% of the outstanding voting stock of any one
investment company will be owned in the aggregate by the Portfolio and other
investment companies advised by the Adviser or Sub-Adviser. Investments in other
investment companies will cause the Portfolio (and, indirectly, the Portfolio's
shareholders) to bear proportionately the cost incurred in connection with the
operations of such other investment companies. In addition, investment companies
in which the Portfolio may invest may impose a sales or distribution change in
connection with the purchase or redemption of their shares as well as other
types of commissions or charges. Such charges will be payable by the Portfolio
and, therefore, will be borne indirectly by its shareholders.
When-Issued Purchases and Forward Commitments. The Portfolio may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. These transactions involve a commitment by the
Portfolio to purchase or sell securities at a stated price and yield with
settlement beyond the normal settlement date. Such transactions permit the
Portfolio to lock-in a price or yield on a security, regardless of future
changes in interest rates. When-issued purchases and forward commitment
transactions involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, or if the value of the security to be
sold increases prior to the settlement date.
When-issued and forward commitment transactions are made to secure
what is considered to be an advantageous price or yield for the Portfolio. When
the Portfolio agrees to purchase or sell securities on a when-issued or forward
commitment basis, the Custodian (or sub-custodian) will maintain in a segregated
account cash or liquid portfolio securities having a value (determined daily) at
least equal to the amount of the Portfolio's commitments. In the case of a
forward commitment to sell portfolio securities, the Custodian (or sub-
custodian) will hold the portfolio securities themselves in a segregated account
while the commitment is outstanding. These procedures are designed to ensure
that the Portfolio will maintain sufficient assets at all times to cover its
obligations under when-issued purchases and forward commitment transactions.
-11-
<PAGE>
The Portfolio does not intend to engage in such transactions for
speculative purposes but only the purpose of acquiring portfolio securities. The
Portfolio will make commitments to purchase securities on a when-issued basis or
to purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, the
Portfolio may dispose of or renegotiate a commitment after it is entered into
and may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases, the Portfolio
may realize a capital gain or loss.
When the Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The value of the securities underlying such commitments to purchase or
sell securities, and any subsequent fluctuations in their value, is taken into
account when determining the Portfolio's net asset value starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date. When the Portfolio makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Portfolio's assets, and fluctuations in the value
of the underlying securities are not reflected in the Portfolio's net asset
value as long as the commitment remains in effect.
The Portfolio expects that when-issued and forward commitment
transactions will not exceed 25% of the value of its total assets (at the time
of purchase) under normal market conditions. Because the Portfolio will set
aside cash or liquid assets to satisfy its purchase commitments in the manner
described above, the Portfolio's liquidity and ability to manage its portfolio
might be affected in the event its commitments to purchase securities on a when-
issued or forward commitment basis ever exceeded 25% of the value of its total
assets.
Repurchase Agreements. The Portfolio may agree to purchase U.S.
Government securities from financial institutions such as banks and broker-
dealers, subject to the seller's agreement to repurchase them at a mutually
agreed-upon date and price ("repurchase agreements"). The Portfolio will enter
into repurchase agreements only with financial institutions such as banks and
broker-dealers that the Sub-Adviser believes to be creditworthy. During the term
of any repurchase agreement, the Sub-Adviser will continue to monitor the
creditworthiness of the seller and will require the seller to maintain the value
of the securities subject to the agreement at not less than 102% of the
repurchase price (including accrued interest). Default by a seller could expose
the Portfolio to possible loss because adverse market action or possible delay
in disposing of the underlying obligations. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although the Portfolio does not presently intend to enter
into repurchase agreements providing for settlement in more than seven days, the
Portfolio does have the authority to do so subject to its limitation on the
purchase of illiquid securities described above. Repurchase agreements are
considered to be loans under the 1940 Act.
-12-
<PAGE>
Reverse Repurchase Agreements. The Portfolio may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment limitations described below. Pursuant to such agreements,
the Portfolio would sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at an agreed upon date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by the Portfolio may decline below the repurchase price
which the Portfolio is obligated to pay. Whenever the Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
cash or other liquid assets in an amount equal to the repurchase price (plus
accrued interest). Reverse repurchase agreements are considered to be borrowings
by the Portfolio under the 1940 Act.
Portfolio Transactions
Subject to the general control of the Fund's Board of Directors and
under the supervision of the Adviser, the Sub-Adviser is responsible for making
decisions with respect to, and placing orders for, all purchases and sales of
portfolio securities for the Portfolio. Securities purchased and sold by the
Portfolio which are traded in the over-the-counter market are generally done so
on a net basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. There is generally no
stated commission in the case of securities traded in the over-the-counter
markets, but the price of those securities includes an undisclosed commission or
mark-up. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Portfolio may participate, if and when practicable, in bidding for
the purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Portfolio will engage in this practice, however, only when the Sub-Adviser,
in its sole discretion, believes such practice to be otherwise in the
Portfolio's interests.
