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MERCANTILE MUTUAL FUNDS, INC.
(FORMERLY KNOWN AS THE ARCH FUND(R), INC.)
Statement of Additional Information
for
Treasury Money Market Portfolio
Money Market Portfolio
Tax-Exempt Money Market Portfolio
U.S. Government Securities Portfolio
Intermediate Corporate Bond Portfolio
Bond Index Portfolio
Government & Corporate Bond Portfolio
Short-Intermediate Municipal Portfolio
Missouri Tax-Exempt Bond Portfolio
National Municipal Bond Portfolio
Balanced Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth & Income Equity Portfolio
Growth Equity Portfolio
Small Cap Equity Portfolio
Small Cap Equity Index Portfolio
International Equity Portfolio
March 31, 1999
TRUST SHARES, TRUST II SHARES, INSTITUTIONAL SHARES
INVESTOR A SHARES AND INVESTOR B SHARES
This Statement of Additional Information, which provides supplemental
information applicable to the above-listed Portfolios of Mercantile Mutual
Funds, Inc. (the "Fund"), is not a prospectus. No investment in shares of any
Portfolio should be made without reading the applicable prospectus. The
prospectuses for the Portfolios listed below, as they may be supplemented or
revised from time to time (the "Prospectuses"), as well as the Annual Report to
Shareholders dated November 30, 1998 (the "Annual Report"), may be obtained,
without charge, by writing:
Mercantile Mutual Funds, Inc.
P. O. Box 78069 - Tram 001/128/41-6
St. Louis, MO 63178
or by calling 1-800-452-2724.
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Current Prospectuses
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- - Prospectus for Trust Shares and Trust II Shares of the Portfolios dated
March 31, 1999
- - Prospectus for Trust Shares of the Money Market Portfolios dated March
31, 1999
- - Prospectus for Institutional Shares of the Portfolios dated March 31,
1999
- - Prospectus for Investor A Shares and Investor B Shares of the Money
Market Portfolios dated March 31, 1999
- - Prospectus for Investor A Shares and Investor B Shares of the Taxable
Bond Portfolios dated March 31, 1999
- - Prospectus for Investor A Shares and Investor B Shares of the
Tax-Exempt Bond Portfolios dated March 31, 1999
- - Prospectus for Investor A Shares and Investor B Shares of the Stock
Portfolios dated March 31, 1999
The financial statements included in the November 30, 1998 Annual
Report and the report thereon of KPMG LLP, the Fund's independent auditors, are
incorporated by reference into this Statement of Additional Information.
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<TABLE>
TABLE OF CONTENTS
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Page
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GENERAL INFORMATION..........................................................1
DESCRIPTION OF MERCANTILE MUTUAL FUNDS, INC..................................1
DESCRIPTION OF SHARES........................................................2
INVESTMENT STRATEGIES, POLICIES AND RISKS....................................6
PRICING OF SHARES...........................................................62
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................64
YIELD AND TOTAL RETURN INFORMATION..........................................74
ADDITIONAL INFORMATION CONCERNING TAXES.....................................89
MANAGEMENT OF THE FUND......................................................93
INDEPENDENT AUDITORS.......................................................117
COUNSEL....................................................................117
MISCELLANEOUS..............................................................117
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
</TABLE>
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GENERAL INFORMATION
This Statement of Additional Information should be read in
conjunction with a current Prospectus. This Statement of Additional Information
relates to the Prospectuses for Trust Shares, Trust II Shares, Institutional
Shares, Investor A Shares and Investor B Shares of the eighteen separate
investment portfolios ("Portfolios") listed on the cover page. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectuses. No investment in shares of the Portfolios should be made without
reading a Prospectus.
PORTFOLIO SHARES 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. INVESTMENT RETURN AND PRINCIPAL VALUE WILL VARY AS A RESULT
OF MARKET CONDITIONS OR OTHER FACTORS SO THAT PORTFOLIO SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. AN INVESTMENT IN THE
PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED. THERE IS NO ASSURANCE THAT THE TREASURY MONEY MARKET, MONEY
MARKET AND TAX-EXEMPT MONEY MARKET 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 investment company currently offering sixty-five
classes of shares in nineteen investment portfolios.
The Fund was organized on September 9, 1982 as a Maryland
corporation. This Statement of Additional Information relates to the Treasury
Money Market Portfolio, Money Market Portfolio, Tax-Exempt Money Market
Portfolio (the "Money Market Portfolios"), U.S. Government Securities Portfolio,
Intermediate Corporate Bond Portfolio, Bond Index Portfolio, Government &
Corporate Bond Portfolio, Short-Intermediate Municipal Portfolio, Missouri
Tax-Exempt Bond Portfolio, National Municipal Bond Portfolio (the "Bond
Portfolios"), Balanced Portfolio, Equity Income Portfolio, Equity Index
Portfolio, Growth & Income Equity Portfolio, Growth Equity Portfolio, Small Cap
Equity Portfolio, Small Cap Equity Index Portfolio and International Equity
Portfolio (the "Equity Portfolios"). The Tax-Exempt Money Market Portfolio (the
"Predecessor Tax-Exempt Money Market Portfolio") and the Missouri Tax Exempt
Bond Portfolio (the "Predecessor Missouri Tax-Exempt Bond Portfolio") commenced
operations on July 10, 1986 and July 15, 1988, respectively, as separate
investment portfolios of The ARCH Tax-Exempt Trust, which was organized as a
Massachusetts business trust. On October 2, 1995, the Predecessor Tax-Exempt
Money Market Portfolio and the Predecessor Missouri Tax-Exempt Bond Portfolio
were reorganized as new portfolios of the Fund. Prior to the reorganization,
these Predecessor Portfolios offered and sold shares of
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beneficial interest that were similar to the Fund's Trust Shares, Investor A
Shares and Investor B Shares. The Growth Equity Portfolio commenced operations
on January 4, 1993 as a separate investment portfolio (the "Predecessor Growth
Equity Portfolio") of Arrow Funds, which was organized as a Massachusetts
business trust. On November 21, 1997, the Predecessor Growth Equity Portfolio
was reorganized as a new Portfolio of the Fund. Prior to the reorganization, the
Predecessor Growth Equity Portfolio offered and sold shares of beneficial
interests that were similar to the Fund's Investor A Shares.
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 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 nineteen investment Portfolios, including the Treasury Money Market,
Money Market, Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Balanced, Equity
Income, Equity Index, Growth & Income Equity, Growth Equity, Small Cap Equity,
Small Cap Equity Index and International Equity Portfolios. Trust Shares, Trust
II Shares, Institutional Shares, Investor A Shares and Investor B Shares in each
Portfolio (except the Treasury Money Market, Intermediate Corporate Bond, Bond
Index, Equity Index and Small Cap Equity Index Portfolios, which do not offer
Investor B Shares, the Tax-Exempt Money Market and Short-Intermediate Municipal
Portfolios, which do not offer Institutional or Investor B Shares, the Missouri
Tax-Exempt Bond and National Municipal Bond Portfolios, which do not offer
Institutional Shares and the Equity and Bond Portfolios, which do not offer
Trust II Shares) are offered through separate prospectuses to different
categories of investors. The Fund also offers shares without class designation
in the Conning Money Market Portfolio through a separate prospectus. Portfolio
shares have no preemptive rights and only such conversion or exchange rights as
the Board may grant in its discretion. When issued for payment as described in
the Prospectuses, the shares will be fully paid and nonassessable.
Shares of each class in a Portfolio represent equal pro rata
interests in the investments held by that Portfolio and are identical in all
respects, except that Shares of each class bear separate distribution and/or
shareholder administrative servicing fees and certain other operating expenses,
and enjoy certain exclusive voting rights on matters relating to these fees. As
a result of payments for distribution and/or shareholder administrative
servicing fees and certain other operating expenses that may be made in
differing amounts, the net investment income of Trust Shares, Trust II Shares,
Institutional Shares, Investor A Shares and Investor B Shares of a Portfolio can
be expected, at any given time, to be different.
Pursuant to its authority, the Board of Directors has authorized
the issuance of the following series of shares representing interests in the
Portfolios, each of which (except the Tax-
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Exempt Money Market and Missouri Tax-Exempt Bond Portfolios) is classified as a
diversified company under the 1940 Act: 1 billion Trust Shares, 2 billion Trust
II Shares, 300 million Institutional Shares and 100 million Investor A Shares,
representing interests in the Treasury Money Market Portfolio; 1.8 billion Trust
Shares, 2 billion Trust II Shares, 300 million Institutional Shares, 550 million
Investor A Shares and 50 million Investor B Shares, representing interests in
the Money Market Portfolio; 300 million Trust Shares, 2 billion Trust II Shares
and 50 million Investor A Shares, representing interests in the Tax-Exempt Money
Market Portfolio; 15 million Trust Shares, 20 million Institutional Shares, 5
million Investor A Shares and 50 million Investor B Shares, representing
interests in the U.S. Government Securities Portfolio; 50 million Trust Shares,
25 million Institutional Shares and 25 million Investor A Shares, representing
interests in the Intermediate Corporate Bond Portfolio; 50 million Trust Shares,
25 million Institutional Shares and 25 million Investor A Shares representing
interests in the Bond Index Portfolio; 50 million Trust Shares, 20 million
Institutional Shares, 5 million Investor A Shares and 50 million Investor B
Shares, representing interests in the Government & Corporate Bond Portfolio; 25
million Trust Shares and 25 million Investor A Shares, representing interests in
the Short-Intermediate Municipal Portfolio; 25 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Missouri Tax-Exempt Bond Portfolio; 50 million Trust Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the National Municipal Bond Portfolio; 15 million Trust Shares, 20 million
Institutional Shares, 5 million Investor A shares and 50 million Investor B
Shares, representing interests in the Balanced Portfolio; 50 million Trust
Shares, 25 million Institutional Shares, 25 million Investor A Shares and 25
million Investor B Shares representing interests in the Equity Income Portfolio;
50 million Trust Shares, 25 million Institutional Shares and 25 million Investor
A Shares representing interests in the Equity Index Portfolio; 50 million Trust
Shares, 20 million Institutional Shares, 5 million Investor A Shares and 50
million Investor B Shares, representing interests in the Growth & Income Equity
Portfolio; 50 million Trust Shares, 25 million Institutional Shares, 25 million
Investor A Shares and 25 million Investor B Shares, representing interests in
the Growth Equity Portfolio; 35 million Trust Shares, 20 million Institutional
Shares, 5 million Investor A Shares and 50 million Investor B Shares,
representing interests in the Small Cap Equity Portfolio; 50 million Trust
Shares, 25 million Institutional Shares and 25 million Investor A Shares,
representing interests in the Small Cap Equity Index Portfolio; and 10 million
Trust Shares, 10 million Institutional Shares, 10 million Investor A Shares and
50 million Investor B Shares, representing interests in the International Equity
Portfolio. Shares in the Fund's Portfolios will be issued without Share
certificates.
Trust Shares are offered to financial institutions acting on
their own behalf or on behalf of discretionary and non-discretionary accounts
for which they may receive account-level asset-based management fees. Trust
Shares also are offered to financial institutions for accounts for which they
provide cash management services. Trust II Shares are offered to financial
institutions acting on their own behalf or on behalf of certain qualified
accounts. Institutional Shares are offered to financial institutions acting on
behalf of discretionary and non-discretionary accounts for which they do not
receive account-level asset-based management fees. Investor A Shares and
Investor B Shares are sold through selected broker/dealers and other financial
intermediaries to individual or institutional customers. Trust Shares, Trust II
Shares and Institutional Shares are sold without a sales charge. Investor A
Shares of the Money Market
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Portfolios are sold without a sales charge, Investor A Shares of the Equity
Portfolios are sold with a maximum 5.5% front-end sales charge, Investor A
Shares of the Bond Portfolios (other than the U.S. Government Securities and
Short-Intermediate Municipal Portfolios) are sold with a maximum 4.75% front-end
sales charge, and Investor A Shares of the U.S. Government Securities and
Short-Intermediate Municipal Portfolios are sold with a maximum 2.5% front-end
sales charge. Investor B Shares are sold with a maximum 5.0% contingent deferred
sales charge. Trust Shares, Trust II Shares, Institutional Shares, Investor A
Shares and Investor B Shares bear their pro rata portion of all operating
expenses paid by a Portfolio, except that Trust Shares and Institutional Shares
bear all payments under the Portfolio's respective Administrative Services Plans
adopted for such Shares and Investor A Shares and Investor B Shares bear all
payments under the Portfolio's respective Distribution and Services Plans
adopted for such Shares. In addition, Institutional Shares of a Portfolio bear
the expense of certain sub-transfer agency fees.
Except as noted below with respect to the Administrative
Services Plans for Trust Shares and Institutional Shares and the Distribution
and Services Plans for Investor A Shares and Investor B Shares, shares of the
Portfolios bear the same types of ongoing expenses with respect to the Portfolio
to which they belong. In addition, Investor A Shares (other than Investor A
Shares of the Money Market Portfolios) are subject to a front-end sales charge
and Investor B Shares are subject to a contingent deferred sales charge as
described in the Prospectuses. The classes also have different exchange
privileges, and Investor B Shares are subject to conversion as described in the
Prospectuses for those shares.
Payments under the Administrative Services Plans for Trust Shares
and Institutional Shares are made to Service Organizations (defined below) for
administrative services provided to the Service Organizations' clients or
account holders who are the beneficial owners of Trust Shares or Institutional
Shares, respectively. Payments under the Administrative Services Plans may not
exceed .25% (on an annual basis) of the average daily net asset value of the
outstanding Trust Shares or Institutional Shares, as the case may be, of the
Money Market Portfolios or .30% (on an annual basis) of the average daily net
asset value of the outstanding Trust Shares or Institutional Shares, as the case
may be, of the Equity and Bond Portfolios.
Payments under the Distribution and Services Plans for Investor A
Shares and Investor B Shares are made to (i) the Fund's distributor or another
person for providing distribution assistance and assuming certain related
expenses, and (ii) Service Organizations for administrative services provided to
the Service Organizations' clients or account holders who are the beneficial
owners of Investor A Shares or Investor B Shares. Payments under the
Distribution and Services Plan for Investor A Shares may not exceed .25% (on an
annual basis) of the average daily net asset value of outstanding Investor A
Shares of the Money Market Portfolios or .30% (on an annual basis) of the
average daily net asset value of Investor A Shares of the Equity and Bond
Portfolios. Payments under the Distribution and Services Plan for Investor B
Shares may not exceed 1.00% (on an annual basis) of the average daily net asset
value of outstanding Investor B Shares of a Portfolio. Distribution payments
made under the
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Distribution and Services Plans are subject to the requirements of Rule 12b-1
under the 1940 Act.
The Fund offers various services and privileges in connection
with Investor A Shares and Investor B Shares of a Portfolio that are not offered
in connection with the Portfolio's Trust Shares, Trust II Shares or
Institutional Shares, including an automatic investment program and an automatic
withdrawal plan. Each class of shares also offers different exchange privileges.
Investor B Shares convert automatically into Investor A Shares eight years after
the beginning of the calendar month in which the Shares were purchased.
In the event of a liquidation or dissolution of the Fund, shares
of a Portfolio are entitled to receive the assets available for distribution
belonging to that Portfolio, and a proportionate distribution, based upon the
relative asset values of the respective Portfolios, of any general assets not
belonging to any particular Portfolio which are available for distribution.
Shareholders of a Portfolio are entitled to participate equally in the net
distributable assets of the particular Portfolio involved on liquidation, except
that Trust Shares of a particular Portfolio will be solely responsible for that
Portfolio's payments pursuant to the Administrative Services Plan for Trust
Shares, Institutional Shares of a particular Portfolio will be solely
responsible for that Portfolio's payments pursuant to the Administrative Service
Plan for Institutional Shares, Investor A Shares of a particular Portfolio will
be solely responsible for that Portfolio's payments pursuant to the Distribution
and Services Plan for Investor A Shares and Investor B Shares of a particular
Portfolio will be solely responsible for that Portfolio's payments pursuant to
the Distribution and Services Plan for Investor B Shares. In addition,
Institutional Shares will be solely responsible for the payment of certain
sub-transfer agency fees attributable to those shares.
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 a particular Portfolio will vote together in the aggregate
and not by class, unless otherwise required by law or permitted by the Board of
Directors. However, only Trust Shares of a Portfolio will be entitled to vote on
matters submitted to a vote of shareholders pertaining to a Portfolio's
Administrative Services Plan for Trust Shares, only Institutional Shares of a
Portfolio will be entitled to vote on matters submitted to a vote of
shareholders pertaining to such Portfolio's Administrative Services Plan for
Institutional Shares, only Investor A Shares of a Portfolio will be entitled to
vote on matters submitted to a vote of shareholders pertaining to such
Portfolio's Distribution and Services Plan for Investor A Shares and only
Investor B Shares of a Portfolio will be entitled to vote on matters submitted
to a vote of shareholders pertaining to such Portfolio's Distribution and
Services Plan for Investor B Shares. Further, shareholders of all of the
Portfolios, irrespective of class, will vote in the aggregate and not separately
on a Portfolio-by-Portfolio basis, except as otherwise required by law or when
the Board of Directors determines that the matter to be voted upon affects only
the interests of the shareholders of a particular Portfolio or class of shares.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of a "series" investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
series (Portfolio) affected by the matter. A Portfolio is considered to be
affected by a matter unless it is clear that the interests of each Portfolio in
the matter are identical or that the matter does not affect any interest of the
Portfolio. Under the
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Rule, the approval of an investment advisory (or sub-advisory) agreement or any
change in a fundamental investment objective or investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of that Portfolio. However, the Rule also
provides that the ratification of the appointment of independent auditors, the
approval of principal underwriting contracts, and the election of directors may
be effectively acted upon by shareholders of the Fund's Portfolios voting
without regard to Portfolio or class.
The Fund is not required, and currently does not intend, to hold
annual meetings except as required by the 1940 Act or other applicable law. Upon
the written request of the holders of 10% or more of the outstanding Shares, the
Fund will call a special meeting to vote on the question of removal of a
director.
Shares of the Portfolios have noncumulative voting rights and,
accordingly, the holders of more than 50% of the Fund's outstanding Shares
(irrespective of Portfolio or class) may elect all of the Directors. Shares have
no preemptive rights and only such conversion and exchange rights as the Board
may grant in its discretion. When issued for payment as described in the
Prospectuses and this Statement of Additional Information, Shares will be fully
paid and nonassessable.
Shares in the Fund's Portfolios will be issued without
certificates.
MISCELLANEOUS
As used in this Statement of Additional Information, a "vote of a
majority of the outstanding Shares" of a Portfolio or a particular class of
Shares means, with respect to the approval of an investment advisory or
sub-advisory agreement, the approval of a Rule 12b-1 distribution plan or a
change in an investment objective, if fundamental, or a fundamental investment
policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding Shares of such Portfolio or class of Shares or (b) 67% or more of
the Shares of such Portfolio or class of Shares present at a meeting if more
than 50% of the outstanding Shares of such Portfolio or class of Shares are
represented at the meeting in person or by proxy.
INVESTMENT STRATEGIES, POLICIES AND RISKS
The following discussion supplements the description of the
investment objectives and policies of the Portfolios described in the
Prospectuses. Although management will use its best efforts to achieve the
investment objective of each Portfolio, there can be no assurance that it will
be able to do so. The investment objective of each Portfolio may be changed only
with the affirmative vote of a majority of the outstanding Shares of the
Portfolio, except that the investment objectives of the Bond Index, Equity Index
and Small Cap Equity Index Portfolios may be changed by the Fund's Board of
Directors without shareholder approval. Shareholders of the latter Portfolios
will be given at least 30 days' written notice before any such change occurs.
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TREASURY MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Treasury Money Market Portfolio in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC") for money market funds.
As stated in the Prospectuses, the Treasury Money Market
Portfolio invests primarily in selected money market obligations issued by the
U.S. Government or its agencies or instrumentalities that are guaranteed as to
principal and interest by the U.S. Government, the income from which is
generally exempt from state income tax. Securities that are generally eligible
for this exemption include those issued by the U.S. Treasury (bills,
certificates of indebtedness, notes and certain bonds) and certain U.S.
Government agencies and instrumentalities, including the General Services
Administration and Small Business Administration. For a current list of the
types of investments that are and are not exempt from your state's income tax,
please consult your tax adviser or write to your state's Department of Revenue.
Under normal market conditions, the Portfolio intends to invest substantially
all (but not less than 65% of its total assets in securities with the above
characteristics and (except to the extent discussed below) will not enter into
repurchase agreements or purchase any U.S. Government security that Mississippi
Valley Advisors Inc. ("MVA" or the "Adviser") believes is subject to state
income tax.
Under extraordinary circumstances, such as when appropriate
exempt securities are unavailable or pending investment, the Portfolio may
temporarily hold cash or invest in repurchase agreements collateralized by U.S.
Government securities, the securities of other U.S. Government agencies or
instrumentalities, securities of other investment companies that invest in
securities in which the Portfolio is permitted to invest, or cash equivalents.
MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the Money
Market Portfolio in accordance with the SEC's rules and regulations for money
market funds. The following descriptions illustrate the types of instruments in
which the Portfolio invests.
BANKING OBLIGATIONS. The Money Market Portfolio may purchase
obligations of issuers in the banking industry, such as certificates of deposit,
letters of credit, bankers' acceptances and time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of
purchase in excess of $1 billion. The Portfolio may invest in obligations of
foreign banks or foreign branches of U.S. banks in amounts not in excess of 25%
of its assets where the Adviser deems the instrument to present minimal credit
risks. (See "Special Risk Considerations -- Risks Associated with Foreign
Securities and Currencies" below.) The Portfolio may also make interest-bearing
savings deposits in commercial and savings banks in amounts not in excess of 5%
of the value of its total assets.
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'
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<PAGE> 11
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 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
Money Market Portfolio may invest in commercial paper, including asset-backed
commercial paper representing interests in a pool of corporate receivables,
dollar-denominated obligations issued by domestic and foreign bank holding
companies, and corporate bonds that meet the quality and maturity requirements
of Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"). Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The Portfolio may also invest in variable or floating rate notes that
may have a stated maturity in excess of thirteen months but will, in any event,
permit the Portfolio to demand payment of the principal of the instrument at
least once every thirteen months upon no more than 30 days' notice (unless the
instrument is guaranteed by the U.S. Government or an agency or instrumentality
thereof). Such instruments may include variable amount master demand notes,
which are unsecured instruments that permit the indebtedness thereunder to vary
in addition to providing for periodic adjustments in the interest rate. Unrated
variable and floating rate instruments will be determined by the Adviser (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to First Tier Eligible Securities 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.
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GOVERNMENT OBLIGATIONS. The Money Market Portfolio may invest in
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. In addition, the Portfolio may, when deemed appropriate by
the Adviser, invest in short-term obligations issued by state and local
governmental issuers that meet the quality requirements described above and, as
a result of the Tax Reform Act of 1986, carry yields that are competitive with
those of other types of money market instruments of comparable quality.
TAX-EXEMPT MONEY MARKET PORTFOLIO
The Adviser makes investment decisions with respect to the
Tax-Exempt Money Market Portfolio in accordance with the SEC's rules and
regulations for money market funds.
As a matter of fundamental policy, under normal market conditions
or when the Adviser deems suitable tax-exempt municipal securities to be
available, at least 80% of the Portfolio's total assets will be invested in
municipal securities. In addition to the types of municipal securities specified
in the Prospectuses, the Portfolio may also hold tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests in
trusts and partnership interests.
In addition, during temporary defensive periods or if, in the
opinion of the Adviser, suitable municipal securities are unavailable and
subject to the quality standards described above, the Portfolio may invest up to
20% of its total assets in money market instruments, the income from which is
subject to federal income tax. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the highest rating category by a rating agency; certificates of deposit
or bankers' acceptances of domestic branches of U.S. banks with total assets at
the time of purchase of $1 billion or more; or repurchase agreements with
respect to such obligations.
Dividends paid by the Portfolio that are derived from interest
attributable to tax-exempt obligations of a particular state and its political
subdivisions as well as of certain other governmental issuers, including Puerto
Rico, Guam and the Virgin Islands, may be exempt from federal and state income
tax. Dividends derived from interest on obligations of other governmental
issuers are exempt from federal income tax but may be subject to state income
tax.
U.S. GOVERNMENT SECURITIES PORTFOLIO
In addition to the types of mortgage-backed securities specified
in the Prospectuses, the U.S. Government Securities Portfolio may also hold
collateralized mortgage obligations ("CMOs"). For further information regarding
mortgage-backed securities, including CMOs, see "Other Investment Policies and
Risk Considerations -- Asset-Backed Securities" below.