Investment decisions for the Portfolio are made independently from
those for other investment companies and accounts advised or managed by the Sub-
Adviser. Such other investment companies and accounts may also invest in the
same securities as the Portfolio. When a purchase or sale of the same security
is made at substantially the same time on behalf of the Portfolio and another
investment company or account, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which the Sub-Adviser
believes to be equitable to the Portfolio and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtained by
the Portfolio. To the extent permitted by law, Sub-Adviser may aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other investment companies or accounts in order to obtain best
execution.
-13-
<PAGE>
Portfolio Turnover
The Portfolio's annual portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the Portfolio's securities. The calculation
excludes all securities the maturities of which at the time of acquisition were
thirteen months or less. Consequently, because the Portfolio is a money market
fund, there is not expected to be any portfolio turnover for the Portfolio for
regulatory reporting purposes.
Investment Limitations
Except as otherwise noted in the Prospectus or this Statement of
Additional Information, the Portfolio's investment policies are not fundamental
and may be changed by the Fund's Board of Directors without shareholder
approval. However, the Portfolio also has in place certain fundamental
investment limitations, which are set forth below, which may be changed only by
a vote of a majority of the outstanding shares of the Portfolio.
The Portfolio may not:
1. Make loans, except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and
policies, lend portfolio securities, and enter into repurchase
agreements with respect to securities (together with any cash
collateral) that are consistent with the Portfolio's permitted
investments and that equal at all times at least 100% of the
value of the purchase price.
2. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and the Portfolio may enter into
reverse repurchase agreements for temporary purposes in amounts
up to 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except
in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Portfolio's total assets at the time of such
borrowing. The Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) are
outstanding.
3. Invest 25% or more of its total assets in one or more issuers
conducting their principal business activities in the same
industry, except that the Portfolio may invest more than 25% of
its total assets in either government securities, as defined in
the 1940 Act, or instruments of domestic banks.
4. Purchase securities of any one issuer, other than obligations of
the U.S. Government, its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of the
Portfolio's total assets would be
-14-
<PAGE>
invested in such issuer, except that up to 25% of the value of
the Portfolio's total assets may be invested without regard to
such 5% limitation.
5. Acquire any other investment company or investment company
security except in connection with a merger, consolidation,
reorganization or acquisition of assets, or where otherwise
permitted by the 1940 Act.
6. Purchase or sell real estate (the Portfolio may purchase
commercial paper issued by companies which invest in real estate
or interests therein).
7. Purchase securities on margin, make short sales of securities or
maintain a short position.
8. Underwrite the securities of other issuers.
9. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
10. Write or purchase put or call options.
In accordance with current regulations of the SEC, the Portfolio
intends to invest no more than 5% of its total assets at the time of purchase in
the securities of any one issuer (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities); provided, however, that
the Portfolio may invest up to 25% of its total assets in the First Tier
Eligible Securities (as defined in Rule 2a-7) of a single issuer for a period of
up to three business days after the purchase thereof, provided, further that the
Portfolio would not make more than one investment in accordance with the
foregoing provision at any time. This intention is not, however, a fundamental
policy of the Portfolio and may change in the event Rule 2a-7 is amended in the
future.
PRICING OF SHARES
The public offering price for shares of the Portfolio is based upon
the net asset value per share. As stated in the Prospectus, the net asset value
per share of the Portfolio is calculated by adding the value of all of the
securities and other assets belonging to the Portfolio, subtracting the
liabilities of the Fund that are attributable to the Portfolio, and dividing the
result by the number of outstanding shares of the Portfolio. The determinations
by the Board of Directors as to the allocable portion of general assets and
liabilities with respect to the Portfolio are conclusive.
The assets in the Portfolio are valued according to the amortized cost
method of valuation. Pursuant to this method, an instrument is valued at its
cost initially and, thereafter, a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
-15-
<PAGE>
market price the Portfolio would receive if it sold the instrument. The value
of securities in the Portfolio can be expected to vary inversely with changes in
prevailing interest rates.