The Portfolio may invest in certificates issued by
government-backed trusts. Such certificates represent an undivided fractional
interest in the respective government-backed trust's assets. The assets of each
government-backed trust consist of (i) a promissory note issued by a
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foreign government (the "Note"), (ii) a guaranty by the U.S. Government, acting
through the Defense Security Assistance Agency of the Department of Defense, of
the due and punctual payment of 90% of all principal and interest due on such
Note, and (iii) a beneficial interest in a government securities trust holding
U.S. Treasury bills, notes and other direct obligations of the U.S. Treasury
sufficient to provide the Portfolio with funds in an amount equal to at least
10% of all principal and interest payments due on the Note.
INTERMEDIATE CORPORATE BOND PORTFOLIO
In addition to those instruments specified in the Prospectuses,
the Intermediate Corporate Bond Portfolio may also invest in asset-backed
securities, including CMOs and other mortgage-related securities. For further
information regarding these instruments, see "Other Investment Policies and Risk
Considerations -- Asset-Backed Securities" below.
The Portfolio may only purchase investment grade debt securities,
which are those rated in one of the four highest rating categories assigned by
one or more rating agencies. Securities that are rated in the lowest of the four
highest rating categories have speculative characteristics, even though they are
of investment grade quality, and such securities will be purchased (and
retained) only if the Adviser believes that the issuers have an adequate
capacity to pay interest and repay principal. Occasionally, the rating of a
security held by the Portfolio may be downgraded below investment grade. If that
happens, the Portfolio does not have to sell the security unless the Adviser
determines that under the circumstances the security is no longer an appropriate
investment for the Portfolio. The applicable ratings issued by rating agencies
are described in Appendix A to this Statement of Additional Information.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Short-term obligations in which the Portfolio may invest
include (i) money market instruments, such as commercial paper, including
variable and floating rate instruments, rated at the time of purchase in one of
the two highest rating categories assigned by a rating agency or, if unrated,
deemed to be of comparable quality by the Adviser at the time of purchase, and
bank obligations, including bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits of U.S. and foreign banks having total
assets at the time of purchase in excess of $1 billion, (ii) obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, and
(iii) repurchase agreements. For further information regarding variable and
floating rate instruments, see "Money Market Portfolio - Commercial Paper and
Variable and Floating Rate Instruments" above. Although the Portfolio will
invest in obligations of foreign banks or foreign branches of U.S. banks only
when the Adviser determines that the instrument presents minimal credit risks,
such investments nevertheless entail risks that are different from those of
investments in domestic obligations of U.S. banks. See "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies"
below. Investments in the obligations of foreign banks or foreign branches of
U.S. banks will not exceed 25% of the Portfolio's total assets at the time of
purchase.
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<PAGE> 14
An increase in interest rates will generally reduce the value of
the investments in the Portfolio, and a decline in interest rates will generally
increase the value of those investments. Depending upon the prevailing market
conditions, the Adviser may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over face value, the yield will be lower
than the coupon rate. In response to changing conditions in fixed-income
markets, the Portfolio may make modest shifts in terms of anticipated interest
rate and sector spread changes.
BOND INDEX PORTFOLIO
The Bond Index Portfolio will only purchase a security that is
included in the Lehman Brothers Aggregate Bond Index (the "Lehman Aggregate") at
the time of such purchase. The Portfolio may, however, temporarily continue to
hold a security that has been deleted from the Lehman Aggregate pending the
rebalancing of the Portfolio's holdings. For further information, see "Other
Investment Policies and Risk Considerations - The Indexing Approach" below. In
addition to holding securities represented by the Lehman Aggregate, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market instruments. See "Intermediate
Corporate Bond Portfolio" above for a description of the types of money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments. If appropriate, the Portfolio may use options,
futures contracts and depository receipts to hedge its positions or for other
permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The Lehman Aggregate. The Lehman Aggregate is composed of U.S.
Government, mortgage-backed, asset-backed and non-convertible corporate debt
securities that meet the following criteria: the securities have at least $100
million par amount outstanding; the securities are rated investment grade (at
least Baa or BBB) by Moody's Investor Services, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P") (if not rated by Moody's); have at least one year
until maturity; and have coupons with fixed rates. The Lehman Aggregate excludes
CMOs, adjustable rate mortgages, manufactured homes, non-agency bonds, buydowns,
graduated equity mortgages, project loans and non-conforming (i.e., "jumbo")
mortgages. As of December 31, 1998, over 7,257 issues were included in the
Lehman Aggregate, representing approximately $5,481 trillion in market value.
U.S. Treasury and agency securities represented approximately 46% of the
total market value, asset-backed and mortgage-backed securities represented
approximately 32% of the total market value, with corporate debt securities
representing the balance of approximately 22%. The average maturity of the
Lehman Aggregate was approximately 8.6 years. The Adviser believes that the
Lehman Aggregate is an appropriate benchmark for the Portfolio because it is
diversified, it is familiar to investors, and it is widely accepted as a
reference for bonds and other fixed income investments.
Because of the large number of issues included in the Lehman
Aggregate, the Portfolio cannot invest in all such issues. Instead, the
Portfolio will hold a representative sample of approximately 100 of the
securities in the Lehman Aggregate, selecting one or two issues to represent an
entire "class" or type of securities in the Lehman Aggregate. At a minimum, the
Portfolio seeks to hold securities which reflect the major asset classes in the
Lehman Aggregate -
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<PAGE> 15
U.S. Treasury and agency issues, mortgage-backed securities, asset-backed
securities and non-convertible corporate debt securities. As the Portfolio's
assets increase, these classes will be further delineated along the lines of
sector, term-to-maturity, coupon and credit ratings. This sampling technique is
expected to be an effective means of substantially duplicating the price and
performance provided by the securities comprising the Lehman Aggregate.
Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics even though they are of investment-grade quality, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher-grade securities. The applicable ratings issued by rating agencies are
described in Appendix A to this Statement of Additional Information.
The value of the fixed income investments of the Portfolio is
generally sensitive to changes in interest rates. (See "Intermediate Corporate
Bond Portfolio" above for a discussion of the effects of interest rate changes).
GOVERNMENT & CORPORATE BOND PORTFOLIO
In addition to the types of debt obligations specified in the
Prospectuses, the Government & Corporate Bond Portfolio may also invest in first
mortgage loans, income participation loans, participation certificates in pools
of mortgages, including mortgages issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, CMOs and other mortgage-related securities,
and other asset-backed securities. For further information regarding
asset-backed securities, see "Other Investment Policies and Risk Considerations
- -- Asset-Backed Securities" below. The Portfolio may invest up to 10% of its
total assets at the time of purchase in dollar-denominated debt obligations of
foreign issuers, either directly or through American Depository Receipts
("ADRs") and European Depository Receipts ("EDRs"), and up to 25% of its total
assets at the time of purchase in non-mortgage asset-backed securities,
respectively. See "Special Risk Considerations -- Risks Associated with Foreign
Securities and Currencies" and "Other Applicable Policies and Risk
Considerations -- ADRs and EDRs" below.
The Portfolio may only purchase investment grade debt securities,
which are those rated in one of the four highest rating categories assigned by
one or more rating agencies. Securities rated in the lowest of the four highest
rating categories have speculative characteristics, even though they are of
investment grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated securities. The
Portfolio's dollar-weighted average portfolio quality is expected to be at least
"A" or higher. The applicable ratings issued by rating agencies are described in
Appendix A to this Statement of Additional Information.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. Short-term obligations include, but are not limited to,
commercial paper, bankers' acceptances, certificates of deposit, demand and time
deposits of
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<PAGE> 16
domestic and foreign banks and savings and loan associations, repurchase
agreements and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
The value of the fixed income investments of the Portfolio is
generally sensitive to changes in interest rates. (See "Intermediate Corporate
Bond Portfolio" above for a discussion of the effects of interest rate changes).
SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO
As a matter of fundamental policy, under normal market
conditions, the Short-Intermediate Municipal Portfolio invests at least 80% of
its total assets in municipal securities primarily bonds (at least 65% under
normal market conditions). The Portfolio may only purchase investment grade
municipal securities, which are those rated in one of the four highest rating
categories assigned by me or more rating agencies. Municipal securities rated in
the lowest of the four highest rating categories are considered to have
speculative characteristics, even though they are of investment grade quality.
Such securities will be purchased only if the Adviser believes they have an
adequate capacity to pay interest and repay principal. Municipal securities
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories assigned by a rating agency will be disposed of
in an orderly manner, normally within 30-60 days. The applicable ratings issued
by rating agencies are described in Appendix A to this Statement of Additional
Information.
The value of the municipal securities held by the Portfolio is
generally sensitive to changes in interest rates. (See "Intermediate Corporate
Bond Portfolio" above for a discussion of the effects of interest rate changes).
In addition, the Short-Intermediate Municipal Portfolio may from
time to time during temporary defensive periods invest in taxable obligations in
such proportions as, in the opinion of the Adviser, prevailing market or
economic conditions warrant. Such instruments may include obligations of the
U.S. Government, its agencies or instrumentalities; debt securities (including
commercial paper) of issuers having, at the time of purchase, a quality rating
within the two highest rating categories assigned by a rating agency; or
repurchase agreements with respect to such obligations.
During temporary defensive periods or if, in the opinion of the
Adviser, suitable tax-exempt obligations are unavailable, the Short-Intermediate
Municipal Portfolio may also hold uninvested cash reserves which do not earn
income pending investment. There is no percentage limitation on the amount of
assets that may be held uninvested during these temporary defensive periods.
MISSOURI TAX-EXEMPT BOND PORTFOLIO
Dividends paid by the Missouri Tax-Exempt Bond Portfolio that are
derived from interest attributable to tax-exempt obligations of the State of
Missouri and its political subdivisions as well as of certain other governmental
issuers including Puerto Rico, Guam and the Virgin Islands ("Missouri municipal
securities") are exempt from federal and Missouri
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<PAGE> 17
income tax. Dividends derived from interest on obligations of other governmental
issuers are exempt from federal income tax but may be subject to Missouri income
tax.
As a matter of fundamental policy, under normal market conditions
or when the Adviser deems suitable tax-exempt municipal securities to be
available, at least 80% of the Missouri Tax-Exempt Bond Portfolio's total assets
will be invested in municipal securities. In addition, as a matter of
fundamental policy, under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Missouri municipal securities.
The Portfolio may only invest in investment grade municipal
securities, which are those rated in one or the four highest rating categories
assigned by one or more rating agencies. Municipal securities rated in the
lowest of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality. Such
securities will be purchased only if the Adviser believes the issuers have an
adequate capacity to pay interest and repay principal. The applicable ratings
issued by ratings agencies are described in Appendix A to this Statement of
Additional Information.
The Portfolio may hold uninvested cash reserves pending
investment during temporary defensive periods or if, in the opinion of the
Adviser, suitable municipal securities are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested during temporary
defensive periods. In addition, during temporary defensive periods or if, in the
opinion of the Adviser, suitable municipal securities are unavailable and
subject to the quality standards described above, the Portfolio may invest up to
20% of its assets in money market instruments, the income from which is subject
to federal income tax. See "Tax-Exempt Money Market Portfolio" above for a
description of the types of taxable money market instruments in which the
Portfolio may invest.
The Portfolio's average weighted maturity will vary in light of
market and economic conditions, the comparative yields on instruments with
different maturities, and other factors. The value of the municipal securities
held by the Portfolio is generally sensitive to changes in interest rates. (See
"Intermediate Corporate Bond Portfolio" above for a discussion of the effects of
interest rate changes.)
NATIONAL MUNICIPAL BOND PORTFOLIO
As a matter of fundamental policy, under normal market and
economic conditions, at least 80% of the National Municipal Bond Portfolio's
total assets will be invested in municipal securities, primarily bonds (at least
65% under normal market conditions).
During temporary defensive periods or if, in the opinion of the
Adviser, suitable tax-exempt obligations are unavailable, the Portfolio may also
hold uninvested cash reserves which do not earn income pending investment. There
is no percentage limitation on the amount of assets that may be held uninvested
during these temporary defensive periods. The Portfolio does not intend to hold
uninvested cash reserves under normal market conditions.
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<PAGE> 18
In addition, the Portfolio may from time to time during temporary
defensive periods, invest in taxable obligations in such proportions as, in the
opinion of the Adviser, prevailing market or economic conditions warrant. Such
instruments may include obligations of the U.S. Government, its agencies or
instrumentalities and debt securities (including commercial paper) of issuers
having, at the time of purchase, a quality rating within the two highest rating
categories assigned by one or more rating agencies. The Portfolio does not
intend to invest in taxable obligations under normal market conditions.
The Portfolio may only invest in investment grade municipal
securities, which are those rated in one of the four highest rating categories
assigned by one or more rating agencies. Municipal securities rated in the
lowest of the four highest rating categories are considered to have speculative
characteristics, even though they are of investment grade quality, and will be
purchased (and retained) only if the Adviser believes that the issuers have an
adequate capacity to pay interest and repay principal. Municipal securities
purchased by the Portfolio whose ratings are subsequently downgraded below the
four highest rating categories assigned by a rating agency will be disposed of
in an orderly manner, normally within 30 to 60 days. The applicable ratings
issued by rating agencies are described in Appendix A to this Statement of
Additional Information.
The value of the Portfolio's securities is generally sensitive to
changes in interest rates. (See "Intermediate Corporate Bond Portfolio" above
for a discussion of the effects of interest rate changes.)
BALANCED PORTFOLIO
In addition to common stock, the equity securities in which the
Balanced Portfolio may invest include preferred stock, rights, warrants and
securities convertible into common stock. The fixed-income securities in which
the Portfolio may invest include U.S. Government securities and other fixed
income and debt securities that are rated investment grade. The Portfolio also
may purchase asset-backed securities. The Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of less
than three years of continuous operations.
The value of the fixed income investments of the Portfolio is
generally sensitive to changes in interest rates. (See "Intermediate Corporate
Bond Portfolio" above for a discussion of the effects of interest rate changes).
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. (See "Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.)
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<PAGE> 19
EQUITY INCOME PORTFOLIO
A convertible security may be purchased for the Portfolio when,
in the Adviser's opinion, the price and yield of the convertible security is
favorable as compared to the price and yield of the common stock.
The Equity Income Portfolio will not normally invest in
securities of issuers having a record, together with their predecessors, of less
than three years of continuous operations.
The Portfolio may invest indirectly in foreign securities through
the purchase of ADRs and EDRs, but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies" and
"Other Investment Policies and Risk Considerations -- ADRs and EDRs" below.
The Portfolio reserves the right to hold as a temporary defensive
measure during abnormal market or economic conditions up to 100% of its total
assets in cash and short-term obligations (having remaining maturities of 13
months or less) at such times and in such proportions as, in the opinion of the
Adviser, such abnormal market or economic conditions warrant. (See "Intermediate
Corporate Bond Portfolio" above for a description of the types of short-term
obligations in which the Portfolio may invest and the applicable limitations
with respect to such investments.)
EQUITY INDEX PORTFOLIO
The Adviser generally selects securities for the Equity Index
Portfolio on the basis of their weightings in the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500") and will only purchase a security
for the Portfolio that is included in the S&P 500 at the time of such purchase.
The Portfolio should exhibit price volatility similar to that of the S&P 500.
For further information, see "Other Investment Policies and Risk Considerations
- -- The Indexing Approach" below.
With respect to the remaining portion of its total assets, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market instruments. (See "Intermediate
Corporate Bond Portfolio" above for a description of the money market
instruments in which the Portfolio may invest and the applicable limitations
with respect to such investments.) If appropriate, the Portfolio may use
options, futures contracts and depository receipts to hedge its positions or for
other permissible purposes. The Portfolio also may enter into reverse repurchase
agreements and lend its portfolio securities.
The S&P 500. The S&P 500 is composed of approximately 500 common
stocks, most of which are listed on the New York Stock Exchange. Standard &
Poor's chooses the stocks for the S&P 500 on statistical basis. As of December
31, 1998 the stocks in the S&P 500 have a market capitalization of $10.64
trillion and account for approximately 58.1% of the total
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<PAGE> 20
market value of all U.S. common stocks. Normally, the Portfolio will hold all
500 stocks in the S&P 500 and will hold each stock in approximately the same
percentage as that stock represents in the S&P 500. Under certain circumstances,
the Portfolio may not hold all 500 stocks in the S&P 500, for example because of
changes in the S&P 500, or as a result of shareholder activity in the Portfolio.
The Portfolio will periodically rebalance its holdings as dictated by changes in
cash flow and the composition of the S&P 500. The Adviser believes that the S&P
500 is an appropriate benchmark for the Portfolio because it is diversified, it
is familiar to many investors and it is widely accepted as a reference for
common stock investments.
GROWTH & INCOME EQUITY PORTFOLIO
In addition to common stock, the Growth & Income Equity Portfolio
may invest in preferred stock, rights, warrants and securities convertible into
common stock. A convertible security may be purchased for the Portfolio when, in
the Adviser's opinion, the price and yield of the convertible security is
favorable compared to the price and yield of the common stock.
The Portfolio may invest indirectly in foreign securities through
the purchase of ADRs and EDRs but will not do so if, immediately after and as a
result of the purchase, the value of ADRs and EDRs would exceed 15% of the
Portfolio's total assets. For further information, see "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies" and
"Other Investment Policies and Risk Considerations -- ADRs and EDRs" below. The
Portfolio may also invest in Canadian securities listed on a national securities
exchange.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing market or economic
conditions warrant. (See "Government & Corporate Bond Portfolio" above for a
description of the types of short-term obligations in which the Portfolio may
invest.)
GROWTH EQUITY PORTFOLIO
In addition to common stock, the Growth Equity Portfolio invests
in preferred stock, convertible securities, corporate bonds, debentures, notes,
warrants, and put and call options on stock. Under normal conditions, the
Portfolio will invest at least 65% of its total assets in equity securities,
including common stocks. Debt obligations purchased by the Portfolio may include
variable and floating rate instruments, including variable rate master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. See "Money Market Portfolio"
above for a description of certain risks in investing in variable and floating
rate obligations. Debt obligations in which the Portfolio invests will be rated
at the time of purchase in one of the four highest rating categories assigned by
one or more rating agencies or, if unrated, deemed to be of comparable quality
by the Adviser. Securities that are rated in the lowest of the four highest
rating categories have speculative characteristics, even though they are of
investment grade quality, and changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated securities. Downgrades will be evaluated on
a case by case basis by the Adviser. The Adviser will determine whether or not
the security
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<PAGE> 21
continues to be an acceptable investment. If it is determined not to be an
acceptable investment, the security will be sold. The applicable ratings
categories of rating agencies are described in Appendix A to this Statement of
Additional Information.
The Portfolio may invest in the securities of foreign issuers
which are freely traded on United States securities exchanges or in the
over-the-counter market in the form of depository receipts, such as ADRs.
Securities of a foreign issuer may present greater risks in the form of
nationalization, confiscation, domestic marketability, or other national or
international restrictions. As a matter of practice, the Portfolio will not
invest in the securities of a foreign issuer if any such risk appears to the
Adviser to be substantial. The Portfolio may not invest more than 5% of its
total assets in securities of foreign issuers. For further information on the
risks of foreign securities, see "Special Risk Considerations -- Risks
Associated with Foreign Securities and Currencies" and "Other Investment
Policies and Risk Considerations -- ADRs and EDRs" below.
In such proportions as, in the judgment of the Adviser,
prevailing market conditions warrant, the Portfolio may, for temporary defensive
purposes, invest in short-term money market instruments, securities issued
and/or guaranteed as to payment of principal and interest by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements. (See
"Intermediate Corporate Bond Portfolio" above for further information on the
types of short-term obligations in which the Portfolio may invest.)
SMALL CAP EQUITY PORTFOLIO
In addition to those securities described in the Prospectuses,
the Small Cap Equity Portfolio may invest in preferred stock, rights, warrants,
and securities convertible into common stock. The Portfolio will not invest more
than 5% of its net assets, taken at market value, in warrants. A convertible
security may be purchased for the Portfolio when, in the Adviser's opinion, the
price of the convertible security is favorable compared to the price of the
common stock. The Portfolio does not intend to invest more than 5% of the value
of its total assets in the securities of unseasoned companies, that is,
companies (or their predecessors) with less than three years' continuous
operation. In general, the Portfolio's stocks and other securities will be
diversified over a number of industry groups in an effort to reduce the risks
inherent in such investments.
The Portfolio may invest indirectly in foreign securities through
the purchase of such obligations as ADRs and EDRs but will not do so if,
immediately after and as a result of the purchase, the value of ADRs and EDRs
would exceed 25% of the Portfolio's total assets. For further information, see
"Other Investment Policies and Risk Considerations -- ADRs and EDRs" below. The
Portfolio may also invest in securities issued by Canadian corporations and
Canadian counterparts of U.S. corporations, which may or may not be listed on a
national securities exchange or traded in over-the-counter markets.
The Portfolio reserves the right to hold as a temporary defensive
measure up to 100% of its total assets in cash and short-term obligations
(having remaining maturities of 13 months or less) at such times and in such
proportions as, in the opinion of the Adviser, prevailing
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<PAGE> 22
market or economic conditions warrant. (See "Government & Corporate Bond
Portfolio" above for a description of the types of short-term obligations in
which the Portfolio may invest.)
SMALL CAP EQUITY INDEX PORTFOLIO
The Small Cap Equity Index Portfolio will invest substantially
all but no less than 80% of its total assets in securities listed in the
Standard & Poor's SmallCap 600 Stock Price Index (the "S&P SmallCap 600"). The
Adviser generally selects securities for the Portfolio on the basis of their
weightings in the S&P SmallCap 600. The Portfolio will only purchase a common
stock that is included in the S&P SmallCap 600 at the time of such purchase. The
Portfolio should exhibit price volatility similar to that of the S&P SmallCap
600. For further information, see "Other Investment Policies and Risk
Considerations -- The Indexing Approach" below.
With respect to the remaining portion of its total assets, the
Portfolio has the ability to hold temporary cash balances which may be invested
in U.S. Government obligations and money market instruments, including variable
and floating rate obligations such as variable rate master demand notes. (See
"Intermediate Corporate Bond Portfolio" above for a description of the money
market instruments in which the Portfolio may invest and the applicable
limitations with respect to such instruments.) If appropriate, the Portfolio may
use options, futures contracts and depository receipts to hedge its positions or
for other permissible purposes. The Portfolio also may enter into repurchase and
reverse repurchase agreements and lend its portfolio securities.
The S&P SmallCap 600. The S&P SmallCap 600 is composed of
approximately 600 common stocks. These companies are chosen to be a part of the
S&P SmallCap 600 based upon their market size, liquidity and industry group
representation. As of December 31, 1998, stocks in the S&P SmallCap 600 had a
market capitalization of $580 million. To be included in the S&P SmallCap 600,
stock selections are also screened by S&P for trading volume, ownership
concentration, share price and bid/ask spreads. Normally, the Portfolio will
hold all 600 stocks in the S&P SmallCap 600 and will hold each stock in
approximately the same percentage as that stock represents in the S&P SmallCap
600. Under certain circumstances, the Portfolio may not hold all 600 stocks in
the S&P SmallCap 600, for example because of changes in the S&P SmallCap 600, or
as a result of shareholder activity in the Portfolio. The Portfolio will
rebalance its holdings periodically as dictated by changes in cash flow and the
composition of the S&P SmallCap 600. The Adviser believes that the S&P SmallCap
600 is an appropriate benchmark for the Portfolio because it represents a
diversified array of small capitalization companies, it is familiar to many
investors and it is widely accepted as a reference for small capitalization
common stock investments.
The S&P SmallCap 600 Index has above-average risk and may
fluctuate more than the S&P 500 Stock Price Index, which lists stocks of larger,
more established companies. Small capitalization companies may be subject to
more abrupt or erratic price movements than the stocks of larger, established
companies or the stock market as a whole. Among the reasons for this greater
price volatility are the less than certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such stocks and the
greater exposure of small
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capitalization companies to changing economic conditions. In addition, such
companies often have limited product lines, smaller markets or fewer financial
resources. Because of the risks associated with investing in the small companies
that comprise the S&P SmallCap 600, shareholders should consider an investment
in the Small Cap Equity Index Portfolio to be long-term. The Portfolio is not
designed to provide investors with a means to speculate on short-term movements
in the stock market.
INTERNATIONAL EQUITY PORTFOLIO
In addition to common stock, the International Equity Portfolio
may invest in preferred stock and securities convertible into common stock. A
convertible security may be purchased for the Portfolio when, in the opinion of
the Adviser or Clay Finlay, Inc. ("Clay Finlay" or the "Sub-Adviser"), the price
and yield of the convertible security is favorable compared to the price and
yield of the common stock. The Portfolio may participate in rights offerings and
purchase warrants. The Portfolio will not invest more than 5% of its net assets,
taken at market value, in warrants. Warrants acquired by the Portfolio in units
or attached to other securities are not subject to this restriction.
During temporary defensive periods, when deemed necessary by the
Adviser or Sub-Adviser, the Portfolio may invest up to 100% of its assets in
U.S. Government obligations, debt obligations of companies incorporated and
having their principal business activities in the United States, or cash and
short-term obligations (having remaining maturities of 13 months or less). (See
"Government & Corporate Bond Portfolio" above for a description of the types of
short-term obligations in which the Portfolio may invest.) The Portfolio does
not intend to invest in such securities for the purpose of meeting its
investment objective.
The Portfolio may also invest, without limitation, in foreign
securities through the purchase of ADRs and EDRs. For further information, see
"Special Risk Consideration -- Risks Associated with Foreign Securities and
Currencies" and "Other Investment Policies and Risk Considerations -- ADRs and
EDRs" below.
The Portfolio will not normally invest in securities of issuers
having a record, together with their predecessors, of less than three years of
continuous operations.
Although investing in any mutual fund has certain inherent risks,
an investment in the Portfolio may have even greater risks than investments in
most other types of mutual funds. The Portfolio is not a complete investment
program, and it may not be appropriate for investors who cannot financially bear
the loss of at least a significant portion of their investment. The Portfolio's
net asset value per Share is subject to rapid and substantial changes because
greater risk is assumed in seeking the Portfolio's objective. See "Special Risk
Considerations -- Risks Associated with Foreign Securities and Currencies"
below.
SPECIAL RISK CONSIDERATIONS
MARKET RISK. The Equity Income, Equity Index, Growth & Income
Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index and
International Equity Portfolios
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invest primarily, and the Balanced Portfolio invests to a significant degree, in
equity securities. As with other mutual funds that invest primarily or to a
significant degree in equity securities, these Portfolios are subject to market
risk. That is, the possibility exists that common stocks will decline over short
or even extended periods of time and both the U.S. and certain foreign equity
markets tend to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease.
INTEREST RATE RISK. Generally, the market value of fixed income
securities, including municipal securities, held by the Portfolios can be
expected to vary inversely to changes in prevailing interest rates. During
periods of declining interest rates, the market value of investment portfolios
comprised primarily of fixed income securities will tend to increase, and during
periods of rising interest rates, the market value will tend to decrease. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also offset the
value of these investments. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not offset cash income from such
securities but will be reflected in a Portfolio's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES.
Investments in securities of foreign issuers, whether made directly or
indirectly, carry certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.-based
companies. There is generally less government supervision and regulation of
foreign exchanges, brokers and issuers than there is in the United States. In
the event of a default by the issuer of a foreign security, it may be more
difficult to obtain or enforce a judgment against such issuer than it would be
against a domestic issuer. In addition, foreign banks and foreign branches of
U.S. banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting, and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certain of the risks associated with international investments
are heightened with respect to investments in developing countries. The risks of
expropriation, nationalization and social, political and economic instability
are greater in those countries than in more developed capital markets. In
addition, developing countries may have economies based on only a few industries
and small securities markets with a low volume of trading. Certain countries may
also
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<PAGE> 25
impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors may limit the
investment opportunities available to the International Equity Portfolio and
result in a lack of liquidity and a high price volatility with respect to
securities of issuers from developing countries.
Certain countries may also impose restrictions on the
International Equity Portfolio's ability to repatriate investment income or
capital. Even when there is no outright restriction on repatriation of
investment income or capital, the mechanics of repatriation may affect certain
aspects of the operations of the International Equity Portfolio.
Governments of many developing countries exercise substantial
influence over many aspects of the private sector. In some countries, the
government may own or control many companies, including the largest company or
companies. As such, government actions in the future could have a significant
effect on economic conditions in these countries, affecting private sector
companies, the International Equity Portfolio and the value of its portfolio
securities.
Since the International Equity Portfolio will invest
substantially in securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will affect the value of
securities in the International Equity Portfolio and the unrealized appreciation
or depreciation of investments so far as U.S. investors are concerned. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets and the regulatory control of the exchanges on which
the currencies trade. These forces are themselves affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. Costs are incurred in connection
with conversions between various currencies.
The expense ratio of the International Equity Portfolio can be
expected to be higher than that of funds investing in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
Interest and dividends payable on the International Equity
Portfolio's foreign portfolio securities may be subject to foreign withholding
taxes. To the extent such taxes are not offset by credits or deductions allowed
to investors under U.S. federal income tax provisions, they may reduce the net
return to the Portfolio's shareholders. For further information, see "Taxes."
In addition to the International Equity Portfolio, other
Portfolios may be subject to certain of the risks described above in connection
with investment in foreign securities.
RISKS ASSOCIATED WITH MUNICIPAL SECURITIES. The ability of the
Tax-Exempt Money Market, Short-Intermediate Municipal, Missouri Tax-Exempt Bond
and National Municipal Bond Portfolios (collectively, the "Tax-Exempt
Portfolios") to achieve their
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<PAGE> 26
respective investment objectives are dependent upon the ability of issuers of
municipal securities to meet their continuing obligations for the payment of
principal and interest. There are additional risks associated with investment in
the Missouri Tax-Exempt Bond Portfolio because it invests its assets
predominantly in Missouri municipal securities. The Missouri Constitution
imposes a limit on the amount of taxes that may be imposed by the General
Assembly during any fiscal year. No assurances can be given that the amount of
revenue derived from taxes will remain at its current level or that the amount
of federal grants previously provided to the State will continue. The State of
Missouri is barred by its constitution from issuing debt instruments to fund
government operations, although it is authorized to issue bonds to finance or
refinance the cost of capital projects upon approval by the voters. In the past,
the State has issued two types of bonds to raise capital-general obligation
bonds and revenue bonds. Payments on general obligation bonds are made from the
General Revenue Fund. Therefore, if the State is unable to increase its tax
revenues, the State's ability to make the payments on the existing obligations
may be adversely affected. The State also is authorized to issue revenue bonds,
which generally provide funds for a specific project, and payments are generally
limited to the revenue to that project. The State may, however, enact a tax
specifically to repay the State's revenue bonds. Therefore, a reduction of
revenues on a project financed by revenue bonds may adversely affect the State's
ability to make payments on such bonds. No assurances can be given that the
State will receive sufficient revenues from the projects, or that the State will
enact and collect tax to be used to make the required payments on such bonds.
See "Other Investment Policies and Risk Considerations - Special Considerations
Regarding Investment in Missouri Municipal Securities" below.
ADDITIONAL RISKS AND OTHER CONSIDERATIONS. Although the
Tax-Exempt Money Market, Short-Intermediate Municipal and National Municipal
Bond Portfolios may invest 25% or more of their respective net assets in (i)
municipal securities whose issuers are in the same state, (ii) municipal
securities the interest on which is paid solely from revenues of similar
projects, and (iii) private activity bonds, no Portfolio presently intends to do
so unless in the opinion of the Adviser the investment is warranted. Although
the Missouri Tax-Exempt Bond Portfolio does not presently intend to do so on a
regular basis, it may invest more than 25% of its assets in industrial
development bonds issued before August 7, 1986, the interest on which is not
treated as a specific tax preference item under the federal alternative minimum
tax, and in municipal securities, the interest on which is paid solely from
revenues of similar projects, if such investments are deemed necessary or
appropriate by the Adviser. To the extent that a Portfolio's assets are invested
in municipal securities the issuers of which are in the same state or that are
payable from the revenues of similar projects or in private activity bonds, a
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent than
it would be if its assets were not so invested.
Each of the Tax-Exempt Money Market and Missouri Tax-Exempt Bond
Portfolios is classified as non-diversified under the 1940 Act. Investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to
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<PAGE> 27
economic, political, and regulatory developments than a diversified investment
portfolio with similar objectives.
Investors in the Missouri Tax-Exempt Bond Portfolio should
consider the risk inherent in such Portfolio's concentrations in Missouri
municipal securities versus the safety that comes with a less geographically
concentrated investment portfolio, and should compare the yields and
tax-equivalent yields available on portfolios of Missouri municipal securities
with the yields and tax-equivalent yields of more diversified portfolios with
securities of comparable quality, including non-Missouri municipal securities,
before making an investment decision.
Municipal securities purchased by the Tax-Exempt Portfolios may
be backed by letters of credit or guarantees issued by domestic or foreign banks
and other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or a
guarantee with respect to a municipal security held by a Tax-Exempt Portfolio
could have an adverse effect on the Portfolio's investment portfolio and the
value of its Shares. Foreign letters of credit and guarantees involve certain
risks in addition to those of domestic obligations, including less stringent
reserve requirements and different accounting, auditing and recordkeeping
requirements.
Opinions relating to the validity of municipal securities and to
the exemption of interest thereon from federal income tax (and, with respect to
Missouri municipal securities, to the exemption from Missouri income tax) are
rendered by bond counsel to the respective issuers at the time of issuance, and
opinions relating to the validity and the tax-exempt status of payments received
by a Portfolio from tax-exempt derivative securities are rendered by counsel to
the respective sponsors of such securities. The Tax-Exempt Portfolios and their
Adviser will rely on such opinions and will not review independently the
underlying proceedings relating to the issuance of municipal securities, the
creation of any tax-exempt derivative security, or the bases for such opinions.
EUROPEAN CURRENCY UNIFICATION. Many European countries have
adopted a single European currency, the euro. On January 1, 1999, the euro
became legal tender for all countries participating in the Economic and Monetary
Union ("EMU"). A new European Central Bank has been created to manage the
monetary policy of the new unified region. On the same date, the exchange rates
were irrevocably fixed between the EMU member countries. National currencies
will continue to circulate until they are replaced by euro coins and bank notes
by the middle of 2002.
This change is likely to significantly impact the European
capital markets in which the International Equity Portfolio invests and may
result in the Portfolio facing additional risks in pursuing its investment
objective. These risks, which include, but are not limited to, uncertainty as to
the proper tax treatment of the currency conversion, volatility of currency
exchange rates as a result of the conversion, uncertainty as to capital market
reaction, conversion costs that may affect issuer profitability and
creditworthiness, and lack of participation by some European countries, may
increase the volatility of the Portfolio's net asset value per share.
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<PAGE> 28
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The investment policies described in the Prospectuses and this
Statement of Additional Information are among those which one or more of the
Portfolios have the ability to utilize. Some of these policies may be employed
on a regular basis; others may not be used at all. Accordingly, reference to any
particular policy, method or technique carries no implication that it will be
utilized or, if it is, that it will be successful.
MUNICIPAL SECURITIES. As described in their Prospectuses and
subject to their respective investment limitations, the Tax-Exempt Portfolios
may invest in municipal securities. Municipal securities 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 securities consist
of "general obligation" and "revenue" issues. General obligation securities are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenues securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed. Revenue securities
include private activity bonds which are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
bonds is usually directly related to the credit standing of the corporate user
of the facility involved. Municipal securities 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
securities both within a particular classification and between classifications,
and the yields on municipal securities 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 and S&P, represent their opinions as
to the quality of municipal securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and municipal
securities with the same maturity, interest rate and rating may have different
yields while municipal securities of the same maturity and interest rate with
different ratings may have the same yield.
Each of the Tax-Exempt Portfolios may acquire zero coupon obligations,
which may have greater price volatility than coupon obligations and which will
not result in payment of interest until maturity. Each Tax-Exempt Portfolio may
also purchase general obligation notes, tax anticipation notes, bond
anticipation notes, revenue anticipation notes, tax-exempt commercial paper,
construction loan notes and other tax-exempt loans. Such instruments are issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other
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<PAGE> 29
revenues. Also included within the general category of municipal securities are
participation certificates in leases, installment purchase contracts, or
conditional sales contracts ("lease obligations") entered into by state or
political subdivisions to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the lessee has no obligation to make these payments in future
years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing and may not be as
marketable as more conventional securities. To the extent these securities are
illiquid, they are subject to each Portfolio's applicable limitation on illiquid
securities described below.
Certificates of participation represent undivided interests in
lease payments by a governmental or nonprofit entity. A lease may provide that
the certificate trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they become due. In the
event of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of payment. In addition,
certificates of participation are less liquid than other bonds because there is
a limited secondary trading market for such obligations. To alleviate potential
liquidity problems with respect to these investments, a Portfolio may enter into
remarketing agreements which may provide that the seller or a third party will
repurchase the obligation within seven days after demand by the Portfolio and
upon certain conditions such as the Portfolio's payment of a fee.
The payment of principal and interest on most securities
purchased by a Tax-Exempt Portfolio will depend upon the ability of the issuers
to meet their obligations. An issuer's obligations under its municipal
securities are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
bankruptcy code, and laws, if any, which may be enacted by federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest on and principal of its
municipal securities 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 the Prospectuses and this Statement of Additional Information. The
non-governmental user of facilities financed by private activity bonds is also
considered to be an "issuer."
Private activity bonds issued by or on behalf of public
authorities to finance various privately operated facilities are considered to
be municipal securities. 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
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<PAGE> 30
publicly owned corporations in the financing of commercial or industrial
facilities. State and local governments are authorized in most states to issue
private activity bonds for such purposes in order to encourage corporations to
locate within their communities. The principal and interest on these obligations
may be payable from the general revenues of the users of such facilities.
Furthermore, payment of principal and interest on municipal securities 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 securities.
Interest on private activity bonds, although free from regular federal income
taxation, may be an item of tax preference for purposes of the federal
alternative minimum tax.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal securities. For example, the Tax Reform Act of 1986
(the "Act"), adopted in October 1986, substantially revised provisions of prior
law affecting the issuance and use of proceeds of certain tax-exempt
obligations. The Act made a new definition of private activity bonds applicable
to many types of bonds, including those which were industrial development bonds
under prior law. Interest on private activity bonds is exempt from regular
federal income tax only if the bonds fall within and meet the requirements of
certain defined categories of qualified private activity bonds. The Act also
extended to all municipal securities issued after August 16, 1986 (August 31,
1986 in the case of certain bonds) certain rules formerly applicable only to
industrial development bonds. If the issuer fails to observe such rules, the
interest on the municipal securities may become taxable retroactive to the date
of issue. In addition, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must include all tax-exempt interest in their federal
alternative minimum taxable income. (See "Additional Information Concerning
Taxes" below.) Moreover, with respect to Missouri municipal securities, the Fund
cannot predict what legislation, if any, may be proposed in the Missouri
Legislature relating to the status of the Missouri income tax on interest on
such obligations, or which proposals, if any, might be enacted. Such proposals,
while pending or if enacted, might adversely affect the availability of
municipal securities generally, or Missouri municipal securities specifically,
for investment by a Portfolio and the liquidity and value of a Portfolio's
assets. In such an event, each Portfolio would reevaluate its investment
objective and policies and consider possible changes in its structure or
possible dissolution.
Subject to its investment policies, the Money Market Portfolio
may also invest in municipal securities. Dividends paid by the Money Market
Portfolio that are derived from interest on municipal securities would be
taxable to its shareholders for federal income tax purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS. Subject to their
respective investment limitations, each Portfolio may purchase variable and
floating rate obligations. The Adviser will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such
obligations and, for obligations subject to a demand feature, will monitor their
financial
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<PAGE> 31
status to meet payment on demand. The Money Market Portfolios and the
International Equity Portfolio will invest in such instruments only when the
Adviser believes that any risk of loss due to issuer default is minimal. In
determining average weighted portfolio maturity, a variable or floating rate
instrument issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, or a variable or floating rate instrument scheduled on its
face to be paid in 397 days or less, will be deemed to have a maturity equal to
the period remaining until the obligation's next interest rate adjustment. Other
variable or floating rate notes will be deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the time
the Portfolio can recover payment of principal as specified in the instrument.
Variable or floating rate obligations held by the Money Market
Portfolios may have maturities of more than 397 days provided that: (i) the
Portfolio is entitled to payment of principal at any time upon not more than 30
days' notice or at specified intervals not exceeding 397 days (upon not more
than 30 days' notice); (ii) the rate of interest on a variable rate instrument
is adjusted automatically on set dates not exceeding 397 days, and the
instrument, upon adjustment, can reasonably be expected to have a market value
that approximates its par value; and (iii) the rate of interest on a floating
rate instrument is 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.
Municipal securities purchased by the Tax-Exempt Portfolios may
include rated or unrated variable and floating rate instruments, including
variable rate master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
Unrated instruments purchased by a Portfolio will be determined by the Adviser
to be of comparable quality at the time of purchase to rated instruments that
may be purchased. The absence of an active secondary market for a particular
variable or floating rate instrument, however, could make it difficult for a
Portfolio to dispose of an instrument if the issuer were to default on its
payment obligation. A Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
The variable and floating rate demand instruments that the
Tax-Exempt Portfolios may purchase include participations in municipal
securities purchased from and owned by financial institutions, primarily banks.
Participation interests provide a Portfolio with a specified undivided interest
(up to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Portfolio. The bank typically retains fees
out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
RESTRICTED AND ILLIQUID SECURITIES. A Portfolio will not invest
more than 15% (10% with respect to a Money Market Portfolio) 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
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<PAGE> 32
buyers pursuant to SEC Rule 144A are subject to the applicable limit (unless the
Adviser or Sub-Adviser, pursuant to guidelines established by the Board of
Directors, determines that a liquid market exists). The 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 Portfolios to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these restricted securities. The International Equity Portfolio will not invest
more than 10% of its total assets in the securities of issuers which are
restricted as to disposition, other than restricted securities eligible for
resale pursuant to Rule 144A.
The Adviser or Sub-Adviser monitors the liquidity of restricted
securities in the Fund's Portfolios under the supervision of the Board of
Directors. In reaching liquidity decisions, the Adviser and Sub-Adviser may
consider the following factors, although such factors may not necessarily be
determinative: (1) the unregistered nature of a security; (2) the frequency of
trades and quotes for the security; (3) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (4)
the trading markets for the security; (5) dealer undertakings to make a market
in the security; and (6) the nature of the security and the nature of the
marketplace trades (including the time needed to dispose of the security,
methods of soliciting offers, and mechanics of transfer).
CONVERTIBLE SECURITIES. Subject to their respective investment
limitations, the Equity and Bond Portfolios (other than the Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios) may
purchase convertible securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt until the convertible securities mature
or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities for a Portfolio, the Adviser
(or Sub-Adviser) will consider, among other factors, its evaluation of the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying stocks; the prices of the securities relative
to other comparable securities and to the benefits of sinking funds or other
protective conditions; diversification of the Portfolio as to issuers; and
whether the securities are rated by Ratings Agencies and, if so, the ratings
assigned. A Portfolio will exchange or convert the convertible securities held
in its portfolio into shares of the underlying common stock when, in the
Adviser's or Sub-Adviser's opinion, the investment characterization of the
underlying common stock will assist the Portfolio in achieving its investment
objective. Otherwise a Portfolio may hold or trade convertible securities.
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The value of convertible securities is a function of their
investment value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
converted into the underlying stock). The investment value of convertible
securities is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline,
and by the credit standing of the issuer and other factors. The conversion value
of convertible securities is determined by the market price of the underlying
stock. If the conversion value is low relative to the investment value, the
price of the convertible securities is governed principally by their investment
value. To the extent the market price of the underlying stock approaches or
exceeds the conversion price, the price of the convertible securities will be
increasingly influenced by their conversion value. In addition, convertible
securities generally sell at a premium over their conversion value determined by
the extent to which investors place value on the right to acquire the underlying
stock while holding fixed income securities.
RIGHTS AND WARRANTS. The Equity Portfolios may participate in
rights offerings and purchase warrants, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Portfolios could lose
the purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' or warrants' expiration. Also, the
purchase of rights or warrants involves the risk that the effective price paid
for the right or warrant added to the subscription price of the related security
may exceed the value of the subscribed security's market price such as when
there is no movement in the level of the underlying security. The Portfolios
will not invest more than 5% of their respective net assets, taken at market
value, in warrants, or more than 2% of their respective net assets, taken at
market value, in warrants not listed on the New York, American or Canadian Stock
Exchanges. Warrants acquired by the Portfolios in units or attached to other
securities are not subject to this restriction.
STAND-BY COMMITMENTS. Each of the Tax-Exempt Portfolios may
acquire "stand-by commitments" with respect to municipal securities held by it.
Under a stand-by commitment, a dealer or bank agrees to purchase from a
Portfolio, at the Portfolio's option, specified municipal securities at their
amortized cost value to the Portfolio plus accrued interest, if any. Standby
commitments acquired by a Portfolio must be rated in the two highest categories
as determined by a rating agency, or, if not rated, must be of comparable
quality as determined by the Adviser pursuant to guidelines approved by the
Fund's Board of Directors. Stand-by commitments are exercisable by a Portfolio
at any time before the maturity of the underlying municipal securities and may
be sold, transferred or assigned by the Portfolio only with the underlying
instruments. The Missouri Tax-Exempt Bond Portfolio expects that its investments
in stand-by commitments will not exceed 5% of the value of its total assets
under normal market conditions.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Tax-Exempt Portfolio may pay for a stand-by
commitment either separately in cash or by paying a
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higher price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities).
The Tax-Exempt Portfolios intend to enter into stand-by
commitments only with dealers, banks and broker-dealers which, in the Adviser's
opinion, present minimal credit risks. A Portfolio's reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying municipal securities that are subject to the commitment. In
evaluating the creditworthiness of the issuer of a stand-by commitment, the
Adviser will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information.
Each Tax-Exempt Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. Stand-by commitments acquired by a
Portfolio would be valued at zero in determining net asset value. The
acquisition of a "stand-by commitment" by the Tax-Exempt Money Market Portfolio
would thus not affect the valuation or assumed maturity of the underlying
municipal securities, which would continue to be valued in accordance with the
amortized cost method. Where a Portfolio paid any consideration directly or
indirectly for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the
Portfolio. If a stand-by commitment is exercised, its cost will reduce the
amount realized on the sale of the municipal securities for purposes of
determining the amount of gain or loss. If a stand-by commitment expires
unexercised, its cost is added to the basis of the security to which it relates
in those instances where the stand-by commitment was acquired on the same day as
the bond, and in other cases will be treated as a capital loss at the time of
expiration. Stand-by commitments would not affect the average weighted maturity
of a Portfolio.
TAX-EXEMPT DERIVATIVES. Subject to their respective investment
limitations, the Tax-Exempt Portfolios may hold tax-exempt derivatives which may
be in the form of tender option bonds, participations, beneficial interests in a
trust, partnership interests or other forms. The Adviser expects that less than
5% of each Tax-Exempt Portfolio's assets will be invested in such securities
during the current year. A number of different structures have been used. For
example, interests in long-term fixed-rate municipal securities, held by a bank
as trustee or custodian, are coupled with tender option, demand and other
features when the tax-exempt derivatives are created. Together, these features
entitle the holder of the interest to tender (or put), the underlying municipal
securities to a third party at periodic intervals and to receive the principal
amount thereof. In some cases, municipal securities are represented by custodial
receipts evidencing rights to receive specific future interest payments,
principal payments, or both, on the underlying municipal securities held by the
custodian. Under such arrangements, the holder of the custodial receipt has the
option to tender the underlying municipal security at its face value to the
sponsor (usually a bank or broker dealer or other financial institution), which
is paid periodic fees equal to the difference between the bond's fixed coupon
rate and the rate that would cause the bond, coupled with the tender option, to
trade at par on the date of a rate adjustment. The Portfolios may hold
tax-exempt derivatives, such as participation interests and custodial receipts,
for municipal securities which give the holder the right to receive payment of
principal subject to the conditions described above. The Internal Revenue
Service has not ruled on whether the interest received on tax-exempt derivatives
in the form of participation interests
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or custodial receipts is tax-exempt, and accordingly, purchases of any such
interests or receipts are based on the opinion of counsel to the sponsors of
such derivative securities. Neither the Fund nor the Adviser will review the
proceedings related to the creation of any tax-exempt derivatives or the basis
for such opinions.
U.S. GOVERNMENT OBLIGATIONS. Examples of the types of U.S.
Government obligations that may be held by the Portfolios, subject to their
respective investment policies, include, in addition to U.S. Treasury bonds,
notes and bills, the obligations of Federal Home Loan Banks, Federal Farm Credit
Banks, Federal Land Banks, the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), 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 GNMA, 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 FNMA, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; still others, such as
those of the FHLMC, 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.
Securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, due to fluctuations in interest rates,
the market value of such securities may vary during the period a shareholder
owns Shares of a Portfolio. Certain U.S. Government securities held by the Money
Market Portfolios may have remaining maturities exceeding thirteen months if
such securities provide for adjustments in their interest rates no less
frequently than every thirteen months.