The Portfolio invests only in instruments that present minimal credit
risks and meet the ratings criteria described in the Prospectus. In addition,
the Portfolio maintains a dollar-weighted average portfolio maturity appropriate
to its objective of maintaining a stable net asset value per share, provided
--------
that the Portfolio will not purchase any security with a remaining maturity of
- ----
more than thirteen months (397 days) (securities subject to repurchase
agreements and certain other securities may bear longer maturities) nor maintain
a dollar-weighted average portfolio maturity that exceeds 90 days. The Fund's
Board of Directors has approved procedures that are intended to stabilize the
Portfolio's net asset value per share at $1.00 for purposes of pricing sales and
redemptions. These procedures include the determination, at such intervals as
the Board deems appropriate, of the extent, if any, to which the net asset value
per share of the Portfolio calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, the Board will promptly consider what action, if any, should be
initiated. If the Board believes that the extent of any deviation from the
Portfolio's $1.00 amortized cost price per share may result in material dilution
or other unfair results to new or existing investors, it will take such steps as
it considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include, but
are not limited to, selling portfolio instruments prior to maturity; shortening
the average portfolio maturity; withholding or reducing dividends; redeeming
shares in kind; or utilizing a net asset value per share determined by using
available market quotations. Although the Portfolio seeks to maintain its net
asset value per share at $1.00, there can be no assurance that the net asset
value per share will not vary.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in the Portfolio are sold on a continuous basis by the Fund's
distributor.
Purchase of Shares
Shares of the Portfolio are sold without any sales charge through
broker-dealers or other financial advisers acting on behalf of their customers.
Generally, investors purchase shares through a broker-dealer organization which
has a sales agreement with the Fund's distributor or through a financial
organization which has entered into a servicing agreement with the Fund with
respect to the Portfolio.
Purchases may be effected on business days (as defined in the
Prospectus). The Fund reserves the right to reject any purchase order, including
purchases made with foreign and third party drafts or checks. On a business day
when the Exchange closes early due to a partial holiday or otherwise, the Fund
reserves the right to advance the times at which purchase and redemption orders
must be received in order to be processed on that business day.
All shareholders of record will receive confirmations of share
purchases and redemptions in the mail. If shares are held in the name of broker-
dealers or other financial
-16-
<PAGE>
organizations, such organization is responsible for transmitting purchase and
redemption orders to the Fund on a timely basis, recording all purchase and
redemption transactions, and providing regular account statements which confirm
such transactions to beneficial owners.
Redemption of Shares
As stated in the Prospectus, the Fund's transfer agent may require a
signature guarantee by an eligible guarantor institution on written redemption
requests. For purposes of this policy, the term "eligible guarantor institution"
shall include banks, brokers, dealers, credit unions, securities exchanges and
associations, clearing agencies and savings associations as those terms are
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. The transfer
agent reserves the right to reject any signature guarantee if (1) it has reason
to believe that the signature is not genuine, (2) it has reason to believe that
the transaction would otherwise be improper, or (3) the guarantor institution is
a broker or dealer that is neither a member of a clearing corporation nor
maintains net capital of at least $100,000. The signature guarantee requirement
will be waived if all of the following conditions apply: (1) the redemption
check is payable to the shareholder(s) of record and (2) the redemption check is
mailed to the shareholder(s) at the address of record or the proceeds are either
mailed or sent electronically to a commercial bank account previously designated
on the account application. An investor with questions or needing assistance
should contact his or her broker-dealer or financial adviser. Additional
documentation may be required if the redemption is requested by a corporation,
partnership, trust, fiduciary, executor, or administrator.
During periods of substantial economic or market change or activity,
telephone redemptions may be difficult to complete. In such event, shares may be
redeemed by mailing the request directly to the organization through which the
original shares were purchased.
Under the 1940 Act, the Portfolio may suspend the right of redemption
or postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than customary
weekend and holiday closing; (c) the SEC has by order permitted such suspension;
or (d) an emergency exists as determined by the SEC. The Portfolio may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.
The Portfolio may redeem shares involuntarily to reimburse the
Portfolio for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Portfolio shares.
YIELD INFORMATION
Yield figures will fluctuate, are based on historical earnings, and
are not intended to indicate future performance. The methods used to compute the
Portfolio's yields are described below.
-17-
<PAGE>
From time to time, performance information such as "yield" and
"effective yield" for the Portfolio may be quoted in advertisements or in
communications to shareholders. The "yield" quoted in advertisements refers to
the income generated by an investment in the Portfolio over a specified period
(such as a seven-day period) identified in connection with the particular yield
quotation. This income is then "annualized." That is, the amount of income
generated by the investment during that period is assumed to be generated for
each such period over a 52-week or one-year period and is shown as a percentage
of the investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Portfolio is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
The Portfolio's "yield" and "effective yield" are calculated according
to formulas prescribed by the SEC. Standardized 7-day "yield" is computed by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in the Portfolio having a balance of one share
at the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, dividing the difference by the value of
the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7). The net change
in the value of an account includes the value of additional shares purchased
with dividends from the original share, and dividends declared on both the
original share and any such additional shares, net of all fees, other than
nonrecurring account or sales charges, that are charged by the Portfolio to all
shareholder accounts in proportion to the length of the base period and the
Portfolio's mean (or median) account size. The capital changes to be excluded
from the calculation of the net change in account value are realized gains and
losses from the sale of securities and unrealized appreciation and depreciation.