STRIPPED GOVERNMENT SECURITIES. To the extent consistent with
their respective investment policies, each Portfolio may invest in bills, notes
and bonds (including zero coupon bonds) issued by the U.S. Treasury. In
addition, each Portfolio (except the Tax-Exempt Money Market, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, Growth Equity, Equity Index and Small Cap
Equity Index Portfolios) may also invest in "stripped" U.S. Treasury
obligations, 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 the "Separate Trading of Registered Interest and Principal Securities"
("STRIPS") program or (2) through the Coupon Under Bank-Entry Safekeeping
("CUBES") program or other stripped securities issued directly by agencies or
instrumentalities of the U.S. Government (and, with respect to the Treasury
Money Market Portfolio only, that are also guaranteed as to principal and
interest by the U.S. Government). STRIPS and CUBES represent either future
interest or principal payments and are direct obligations of the U.S. Government
that clear through the Federal Reserve System.
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The Money Market, Intermediate Corporate Bond, Bond Index, Government &
Corporate Bond, Growth & Income Equity, Small Cap Equity and Balanced Portfolios
may also purchase U.S. Treasury and agency securities that are stripped by
brokerage firms and custodian banks and sold under proprietary names. Having
separated the interest coupons from the underlying principal of the U.S.
Government Obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names including "Treasury
Income Growth Receipts" ("TIGRS") and "Certificates of Accrual on Treasury
Securities" ("CATS"). Such securities may not be as liquid as STRIPS and CUBES
and are not viewed by the staff of the SEC as U.S. Government securities for
purposes of the 1940 Act.
Stripped securities are issued at a discount to their "face
value" and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The Adviser will consider the liquidity needs of a Portfolio when any
investments in zero coupon obligations or other principal-only obligations are
made.
The stripped coupons are sold separately from the underlying
principal, which is sold at a deep discount because the buyer receives only the
right to receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. Purchasers of stripped
principal-only securities acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury
Department sells itself. In the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder), the underlying
U.S. Treasury bonds and notes themselves are held in trust on behalf of the
owners. Counsel to the underwriters of these certificates or other evidences of
ownership of the U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities, such as the Portfolios, most likely will
be deemed the beneficial holders of the underlying U.S. Government obligations
for federal tax and security purposes.
The U.S. Government does not issue stripped Treasury securities
directly. The STRIPS program, which is ongoing, is designed to facilitate the
secondary market in the stripping of selected U.S. Treasury notes and bonds into
separate interest and principal components. Under the program, the U.S. Treasury
continues to sell its notes and bonds through its customary auction process. A
purchaser of those specified notes and bonds who has access to a book-entry
account at a Federal Reserve bank, however, may separate the Treasury notes and
bonds into interest and principal components. The selected Treasury securities
thereafter may be maintained in the book-entry system operated by the Federal
Reserve in a manner that permits the separate trading and ownership of the
interest and principal payments.
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
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action by the custodian's employees. The holders of receipts or certificates, as
the real parties in interest, are entitled to the rights and privileges of the
underlying debt obligations, including the right, in the event of default in
payment of principal or interest, to proceed individually against the issuer
without acting in concert with other holders of those receipts or certificates
or the custodian.
SECURITIES LENDING. To increase return or offset expenses, each
Portfolio (except the Tax-Exempt Money Market and Missouri Tax-Exempt Bond
Portfolios) may 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, marked to market
daily, to at least the market value of the securities loaned. Collateral for
such loans may include cash, securities of the U.S. Government, or its agencies
or instrumentalities, or an irrevocable letter of credit issued by a bank that
has at least $1.5 billion in total assets, or any combination thereof. The
collateral must be valued daily and, should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
lending Portfolio. By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. Government
securities are used as collateral. In accordance with current SEC policies, each
Portfolio is currently limiting its securities lending to 33-1/3% of the 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 a Portfolio or a borrower
at any time.
While these Portfolios would not have the right to vote
securities on loan, each Portfolio intends to terminate the loan and regain the
right to vote should this be considered important with respect to the
investment. When the Portfolios lend their securities, they continue to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral which will be invested in
readily marketable, high quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
SECURITIES OF OTHER INVESTMENT COMPANIES. Under certain
circumstances and subject to their respective investment policies and
limitations, each Portfolio may invest in securities issued by other investment
companies, limited, except as described below, with respect to each Portfolio
(other than the Growth Equity Portfolio) to investment companies which determine
their net asset value per Share based on the amortized cost or penny-rounding
method and which invest in securities in which the Portfolio is permitted to
invest. Each Portfolio currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
(c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio; and (d) not more than 10% of the
outstanding voting stock of any one investment company will be owned in the
aggregate by the Portfolios and other investment companies advised by the
Adviser.
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Investments in other investment companies will cause a Portfolio
(and, indirectly, the Portfolio's shareholders) to bear proportionately the cost
incurred in connection with the operations of such other investment companies.
In addition, investment companies in which a Portfolio may invest may impose a
sales or distribution charge in connection with the purchase or redemption of
their shares as well as other types of commissions or charges (no sales charge
will be paid by the Missouri Tax-Exempt Bond Portfolio in connection with such
investments). Such charges will be payable by a Portfolio and, therefore, will
be borne indirectly by its shareholders. The income on securities of other
investment companies may be taxable to investors at the state or local level.
See "Additional Information Concerning Taxes" below.
ASSET-BACKED SECURITIES. Subject to their respective investment
policies, the U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond and Balanced Portfolios may purchase
asset-backed securities (i.e., securities backed by mortgages, installment sale
contracts, corporate receivables, credit card receivables or other assets) that
are issued by entities such as GNMA, FNMA and FHLMC and private issuers such as
commercial banks, financial companies, finance subsidiaries of industrial
companies, savings and loan associations, mortgage banks, and investment banks.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and for this and other
reasons, an asset-backed security's stated maturity may be shortened, and the
security's total return may be difficult to predict precisely.
Presently there are several types of mortgage-backed securities,
including guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and collateralized
mortgage obligations ("CMOs"), which provide the holder with a specified
interest in the cash flow of a pool of underlying mortgages or other
mortgage-backed securities. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be subject to greater
volatility and interest-rate risk than other types of mortgage-backed
securities. The average life of asset-backed securities varies with the
underlying instruments or assets and market conditions, which in the case of
mortgages have maximum maturities of forty years. The average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgages underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The
relationship between mortgage prepayment and interest rates may give some
high-yielding mortgage-backed securities less potential for growth in value than
conventional bonds with comparable maturities. In addition, in periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Portfolio will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. When interest rates rise, the value of an asset-backed
security generally will decline; however, when interest rates decline, the value
of an asset-backed security with prepayment features may not increase as much as
that of other fixed-income securities. Because
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of these and other reasons, an asset-backed security's total return may be
difficult to predict precisely.
There are a number of important differences among the agencies
and instrumentalities of the U.S. Government that issue mortgage-backed
securities and among the securities that they issue. Mortgage-backed securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation with the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the FNMA
include FNMA Guaranteed Mortgage Pass-through Certificates (also known as
"Fannie Maes") which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private stockholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-backed securities issued by the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a
corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are
not guaranteed by the United States or by any Federal Home Loan Bank. Freddie
Macs entitle the holder to timely payment of interest, which is guaranteed by
the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Non-mortgage asset-backed securities involve certain risks that
are not presented by mortgage-backed securities. The collateral supporting
non-mortgage asset-backed securities generally is of shorter maturity than
mortgage loans and is less likely to experience substantial prepayments.
Primarily, these securities do not have the benefit of the same security
interest in the underlying collateral (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which have given debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. The repossession of automobiles and other personal property upon
the default of the debtor may be difficult or unpracticable in some cases. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
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WHEN-ISSUED PURCHASES, DELAYED SETTLEMENT TRANSACTIONS AND
FORWARD COMMITMENTS. Each Portfolio may purchase securities on a "when-issued"
basis and, except for the Growth Equity Portfolio, may purchase or sell
securities on a "forward commitment" basis. These transactions involve a
commitment by a Portfolio to purchase or sell securities at a stated price and
yield with settlement beyond the normal settlement date. Such transactions
permit a Portfolio to lock-in a price or yield on a security, regardless of
future changes in interest rates. Additionally, the Short-Intermediate
Municipal, National Municipal Bond and Growth Equity Portfolios may purchase or
sell securities on a "delayed settlement" basis. This refers to a transaction in
the secondary market that will settle some time in the future. When-issued
purchases, forward commitments and delayed settlement transactions involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, or if the value of the security to be sold increases prior to
the settlement date.
When a Portfolio agrees to purchase or sell securities on a
when-issued, delayed settlement or forward commitment basis, the Custodian (or
sub-custodian) will maintain in a segregated account cash, U.S. Government
securities, liquid portfolio securities or other high-grade debt obligations
having a value (determined daily) at least equal to the amount of the
Portfolio's commitments. In the case of a forward commitment to sell portfolio
securities, the Custodian (or sub-custodian) will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that a Portfolio will maintain sufficient
assets at all times to cover is obligations under when-issued purchases and
delayed delivery and forward commitment transactions.
A Portfolio will make commitments to purchase securities on a
when-issued basis or to purchase or sell securities on a delayed delivery or
forward commitment basis only with the intention of completing the transaction
and actually purchasing or selling the securities. No Portfolio intends to
engage in such transactions for speculative purposes. If deemed advisable as a
matter of investment strategy, however, a Portfolio may dispose of or
renegotiate a commitment after it is entered into and may sell securities it has
committed to purchase before those securities are delivered to the Portfolio on
the settlement date. In these cases, the Portfolio may realize a capital gain or
loss.
When a Portfolio engages in when-issued, delayed delivery 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 a Portfolio's net asset value starting on
the day the Portfolio agrees to purchase the securities. The Portfolio does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. When a Portfolio makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Portfolio's assets, and fluctuations in the value
of the underlying securities are not reflected in the Portfolio's net asset
value as long as the commitment remains in effect.
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Each Portfolio expects that these transactions will not exceed
25% of the value of its total assets (at the time of purchase) under normal
market conditions. Because the Portfolios will each set aside cash or liquid
assets to satisfy its purchase commitments in the manner described, a
Portfolio's liquidity and ability to manage its portfolio might be affected in
the event its commitments to purchase securities on a when-issued or forward
commitment basis ever exceeded 25% of the value of its total assets. The
National Municipal Bond Portfolio expects that commitments to purchase
when-issued securities will not exceed 5% of its total assets under normal
market conditions.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International
Equity Portfolio may buy and sell securities denominated in currencies other
than the U.S. dollar, and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Portfolio may from time to time enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. The Portfolio may enter into currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or use forward currency contracts to purchase or sell foreign
currencies.
A forward foreign currency contract involves an obligation by the
Portfolio to purchase or sell a specified currency at a future date at a price
set at the time of the contract. In this respect, forward currency contracts are
similar to foreign currency futures contracts described below; however, unlike
futures contracts, which are traded on recognized commodities exchanges, forward
currency contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow the Portfolio to establish a rate of exchange for a future
point in time. The Portfolio may enter into forward foreign currency exchange
contracts when deemed advisable by their investment adviser under two
circumstances.
When entering into a contract for the purchase or sale of a
security, the International Equity Portfolio may enter into a forward foreign
currency exchange contract for the amount of the purchase or sale price to
protect against variations in the value of the foreign currency relative to the
U.S. dollar or other foreign currency between the date the security is purchased
or sold and the date on which payment is made or received. For instance, the
Portfolio may use forward foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates. The
use of such forward contracts is limited to hedging against movements in the
value of foreign currencies relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. The
purpose of transaction hedging is to "lock in" the U.S. dollar equivalent price
of such specific securities. Position hedging is the sale of foreign currency
with respect to portfolio security positions denominated or quoted in that
currency. The Portfolio will not speculate in foreign currency exchange
transactions. Transaction and position hedging will not be limited to an overall
percentage of the Portfolio's assets but will be employed as necessary to
correspond to particular transactions or positions. The Portfolio may not hedge
its currency positions to an
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extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated in, quoted
in, or currently convertible into that particular currency. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities decline, but
forward foreign currency exchange contracts do allow the Portfolio to establish
a rate of exchange for a future point in time.
When the Sub-Adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the International Equity Portfolio may
enter into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency. The Portfolio does not intend to enter
into forward contracts under this second circumstance on a regular or continuing
basis. The Portfolio will not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency.
While forward contracts may offer protection from losses resulting from declines
in the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. Furthermore,
forward foreign currency exchange contracts do not eliminate fluctuations in the
underlying prices of securities. In addition, the Portfolio will incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
The Fund's Custodian will place in a separate account of the
International Equity Portfolio cash or liquid securities in an amount equal to
the value of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above. For
the purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio.
At the maturity of a forward contract, the International Equity
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of the contract. Accordingly, it
may be necessary for the International Equity Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency the Portfolio is obligated to deliver.
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If the International Equity Portfolio retains the portfolio
security and engages in an offsetting transaction, it will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Portfolio engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline between the date the Fund enters into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, it will realize a
gain to the extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell. For
a discussion of the Federal tax treatment of forward contracts, see "Additional
Information Concerning Taxes -- Taxation of Certain Financial Instruments."
OPTIONS TRADING. Each of the Equity and Bond Portfolios (except
the Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National
Municipal Bond Portfolios) may purchase put options and each Portfolio (except
the Short-Intermediate Municipal, Missouri Tax-Exempt Bond, National Municipal
Bond and Growth Equity Portfolios) may purchase call options. Except as
described below with respect to the Growth Equity Portfolio, such options will
be listed on a national securities exchange and issued by the Options Clearing
Corporation and, with respect to each Portfolio other than the Growth Equity
Portfolio, will be in an amount not exceeding 10% of that Portfolio's net
assets. The International Equity Portfolio will not invest more than 5% of its
total assets in initial margin deposits and premiums (including without
limitation, puts, calls, straddles and spreads) and any combination thereof.
Options trading is a specialized activity which entails greater than ordinary
investment risks. Regardless of how much the market price of the underlying
security or index increases or decreases, the option buyer's risk is limited to
the amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. In contrast to an option on a particular security, an option on
a stock or bond index provides the holder with the right to make or receive a
cash settlement upon the exercise of the option. The amount of this settlement
will be equal to the difference between the closing price of the index at the
time of exercise and the exercise price of the option expressed in dollars,
times a specified multiple. Such transactions will be entered into only as a
hedge against fluctuations in the value of securities which a Portfolio holds or
intends to purchase.
A Portfolio's obligation to sell a security subject to a covered
call option written by it may be terminated prior to the expiration date of the
option by the Portfolio's executing a closing purchase transaction, which is
effected by purchasing on an exchange an option of the
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same series (i.e., same underlying security, exercise price and expiration date)
as the option previously written. Such a purchase does not result in the
ownership of an option. A closing purchase transaction will ordinarily be
effected to realize a profit on an outstanding option, to prevent an underlying
security from being called, to permit the sale of the underlying security or to
permit the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
Portfolio will have incurred a loss in the transaction. An option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary market
on an exchange will exist for any particular option. A covered call option
writer, unable to effect a closing purchase transaction, would not be able to
sell the underlying security until the option expires or the underlying security
is delivered upon exercise with the result that the writer in such circumstances
will be subject to the risk of market decline in the underlying security during
such period. A Portfolio will write an option on a particular security only if
the Adviser or Sub-Adviser believes that a liquid secondary market will exist on
an exchange for options of the same series which will permit the Portfolio to
make a closing purchase transaction in order to close out its position.
The Growth Equity Portfolio may purchase and write
over-the-counter options or portfolio securities in negotiated transactions with
the buyers or writers of the options for those options on portfolio securities
held by the Portfolio that are not traded on an exchange.
Each of the Equity and Bond Portfolios (except the
Short-Intermediate Municipal, Missouri Tax-Exempt Bond and National Municipal
Bond Portfolios) may also write covered call options. A covered call option is
an option to acquire a security that a Portfolio owns or has the right to
acquire during the option period. Except as described below with respect to the
Growth Equity Portfolio, such options will be listed on a national securities
exchange and issued by the Options Clearing Corporation. When a Portfolio writes
a covered call option, an amount equal to the net premium (the premium less the
commission) received by the Portfolio is included in the liability section of
the Portfolio's statement of assets and liabilities as a deferred credit. The
amount of the deferred credit is subsequently marked-to-market to reflect the
current value of the option written. The current value of the traded option is
the last sale price or, in the absence of a sale, the average of the closing bid
and asked prices. If an option expires on the stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, it will realize a gain
(or loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. Any gain on a covered call option may be offset by a decline
in the market price of the underlying security during the option period. If a
covered call option is exercised, the Portfolio may deliver the underlying
security held by it or purchase the underlying security in the open market. In
either event, the proceeds of the sale will be increased by the net premium
originally received, and the Portfolio will realize a gain or loss. Premiums
from expired options written by a Portfolio and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses.
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As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, even when traded on a national securities
exchange ("Exchange"), may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an Exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms. Exchange-traded options have a continuous liquid market while
over-the-counter options may not.
The Growth Equity Portfolio may purchase and write
over-the-counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options when options on the portfolio securities
held by such Portfolio are not traded on a national securities exchange.
Over-the-counter options are two-party contracts with price and terms negotiated
between the buyer and seller. In contrast, exchange-traded options are third
party contracts with standardized strike prices and expiration dates and are
purchased from a clearing corporation such as the Options Clearing Corporation.
Exchange-traded options have a continuous liquid market while over-the-counter
options may not. While each of the Portfolios authorized to engage in options
transactions may invest in options relating to various securities indexes as
well as to individual securities, the Growth Equity Portfolio may not engage in
options transactions relating to indexes.
The International Equity Portfolio may write covered call
options, buy put options, buy call options and write secured put options for
hedging (or cross-hedging) purposes or for the purpose of earning additional
income. Such options may relate to particular securities, foreign or domestic
stock or bond indices, financial instruments or foreign currencies; may or may
not be listed on a domestic or foreign securities exchange; and may or may not
be issued by the Options Clearing Corporation. The International Equity
Portfolio will invest and trade in unlisted over-the-counter options only with
firms deemed creditworthy by the Adviser or Sub-Adviser. However, unlisted
options are not subject to the protections afforded purchasers of listed options
by the Options Clearing Corporation, which performs the obligations of its
members which fail to perform them in connection with the purchase or sale of
options. The International Equity Portfolio will not purchase put and call
options in an amount that exceeds 10% of its net assets at the time of purchase.
The aggregate value of the securities subject to covered call
options written by a Portfolio will not exceed 25% of the value of its net
assets. In order to close out an option
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position, a Portfolio may enter into a "closing purchase transaction" -- the
purchase of a covered call option on the same security with the same exercise
price and expiration date as the option which the Portfolio previously wrote. By
writing a covered call option, a Portfolio forgoes the opportunity to profit
from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents such a profit and it is
not able to sell the underlying security until the option expires, is exercised,
or the Portfolio effects a closing purchase transaction by purchasing an option
of the same series. The use of covered call options will not be a primary
investment technique of any Portfolio.
A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
FOREIGN CURRENCY PUT AND CALL OPTIONS. The International Equity
Portfolio may purchase foreign currency put options on U.S. exchanges or U.S.
over-the-counter markets. (See "Options Trading" above for a discussion of
options trading). A put option gives the Portfolio, upon payment of a premium,
the right to sell a currency at the exercise price until the expiration of the
option and serves to insure against adverse currency price movements in the
underlying portfolio assets denominated in that currency. Exchange listed
options markets in the United States include seven major currencies, and trading
may be thin and illiquid. The seven major currencies are Australian dollars,
British pounds, Canadian dollars, German marks, French francs, Japanese yen and
Swiss francs.
UNLISTED CURRENCY OPTIONS. The International Equity Portfolio may
purchase unlisted currency options. A number of major investment firms trade
unlisted options which are more flexible than exchange listed options with
respect to strike price and maturity date. These unlisted options generally are
available on a wider range of currencies. Unlisted foreign currency options are
generally less liquid than listed options and involve the credit risk associated
with the individual issuer. They will be deemed to be illiquid for purposes of
the limitation on investments in illiquid securities.
WRITING FOREIGN CURRENCY CALL OPTIONS. A call option written by
the International Equity Portfolio gives the purchaser, upon payment of a
premium, the right to purchase from the International Equity Fund a currency at
the exercise price until the expiration of the option.
FUTURES CONTRACTS AND RELATED OPTIONS. The Equity Portfolios and
the U.S. Government Securities, Intermediate Corporate Bond, Bond Index and
Government & Corporate Bond Portfolios may invest in futures contracts to the
extent permitted by the Commodity Futures Trading Commission ("CFTC") and the
SEC. The International Equity Portfolio may invest in interest rate futures
contracts, options on futures contracts and other types of financial futures
contracts (such as foreign currency contracts), as well as any index or foreign
market futures (such as stock or bond index futures contracts or interest rate
futures or options) which are available in recognized exchanges or in other
established financial markets to the extent permitted by the CFTC and the SEC.
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Such transactions, including stock or bond index futures
contracts, or options thereon, act as a hedge to protect a Portfolio from
fluctuations in the value of its securities caused by anticipated changes in
interest rate or market conditions without necessarily buying or selling the
securities or, with respect to the Equity Index and Small Cap Equity Index
Portfolios, can be used to simulate full investment in the S&P 500 or S&P
SmallCap 600, respectively, while retaining a cash balance for portfolio
management purposes. Hedging is a specialized investment technique that entails
skills different from other investment management. The Adviser (or Sub-Adviser)
may also consider such transactions to be economically appropriate for the
reduction of risk inherent in the ongoing management of a Portfolio. A stock or
bond index futures contract is an agreement in which one party agrees to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value (which assigns relative values to the common
stock or bonds included in the index) at the close of the last trading day of
the contract and the price at which the agreement is originally made. No
physical delivery of the underlying stock or bond in the index is contemplated.
Similarly, it may be in the best interest of a Portfolio to purchase or sell
interest rate futures contracts, or options thereon, which provide for the
future delivery of specified fixed income securities.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contracts, is deposited in
a segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged. Positions in futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. However, there
can be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio had insufficient cash, it might have
to sell portfolio securities to meet daily margin requirements at a time when it
would be disadvantageous to do so. In addition, a Portfolio might be required to
make delivery of the instruments underlying futures contracts that it holds. The
inability to close options and futures positions also could have an adverse
impact on a Portfolio's ability to hedge effectively.
Successful use of futures by a Portfolio is also subject to the
Adviser's or Sub-Adviser's ability to predict movements correctly in the
direction of the market. There is an imperfect correlation between movements in
the price of futures and movements in the price of the securities which are the
subject of the hedge. In addition, the price of futures may not correlate
perfectly with movement in the cash market due to certain market distortions.
Due to the possibility of price distortion in the futures market and because of
the imperfect correlation between the movements in the cash market and movements
in the price of futures, a correct forecast of general market trends or interest
rate movements by the Adviser or Sub-Adviser may still not result in a
successful hedging transaction over a short time frame.
The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10%
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decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Portfolio involves the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond the limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
The purchase and sale of futures contracts or related options
will not be a primary investment technique of any Portfolio. None of the
Portfolios will purchase or sell futures contracts (or related options thereon)
for hedging purposes if, immediately after purchase, the aggregate initial
margin deposits and premiums paid by a Portfolio on its open futures and options
positions exceeds 5% of the liquidation value of the Portfolio, after taking
into account any unrealized profits and unrealized losses on any such futures or
related options contracts into which it has entered. For a more detailed
description of futures contracts and related options, see Appendix B to this
Statement of Additional Information.
ADRS AND EDRS. The Intermediate Corporate Bond, Government &
Corporate Bond, Equity Income, Growth & Income Equity, Growth Equity, Small Cap
Equity, International Equity and Balanced Portfolios may invest their assets in
securities such as ADRs and EDRs, which are receipts issued by a U.S. bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs and EDRs may be listed on a national securities exchange or may
trade in the over-the-counter market. ADR and EDR prices are denominated in U.S.
dollars, even though the underlying security may be denominated in a foreign
currency. The underlying security may be subject to foreign government taxes
which would reduce the yield on such securities. Investments in such instruments
involve risks similar to those of investing directly in foreign securities. Such
risks include political or economic
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<PAGE> 49
instability of the issuer or the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities may also be subject to greater fluctuations in price
than securities of domestic corporations. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
MONEY MARKET INSTRUMENTS. Subject to their respective investment
policies, the Equity and Bond Portfolios may invest in the following taxable
investments for temporary defensive or other purposes: commercial paper,
bankers' acceptances, certificates of deposit, time deposits and floating rate
notes. (See "Money Market Portfolio" above for a discussion of cash equivalents
and "Variable and Floating Rate Instruments" above for a discussion of variable
and floating rate instruments.)
The International Equity Portfolio may invest a portion of its
assets in the obligations of foreign banks and foreign branches of domestic
banks. Such obligations may include ECDs; ETDs; CTDs; Schedule Bs, which are
obligations issued by Canadian branches of foreign or domestic banks; Yankee
CDs; and Yankee BAs. (See "Money Market Portfolio" above for a description of
certain of these obligations.)
REPURCHASE AGREEMENTS. Subject to their respective investment
policies, each Portfolio (except the National Municipal Bond Portfolio) may
agree to purchase U.S. Government securities from financial institutions such as
banks and broker-dealers, subject to the seller's agreement to repurchase them
at a mutually agreed-upon date and price ("repurchase agreements"). Under the
terms of a repurchase agreement, a Portfolio purchases securities from financial
institutions such as banks and broker-dealers that are deemed to be creditworthy
by the Adviser under guidelines approved by the Board of Directors, subject to
the seller's agreement to repurchase them at a mutually agreed-upon date and
price. Securities subject to repurchase agreements are held by the Portfolios'
Custodian or in the Federal Reserve/Treasury book-entry system. During the term
of any repurchase agreement, the Adviser or Sub-Adviser will continue to monitor
the creditworthiness of the seller. The repurchase price generally equals 102%
of the price paid by the Portfolio plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on the
underlying portfolio securities). Under a repurchase agreement, the seller is
required to maintain the value of the securities subject to the agreement at not
less than the repurchase price, and securities subject to repurchase agreements
are maintained by the Portfolios' Custodian in segregated accounts in accordance
with the 1940 Act. Default by the seller could, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying securities. Because of the seller's repurchase
obligations, the securities subject to repurchase agreements do not have
maturity limitations. Although no Portfolio presently intends to enter into
repurchase agreements providing for settlement in more than seven days, each
Portfolio does have the authority to do so subject to its limitation on the
purchase of illiquid securities described below. Repurchase agreements are
considered to be loans under the 1940 Act. The income on repurchase agreements
is taxable. See "Additional Information Concerning Taxes" below.
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REVERSE REPURCHASE AGREEMENTS. Subject to their investment
policies, each Portfolio (except the Treasury Money Market Portfolio and the
Tax-Exempt Portfolios) may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with their respective investment
limitations below. Pursuant to such agreements, a Portfolio would sell portfolio
securities to financial institutions such as banks and broker-dealers and agree
to repurchase them at an agreed upon date and price. At the time a Portfolio
enters into such an arrangement, it will place, in a segregated custodial
account, liquid assets having a value at least equal to the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the price of the
securities that it is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. Each Portfolio intends to limit
its borrowings (including reverse repurchase agreements) during the current
fiscal year to not more than 5% of its net assets.
STANDARD AND POOR'S DEPOSITORY RECEIPTS, STANDARD & POOR'S MIDCAP
400 DEPOSITORY RECEIPTS AND THE DOW INDUSTRIALS DIAMONDS. The Equity Portfolios
may invest in Standard & Poor's Depository Receipts ("SPDRs"), Standard & Poor's
MidCap 400 Depository Receipts ("MidCap SPDRs") and The Dow Industrials DIAMONDS
("DIAMONDS"). SPDRs represent ownership in the SPDR Trust, a long-term unit
investment trust which holds a portfolio of common stocks that is intended to
track the performance and dividend yield of the Standard & Poor's 500 Composite
Stock Price Index. MidCap SPDRs represent ownership in the MidCap SPDR Trust, a
long-term unit investment trust which holds a portfolio of common stocks that is
intended to tract the performance and dividend yield of the Standard & Poor's
MidCap 400 Index. DIAMONDS represent ownership in the DIAMONDS Trust, a
long-term unit investment trust which holds a portfolio of common stocks that is
intended to track the performance and yield of the Dow Jones Industrial Average.
Because investments in SPDRs, MidCap SPDRs and DIAMONDS represent investments in
unit investment trusts, such investments are subject to the 1940 Act's
limitations on investments in other investment companies.
The Bond Index, Equity Index and Small Cap Equity Index
Portfolios may invest in any index-based depository receipts in lieu of
investment in the actual securities that are listed in their respective indexes.
THE INDEXING APPROACH. The Bond Index, Equity Index and Small Cap
Equity Index Portfolios seek to approximate the investment performance of their
respective market segments, as represented by their respective indexes, i.e. the
Lehman Aggregate in the case of the Bond Index Portfolio, the S&P 500 in the
case of the Equity Index Portfolio and the S&P SmallCap 600 in the case of the
Small Cap Equity Index Portfolio. While there can be no guarantee that a
Portfolio's investment results will precisely match the results of its
corresponding index, the Adviser believes that, before deduction of operating
expenses, there will be a very high correlation between the returns generated by
the Portfolios and their respective indexes. Each Portfolio will attempt to
achieve a correlation between its performance
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and its respective index of at least 0.95 before deduction of operating
expenses. A correlation of 1.00 would indicate a perfect correlation, which
would be achieved when a Portfolio's net asset value, including the value of its
dividend and capital gains distributions, increases or decreases in exact
proportion to changes in its respective index. Each Portfolio's ability to
correlate its performance with its respective index, however, may be affected
by, among other things, transaction costs, changes in securities markets, the
manner in which S&P or Lehman Brothers, Inc. ("Lehman") calculate their
respective indexes, and the timing of purchases and redemptions. The Adviser
monitors the correlation of the performance of the Portfolios in relation to
their indexes under the supervision of the Board of Directors. In the unlikely
event that a high correlation is not achieved, the Board of Directors will take
appropriate steps to correct the reason for the lower correlation.
THE INCLUSION OF A SECURITY IN ANY OF THE PORTFOLIOS' INDEXES IN
NO WAY IMPLIES AN OPINION BY S&P OR LEHMAN AS TO ITS ATTRACTIVENESS AS AN
INVESTMENT. S&P AND LEHMAN ARE NOT SPONSORS OF, OR IN ANY WAY AFFILIATED WITH,
THE PORTFOLIOS.
The Adviser believes that the indexing approach should involve
less portfolio turnover, and thus lower brokerage costs, transfer taxes and
operating expenses, than in more traditionally managed funds, although there is
no assurance that this will be the case. Ordinarily, a Portfolio will buy or
sell securities only to reflect changes in an index (including mergers or
changes in the composition of an index) or to accommodate cash flows into and
out of the Portfolio. The costs and other expenses incurred in securities
transactions, apart from any difference between the investment results of a
Portfolio and that of its respective index, may cause the return of a Portfolio
to be lower than the return of its respective index. The Portfolios may invest
in less than all of the securities included in their respective indexes, which
may result in a return that does not correspond with that of the indexes, after
taking expenses into account.
PORTFOLIO TURNOVER AND TRANSACTIONS
Subject to the general control of the Fund's Board of Directors,
the Adviser (and with respect to the International Equity Portfolio, the
Sub-Adviser) is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Portfolios.
In the case of the Equity and Bond Portfolios, portfolio turnover
may vary greatly from year to year as well as within a particular year.
Portfolio turnover may also be affected by cash requirements for redemptions of
shares and by requirements which enable a Portfolio to receive certain favorable
tax treatment. Portfolio turnover will not be a limiting factor in making
investment decisions.
The Fund did not acquire any securities of its "regular brokers
or dealers" or their parents during its most recent fiscal year.
Transactions on United States stock exchanges involve the payment
of negotiated brokerage commissions. On the exchanges on which commissions are
negotiated, the cost of the transactions may vary among different brokers.
During the fiscal years ended November 30,
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1998, 1997 and 1996, the Growth & Income Equity Portfolio paid $1,278,698,
$858,757, and $708,924, respectively, in brokerage commissions. During the
fiscal years ended November 30, 1998, 1997 and 1996, the Small Cap Equity
Portfolio paid $550,114, $428,191 and $352,745, respectively, in brokerage
commissions. During the fiscal years ended November 30, 1998, 1997 and 1996, the
International Equity Portfolio paid $293,093, $248,564 and $235,230,
respectively, in brokerage commissions. During the fiscal years ended November
30, 1998, 1997 and 1996, the Balanced Portfolio paid $123,935, $120,705 and
$144,448, respectively, in brokerage commissions. For the fiscal year ended
November 30, 1998, and during the period October 1, 1997 through November 30,
1997 and for the fiscal years ended September 30, 1997 and 1996, the Growth
Equity Portfolio paid brokerage commissions of $122,348, $95,470 and $71,770,
respectively. During the fiscal years ended November 30, 1998 and 1997, the
Equity Income Portfolio paid $361,966 and $151,046 in brokerage commissions.
During the fiscal year ended November 30, 1998 and 1997, the Equity Index
Portfolio paid $15,775 and $10,259 in brokerage commissions. No commissions were
paid by the Fund to any "affiliated" persons (as defined in the 1940 Act) of the
Fund. The Small Cap Equity Index Portfolio had not commenced operations as of
November 30, 1998.
Securities purchased and sold by the Portfolios which are traded
in the over-the-counter market are generally done so on a net basis (i.e.,
without commission) through dealers, or otherwise involve transactions directly
with the issuer of an instrument. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price of
those securities includes an undisclosed commission or mark-up. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Portfolios will engage in this practice, however, only when
the Adviser (or Sub-Adviser in the case of the International Equity Portfolio),
in its sole discretion, believes such practice to be otherwise in a Portfolio's
interests.
While the Adviser (or Sub-Adviser in the case of the
International Equity Portfolio) generally seeks competitive spreads or
commissions, it may not necessarily allocate each transaction to the underwriter
or dealer charging the lowest spread or commission available on the transaction.
Allocation of transactions, including their frequency, to various dealers is
determined by the Adviser or Sub-Adviser in its best judgment and in a manner
deemed fair and reasonable to shareholders. The primary consideration is prompt
execution of orders in an effective manner at the most favorable price.
Subject to this consideration, dealers who provide supplemental
investment research to the Adviser (or Sub-Adviser) may receive orders for
transactions by a Portfolio. Information so received is in addition to and not
in lieu of services required to be performed by the Adviser (or Sub-Adviser) and
does not reduce the advisory fees payable to it by a Portfolio. Such information
may be useful to the Adviser (or Sub-Adviser) in serving both the Portfolios and
other clients, and conversely, supplemental information obtained by the
placement of
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business of other clients may be useful to the Adviser (or Sub-Adviser) in
carrying out its obligations to the Portfolios. Portfolio securities will not be
purchased from or sold to the Adviser, the Sub-Adviser, the Fund's distributor,
the Fund's administrator or any "affiliated person" (as such term is defined
under the 1940 Act) or any of them acting as principal, except to the extent
permitted by the SEC. In addition, the Portfolios will not give preference to
the Adviser's correspondents with respect to such transactions, securities,
savings deposits, repurchase agreements and reverse repurchase agreements.
Investment decisions for the Portfolios are made independently
from those for other investment companies and accounts advised or managed by the
Adviser (or Sub-Adviser). Such other investment companies and accounts may also
invest in the same securities as the Portfolios. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Portfolio
and another investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser (or Sub-Adviser) believes to be equitable to the Portfolio and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Portfolio or
the size of the position obtained by the Portfolio. To the extent permitted by
law, the Adviser (or Sub-Adviser) may aggregate the securities to be sold or
purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in order to obtain best execution.
Although the Equity and Bond Portfolios will not normally engage
in short-term trading, each Portfolio (except the Bond Index, Equity Index and
Small Cap Equity Index Portfolios) reserves the right to do so if the Adviser
(or Sub-Adviser) believes that selling a particular security is appropriate in
light of the Portfolio's investment objective. Investments may be sold for a
variety of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses and other transaction costs, which must be borne
directly by the Portfolio involved and ultimately by its shareholders. High
portfolio turnover may result in the realization of substantial net capital
gains; distributions derived from such gains may be treated as ordinary income
for federal income tax purposes. See "Additional Information Concerning Taxes"
below.
Although the Small Cap Equity Index Portfolio cannot accurately
predict its annual portfolio turnover rate, such rate is not expected to exceed
100%.
To the extent permitted by the 1940 Act and guidelines adopted by
the Fund's Board of Directors, a Portfolio may utilize the Fund's distributor or
one or more of its affiliates as a broker in connection with the purchase or
sale of securities when the Adviser believes the charge for the transaction does
not exceed the usual and customary broker's commission.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI MUNICIPAL SECURITIES
The following highlights some of the more important economic and
financial trends and considerations and is based on information from official
statements, prospectuses and other publicly available documents relating to
securities offerings of the State of Missouri, its
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agencies and instrumentalities, as available on the date of this Statement of
Additional Information. The Fund has not independently verified any of the
information contained in such statements or other documents.
Missouri's population was approximately 5.4 million in 1997,
which represents a 5.6% increase from the 1990 decennial census of the U.S.
Census Bureau. Based on 1997 U.S. Census Bureau estimates, Missouri constituted
the 16th most populous state and its two largest cities, St. Louis and Kansas
City and their surrounding metropolitan areas, constituted the 18th and 24th
largest metropolitan areas in the nation, respectively. St. Louis is a
distribution center and an important site for banking and manufacturing
activity. Kansas City is a major agri-business center for the United States and
an important center for finance and industry.
[Source: U.S. Department of Commerce, Bureau of the Census.]
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming traditionally has played
a dominant role in the State's economy, although farming and agricultural
services contributed only approximately $1.25 billion to the State's economy in
1997. With increasing urbanization, significant income-generating activity has
shifted from agriculture to the manufacturing and services sectors. Earnings and
employment are distributed among the manufacturing, trade and service sectors in
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single activity. Per capita income
in Missouri grew 3.3% between 1996 and 1997 while per capita income nationally
grew 6% during that period. In 1997, services represented the single most
important economic activity, followed by wholesale and retail trade.
Manufacturing, which accounts for approximately 16% of employment, is
concentrated in defense, transportation and other durable goods. [Source: U.S.
Census Bureau, Bureau of Economic Analysis.]
Defense-related business plays an important role in Missouri's
economy. In addition to the large number of civilians in the State, aircraft
production and defense-related businesses receive sizable annual defense
contract awards. Over the past decade, Missouri has annually ranked among the
top six states in total military contract awards. Declining defense
appropriations and federal downsizing may continue to have an impact on the
State. [Source: Missouri Dept. of Economic Development.] The Boeing Company is
the State's largest employer, with 22,800 employees as of January 1998.
Revenue collections for the fiscal year ended June 30, 1998
("Fiscal Year 1998") were $6.549 million, excluding $176.5 million from other
transfers, representing an increase of 5.6% over revenue collections from the
fiscal year ended June 30, 1997. These revenues supplement a carry-over balance
from the previous year of $49.5 million. Expenditures for Fiscal Year 1998 are
estimated at $6.641 million including $150.9 million and $105 million,
respectively, for the St. Louis and Kansas City school desegregation cases.
For the fiscal year ending June 30, 1999 ("Fiscal Year 1999")
revenues are projected to be $6.711 million. This projection does not include an
estimated $74.1 million in proceeds from other transfers or a carry-over balance
of approximately $172.3 million.
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Expenditures are projected at $6.937 million, including $151.6 million and $99
million, respectively, for the St. Louis and Kansas City school desegregation
cases. Projected expenditures also include $80 million for supplemental
appropriations for Fiscal Year 1999.
INVESTMENT LIMITATIONS
Except as otherwise noted in the Prospectuses or this Statement
of Additional Information, each Portfolio's investment policies are not
fundamental and may be changed by the Fund's Board of Directors without
shareholder approval. However, each Portfolio also has in place certain
fundamental investment limitations, which are set forth below, which may be
changed only by a vote of a majority of the outstanding Shares of a Portfolio.
THE TREASURY MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
2. Borrow money or issue senior securities, except from banks for
temporary purposes and then in an amount not exceeding 10% of the value of the
Portfolio's total assets at the time of such borrowing, or mortgage, pledge or
hypothecate its assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the
value of the Portfolio's total assets at the time of such borrowing. The
Portfolio will not purchase securities while its borrowings are outstanding.
(This borrowing provision is not for investment leverage, but solely to
facilitate management of the Portfolio by enabling the Fund to meet redemption
requests where the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous).
3. Underwrite the securities of other issuers.
4. Make loans except that the Portfolio may purchase or hold debt
instruments in accordance with its investment objective and policies, lend
portfolio securities and enter into repurchase agreements for U.S. Treasury
securities (together with any cash collateral) that equal at all times at least
100% of the value of the repurchase price.
5. Purchase or sell real estate.
6. Purchase or sell commodities or commodity contracts or invest
in oil, gas, or other mineral exploration programs.
7. Purchase securities other than obligations of the U.S.
Government, its agencies and instrumentalities, some of which may be subject to
repurchase agreements, except that the Portfolio may purchase securities of
other investment companies that seek to maintain a constant net asset value per
Share and that are permitted themselves only to invest in securities which may
be acquired by the Portfolio.
8. Purchase securities of any one issuer if immediately after
such purchase more than 5% of the value of its total assets would be invested in
the securities of such issuer (the "5% limitation"), except that up to 25% of
the value of its total assets may be invested without regard to the 5%
limitation; notwithstanding the foregoing restriction, the Portfolio may invest
without regard to the 5% limitation in U.S. Government obligations and as
otherwise permitted in accordance with Rule 2a-7 under the 1940 Act or any
successor rule. Adherence to the diversification requirements of Rule 2a-7 is
deemed to constitute adherence to the diversification requirements of this
limitation.
With respect to Investment Limitation No. 8 above, (a) a security
is considered to be issued by the governmental entity or entities whose assets
and revenues back the security or, with respect to a private activity bond that
is backed only by the assets and revenues of a non-governmental user, such
non-governmental user; (b) in certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee; and (c) securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities (including securities backed by the full faith
and credit of the United States) are deemed to be U.S. Government obligations.
In addition to the foregoing limitations, Portfolio may not
purchase securities that would cause 25% or more of the value of its total
assets at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same industry;
provided, however, that there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
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THE MONEY MARKET PORTFOLIO MAY NOT:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets, or where otherwise permitted by the 1940 Act.
2. Purchase securities of any one issuer, other than obligations
of the U.S. Government, its agencies or instrumentalities, if immediately after
such purchase more than 5% of the value of the Portfolio's total assets would be
invested in such issuer, except that up to 25% of the value of a Portfolio's
total assets may be invested without regard to such 5% limitation.
3. Buy common stocks or voting securities, or state, municipal or
industrial revenue bonds.
4. Purchase or sell real estate (the Portfolio may purchase
commercial paper issued by companies which invest in real estate or interests
therein).
5. Purchase securities on margin, make short sales of securities
or maintain a short position.
6. Underwrite the securities of other issuers.
7. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
8. Write or purchase put or call options.
9. 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 for U.S. Treasury
securities (together with any cash collateral) that equal at all times at least
100% of the value of the repurchase price.
10. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase agreements,
for temporary purposes in amounts up to 10% of the value of its total assets at
the time of such borrowing; or mortgage, pledge or hypothecate any assets,
except in connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 10% of the value of a Portfolio's total
assets at the time of such borrowing. The Portfolio will not purchase securities
while its borrowings (including reverse repurchase agreements) are outstanding.
11. Purchase any securities which would cause 25% or more of the
value of the Portfolio's total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, domestic bank certificates of deposit, bankers'
acceptances and repurchase agreements secured by domestic bank instruments or
obligations of the U.S. Government, its agencies or instrumentalities; (b)
wholly-owned finance companies will be
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considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) utilities
will be divided according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry.
In accordance with Rule 2a-7 of the 1940 Act and current
regulations of the SEC, the Money Market Portfolio intends to invest no more
than five percent of its total assets 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 of a single issuer for
a period of up to three business days after the purchase thereof, provided,
further that the Portfolio would not make more than one investment in accordance
with the foregoing provision at any time. This intention is not, however, a
fundamental policy of the Portfolio and may change in the event Rule 2a-7 is
amended in the future.
THE TAX-EXEMPT MONEY MARKET PORTFOLIO MAY NOT:
1. Make loans, except that the Portfolio may purchase or hold
debt instruments in accordance with its investment objective and policies.
2. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization or where
otherwise permitted by the 1940 Act.
3. Purchase securities on margin, make short sales of securities,
or maintain a short position.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Portfolio might be deemed to be an
underwriter upon purchase of certain portfolio securities acquired subject to
the investment limitation pertaining to purchases of restricted securities.
5. Purchase or sell real estate, except that the Portfolio may
invest in Municipal Obligations which are secured by real estate or interests
therein.
6. Purchase or sell commodities or commodity contracts or invest
in oil, gas, or other mineral exploration or development programs.
7. Invest in or sell put options (except as described above under
"Other Investment Policies and Risk Considerations -- Stand-by Commitments"),
call options, straddles, spreads, or any combination thereof.
8. Purchase foreign securities.
9. Invest in industrial development bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation, or buy common
stock or voting securities.
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10. Purchase any securities, except securities issued or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, which would cause 25% or more of
the Portfolio's net assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry.
11. Purchase securities of any one issuer if, immediately after
and as a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to 50% of
the Portfolio's total assets may be invested without regard to this 5%
limitation provided that no more than 25% of the Portfolio's total assets are
invested in the securities of any one issuer and (b) this 5% limitation does not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial development bond that is
backed only by the assets and revenues of a non-governmental user, a security is
considered to be issued by such non-governmental user. In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee, except that a guarantee of a security shall not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Portfolio,
does not exceed 10% of the Portfolio's total assets.
12. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks for temporary defensive purposes in amounts not
in excess of 10% of its total assets at the time of such borrowing; or mortgage,
pledge, or hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of its total assets at the time of such borrowing; or purchase securities while
borrowings exceed 5% of the Portfolio's net assets. Securities held in escrow or
separate accounts in connection with the Portfolio's investment practices
described herein are not subject to this limitation.
With respect to investment limitation No. 11, the Fund intends
that guarantees will only be treated as separate securities for diversification
purposes to the extent required by Rule 5b-2 under the 1940 Act. Letters of
credit will not be treated as separate securities with regard to diversification
as the Fund does not consider the latter instruments to be securities.
In addition, under normal market conditions or when the Adviser
deems that suitable tax-exempt obligations are available, at least 80% of the
Tax-Exempt Money Market Portfolio's assets must be invested in obligations the
interest on which is exempt from federal income tax and stand-by commitments
with respect to such obligations.
Notwithstanding the Investment Limitation in the preceding
paragraph, the Tax-Exempt Money Market Portfolio may invest in securities of
other investment companies that (a) invest in securities that are substantially
similar to those the Portfolio may acquire, and (b) distribute income that is
exempt from regular federal income tax.
In accordance with Rule 2a-7 of the 1940 Act and current
regulations of the SEC, the Tax-Exempt Money Market Portfolio intends to invest
no more than five percent of its total
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assets 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 of a single issuer for a period of up to three
business days after the purchase thereof, provided, further that the Portfolio
would not make more than one investment in accordance with the foregoing
provision at any time. This intention is not, however, a fundamental policy of
the Portfolio and may change in the event Rule 2a-7 is amended in the future.
THE U.S. GOVERNMENT SECURITIES, INTERMEDIATE CORPORATE BOND, BOND
INDEX, GOVERNMENT & CORPORATE BOND, NATIONAL MUNICIPAL BOND, EQUITY INCOME,
EQUITY INDEX, GROWTH & INCOME EQUITY, SMALL CAP EQUITY, SMALL CAP EQUITY INDEX
AND BALANCED PORTFOLIOS MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that each Portfolio may
invest in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests therein;
provided further that, as described in the Prospectuses, (a) the Government &
Corporate Bond Portfolio may invest in first mortgage loans, income
participation loans and participation certificates in pools of mortgages,
including mortgages issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities and CMOs; (b) the U.S. Government Securities Portfolio may
invest in certain mortgage-backed securities, CMOs and certain other securities;
(c) the Intermediate Corporate Bond Portfolio may invest in first mortgage
loans, income participation loans and participation certificates in pools of
mortgages, including mortgages issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, mortgage-backed securities or CMOs; and (d) the
Bond Index Portfolio may invest in first mortgage loans, income participation
loans and participations in pools of mortgages, including mortgages issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
mortgage-backed securities.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
a Portfolio's investment objective, policies and limitations may be deemed to be
underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Intermediate
Corporate Bond, Bond Index, National Municipal Bond, Equity Income, Equity
Index, Small Cap Equity Index and Balanced Portfolios may, to the extent
appropriate to their respective investment objectives, purchase publicly traded
securities of companies engaging in whole or in part in such activities; and
provided further, that (a) the Bond Index, Equity Index and Balanced Portfolios
may enter into futures contracts and related options, and (b) the Intermediate
Corporate Bond, Equity Income and Small Cap Equity Index Portfolios may invest
in futures contracts and related options in accordance with their respective
investment obligations and policies.