"Effective yield" is computed by compounding the unannualized base period return
(calculated as above) by adding one to the base period return, raising the sum
to a power equal to 365 divided by seven, and subtracting one from the result.
Based upon the same calculations, the Portfolio's 30-day yields and 30-day
effective yields may also be quoted.
Based on the foregoing calculations, (i) for the 7-day period ended
May 31, 1999, the Portfolio's 7-day yield and 7-day effective yield were 4.05%
and 4.13%, respectively, and (ii) for the 30-day period ended May 31, 1999, the
Portfolio's 30-day yield was 4.02%.
The Portfolio's quoted yields are not indicative of future yields and
depend upon factors such as portfolio maturity, the Portfolio's expenses, and
the types of instruments held by the Portfolio. Any account fees imposed by
broker-dealers or other financial organizations would reduce the Portfolio's
effective yield.
Investors may judge the performance of the Portfolio by comparing it
to the performance of other mutual funds or mutual fund portfolios with
comparable investment objectives and policies. Such comparisons may be made by
referring to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. Such
comparisons may also be made by referring to data prepared by Lipper Analytical
Services, Inc. (a widely recognized independent service which monitors the
-18-
<PAGE>
performance of mutual funds), Indata, Frank Russell, CDA, and the Bank Rate
Monitor (which reports average yields for money market accounts offered by the
50 leading banks and thrift institutions in the top five standard metropolitan
statistical areas). Other similar yield data, including comparisons to the
performance of Mercantile Bank repurchase agreements, or the average yield data
for similar asset classes including but not limited to Treasury bills, notes and
bonds, may also be used for comparison purposes. Comparisons may also be made to
indices or data published in the following national financial publications:
Mutual Fund Forecaster, IBC's Money Fund Report(R), MorningStar,
CDA/Wiesenberger, Money Magazine, Forbes, Fortune, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and publications of Ibbotson Associates,
Inc. and other publications of a local or regional nature. In addition to
performance information, general information about the Portfolio that appears in
a publication such as those mentioned above may be included in advertisements,
supplemental sales literature and in reports to shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation and the power of compounding); (2) discussions of
general economic trends; (3) presentations of statistical data to supplement
such discussions; (4) descriptions of past or anticipated portfolio holdings for
the Portfolio; (5) descriptions of investment strategies for the Portfolio; (6)
descriptions or comparisons of various investment products, which may or may not
include the Portfolio; (7) comparisons of investment products (including the
Portfolio) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of rankings or ratings by recognized rating
organizations. Such data are for illustrative purposes only and are not intended
to indicate past or future performance results of the Portfolio. Actual
performance of the Portfolio may be more or less than that noted in the
hypothetical illustrations.
Since performance will fluctuate, performance data for the Portfolio
cannot necessarily be used to compare an investment in the Portfolio with bank
deposits, savings accounts, and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in the Portfolio, portfolio maturity,
operating expenses, and market conditions. The current yield and performance of
the Portfolio may be obtained by calling your broker-dealer or financial
adviser.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisors with specific reference to
their own tax situations.
-19-
<PAGE>
Each portfolio of the Fund is treated as a separate corporate entity
under the Internal Revenue Code of 1986, as amended (the "Code"). The Portfolio
intends to qualify each year as a regulated investment company. In order to so
qualify for a taxable year under the Code, the Portfolio must satisfy certain
distribution requirements as set forth below.
At least 90% of the Portfolio's gross income for a taxable year must
be derived from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities or foreign
currencies, and other income (including, but not limited to, gains from options,
futures, or forward contracts) derived with respect to the Portfolio's business
of investing in such stock, securities or currencies (the "Gross Income
Requirement").
Also, at the close of each quarter of its taxable year, at least 50%
of the value of the Portfolio's assets must consist of cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Portfolio has not invested more
than 5% of the value of its total assets in securities of such issuer and as to
which the Portfolio does not hold more than 10% of the outstanding voting
securities of such issuer) and no more than 25% of the value of the Portfolio's
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses.