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In addition, each such Portfolio, together with the
SHORT-INTERMEDIATE Municipal and INTERNATIONAL EQUITY PORTFOLIOS, may not:
5. Purchase securities on margin, make short sales of securities
or maintain a short position, except that (a), with the exception of the
National Municipal Bond Portfolio, this investment limitation shall not apply to
a Portfolio's transactions in options, and futures contracts and related
options, and (b) a Portfolio may obtain short-term credits as may be necessary
for the clearance of purchases and sales of portfolio securities.
6. Purchase securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if, immediately after and as a result of such investments, more than 5% of the
Portfolio's total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's outstanding voting securities would be owned by
the Portfolio or the Fund, except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations.
7. Purchase any securities which would cause 25% or more of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided however, that (a) with respect to each Portfolio
except the Short-Intermediate Municipal and National Municipal Bond Portfolios,
(i) there is no limitation with respect to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, and repurchase
agreements secured by obligations of the U.S. Government or its agencies or
instrumentalities; (ii) wholly-owned finance companies will be considered to be
in the industries of their parents if their activities are primarily related to
financing the activities of their parents; and (iii) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric, and telephone will each be considered a separate industry); and
(b) with respect to the Short-Intermediate Municipal and National Municipal Bond
Portfolios, there is no limitation with respect to obligations issued or
guaranteed by the U.S. Government, any state, territory or possession of the
U.S. Government, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions.
8. Borrow money or issue senior securities, except that each
Portfolio may borrow from banks and each Portfolio other than the National
Municipal Bond Portfolio may enter into reverse repurchase agreements for
temporary defensive purposes in amounts not in excess of 10% of the Portfolio's
total assets at the time of such borrowing; or mortgage, pledge, or hypothecate
any assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the Portfolio's
total assets at the time of such borrowing; or purchase securities while its
borrowings exceed 5% of its total assets. A Portfolio's transactions in futures
and related options (including the margin posted by a Portfolio in connection
with such transactions), and securities held in escrow or separate accounts in
connection with a Portfolio's investment practices described in this Prospectus
or the Statement of Additional Information are not subject to this limitation.
9. Make loans, except that (a) each Portfolio may purchase or
hold debt instruments, lend portfolio securities and make other investments in
accordance with its
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investment objective and policies, and (b) each Portfolio except the National
Municipal Bond Portfolio may enter into repurchase agreements.
THE GROWTH EQUITY PORTFOLIO MAY NOT:
1. With respect to 75% of the value of its total assets, purchase
securities issued by any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
and repurchase agreements collateralized by such securities), if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. The Portfolio will not acquire more than 10% of the
outstanding voting securities of any one issuer.
2. Invest 25% or more of the value of its total assets in any one
industry, provided, however, that the Portfolio may invest more than 25% of the
value of its total assets in cash or certain money market instruments (including
instruments issued by a U.S. branch of a domestic bank or savings and loan
association having capital, surplus and undivided profits in excess of
$100,000,000 at the time of investment), securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
collateralized by such securities. (For purposes of this Investment Limitation,
money market instruments shall include bankers' acceptances, negotiable
certificates of deposit and negotiable time deposits of U.S. or foreign banks
and savings and loan associations.)
3. Issue senior securities, except that the Portfolio may borrow
money directly or indirectly through reverse repurchase agreements in amounts up
to one-third the value of its total assets, including the amount borrowed, and
except to the extent that the Portfolio may enter into futures contracts. The
Portfolio will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of its portfolio by enabling the Portfolio to,
for example, meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio will
not purchase any securities while any borrowings in excess of 5% of its total
assets are outstanding.
4. Sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as are necessary for clearance of
purchases and sales of securities. The deposit or payment by the Portfolio of
initial or variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a security on
margin.
5. Purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Portfolio may engage
in transactions involving financial futures contracts or options on financial
futures contracts.
6. Purchase or sell real estate, including limited partnership
interests, although the Portfolio may invest in securities of issuers whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or which represent interests in real estate.
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7. Underwrite any issue of securities, except as the Portfolio
may be deemed to be an underwriter under the Securities Act of 1933, as amended,
in connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
The following limitations may be changed by the Fund's Board of
Directors without shareholder approval, although shareholders will be notified
before any material change in these limitations becomes effective:
8. The Portfolio will not mortgage, pledge, or hypothecate any
assets, except to secure permitted borrowings. In these cases, the Portfolio may
pledge assets having a market value not exceeding the lesser of the dollar
amounts borrowed or 15% of the value of its total assets at the time of the
pledge. The purchase of securities on a when-issued basis will not be deemed to
be a pledge of the Portfolio's assets. For purposes of this limitation the
following will not be deemed to be pledges of the Portfolio's assets: (a) the
deposit of assets in escrow in connection with the writing of covered put or
call options and, (b) collateral arrangements with respect to (i) the purchase
and sale of stock options (and options on stock indexes) and (ii) initial or
variation margin for futures contracts.
9. The Portfolio will not invest more than 15% of the value of
its net assets in illiquid securities, including repurchase agreements providing
for settlement more than seven days after notice, over-the-counter options,
certain restricted securities not determined by the Fund's Board of Directors to
be liquid, and non-negotiable time deposits with maturities over seven days.
10. The Portfolio will limit its investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of its total assets in any one
investment company, and invest no more than 10% of its total assets in
investment companies in general. The Portfolio will purchase securities of
closed-end investment companies only in open market transactions involving only
customary broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization, or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and, therefore, any investment by the
Portfolio in shares of another investment company would be subject to such
duplicate expenses.
11. The Portfolio will not purchase put options on securities,
unless the securities are held in its portfolio and not more than 5% of the
value of the Portfolio's total assets would be invested in premiums on open put
option positions.
12. The Portfolio will not write call options on securities
unless the securities are held in its portfolio or unless the Portfolio is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment.
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13. The Portfolio will not purchase securities of a company for
the purpose of exercising control or management.
14. The Portfolio will not invest more than 5% of its net assets
in warrants. No more than 2% of the Portfolio's net assets, to be included
within the overall 5% limit on investments in warrants, may be warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange.
For purposes of this investment restriction, warrants will be valued at the
lower of cost or market, except that warrants acquired by the Portfolio in units
with or attached to securities may be deemed to be without value.
15. Make loans, except that (a) the Portfolio may purchase or
hold debt instruments, lend portfolio securities and make other investments in
accordance with its investment objective and policies, and (b) the Portfolio
may enter into repurchase agreements.
THE INTERNATIONAL EQUITY PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, provided that the Portfolio may
invest in securities secured by real estate or interests therein or issued by
companies or investment trusts which invest in real estate or interests therein.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that: (a) it may, to the
extent appropriate to its investment objective, invest in securities issued by
companies which purchase or sell commodities or commodity contracts or which
invest in such programs; and (b) it may purchase and sell futures contracts and
options on futures contracts.
THE SHORT-INTERMEDIATE MUNICIPAL PORTFOLIO MAY NOT:
1. Make investments for the purpose of exercising control or
management.
2. Purchase or sell real estate, except that the Portfolio may
invest in Municipal Obligations which are secured by real estate or interests
therein.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as the Portfolio might be deemed to be an
underwriter upon disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Portfolio's investment objective, policies and limitations may be deemed to
be underwriting.
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4. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs.
THE MISSOURI TAX-EXEMPT BOND PORTFOLIO MAY NOT:
1. Purchase or sell real estate, except that the Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Purchase securities of companies for the purpose of exercising
control.
3. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or as otherwise permitted by the 1940 Act.
4. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon disposition of portfolio securities acquired within the limitation on
purchases of restricted securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with the Portfolio's
investment objective, policies and limitations may be deemed to be underwriting.
5. Purchase securities on margin, make short sales of securities
or maintain a short position, except that the Portfolio may obtain short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Portfolio may, to
the extent appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such activities.
7. Write or sell put options, call options, straddles, spreads,
or any combination thereof.
8. Purchase any securities, except securities issued (as defined
in Investment Limitation No. 11 above with respect to the Tax-Exempt Money
Market Portfolio) or guaranteed by the United States, any state, territory or
possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, which would
cause 25% or more of the Portfolio's net assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry.
9. Make loans except that the Portfolio may purchase and hold
debt instruments and enter into repurchase agreements in accordance with its
investment objective and policies.
10. Purchase securities of any one issuer if, immediately after
and as a result of such purchase, more than 5% of the Portfolio's total assets
would be invested in the securities of such issuer, except that (a) up to 50%
of the Portfolio's total assets may be invested without regard to this 5%
limitation provided that no more than 25% of the Portfolio's total assets are
invested in the securities of any one issuer and (b) this 5% limitation does
not apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. For purposes of this limitation, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to a private activity bond
that is backed only by the assets and revenues of a non-governmental user, a
security is considered to be issued by such non-governmental user. In certain
circumstances, the guarantor of a guaranteed security may also be considered to
be an issuer in connection with such guarantee, except that a guarantee of a
security shall not be deemed to be a security issued by the guarantor when the
value of all securities issued and guaranteed by the guarantor, and owned by
the Portfolio, does not exceed 10% of the Portfolio's total assets.
11. Borrow money or issue senior securities, except that the
Portfolio may borrow from banks and enter into reverse repurchase agreements
for temporary defensive purposes in amounts not in excess of 10% of its total
assets at the time of such borrowing; or mortgage, pledge, or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of its total assets
at the time of such borrowing (including any reverse repurchase agreements), or
purchase securities while borrowings exceed 5% of the Portfolio's total assets.
Securities held in escrow or separate accounts in connection with the
Portfolio's investment practices described in the Prospectus or this Statement
of Additional Information are not subject to this limitation.
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The following additional investment policies with respect to the
TAX-EXEMPT MONEY MARKET and MISSOURI TAX-EXEMPT BOND PORTFOLIOS are not
fundamental and may be changed by the Board of Directors without shareholder
approval:
The Portfolios may not purchase securities which are not readily
marketable, enter into repurchase agreements providing for settlement in
more than seven days after notice, or purchase other illiquid securities
if, as a result of such purchase, illiquid securities would exceed 15%
(10% with respect to the Tax-Exempt Money Market Portfolio) of the
Portfolios' respective net assets.
Except with respect to the Growth Equity Portfolio's policy on
borrowing money set forth above in its Investment Limitation No. 3, if a
percentage limitation is satisfied at the time of investment, a later increase
or decrease in such percentage resulting from a change in value in the
Portfolio's securities will not constitute a violation of such limitation.
PRICING OF SHARES
As stated in the applicable Prospectuses, the net asset value per
share of each class of shares of a Portfolio is calculated separately by adding
the value of all of the portfolio securities and other assets belonging to a
Portfolio that are attributable to such class, subtracting the liabilities of
the Fund that are attributable to such class, and dividing the result by the
number of outstanding shares of such class. Assets attributable to a particular
class of shares of a Portfolio are charged with any direct liabilities that the
Board of Directors has allocated to such class pursuant to the Fund's Plan for
Operation of a Multi-Class System adopted pursuant to Rule 18f-3 under the 1940
Act. The determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of general assets, with respect to a
particular Portfolio or class are conclusive.
THE MONEY MARKET PORTFOLIOS
The assets in the Money Market Portfolios are valued according to
the amortized cost method of valuation. Pursuant to this method, an instrument
is valued at its cost initially and, thereafter, a constant amortization to
maturity of any discount or premium is assumed, regardless of the impact of
fluctuating interest rates on the market value of the instrument. This method
may result in periods during which value, as determined by amortized cost, is
higher or lower than the market price a Portfolio would receive if it sold the
instrument. The value of securities in the Portfolios can be expected to vary
inversely with changes in prevailing interest rates.
Each Portfolio invests only in instruments that present minimal
credit risks and meet the ratings criteria described in the Prospectuses. In
addition, each Portfolio maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset value per share,
provided that no Portfolio will purchase any security with a remaining maturity
of more than thirteen months (397 days) (securities subject to repurchase
agreements and certain other securities may bear longer maturities) nor maintain
a dollar-weighted average
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portfolio maturity that exceeds 90 days. The Fund's Board of Directors has
approved procedures that are intended to stabilize the Portfolios' net asset
value per share at $1.00 for purposes of pricing sales and redemptions. These
procedures include the determination, at such intervals as the Board deems
appropriate, of the extent, if any, to which the net asset value per share of a
Portfolio calculated by using available market quotations deviates from $1.00
per share. In the event such deviation exceeds one-half of one percent, the
Board will promptly consider what action, if any, should be initiated. If the
Board believes that the extent of any deviation from a Portfolio's $1.00
amortized cost price per share may result in material dilution or other unfair
results to new or existing investors, it will take such steps as it considers
appropriate to eliminate or reduce to the extent reasonably practicable any such
dilution or unfair results. These steps may include, but are not limited to,
selling portfolio instruments prior to maturity; shortening the average
portfolio maturity; withholding or reducing dividends; redeeming shares in kind;
or utilizing a net asset value per share determined by using available market
quotations. Although each Portfolio seeks to maintain its net asset value per
share at $1.00, there can be no assurance that the net asset value per share
will not vary.
THE EQUITY AND BOND PORTFOLIOS
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are valued
on the basis of market values when available. Securities for which there are no
transactions are valued at the average of the current bid and asked prices.
Other securities, including restricted and other securities for which market
quotations are not readily available, and other assets are valued at fair value
by the Adviser (or Sub-Adviser) under the supervision of the Fund's Board of
Directors and in accordance with guidelines approved by the Board of Directors.
Investments in debt securities with remaining maturities of 60 days or less may
be valued based upon the amortized cost method. In computing net asset value,
the current value of a Portfolio's open futures contracts and related options
will be "marked-to-market." Short-term securities are valued at amortized cost,
which approximates fair market value.
Among the factors that ordinarily will be considered in valuing
portfolio securities are the existence of restrictions upon the sale of the
security by the Portfolio, the existence and extent of a market for the
security, the extent of any discount in acquiring the security, the estimated
time during which the security will not be freely marketable, the expenses of
registering or otherwise qualifying the security for public sale, underwriting
commissions if underwriting would be required to effect a sale, the current
yields on comparable securities for debt obligations traded independently of any
equity equivalent, changes in the financial condition and prospects of the
issuer, and any other factors affecting fair value. In making valuations,
opinions of counsel to the issuer may be relied upon as to whether or not
securities are restricted securities and as to the legal requirements for public
sale.
The Fund's administrator may use a pricing service to value
certain portfolio securities where the prices provided are believed to reflect
the fair market value of such securities. The methods of valuation used by the
pricing service will be reviewed by the administrator under the general
supervision of the Fund's Board of Directors. Several pricing
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<PAGE> 67
services are available, one or more of which may be used by the administrator
from time to time. In valuing a Portfolio's securities, the pricing service
would normally take into consideration such factors as yield, risk, quality,
maturity, type of issue, trading characteristics, special circumstances, and
other factors which are deemed relevant in determining valuations for normal
institutionalized trading units of debt securities and would not rely
exclusively on quoted prices.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Portfolio are sold on a continuous basis by the
Fund's distributor. As described in the applicable Prospectuses, Trust Shares,
Trust II Shares and Institutional Shares of each Portfolio (Money Market
Portfolios only, with respect to Trust II Shares) are sold to certain qualified
customers at their net asset value without a sales charge. Investor A Shares of
each Portfolio (other than Investor A Shares of the Money Market Portfolios
which are sold at their net asset value without a sales charge) are sold to
retail customers at the public offering price based on a Portfolio's net asset
value plus a front-end load or sales charge as described in the applicable
Prospectuses. Investor B Shares of each Portfolio (other than the Treasury Money
Market, Tax-Exempt Money Market, Intermediate Corporate Bond, Bond Index,
Short-Intermediate Municipal, Equity Index and Small Cap Equity Index
Portfolios, which do not offer Investor B Shares) are sold to retail customers
at the net asset value next determined after a purchase order is received, but
are subject to a contingent deferred sales charge which is payable on redemption
of such shares as described in the applicable Prospectuses.
PURCHASES OF INVESTOR A SHARES AND INVESTOR B SHARES
Investor A Shares of each Portfolio are sold subject to a
front-end sales charge, except for Investor A Shares of the Money Market
Portfolios which are sold without any sales charge. Investor B Shares of each
Portfolio, except for the Treasury Money Market, Tax-Exempt Money Market,
Intermediate Corporate Bond, Bond Index, Short-Intermediate Municipal, Equity
Index and Small Cap Equity Index Portfolios, which do not offer Investor B
Shares, are sold subject to a back-end sales charge (the "CDSC Portfolios").
This back-end sales charge declines over time and is known as a "contingent
deferred sales charge." Before choosing between Investor A Shares or Investor B
Shares of a Portfolio, investors should read "Characteristics of Investor A
Shares and Investor B Shares" and "Factors to Consider When Selecting Investor A
Shares or Investor B Shares" below.
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If Shares are held in the
name of an organization, such organization is responsible for transmitting
purchase, exchange, and redemption orders to the Fund on a timely basis,
recording all purchase, exchange, and redemption transactions, and providing
regular account statements which confirm such transactions to beneficial owners
(or arranging for such services).
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REDUCED SALES CHARGES - INVESTOR A SHARES OF THE EQUITY AND BOND PORTFOLIOS
To qualify for a reduced sales load, an investor must so notify
his or her investment representative, who in turn will notify the Fund's
distributor at the time of purchase.
EXISTING SHAREHOLDER ACCOUNTS. Additional purchases of Investor A
Shares by existing Investor A shareholder accounts at March 31, 1999 in the
Intermediate Corporate Bond, Government & Corporate Bond, Missouri Tax-Exempt
Bond, National Municipal Bond, Balanced, Equity Income, Growth & Income Equity,
Growth Equity, Small Cap Equity and International Equity Portfolios are subject
to the following sales charges:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Amount of transaction Sales charges as a % Sales charge as a % of Dealers' reallowance
of the offering price net asset value per as a % of offering
per share share price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
- ------------------------------------------------------------------------------------------------
$50,000 but less than 3.50% 3.63% 3.00%
$100,000
- ------------------------------------------------------------------------------------------------
$100,000 but less than 2.50% 2.56% 2.00%
$250,000
- ------------------------------------------------------------------------------------------------
$250,000 but less than 1.50% 1.52% 1.00%
$500,000
- ------------------------------------------------------------------------------------------------
$500,000 but less than 1.00% 1.01% 0.50%
$1 million
- ------------------------------------------------------------------------------------------------
$1 million or more 0.50% 0.50% 0.40%
- ------------------------------------------------------------------------------------------------
</TABLE>
Additional purchase of Investor A Shares by existing Investor A
shareholder accounts at March 31, 1999 in the Bond Index, Equity Index and
Small Cap Equity Index Portfolios are subject to the following sales charges:
<TABLE>
<CAPTION>
Amount of transaction Sales charges as a % Sales charge as a % Dealers' reallowance
of the offering price of net asset value per as a % of offering
per share share price
<S> <C> <C> <C>
Less than $50,000 2.50% 2.56% 2.00%
$50,000 but less than
$100,000 1.50% 1.52% 1.30%
$100,000 but less than
$1 million 1.00% 1.01% .85%
$1 million or more 0.50% 0.50% 0.40%
</TABLE>
RIGHTS OF ACCUMULATION. An investor who has previously purchased
Investor A Shares of a Portfolio and has paid a sales charge ("load") may be
eligible for reduced sales charges when purchasing additional Investor A Shares
of a Portfolio with a sales charge. An investor's aggregate investment in Shares
of such load Portfolios is the total value (based on the higher of current net
asset value or the public offering price originally paid) of: (a) current
purchases, and (b) Shares that are already beneficially owned by the investor on
which a sales charge has already been paid. If, for example, an investor
beneficially owns Investor A Shares of Portfolio with a maximum 5.50% sales load
having an aggregate current value of $240,000 and subsequently purchases
additional Investor A Shares of a Portfolio with a maximum 5.50% sales load
having a current value of $10,000, the sales charge applicable to the subsequent
purchase would be reduced to 2.50% of the offering price.
QUANTITY DISCOUNTS. As described in the applicable Prospectuses,
larger purchases reduce the sales charge paid. The Fund will combine purchases
made in a load Portfolio on the same day by the investor and immediate family
members when calculating the applicable sales charge.
LETTER OF INTENT. By checking the Letter of Intent box on the
account application, a shareholder becomes eligible for reduced sales charges
applicable to the total amount invested in Investor A Shares in a load Portfolio
over a 13-month period (beginning up
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<PAGE> 69
to 90 days prior to the date indicated on the account application). The Fund's
transfer agent will hold in escrow 5% of the amount indicated for payment of a
higher sales load if a shareholder does not purchase the full amount indicated
on the account application. Upon completion of the total minimum investment
specified on the account application, the escrow will be released, and an
adjustment will be made to reflect any reduced sales charge applicable to Shares
purchased during the 90-day period prior to submission of the account
application. Additionally, if total purchases within the 13-month period exceed
the amount specified, an adjustment will be made to reflect further reduced
sales charges applicable to such purchases. All such adjustments will be made at
the conclusion of the 13-month period and in the form of additional Shares
credited to the shareholder's account at the then current public offering price
applicable to a single purchase of the total amount of the total purchases. If
total purchases are less than the amount specified, escrowed Shares may be
involuntarily redeemed to pay the additional sales charge. Checking a Letter of
Intent box does not bind an investor to purchase, or the Fund to sell, the full
amount indicated at the sales load in effect at the time of signing, but an
investor must complete the intended purchase to obtain the reduced sales load.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares on
which a sales charge was paid, a shareholder has a one-time right, to be
exercised within 60 days, to reinvest the redemption proceeds at the next
determined net asset value without paying any additional sales charge. The
shareholder must notify his or her investment representative or the Distributor
in writing of the reinvestment and provide a receipt or other evidence of the
redemption in order to eliminate a sales charge.
MISCELLANEOUS. Reduced sales charges may be modified or
terminated at any time and are subject to confirmation of an investor's
holdings. For more information about reduced sales charges, an investor should
contact his or her broker-dealer or other financial organization or the Fund's
distributor.
An illustration of the computation of the public offering price
per share of Investor A Shares of the Equity and Bond Portfolios, based on the
value of each Portfolio's net assets and the number of outstanding Investor A
Shares on November 30, 1998 and the maximum front-end sales charge of 5.5% with
respect to the Equity Portfolios, 4.75% with respect to the Bond Portfolios
(other than the U.S. Government Securities Portfolio and the Short-Intermediate
Municipal Portfolio), and 2.5% with respect to the U.S. Government Securities
and Short-Intermediate Municipal Portfolios, currently applicable, is as
follows:
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<PAGE> 70
<TABLE>
<CAPTION>
Equity Growth & Growth Small Cap International Equity
Balanced Income Income Equity Equity Equity Equity Index
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets $10,658,767 $1,709,108 $48,868,457 $4,831,601 $11,601,051 $3,153,782 $914,155
Outstanding Shares 843,829 166,945 2,554,054 242,503 978,282 237,623 62,864
Net Asset Value $ 12.63 $ 10.24 $ 19.13 $ 19.92 $ 11.86 $ 13.27 $ 14.54
Per Share
Sales Charge, 5.50% $ .74 $ .60 $ 1.11 $ 1.16 $ .69 $ .77 $ .85
of offering price
(5.82% of net asset
value per share)
Offering Price $ 13.37 $ 10.84 $ 20.24 $ 21.08 $ 12.55 $ 14.04 $ 15.39
to Public
</TABLE>
<TABLE>
<CAPTION>
Intermediate Government & Missouri National
Corporate Bond Corporate Bond Tax-Exempt Bond Municipal Bond Bond Index
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets $283,962 $4,927,499 $23,610,806 $1,161,747 $364,223
Outstanding Shares 27,575 459,506 1,955,140 113,630 34,853
Net Asset Value $ 10.30 $ 10.72 $ 12.08 $ 10.22 $ 10.45
Per Share
Sales Charge, 4.75% $ .51 $ .53 $ .60 $ .51 $ .52
Of offering price
(4.99% of net asset
value per share)
Offering Price $ 10.81 $ 11.25 $ 12.60 $ 10.73 $ 10.97
to Public
</TABLE>
<TABLE>
<CAPTION>
U.S. Government Short-Intermediate
Securities Municipal
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets $4,663,726 $31,661
Outstanding Shares 434,198 3,085
Net Asset Value $ 10.74 $ 10.26
Per Share
Sales Charge, 2.50% $ .27 $ .26
of offering price
(2.56% of net asset
value per share)
Offering Price $ 11.01 $ 10.52
to Public
</TABLE>
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<PAGE> 71
APPLICABLE SALES CHARGES - INVESTOR B SHARES OF THE CDSC PORTFOLIOS
Investor B Shares of the CDSC Portfolios are sold at their net
asset value next determined after a purchase order is received in good form by
the Fund's distributor. Although investors pay no front-end sales charge on
purchases of Investor B Shares, such Shares are subject to a deferred sales
charge at the rates set forth in the applicable Prospectuses if they are
redeemed within six years of purchase. Service organizations will receive
commissions from the distributor in connection with sales of Investor B Shares.