Qualification as a regulated investment company under the Code for a
taxable year also requires that the Portfolio distribute to its shareholders an
amount equal to at least the sum of 90% of its investment company taxable income
and 90% of its net exempt-interest income (if any). In general, the Portfolio's
investment company taxable income will be its taxable income, including
dividends, interest and short-term capital gains (the excess of net short-term
capital gain over net long-term capital loss), subject to certain adjustments
and excluding the excess of any net long-term capital gain over net short-term
capital loss, if any, for such taxable year.
Dividends declared by the Portfolio in October, November, or December
of any year payable to shareholders of record on a specified date in such months
will be deemed to have been received by shareholders and paid by the Fund on
December 31 of such year, if such dividends are actually paid during January of
the following year.
The Portfolio may be required in certain cases to withhold and remit
to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid to
shareholders who have failed to provide a correct tax identification number in
the manner required, who are subject to backup withholding by the Internal
Revenue Service for prior failure properly to include on their return payments
of taxable interest or dividends, or who have failed to certify to the Portfolio
that they are not subject to backup withholding when required to do so or that
they are "exempt recipients."
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Portfolio intends to make
-20-
<PAGE>
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income each year to avoid liability for this excise
tax.
State and Local Taxes
Shareholders should note that dividends paid by the Portfolio may be
taxable to investors under state or local law as dividend income even though all
or a portion of such dividends may be derived from interest on obligations that,
if realized directly, would be exempt from such income taxes.
* * * * *
The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisors concerning the
application of federal, state and local taxes and with specific reference to
their own tax situation.
MANAGEMENT OF THE FUND
Directors and Officers
The business and affairs of the Portfolio are managed under the
direction of Fund's Board of Directors in accordance with the laws of Maryland
and the Fund's Articles of Incorporation. The directors and executive officers
of the Fund, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- --------------------- ---------------- -----------------------------------
<S> <C> <C>
Jerry V. Woodham* Chairman of the Treasurer, St. Louis University,
St. Louis University Board, President August 1996 to present; Treasurer,
3500 Lindell and Director Washington University, 1981 to 1995
Fitzgerald Hall
St. Louis, MO 63131
Age: 55
</TABLE>
- ----------------------------
* Mr. Woodham is an "interested person" of the Fund as defined in the 1940 act.
-21-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- --------------------- ---------------- -----------------------------------
<S> <C> <C>
Robert M. Cox, Jr. Director Senior Vice President and Advisory
Emerson Electric Co. Director, Emerson Electric Co. since
8000 W. Florissant Ave. November, 1990
P.O. Box 4100
St. Louis, MO 63136-8506
Age: 53
Joseph J. Hunt Director General Vice-President,
Iron Workers International International Association of Bridge,
Union 1750 New York Avenue, Structural and Ornamental Iron
N.W. Workers (International Labor Union),
Suite 400 January 1994 to present.
Washington, DC 20006
Age: 56
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing apparel and
600 Kellwood Parkway camping softgoods) since 1975; Vice
Chesterfield, MO 63017 Chairman, Kellwood Company since
Age: 63 May, 1989
Donald E. Brandt Director Senior Vice President, Finance and
Union Electric Company Corporate Services, Union Electric
P.O. Box 66149 Company (electric utility company);
St. Louis, MO 63166 Director, Huntco, Inc. (intermediate
Age: 44 steel processors).
Patrick J. Moore Director Vice President & Chief Financial
Jefferson Smurfit Corporation Officer since 1996 and Vice
8182 Maryland Avenue President & General Manager,
St. Louis, MO 63105 1994-1996, of Industrial Packaging
Age: 44 Division and Corporate Vice
President & Treasurer, 1993-1994,
Jefferson Smurfit Corporation
(paper, paperboard and packaging).
Ronald D. Winney* Director and Treasurer, Ralston Purina Company
Ralston Purina Company Treasurer since 1985.
Checkerboard Square
St. Louis, MO 63164
Age: 56
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund and other affiliations
- --------------------- ---------------- -----------------------------------
<S> <C> <C>
W. Bruce McConnel, III* Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP, Philadelphia,
18th and Cherry Streets Pennsylvania since 1977.
Philadelphia, PA 19103-6996
Age: 55
Walter B. Grimm* Vice President and Employee of BISYS Fund Services.
3435 Stelzer Road Assistant Treasurer
Columbus, OH 43219
Age: 53
R. Jeffrey Young* Assistant Secretary Employee of BISYS Fund Services.
3435 Stelzer Road
Columbus, OH 43219
Age: 35
</TABLE>
* Messrs. Grimm, Winney, McConnel and Young are "interested persons" of the Fund
as defined in the 1940 Act.