These commissions may be different than the reallowances or placement fees, if
any, paid to dealers in connection with sales of Investor A Shares.
The deferred sales charge on Investor B Shares is based on the
lesser of the net asset value of the Shares on the redemption date or the
original cost of the Shares being redeemed. As a result, no sales charge is
charged on any increase in the principal value of an investor's Shares. In
addition, a contingent deferred sales charge will not be assessed on Investor B
Shares purchased through reinvestment of dividends or capital gains
distributions.
The amount of any contingent deferred sales charge an investor
must pay on Investor B Shares depends on the number of years that elapse between
the purchase date and the date such Investor B Shares are redeemed, as described
in the relevant Prospectuses. Solely for purposes of determining the number of
years from the time of payment for an investor's Share purchase, all payments
during a month will be aggregated and deemed to have been made on the first day
of the month.
When an investor redeems his or her Investor B Shares, the
redemption order is processed to minimize the amount of the contingent deferred
sales charge that will be charged. Investor B Shares are redeemed first from
those Investor B Shares that are not subject to the deferred sales load (i.e.,
Investor B Shares that were acquired through reinvestment of dividends or
capital gain distributions) and after that from the Investor B Shares that have
been held the longest.
For example, assume an investor purchased 100 Investor B Shares
at $10 a Share (for a total cost of $1,000), three years later the Shares have a
net asset value of $12 per Share and during that time the investor acquired 10
additional Shares through dividend reinvestment. If the investor then makes one
redemption of 50 Shares (resulting in proceeds of $600, 50 Shares x $12 per
share), the first 10 Shares redeemed will not be subject to the contingent
deferred sales charge because they were acquired through reinvestment of
dividends. With respect to the remaining 40 Shares redeemed, the contingent
deferred sales charge is charged at $10 per Share (because the original purchase
price of $10 per Share is lower than the current net asset value of $12 per
share). Therefore, only $400 of the $600 such investor received from selling his
or her Shares will be subject to the contingent deferred sales charge, at a rate
of 3.0% (the applicable rate in the third year after purchase). The proceeds
from the contingent deferred sales charge that the investor may pay upon
redemption go to the distributor, which may use such amounts to defray the
expenses associated with the distribution-related services involved in selling
Investor B Shares. The contingent deferred sales charge, along with ongoing
distribution fees paid with respect to Investor B Shares, enables those Shares
to be purchased without the imposition of a front-end sales charge.
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<PAGE> 72
CHARACTERISTICS OF INVESTOR A SHARES AND INVESTOR B SHARES
The primary difference between Investor A Shares and Investor B
Shares lies in their sales charge structures and distribution arrangements as
described in the applicable Prospectuses. An investor should understand that the
purpose and function of the sales charge structures and distribution
arrangements for both Investor A Shares and Investor B Shares are the same.
Investor A Shares are sold at their net asset value plus, in the
case of the Equity and Bond Portfolios, a front-end sales charge. Investor A
Shares are subject to ongoing distribution and service fees at an annual rate of
up to 0.30% (0.25% with respect to the Money Market Portfolios) of a Portfolio's
average daily net assets attributable to its Investor A Shares.
Investor B Shares are sold at net asset value without an initial
sales charge. Normally, however, a deferred sales charge is paid if the Shares
are redeemed within six years of investment. Investor B Shares are subject to
ongoing distribution and service fees at an annual rate of up to 1.00% of a
Portfolio's average daily net assets attributable to its Investor B Shares.
These ongoing fees, which are higher than those charged on Investor A Shares,
will cause Investor B Shares to have a higher expense ratio and pay lower
dividends than Investor A Shares.
Eight years after purchase, Investor B Shares will convert
automatically to Investor A Shares. The purpose of the conversion is to relieve
a holder of Investor B Shares of the higher ongoing expenses charged to those
Shares, after enough time has passed to allow the distributor to recover
approximately the amount it would have received if a front-end sales charge had
been charged. The conversion from Investor B Shares to Investor A Shares takes
place at net asset value, as a result of which an investor receives
dollar-for-dollar the same value of Investor A Shares as he or she had of
Investor B Shares. The conversion occurs eight years after the beginning of the
calendar month in which the Shares are purchased. As a result of the conversion,
the converted Shares are relieved of the distribution and service fees borne by
Investor B Shares, although they are subject to the distribution and service
fees borne by Investor A Shares.
Investor B Shares acquired through a reinvestment of dividends or
distributions are also converted at the earlier of two dates - eight years after
the beginning of the calendar month in which the reinvestment occurred or the
date of conversion of the most recently purchased Investor B Shares that were
not acquired through reinvestment of dividends or distributions. For example, if
an investor makes a one-time purchase of Investor B Shares of a particular
Portfolio, and subsequently acquires additional Investor B Shares of that
Portfolio only through reinvestment of dividends and/or distributions, all of
such investor's Investor B Shares in that Portfolio, including those acquired
through reinvestment, will convert to Investor A Shares of that Portfolio on the
same date.
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FACTORS TO CONSIDER WHEN SELECTING INVESTOR A SHARES OR INVESTOR B SHARES
Before purchasing Shares of a Portfolio which offers both
Investor A Shares and Investor B Shares, investors should consider whether,
during the anticipated life of their investment in the Portfolio, the
accumulated distribution fees and potential contingent deferred sales charges on
Investor B Shares prior to conversion would be less than the initial sales
charge and accumulated distribution fees on Investor A Shares purchased at the
same time (note that Investor A Shares of the Money Market Portfolio are sold
without a sales charge), and to what extent such differential would be offset by
the higher yield of Investor A Shares. In this regard, to the extent that there
is no sales charge for Investor A Shares, in the case of the Money Market
Portfolio, or the sales charge for Investor A Shares is waived or reduced by one
of the methods described above, in the case of the Equity and Bond Portfolios,
investments in Investor A Shares become more desirable. The Fund reserves the
right to refuse all purchase orders for Investor B Shares of over $100,000.
Although Investor A Shares are subject to a distribution and
service fee, they are not subject to the higher distribution and service fee
applicable to Investor B Shares. For this reason, Investor A Shares can be
expected to pay correspondingly higher dividends per Share. However, because
initial sales charges are deducted at the time of purchase, purchasers of
Investor A Shares of the Equity and Bond Portfolios that do not qualify for
waivers of or reductions in the initial sales charge would have less of their
purchase price initially invested in a Portfolio than purchasers of Investor B
Shares of the same Portfolio.
As described above, purchasers of Investor B Shares of the Equity
and Bond Portfolios will have more of their initial purchase price invested. Any
positive investment return on this additional invested amount would partially or
wholly offset the expected higher annual expenses borne by Investor B Shares of
those Portfolios. Because the Portfolios' future returns cannot be predicted,
there can be no assurance that this will be the case. Holders of Investor B
Shares would, however, own Shares that are subject to higher annual expenses
and, for a six-year period, such Shares would be subject to a contingent
deferred sales charge of up to 5.00% upon redemption, depending upon the year of
redemption. Investors expecting to redeem during this six-year period should
compare the cost of the contingent deferred sales charge plus the aggregate
annual Investor B Shares' distribution and service fees to the cost of the
initial sales charge and distribution and service fees on the Investor A Shares
(note that Investor A Shares of the Money Market Portfolio are sold without a
sales charge). Over time, the expense of the annual distribution and service
fees on the Investor B Shares may equal or exceed the initial sales charge, if
any, and annual distribution and service fees applicable to Investor A Shares.
For example, if net asset value remains constant, the aggregate distribution and
service fees with respect to Investor B Shares of the Equity and Bond Portfolios
would equal or exceed the initial sales charge and aggregate distribution fees
of Investor A Shares of those Portfolios approximately eight years after the
purchase. In order to reduce such fees of investors that hold Investor B Shares
for more than eight years, Investor B Shares will be automatically converted to
Investor A Shares as described above at the end of such eight-year period.
EXCHANGES - INVESTOR A SHARES. Shareholders who have purchased
Investor A Shares of a Portfolio and who have paid any applicable sales charge
("load") (including Shares
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acquired through reinvestment of dividends or distributions on such Shares) may
exchange those Shares for Investor A Shares of another load Portfolio without
paying an additional sales load. Shareholders who have purchased Investor A
Shares of a Portfolio (other than through a previous exchange from another load
Portfolio on which any applicable sales load has been paid) with a lower sales
load may be charged an additional sales load on exchanges of Shares of such
Portfolio for Shares of a Portfolio with a higher sales load. Shareholders may
also exchange Investor A Shares of a no-load Portfolio for Investor A Shares of
another no-load Portfolio without paying a sales load. When Investor A Shares of
a no-load Portfolio are exchanged for Investor A Shares of a load Portfolio, the
applicable sales load (if any) will be assessed. However, shareholders
exchanging Investor A Shares of a no-load Portfolio that were acquired through a
previous exchange involving Shares on which a load was paid will not be required
to pay an additional sales load upon the reinvestment of the equivalent
investment into a load Portfolio within a twelve month period. Under such
circumstances, the shareholder must notify the Distributor that a sales load was
originally paid and provide the Distributor with sufficient information to
permit confirmation of the shareholder's right not to pay a sales load.
In addition, shareholders who have a qualified trust, agency or
custodian account with the trust department of Mercantile Trust or any of its
affiliated or correspondent banks, and whose Shares are to be held in that
account, may also exchange Investor A Shares of a Portfolio for Trust Shares or
Institutional Shares in the same Portfolio, and vice versa, without payment of
any exchange or sales charge.
EXCHANGES - INVESTOR B SHARES. Shareholders who have purchased
Investor B Shares of a Portfolio (including Shares acquired through reinvestment
of dividends or distributions on such Shares) may exchange those Shares for
Investor B Shares of another Portfolio without the payment of any contingent
deferred sales charge at the time the exchange is made. In determining the
holding period for calculating the contingent deferred sales charge payable on
redemptions of Investor B Shares, the holding period of the Investor B Shares
originally held will be added to the holding period of the Investor B Shares
acquired through the exchange. No exchange fee is imposed by the Fund.
OTHER INFORMATION CONCERNING EXCHANGES. The Shares exchanged must
have a current value at least equal to the minimum initial or subsequent
investment required by the particular Portfolio into which the exchange is being
made. An investor may telephone an exchange request by calling his or her
broker-dealer or financial institution, which is responsible for transmitting
such exchange request to the Fund.
AUTOMATIC EXCHANGE PROGRAM. The Automatic Exchange Program
enables shareholders to make regular, automatic withdrawals from an Investor A
Share or Investor B Share account in a Portfolio and use those proceeds to
benefit from Dollar Cost Averaging by automatically making purchases of the same
class of Shares in another Portfolio. With shareholder authorization, the Fund's
Transfer Agent will withdraw the amount specified (subject to the applicable
minimums) from the shareholder's account and will automatically invest that
amount in Shares of the Portfolio designated by the shareholder on the date of
such deduction.
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In order to participate in the Automatic Exchange Program,
shareholders must make a minimum initial purchase of $5,000 and maintain a
minimum account balance of $1,000. Additionally, shareholders must complete the
supplementary authorization form which may be obtained from their broker-dealer
or financial institution or the Fund. To change instructions with respect to the
Automatic Exchange Program or to discontinue this feature, shareholders must
send a written request to their broker-dealer or financial institution or to the
Fund. The Automatic Exchange Program may be amended or terminated without notice
at any time by the Fund.
CHECKWRITING -- MONEY MARKET PORTFOLIOS
To establish the checkwriting service after opening an account in
a Money Market Portfolio, the shareholder must contact his or her broker-dealer
or financial institution by telephone or mail to obtain an account application.
A signature guarantee may be required. A SHAREHOLDER WILL RECEIVE THE DAILY
DIVIDENDS DECLARED ON THE SHARES TO BE REDEEMED UP TO THE DAY THAT A CHECK IS
PRESENTED TO THE CUSTODIAN FOR PAYMENT. The checkwriting privilege may be
disadvantageous for holders of Investor B Shares of the Money Market Portfolio
due to the effect of the contingent deferred sales charge.
AUTOMATIC WITHDRAWAL PLAN (AWP)
An Automatic Withdrawal Plan may be established by a new or
existing shareholder of any Portfolio if the value of his or her account (valued
at the net asset value at the time of the establishment of the AWP) equals
$10,000 or more. Shareholders who elect to establish an AWP may receive a
monthly, quarterly, semi-annual, or annual check in a stated amount of not less
than $50 on or about the 25th day of the applicable month of withdrawal.
Portfolio Shares will be redeemed as necessary to meet withdrawal payments.
Withdrawals may reduce principal and eventually deplete the shareholder's
account. A shareholder who desires to establish an AWP after opening an account
should complete the AWP form in the back of the Prospectus or contact his or her
investment representative or the Fund for an AWP application. A signature
guarantee will be required. An AWP may be terminated by a shareholder on 30
days' written notice to his or her investment representative or to the Fund or
by the Fund at any time. No contingent deferred sales charge will be assessed on
redemptions of Investor B Shares of a Portfolio made through an AWP that do not
exceed 12% of an account's net asset value on an annualized basis. For example,
monthly, quarterly, semi-annual and annual AWP redemptions of Investor B Shares
will not be subject to the contingent deferred sales charge if they do not
exceed 1%, 3%, 6% and 12%, respectively, of an account's net asset value on the
redemption date. AWP redemptions of Investor B Shares in excess of this limit
are still subject to the applicable contingent deferred sales charge.
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PURCHASE OF INVESTOR A SHARES AT NET ASSET VALUE
From time to time the Fund's distributor may offer special
concessions to enable investors to purchase Investor A Shares of the Equity and
Bond Portfolios at net asset value without payment of a front-end sales charge.
To qualify for a net asset value purchase, the investor must pay for such
purchase with the proceeds from the redemption of shares of a non-affiliated
mutual fund on which a front-end sales charge was paid. A qualifying purchase of
Investor A Shares must occur within 30 days of the prior redemption and must be
evidenced by a confirmation of the redemption transaction. At the time of
purchase, the investment representative must notify the Fund that the purchase
qualifies for a purchase at net asset value. Proceeds from the redemption of
Shares on which no front-end sales charge was paid do not qualify for a purchase
at net asset value.
PURCHASE OF TRUST, TRUST II AND INSTITUTIONAL SHARES
All shareholders of record will receive confirmations of Share
purchases, exchanges, and redemptions in the mail. If Shares are held in the
name of banks or other financial institutions, such institution is responsible
for transmitting purchase, exchange, and redemption orders to the Fund on a
timely basis, recording all purchase, exchange, and redemption transactions, and
providing regular account statements which confirm such transactions to
beneficial owners.
EXCHANGES - TRUST, TRUST II AND INSTITUTIONAL SHARES
The exchange privilege enables shareholders to exchange Trust
Shares of a Portfolio for Trust Shares of another Portfolio offered by the Fund,
Trust II Shares for Trust II Shares of another such Portfolio and Institutional
Shares for Institutional Shares of another such Portfolio. Exchanges for Trust
Shares, Trust II Shares or Institutional Shares in another Portfolio are
effected without payment of any exchange or sales charges. In addition, Trust
Shares of a Portfolio may also be exchanged for Investor A Shares of the same
Portfolio in connection with the distribution of assets held in a qualified
trust, agency or custodian account with the trust department of Mercantile Trust
Company National Association or any of its affiliated or correspondent banks.
Such exchanges will also be effected without payment of any exchange or sales
charges.
OTHER PURCHASE, EXCHANGE AND REDEMPTION INFORMATION - ALL CLASSES
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.
WHEN REDEEMING SHARES IN A PORTFOLIO THAT OFFERS BOTH INVESTOR A
SHARES AND INVESTOR B SHARES, SHAREHOLDERS SHOULD INDICATE WHETHER THEY ARE
REDEEMING INVESTOR A SHARES OR INVESTOR B SHARES. In the event a redeeming
shareholder owns both Investor A Shares and Investor B Shares in a Portfolio,
the Investor A Shares will be redeemed first unless the shareholder indicates
otherwise.
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During periods of substantial economic or market change or
activity, telephone redemptions or exchanges may be difficult to complete. In
such event, Shares may be redeemed or exchanged by mailing the request directly
to the organization through which the original Shares were purchased or directly
to the Fund at P.O. Box 78069, St. Louis, Missouri 63178.
Under the 1940 Act, a Portfolio may suspend the right of
redemption or postpone the date of payment for shares during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. A Portfolio may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
The Portfolios may redeem shares involuntarily to reimburse them
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 AND TOTAL RETURN INFORMATION
Yield and total return quotations are computed separately for
Trust Shares, Trust II Shares, Institutional Shares, Investor A Shares and
Investor B Shares of a Portfolio. TOTAL RETURN AND YIELD FIGURES WILL FLUCTUATE,
ARE BASED ON HISTORICAL EARNINGS, AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The methods used to compute each Portfolio's yields and total
returns are described below.
THE MONEY MARKET PORTFOLIOS
From time to time, performance information such as "yield," and
"effective yield" for the Money Market Portfolios' Trust Shares, Trust II
Shares, Institutional Shares, and Investor A Shares and/or Investor B Shares may
be quoted in advertisements or in communications to shareholders. The "yield"
quoted in advertisements refers to the income generated by an investment in a
particular class of Shares of a Portfolio over a specified period (such as a
seven-day period) identified in connection with the particular yield quotation.
This income is then "annualized." That is, the amount of income generated by the
investment during that period is assumed to be generated for each such period
over a 52-week or one-year period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in a particular class of Shares of a
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment.
In addition, the Treasury Money Market Portfolio's "state
tax-equivalent yield" may also be quoted. The "state tax-equivalent yield" shows
the level of taxable yield needed to produce an after-tax yield that is
equivalent to a particular state's tax-exempt yield achieved by the Portfolio.
The "state tax-equivalent yield" refers to the portion of income that is derived
from
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interest income on direct obligations of the U.S. Government, its agencies or
instrumentalities that qualifies for exemption from state income tax. The yield
calculation assumes that 100% of the interest income is exempt from state income
tax. The "state tax-equivalent yield" is computed by dividing the tax-exempt
portion of the Portfolio's yield by a denominator consisting of one minus a
stated income tax rate.
The Tax-Exempt Money Market Portfolio may also quote its
"tax-equivalent yield" and "tax-equivalent effective yield," which demonstrate
the level of taxable yield needed to produce an after-tax yield that is
equivalent to the Portfolio's yield and effective yield. Each are calculated by
increasing the Portfolio's yield and effective yield by the amount necessary to
reflect the payment of federal (and/or state) tax at a stated tax rate. The "tax
equivalent yield" and "tax-equivalent effective yield" will always be higher
than the Portfolio's yield and effective yield, respectively. The Tax-Exempt
Money Market Portfolio may also compute its "tax-equivalent yield" and
"tax-equivalent effective yield" with respect to certain states, which shows the
level of taxable yield and effective yield, respectively, needed to produce an
after-tax equivalent to the federal and state tax-exempt yield of the
Portfolio's particular class of Shares, assuming payment of federal income tax
and state personal income tax each at a stated rate and based upon a specified
percentage of the Portfolio's income which is exempt from state income tax as
well as federal income tax.
A Money Market Portfolio's "yield" and "effective yield" are
calculated separately for Trust Shares, Trust II Shares, Institutional Shares,
Investor A Shares and Investor B Shares of the Portfolios according to formulas
prescribed by the SEC. Standardized 7 day "yield" is computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in a Portfolio having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7). The net change in the value of an
account includes the value of additional shares purchased with dividends from
the original share, and dividends declared on both the original share and any
such additional shares, net of all fees, other than nonrecurring account or
sales charges, that are charged by the Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. The capital changes to be excluded from the calculation of the net
change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. "Effective yield" is
computed by compounding the unannualized base period return (calculated as
above) by adding one to the base period return, raising the sum to a power equal
to 365 divided by seven, and subtracting one from the result. Based upon the
same calculations, each Portfolio's 30 day yields and 30 day effective yields
may also be quoted. The Tax-Exempt Money Market Portfolio's "tax-equivalent
yield" is computed by dividing the tax-exempt portion of the yield (calculated
as above) by one minus a stated federal income tax rate and adding the product
to that portion, if any, of the yield that is not tax-exempt. In addition, a
"Missouri" tax-equivalent yield may be calculated by dividing the portion of the
Tax-Exempt Money Market Portfolio's yield (calculated as above) that is exempt
from federal tax and the portion that is exempt from Missouri personal income
tax by one minus a stated tax rate and adding such figure to that portion, if
any, of the Portfolio's yield that is not exempt from federal
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or state income tax. Based on the foregoing calculations, for the year ended
November 30, 1998, the 7-day yields, 7-day effective yields and the 30-day
yields were as follows:
<TABLE>
<CAPTION>
7-DAY EFFECTIVE
PORTFOLIO* 7-DAY YIELD YIELD 30-DAY YIELD
---------- ----------- ----- ------------
<S> <C> <C> <C>
Treasury Money Market
Trust Shares 3.83% 3.91% 3.90%
Trust Shares II 4.08% 4.17% 4.05%
Institutional Shares 3.83% 3.91% 3.85%
Investor A Shares 3.83% 3.91% 3.85%
Money Market
Trust Shares 4.49% 4.59% 4.57%
Trust II Shares 4.74% 4.85% 4.74%
Institutional Shares 4.49% 4.59% 4.53%
Investor A Shares 4.49% 4.59% 4.53%
Investor B Shares 3.74% 3.80% 3.77%
Tax-Exempt Money Market
Trust Shares 2.44% 2.47% 2.52%
Trust II Shares 2.69% 2.73% 2.64%
Investor A Shares 2.44% 2.47% 2.42%
</TABLE>
- --------------------
* Trust II Shares of the Money Market Portfolios were initially offered
on November 2, 1998.
Based on the foregoing calculations, the tax-equivalent yields
and tax-equivalent effective yields of the Tax-Exempt Money Market Portfolio for
the same 7-day and 30-day periods were as follows (assuming payment of federal
income tax at a rate of 39.60%):
<TABLE>
<CAPTION>
7-DAY 7-DAY TAX- 30-DAY
TAX-EQUIVALENT EQUIVALENT TAX-EQUIVALENT
PORTFOLIO* YIELD EFFECTIVE YIELD YIELD
---------- ----- --------------- -----
<S> <C> <C> <C>
Tax-Exempt Money Market
Trust Shares 4.04% 4.09% 4.17%
Trust II Shares 4.45% 4.52% 4.37%
Investor A Shares 4.04% 4.09% 4.01%
</TABLE>
- --------------------
* Trust II Shares of the Tax-Exempt Money Market Portfolio were initially
offered on November 2, 1998.
In addition, the Treasury Money Market Portfolio may calculate a
7 day "state tax-exempt yield," which is computed by dividing the portion of the
Portfolio's yield (calculated as above) that is exempt from state income tax by
one minus a state income tax rate. Based upon the same calculations, the
Portfolio's 30 day state tax-exempt yield may also be quoted.
A Portfolio's quoted yield is not indicative of future yields and
depends upon factors such as portfolio maturity, the Portfolio's expenses, and
the types of instruments held by the Portfolio. Any account fees imposed by
financial institutions, Service Organizations, or broker-dealers would reduce a
Portfolio's effective yield.
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THE EQUITY AND BOND PORTFOLIOS
From time to time, performance information such as total return
and yield data for the Equity and Bond Portfolios' Trust Shares, Institutional
Shares, Investor A Shares and/or Investor B Shares may be quoted in
advertisements, sales literature or in communications to shareholders. The yield
is computed based on the net income of a particular class of Shares in the
particular Portfolio during a 30-day (or one-month) period identified in
connection with the particular yield quotation. More specifically, the yield is
computed by dividing the Portfolio's net income per Share during a 30-day (or
one-month) period by the maximum public offering price per Share on the last day
of the period and annualizing the result. The Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' "tax
equivalent" yields, which show the level of taxable yield needed to produce an
after-tax equivalent to each Portfolio's tax-free yield, may also be quoted from
time to time. This is done by increasing a Portfolio's yield (calculated as
above) by the amount necessary to reflect the payment of federal income tax at a
stated tax rate. The Missouri Tax-Exempt Bond Portfolio may also compute its
"Missouri tax-equivalent" yield which shows the amount of taxable yield needed
to produce an after-tax equivalent to the federal and Missouri tax-exempt yield
of the Portfolio's Shares, assuming payment of federal income tax and Missouri
income tax each at a stated rate.
The Portfolios' total returns may be calculated on an average
annual total return basis, and may also be calculated on an aggregate total
return basis, for various periods. Average annual total returns with respect to
a particular class of Shares reflect the average annual percentage change in
value of an investment in such Shares of a Portfolio over the particular
measuring period. Aggregate total returns reflect the cumulative percentage
change in value over the measuring period. Both methods of calculating total
returns assume that dividends and capital gain distributions made by a Portfolio
during the period are reinvested in the same class of Shares of the Portfolio
and that the maximum sales load in effect during the period has been charged by
the Portfolio. The Portfolios' total return figures may also be calculated
without the deduction of the maximum sales charge in effect during the period.