___________________
Each director receives an annual fee of $10,000 plus reimbursement of
expenses incurred as a director. The Chairman of the Board and President of the
Fund receives an additional annual fee of $5,000 for his services in these
capacities. For the fiscal year ended November 30, 1998, the Fund paid or
accrued for the account of its directors as a group, for services in all
capacities, a total of $67,500. Drinker Biddle & Reath LLP, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Fund. As of the
date of this Statement of Additional Information, the directors and officers of
the Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
The following chart provides certain information about the fees
received by the Fund's directors for their services as members of the Board of
Directors and committees thereof for the fiscal year ended November 30, 1998:
-23-
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Compensation
Compensation as Part of Fund from the Fund and
Name of Director from the Fund Expense Fund Complex*
- ---------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C>
Jerry V. Woodham $15,000 N/A $15,000
Donald E. Brandt** $ 7,500 N/A $ 7,500
Robert M. Cox, Jr. $10,000 N/A $10,000
Joseph J. Hunt $10,000 N/A $10,000
James C. Jacobsen $10,000 N/A $10,000
Patrick J. Moore** $ 5,000 N/A $ 5,000
Ronald D. Winney $10,000 N/A $10,000
</TABLE>
* The "Fund Complex" consists solely of the Fund.
** Elected a director of the Fund on January 30, 1998.
- ---------------------
Investment Adviser and Sub-Adviser
Mississippi Valley Advisors Inc. (the "Adviser") serves as the
investment adviser to the Portfolio. For the services provided and expenses
assumed pursuant to the investment advisory agreement, the Adviser is entitled
to receive fees, computed daily and payable monthly, at the annual rate of .40%
of the first $1.5 billion of the Portfolio's average daily net assets, .35% of
the next $1.0 billion of net assets and .25% of net assets in excess of $2.5
billion.
In addition, Conning Asset Management Company (the "Sub-Adviser")
serves as sub-adviser to the Portfolio. For the services provided and expenses
assumed pursuant to its sub-advisory agreement with the Adviser, the Sub-Adviser
receives from the Adviser a fee, computed daily and payable monthly, at the
annual rate of .30% of the first $1.5 billion of the Portfolio's average daily
net assets, .25% of the next $1.0 billion of net assets and .15% of net assets
in excess of $2.5 billion.
The Adviser and Sub-Adviser may from time to time voluntarily reduce
all or a portion of their respective advisory and sub-advisory fees to increase
the net income of the Portfolio available for distribution as dividends. These
voluntary fee reductions will cause the return of the Portfolio to be higher
than it would otherwise be in the absence of such reductions.
Pursuant to the advisory and sub-advisory agreements, the Adviser and
the Sub-Adviser have agreed to provide investment advisory and sub-investment
advisory services, respectively, as described in the Portfolio's Prospectus. The
Adviser and Sub-Adviser have agreed to pay all expenses incurred by them in
connection with their activities under their
-24-
<PAGE>
respective agreements other than the cost of securities, including brokerage
commissions, if any, purchased for the Portfolio.
The investment advisory and sub-advisory agreements provide that the
Adviser and Sub-Adviser, respectively, shall not be liable for any error of
judgment or mistake of law or for any loss suffered in connection with the
performance of their respective agreements, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their duties or from reckless disregard by them
of their duties and obligations thereunder.
Administrator
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road,
Columbus, Ohio 43219, acts as the Portfolio's administrator (the
"Administrator").
The Administrator generally assists in all aspects of the Portfolio's
administration and operation. For its services, the Administrator is entitled to
receive a fee, computed daily and payable monthly, at the annual rate of .20% of
the Portfolio's average daily net assets. From time to time, the Administrator
may voluntarily waive all or a portion of the administration fees otherwise
payable by the Portfolio in order to increase the net income available for
distribution to shareholders.
The Administrator has agreed to maintain office facilities for the
Portfolio, furnish the Portfolio with statistical and research data, clerical,
accounting, and certain bookkeeping services, stationery and office supplies,
and certain other services required by the Portfolio, and to compute the net
asset value and net income of the Portfolio. The Administrator prepares annual
and semi-annual reports to the SEC on Form N-SAR, compiles data for and prepares
federal and state tax returns and required tax filings other than those required
to be made by the Fund's custodian and transfer agent, prepares the Fund's
compliance filings with state securities commissions, maintains the registration
or qualification of shares for sale under the securities laws of any state in
which the Fund's shares shall be registered, assists in the preparation of
annual and semi-annual reports to shareholders of record, participates in the
periodic updating of the Fund's Registration Statement, prepares and assists in
the timely filing of notices to the SEC required pursuant to Rule 24f-2 under
the 1940 Act, arranges for and bears the cost of processing share purchase,
exchange and redemption orders, keeps and maintains the Portfolios' financial
accounts and records including calculation of daily expense accruals, monitors
compliance procedures for the Portfolio with its investment objective, policies
and limitations, tax matters, and applicable laws and regulations, and generally
assists in all aspects of the Portfolio's operations. The Administrator bears
all expenses in connection with the performance of its services, except that the
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities.
-25-
<PAGE>
From time to time, the Administrator may voluntarily waive a portion
or all of its fees otherwise payable to it with respect to the Portfolio in
order to increase the net income available for distribution to shareholders.
Distributor
Shares in the Portfolio are sold continuously by BISYS Fund Services
(the "Distributor"), an affiliate of the Administrator. The Distributor is a
registered broker-dealer with principal offices at 3435 Stelzer Road, Columbus,
Ohio 43219.
Shareholder Services Plan
The Fund has adopted a Shareholder Services Plan (the "Plan") with
respect to the Portfolio. Under the Plan, the Portfolio may pay (a) broker-
dealers, financial advisers and other institutions ("Service Organizations") for
shareholder liaison services, which means personal services for shareholders
and/or the maintenance of shareholder accounts, such as responding to customer
inquiries and providing information on accounts, and (b) Service Organizations
for administrative support services, which include but are not limited to (i)
transfer agent and sub-transfer agent services for beneficial owners of shares
of the Portfolio; (ii) aggregating and processing purchase and redemption
orders; (iii) providing beneficial owners with statements showing their position
in shares of the Portfolio; (iv) processing dividend payments; (v) providing
sub-accounting services for shares of the Portfolio held beneficially; (vi)
forwarding shareholder communications, such as proxies, shareholder reports,
dividend and tax notices, and updating prospectuses to beneficial owners; and
(vii) receiving, translating and transmitting proxies executed by beneficial
owners.
Under the Plan, payments by the Fund to a Service Organization for
shareholder liaison services and/or administrative support services may not
exceed the annual rates of .25% and .50%, respectively, of the average daily net
assets attributable to the Portfolio's outstanding shares which are owned of
record or beneficially by that Service Organization's customers for whom the
Service Organization is the dealer of record or shareholder of record or with
whom it has a servicing relationship. As of the date of this Statement of
Additional Information, the Fund intends to limit the Portfolio's payments for
shareholder liaison and administrative support services under the Plan to an
aggregate fee of not more than .67% (on an annualized basis) of the average
daily net asset value of shares owned of record or beneficially by customers of
Service Organizations.
The servicing agreements adopted under the Shareholder Services Plan
(the "Servicing Agreements") require the Service Organizations receiving such
compensation (which may include affiliates of the Adviser and Sub-Adviser) to
perform certain services, including providing shareholder liaison services
and/or administrative support services with respect to the beneficial owners of
shares of the Portfolio, such as those described above.
Under the Servicing Agreements and upon notice to the Fund, a Service
Organization may subcontract with one or more entities for the performance of
certain services provided under its Servicing Agreement with the Fund. Such
Service Organization shall be as
-26-
<PAGE>
fully responsible to the Fund for the acts or omissions of any subcontractor as
it would be for its own acts or omissions. The fees payable to any sub-
contractor are paid by the Service Organization out of the fees it receives from
the Fund.
The Fund understands that Service Organizations providing such
services may also charge fees to their customers beneficially owing shares of
the Portfolio. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by the
Portfolio and any other compensation payable by its customers in connection with
their investment in shares of the Portfolio. Customers of such a Service
Organization receiving servicing fees should read the Portfolio's Prospectus and
this Statement of Additional Information in light of the terms governing their
accounts with their Service Organization.
The Board of Directors has approved the Plan and its respective
arrangements with Service Organizations based on information provided by the
Fund's service contractors that there is a reasonable likelihood that the Plan
and arrangements will benefit the Portfolio and its shareholders. Pursuant to
the Plan, the Board of Directors reviews, at least quarterly, a written report
of the amounts of servicing fees expended pursuant to the Plan and the purposes
for which the expenditures were made. Any material amendment to the Plan or
arrangements with Service Organizations must be approved by a majority of the
Board of Directors.
Custodian and Transfer Agent
Mercantile Trust Company National Association, an indirect wholly-
owned subsidiary of Firstar Corporation, with principal offices located at One
Mercantile Center, 8/th/ and Locust Streets, St. Louis, Missouri 63101, serves
as custodian of the Portfolio's assets. BISYS Fund Services Ohio, Inc. also
serves as the Portfolio's transfer agent and dividend disbursing agent. Its
address is 3435 Stelzer Road, Columbus, Ohio 43219.
Regulatory Matters
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any affiliate
thereof from sponsoring, organizing, or controlling the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting, selling, or
distributing securities such as shares of the Portfolio. Such banking laws and
regulations do not prohibit such a holding company or affiliate, or banks, from
acting as investment adviser, transfer agent, or custodian to such an investment
company, or from purchasing shares of such a company as agent for and upon the
order of customers. Mercantile Trust Company National Association, the Adviser,
Service Organizations that are banks or bank affiliates, and broker-dealers that
are bank affiliates are subject to such laws and regulations, but believe they
may perform the services for the Portfolio contemplated by their respective
agreements, the Prospectus and this Statement of Additional Information without
violating applicable banking laws and regulations. In addition, state securities
laws on this issue may
-27-
<PAGE>
differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Should future legislative, judicial, or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Portfolio and the shareholders, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is not expected that investors would
suffer any adverse financial consequences as a result of any of these
occurrences.
If current restrictions preventing a bank from legally sponsoring,
organizing, controlling, or distributing shares of an investment company were
relaxed, Mercantile Trust Company National Association, or an affiliate of
Mercantile Trust Company National Association, would consider the possibility of
offering to perform additional services for the Portfolio. It is not possible,
of course, to predict whether or in what form such legislation might be enacted
or the terms upon which Mercantile Trust Company National Association, or such
an affiliate, might offer to provide such services.
Conflict of interest restrictions may apply to the receipt of
compensation paid pursuant to a Servicing Agreement by the Portfolio to a
financial intermediary in connection with the investment of fiduciary funds in
the Portfolio. Institutions, including banks regulated by the Comptroller of the
Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
Expenses
Except as noted above, the Fund's service contractors bear all
expenses in connection with the performance of their services. Expenses are
deducted from the total income of the Portfolio before dividends and
distributions are paid. These expenses include, but are not limited to, fees
paid to the Adviser and Administrator, transfer agency fees, fees and expenses
of officers and directors who are not affiliated with the Adviser or the
Distributor, taxes, interest, legal fees, custodian fees, auditing fees,
shareholder servicing fees, certain fees and expenses in registering and
qualifying the Portfolio and its shares for distribution under federal and state
securities laws, costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders, the expense of reports to shareholders, shareholders' meetings and
proxy solicitations, fidelity bond and directors' and officers' liability
insurance premiums, the expense of using independent pricing services and other
expenses which are not expressly assumed by the Adviser, Sub-Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular portfolio will be allocated among all portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable.
-28-
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP, certified public accountants, with offices at Two Nationwide
Plaza, Columbus, Ohio 43215, serves as independent auditors for the Fund. KPMG
LLP has been engaged to perform an annual audit of the Fund's financial
statements. Reports of its activities are provided to the Fund's Board of
Directors.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III, Secretary
of the Fund, is a partner), One Logan Square, 18/th/ and Cherry Streets,
Philadelphia, Pennsylvania 19103-6996, is counsel to the Fund and will pass upon
certain legal matters on its behalf.
MISCELLANEOUS
As of August 27, 1999, Pershing, as Agent-Omnibus Account, One
Pershing Plaza, Jersey City, NJ 07399-0002, held of record 97.54% of the
Portfolio's outstanding shares as fiduciary or agent on behalf of its customers.
On the basis of information received from these institutions, the Fund
believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
FINANCIAL STATEMENTS
The Portfolio's Semi-Annual Report to Shareholders dated May 31, 1999
has been filed with the Securities and Exchange Commission. The financial
statements in such Semi-Annual Report are incorporated by reference into this
Statement of Additional Information. The financial statements included in such
Semi-Annual Report have not been audited.
-29-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be
A-1
<PAGE>
evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
that default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations are rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to non-payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
A-4
<PAGE>
"CCC" - An obligation rated "CCC" is currently vulnerable to non-
payment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest
A-5
<PAGE>
are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is
A-6
<PAGE>
deemed likely to meet obligations when due. Debt rated "B" possesses the risk
that obligations will not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to timely payment of
principal, interest or preferred dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock with dividend
arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. these ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," and "C" - Bonds have high default risk. Default is a real
possibility and capacity for meeting financial commitments is reliant upon
sustained, favorable
A-7
<PAGE>
business or economic developments. "CC" ratings indicate that default of some
kind appears probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential of amounts outstanding on any securities involved, and "D" represents
the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-8
<PAGE>
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-9