The effect of not deducting the sales charge will be to increase the total
return reflected. When considering average annual total return figures for
periods longer than one year, it is important to note that a Portfolio's annual
total return for any one year in the period might have been more or less than
the average for the entire period.
An Equity and Bond Portfolio's 30 day "yield" is calculated
separately for Trust Shares, Institutional Shares, Investor A Shares and/or
Investor B Shares of a Portfolio by dividing the Portfolio's net investment
income per share earned during a 30-day period by the maximum offering price per
share (the "maximum offering price") with respect to Investor A Shares and the
net asset value per share with respect to Trust Shares, Institutional Shares and
Investor B Shares on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power of
six, subtracting one from the result and then doubling the difference. A
Portfolio's net investment income per share (irrespective of series) earned
during the period is based on the average daily number of shares outstanding
during the period entitled to receive dividends and includes income dividends
and interest earned
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<PAGE> 81
during the period minus expenses accrued for the period, net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(-------)6 - 1]
cd + 1
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding that
were entitled to receive dividends.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining interest earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Portfolio is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in that Portfolio. A Portfolio calculates
interest earned on any debt obligation held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30 day period, or, with respect to obligations
purchased during the 30 day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30 day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Interest earned on municipal securities of the Short-Intermediate
Municipal, Missouri Tax-Exempt Bond and National Municipal Bond Portfolios that
are issued without original issue discount and have a current market discount is
calculated by using the coupon rate of interest instead of the yield to
maturity. In the case of municipal securities that are issued with original
issue discount but which have discounts based on current market value that
exceed the then-remaining portion of the original issue discount (market
discount), the yield to maturity is the imputed rate based on the original issue
discount calculation. On the other hand, in the case of municipal securities
that are issued with original issue discount but which have discounts based on
current market value that are less than the then-remaining portion of the
original issue discount (market premium), the yield to maturity is based on the
market value.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Portfolio to all shareholder accounts in
proportion to the length of the base period and the Portfolio's mean (or median)
account size. Investor A Shares, Investor B Shares,
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<PAGE> 82
Institutional Shares and Trust Shares each bear separate fees applicable to the
particular class of shares. Undeclared earned income will not be subtracted from
the maximum offering price per share (variable "d" in the formula). Undeclared
earned income is net investment income which, at the end of the base period, has
not been declared and paid as a dividend, but is reasonably expected to be and
is declared and paid as a dividend shortly thereafter.
The Short-Intermediate Municipal, Missouri Tax-Exempt Bond and
National Municipal Bond Portfolios' "tax-equivalent" yield for each class of
shares is computed by dividing the portion of a Portfolio's yield (calculated as
above) that is exempt from federal income tax by one minus a stated federal
income tax rate and adding that figure to that portion, if any, of the
Portfolio's yield that is not exempt from federal income tax. Similarly, the
Missouri Tax-Exempt Bond Portfolio's "Missouri tax-equivalent" yields for each
class of shares is calculated by dividing the portion of a Portfolio's yield
(calculated as above) that is exempt from federal tax and the portion that is
exempt from Missouri personal income tax by one minus a stated tax rate and
adding such figure to that portion, if any, of the Portfolio's yield that is not
exempt from federal or state income tax.
The Fund currently calculates 30-day yields for its Bond
Portfolios but not for its Equity Portfolios. For the 30-day period ended
November 30, 1998, the yields on the Bond Portfolios were as follows:
<TABLE>
<CAPTION>
PORTFOLIO 30-DAY YIELD
--------- ------------
<S> <C>
U.S. Government Securities
Trust Shares 5.02%
Institutional Shares 4.72%
Investor A Shares 4.60%
Investor B Shares 4.02%
Intermediate Corporate Bond
Trust Shares 5.05%
Institutional Shares 4.75%
Investor A Shares 4.53%
Bond Index
Trust Shares 5.14%
Institutional Shares 4.84%
Investor A Shares 4.72%
Government & Corporate Bond
Trust Shares 5.15%
Institutional Shares 4.85%
Investor A Shares 4.63%
Investor B Shares 4.15%
Short-Intermediate Municipal
Trust Shares 3.25%
Investor A Shares 2.95%
</TABLE>
-79-
<PAGE> 83
<TABLE>
<S> <C>
Missouri Tax Exempt Bond
Trust Shares 3.89%
Investor A Shares 3.52%
Investor B Shares 2.90%
National Municipal Bond
Trust Shares 4.03%
Investor A Shares 3.64%
Investor B Shares 3.04%
Balanced
Trust Shares 2.25%
Institutional Shares 1.96%
Investor A Shares 1.87%
Investor B Shares 1.26%
</TABLE>
For the same 30-day period, the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios' tax-equivalent
yields (assuming payment of federal income taxes at a rate of 39.60%) and the
Missouri Tax-Exempt Bond Portfolio's Missouri tax-equivalent yield (assuming
Missouri state income taxes at a rate of 43.20%) were as follows:
<TABLE>
<CAPTION>
30-DAY TAX- 30-DAY MISSOURI
PORTFOLIO EQUIVALENT YIELD TAX-EQUIVALENT YIELD
--------- ---------------- --------------------
<S> <C> <C>
Short-Intermediate Municipal
Trust Shares 5.38% 5.72%
Investor A Shares 4.88% 5.19%
Missouri Tax-Exempt Bond
Trust Shares 6.44% 6.85%
Investor A Shares 5.83% 6.20%
Investor B Shares 4.80% 5.11%
National Municipal Bond
Trust Shares 6.67% 7.10%
Investor A Shares 6.03% 6.41%
Investor B Shares 5.03% 5.35%
</TABLE>
A Portfolio computes its "average annual total return" for each
series of that Portfolio by determining the average annual compounded rate of
return during specified periods that would equate the initial amount invested in
a particular series to the ending redeemable value of such investment in the
series by dividing the ending redeemable value of a hypothetical $1,000 payment
by $1,000 (representing a hypothetical initial payment) and raising the quotient
to a power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
-80-
<PAGE> 84
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the 1, 5 or 10 year (or other)
periods (or a fractional portion thereof)
P = hypothetical initial payment of $1,000
n = period covered by the computation, expressed in terms of
years
A Portfolio computes its aggregate total returns separately for
each series by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested in a
particular series to the ending redeemable value of such investment in the
series. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(------)- 1]
P
The calculations of average annual total return and aggregate
total return assume reinvestment of all income dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean or median account size for any fees that vary with
the size of the account. The ending redeemable value (variable "ERV" in each
quotation) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all non-recurring charges at the end of the
period covered by the computation. In addition, a non-money market Portfolio's
average annual total return and aggregate total return quotations reflect the
deduction of the maximum front-end sales charge in connection with the purchase
of Investor A Shares and the deduction of any applicable contingent deferred
sales charge with respect to Investor B Shares.
Based on the foregoing calculations, the average annual total
returns for the year/period ended November 30, 1998, the average annual total
returns for the 5-year and 10-year periods ended November 30, 1998 (where
applicable) and the average annual total returns for the periods from
commencement of operations were as follows:
-81-
<PAGE> 85
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 FOR THE 10 SINCE
FOR THE YEAR YEARS ENDED YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/98 11/30/98 11/30/98 OF OPERATIONS
--------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C>
U.S. Government Securities
Trust Shares(1) 6.98% 5.74% 7.85% 7.78%
Institutional Shares(4) 6.67% 5.34% 7.56% 7.50%
Investor A Shares(1) 4.02% 4.89% 7.34% 7.28%
Investor B Shares(2) 1.02% 4.52% 7.22% 7.17%
Intermediate Corporate Bond(15)
Trust Shares 9.53% N/A N/A 9.00%
Institutional Shares 9.32% N/A N/A 8.86%
Investor A Shares 4.36% N/A N/A 6.05%
Bond Index(15)
Trust Shares 9.69% N/A N/A 9.38%
Institutional Shares 9.47% N/A N/A 9.27%
Investor A Shares 6.64% N/A N/A 7.53%
Government & Corporate Bond
Trust Shares(3) 9.63% 6.62% 8.11% 8.01%
Institutional Shares 9.30% 6.30% 7.86% 7.77%
Investor A Shares(3) 4.37% 5.29% 7.34% 7.28%
Investor B Shares(2) 3.65% 5.59% 7.58% 7.51%
Short-Intermediate Municipal
Trust Shares(10) 5.36% N/A N/A 4.73%
Investor A Shares(10) 2.53% N/A N/A 3.37%
Missouri Tax-Exempt Bond(11)
Trust Shares(12) 6.52% 5.76% 7.57% 7.81%
Investor A Shares(13) 1.52% 4.59% 6.89% 7.16%
Investor B Shares(2) 0.47% 4.73% 7.06% 7.32%
National Municipal Bond(14)
Trust Shares 7.76% N/A N/A 8.12%
Investor A Shares 2.76% N/A N/A 5.43%
Investor B Shares 1.71% N/A N/A 5.71%
Balanced
Trust Shares(7) 9.75% 12.50% N/A 11.70%
Institutional Shares(7) 9.38% 12.18% N/A 11.41%
Investor A Shares(7) 4.54% 11.20% N/A 10.55%
Investor B Shares(2) 3.88% 11.45% N/A 10.78%
Equity Income(16)
Trust Shares 12.00% N/A N/A 17.00%
Institutional Shares 11.82% N/A N/A 16.89%
Investor A Shares 6.71% N/A N/A 13.68%
Investor B Shares 6.55% N/A N/A 13.82%
Equity Index(17)
Trust Shares 23.34% N/A N/A 28.37%
Institutional Shares 23.01% N/A N/A 28.16%
Investor A Shares 19.89% N/A N/A 25.92%
Growth & Income Equity
Trust Shares(1) 9.67% 17.49% 15.84% 15.41%
Institutional Shares 9.36% 17.12% 15.67% 15.25%
Investor A Shares(1) 4.40% 16.05% 15.14% 14.75%
Investor B Shares(2) 4.07% 16.42% 15.37% 14.96%
Growth Equity
Trust Shares(18) 22.94% 20.75% N/A 17.05%
Institutional Shares(18) 22.58% 20.68% N/A 17.00%
Investor A Shares(19) 16.99% 19.57% N/A 16.08%
Investor B Shares(18) 16.78% 20.44% N/A 16.80%
</TABLE>
-82-
<PAGE> 86
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
FOR THE 5 FOR THE 10 SINCE
FOR THE YEAR YEARS ENDED YEARS ENDED COMMENCEMENT
PORTFOLIO ENDED 11/30/98 11/30/98 11/30/98 OF OPERATIONS
--------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Small Cap Equity
Trust Shares(5) (13.90%) 7.98% N/A 10.94%
Institutional Shares (14.17%) 7.64% N/A 10.68%
Investor A Shares(6) (18.06%) 6.71% N/A 9.95%
Investor B Shares(2) (18.70%) 7.00% N/A 10.28%
Small Cap Equity Index(20)
Trust Shares N/A N/A N/A N/A
Institutional Shares N/A N/A N/A N/A
Investor A Shares N/A N/A N/A N/A
International Equity
Trust Shares(8) 15.73% N/A N/A 8.24%
Institutional Shares(8) 15.37% N/A N/A 7.92%
Investor A Shares(9) 10.19% N/A N/A 6.89%
Investor B Shares(2) 9.48% N/A N/A 6.99%
</TABLE>
- ----------------
(1) Commenced operations on June 2, 1988.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to
such date represent the performance for Investor A Shares of
the Portfolio which has been restated to reflect the
contingent deferred sales charges payable by holders of
Investor B Shares that redeem within six years of the date of
purchase. Investor B Shares are also subject to distribution
and services fees at a maximum annual rate of 1.00%. Had those
distribution and services fees been reflected, performance
would have been reduced.
(3) Commenced operations on June 15, 1988.
(4) Commenced operations on June 7, 1994.
(5) Commenced operations on May 1, 1992.
(6) Initial public offering commenced on May 6, 1992.
(7) Commenced operations on April 1, 1993.
(8) Commenced operations on April 4, 1994.
(9) Initial public offering commenced on April 4, 1993.
(10) Commenced operations on July 10, 1995.
(11) Commenced operations on July 15, 1988 as a portfolio of The
ARCH Tax-Exempt Trust. On October 2, 1995, the Portfolio was
reorganized as a new Portfolio of the Fund.
(12) Commenced operations on July 15, 1988.
(13) Initial public offering commenced on September 28, 1990.
(14) Commenced operations on November 18, 1996.
(15) Commenced operations on February 10, 1997.
(16) Commenced operations on February 27, 1997.
(17) Commenced operations on May 1, 1997.
(18) Commenced operations on November 24, 1997.
(19) Performance information includes that of Predecessor Growth
Equity Portfolio, which commenced operations on January 4,
1993.
(20) Portfolio had not commenced operations as of November 30,
1998.
Based on the foregoing calculations, the aggregate total returns
for the Equity and Bond Portfolios from their respective dates of commencement
of operations through November 30, 1998 (other than the Small Cap Equity Index
Portfolios which had not commenced operations as of November 30, 1998) were as
follows:
-83-
<PAGE> 87
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
SINCE COMMENCEMENT
PORTFOLIO OF OPERATIONS
--------- -------------
<S> <C>
U.S. Government Securities
Trust Shares 119.46%
Institutional Shares(1) 113.58%
Investor A Shares 109.02%
Investor B Shares(2) 106.93%
Intermediate Corporate Bond
Trust Shares 16.82%
Institutional Shares 16.53%
Investor A Shares 11.17%
Bond Index
Trust Shares 17.54%
Institutional Shares 17.33%
Investor A Shares 13.98%
Government & Corporate Bond
Trust Shares 123.85%
Institutional Shares(1) 118.81%
Investor A Shares 108.58%
Investor B Shares(2) 113.19%
Short-Intermediate Municipal
Trust Shares 16.97%
Investor A Shares 11.90%
Missouri Tax-Exempt Bond
Trust Shares 118.27%
Investor A Shares 104.90%
Investor B Shares(2) 108.11%
National Municipal Bond
Trust Shares 17.20%
Investor A Shares 11.35%
Investor B Shares 11.96%
Equity Income
Trust Shares 31.75%
Institutional Shares 31.54%
Investor A Shares 25.26%
Investor B Shares 25.56%
Balanced
Trust Shares 87.14%
Institutional Shares(1) 84.48%
Investor A Shares 76.53%
Investor B Shares(2) 78.63%
Equity Index
Trust Shares 48.51%
Institutional Shares 48.12%
Investor A Shares 44.04%
Growth & Income Equity
Trust Shares 350.18%
Institutional Shares(1) 343.55%
Investor A Shares 323.69%
Investor B Shares(2) 332.05%
Growth Equity
Trust Shares 153.38%
Institutional Shares 152.63%
Investor A Shares(3) 141.20%
Investor B Shares 150.13%
Small Cap Equity
Trust Shares 97.84%
Institutional Shares(1) 94.75%
Investor A Shares 86.49%
Investor B Shares(2) 90.23%
</TABLE>
-84-
<PAGE> 88
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
SINCE COMMENCEMENT
PORTFOLIO OF OPERATIONS
--------- -------------
<S> <C>
International Equity
Trust Shares 44.61%
Institutional Shares(1) 42.60%
Investor A Shares 36.37%
Investor B Shares(2) 36.96%
</TABLE>
- ----------------
(1) Reflects combined performance of Institutional Shares which were
initially offered to the public on January 4, 1994 and Investor A
Shares for the period prior to January 4, 1994.
(2) Investor B Shares were initially offered on March 1, 1995. The
performance figures for Investor B Shares for periods prior to such
date represent the performance for Investor A Shares of the Portfolio
which has been restated to reflect the contingent deferred sales
charges payable by holders of Investor B Shares that redeem within six
years of the date of purchase. Investor B Shares are also subject to
distribution and services fees at a maximum annual rate of 1.00%. Had
those distribution and services fees been reflected, performance would
have been reduced.
(3) Total return information includes that of Predecessor Growth Equity
Portfolio, which commenced operations on January 4, 1993.
Investor A Shares and Investor B Shares of a Portfolio may also
calculate total return figures for that Portfolio without deducting the maximum
sales charge imposed on purchases or redemptions. The effect of not deducting
the sales charge will be to increase the total return reflected.
Investors may judge the performance of the Portfolios by
comparing them to the performance of other mutual funds or mutual fund
portfolios with comparable investment objectives and policies. Such comparisons
may be made by referring to market indices and data such as those prepared by
Dow Jones & Co., Inc., Russell, Salomon Brothers, Inc., Lehman Brothers or
Standard & Poor's Ratings Group or any of their affiliates, the Consumer Price
Index, the EAFE Index, the NASDAQ Composite, or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. Such comparisons may also be made by referring
to data prepared by Lipper Analytical Services, Inc., (a widely recognized
independent service which monitors the performance of mutual funds) Indata,
Frank Russell, CDA, and the Bank Rate Monitor (which reports average yields for
money market accounts offered by the 50 leading banks and thrift institutions in
the top five standard metropolitan statistical areas). Other similar yield data,
including comparisons to the performance of Mercantile Trust repurchase
agreements, or the average yield data for similar asset classes including but
not limited to Treasury bills, notes and bonds, may also be used for comparison
purposes. Comparisons may also be made to indices or data published in the
following national financial publications: IBC's Money Fund Report(R),
MorningStar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune, Pension's
and Investments, Institutional Investor, U.S.A. Today and publications of
Ibbotson Associates, Inc. and other publications of a local or regional nature.
In addition to performance information, general information about the Portfolios
that appears in a publication such as those mentioned above may be included in
advertisements, supplemental sales literature and in reports to Shareholders.
From time to time, the Fund may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic
-85-
<PAGE> 89
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the Portfolios within the Fund; (5) descriptions of investment strategies for
one or more of such Portfolios; (6) descriptions or comparisons of various
investment products, which may or may not include the Portfolios; (7)
comparisons of investment products (including the Portfolios) with relevant
market or industry indices or other appropriate benchmarks; and (8) discussions
of rankings or ratings by recognized rating organizations.
In addition, with respect to the Short-Intermediate Municipal,
Missouri Tax-Exempt Bond and National Municipal Bond Portfolios the benefits of
tax-free investments may be communicated in advertisements or communications to
shareholders. For example, the tables below present the approximate yield that a
taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 4.50% to
7.00%. The yields below are for illustration purposes only and are not intended
to represent current or future yields for the Portfolios, which may be higher or
lower than those shown. The tax brackets shown below will be indexed for
inflation for years after 1999. Investors should consult their tax advisor with
specific reference to their own tax situation.
-86-
<PAGE> 90
<TABLE>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<CAPTION>
- --------------------------------------------------------------------------
SINGLE RETURN Federal
Sample Taxable Marginal
Income Tax Rate
(1999) --------Tax-Exempt Yields--------
4.50% 5.00% 5.50% 6.50% 7.00%
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$24,000
FROM
$24,000 TO 28.00% 6.25% 6.64% 7.64% 9.03% 9.72%
$58,150
FROM
$58,150 TO 31.00% 6.52% 7.25% 7.97% 9.42% 10.41%
$121,300
FROM
$121,300 TO 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$263,750
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
APPROXIMATE YIELD TABLE: SHORT-INTERMEDIATE MUNICIPAL
AND NATIONAL MUNICIPAL BOND PORTFOLIOS
<CAPTION>
- --------------------------------------------------------------------------
MARRIED FILING
JOINTLY
Sample Taxable Federal
Income Marginal
(1999) Tax Rate --------Tax-Exempt Yields--------
4.50% 5.00% 5.50% 6.50% 7.00%
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM
$0 TO 15.00% 5.29% 5.88% 6.47% 7.65% 8.24%
$40,000
FROM
$40,000 TO 28.00% 6.25% 6.94% 7.64% 9.03% 9.72%
$96,900
FROM
$96,900 TO 31.00% 6.52% 7.25% 7.97% 9.42% 10.14%
$147,700
FROM
$147,700 TO 36.00% 7.03% 7.81% 8.59% 10.16% 10.94%
$263,750
OVER
$263,750 39.60% 7.45% 8.28% 9.11% 10.76% 11.59%
- --------------------------------------------------------------------------
</TABLE>
-87-
<PAGE> 91
<TABLE>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<CAPTION>
- ------------------------------------------------------------------------------------------------
SINGLE
RETURN Combined
Sample Federal and
Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1999) Tax Rate Tax Rate Rate -----------Tax-Exempt Yields------------
4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$0 TO
$24,000
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$24,000 TO
$58,150
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$58,150 TO
$121,300
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$121,300 TO
$263,750
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$263,750
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
APPROXIMATE YIELD TABLE: MISSOURI TAX-EXEMPT BOND PORTFOLIO
<CAPTION>
- ------------------------------------------------------------------------------------------------
MARRIED
FILING
JOINTLY Combined
Sample Federal and
Taxable Federal Missouri Missouri
Income Marginal Marginal Marginal Tax
(1998) Tax Rate Tax Rate Rate -----------Tax-Exempt Yields------------
4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM 15.00% 6.00% 20.10% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$0 TO
$40,000
FROM 28.00% 6.00% 32.32% 6.65% 7.39% 8.13% 8.87% 9.60% 10.34%
$40,000 TO
$96,900
FROM 31.00% 6.00% 35.14% 6.94% 7.71% 8.48% 9.25% 10.02% 10.79%
$96,900 TO
$147,700
FROM 36.00% 6.00% 39.84% 7.48% 8.31% 9.14% 9.97% 10.80% 11.64%
$147,700 TO
$263,750
OVER 39.60% 6.00% 43.22% 7.93% 8.81% 9.69% 10.57% 11.45% 12.33%
$263,750
- ------------------------------------------------------------------------------------------------
</TABLE>
Such data are for illustrative purposes only and are not intended to indicate
past or future performance results of a Portfolio. Actual performance of the
Portfolios' may be more or less than that noted in the hypothetical
illustrations.
Performance quotations of a class of Shares in a Portfolio
represent that Portfolio's past performance and should not be considered as
representative of future results. Any account fees charged by an investment
representative will not be included in the calculation of the Portfolios yield
and total returns. Since performance will fluctuate, performance data for the
Portfolios cannot necessarily be used to compare an investment in the
Portfolios' shares with
-88-
<PAGE> 92
bank deposits, savings accounts, and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses, and market conditions. The current yield and performance of
the Portfolios may be obtained by calling the Fund at: INVESTOR A OR INVESTOR B
SHARES - 1-800-452-2724 OR TRUST, TRUST II OR INSTITUTIONAL SHARES -
1-800-452-4015.
ADDITIONAL INFORMATION CONCERNING TAXES
IN GENERAL
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses are not intended as a substitute for careful tax
planning. Potential investors should consult their tax advisors with specific
reference to their own tax situations.
Each Portfolio of the Fund is treated as a separate corporate
entity under the Code. Each Portfolio intends to qualify or continue to qualify
each year as a regulated investment company. In order to so qualify for a
taxable year under the Code, each Portfolio must satisfy, in addition to the
distribution requirement described in the Prospectuses, certain other
requirements set forth below.
At least 90% of the gross income for a taxable year of each
Portfolio must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, and other income (including, but not limited to, gains
from options, futures, or forward contracts) derived with respect to the
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 a Portfolio's assets must consist of cash and cash items,
U.S. Government securities, securities of other regulated investment companies,
and securities of other issuers (as to which a Portfolio has not invested more
than 5% of the value of its total assets in securities of such issuer and as to
which that Portfolio does not hold more than 10% of the outstanding voting
securities of such issuer) and no more than 25% of the value of such Portfolio's
total assets may be invested in the securities of any one issuer (other than
U.S. government securities and securities of other regulated investment
companies), or in two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses.
Qualification as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), for a taxable year
requires, among other things, that each Portfolio distribute to its shareholders
an amount equal to at least the sum of 90% of its investment company taxable
income and 90% of its net exempt-interest income (if any). In
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<PAGE> 93
general, a Portfolio's investment company taxable income will be its taxable
income, including dividends, interest and short-term capital gains (the excess
of net short-term capital gain over net long-term capital loss), subject to
certain adjustments and excluding the excess of any net long-term capital gain
over net short-term capital loss, if any, for such taxable year.
It is the policy of each Tax-Exempt Portfolio to distribute as
dividends substantially all of its net tax-exempt interest income and any
investment company taxable income each year. Dividends derived from interest on
Municipal Obligations (known as exempt-interest dividends) may be treated by
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless under the circumstances applicable to the
particular shareholder the exclusion would be disallowed. Distributions of net
income may be taxable to investors under state or local law as dividend income
even though a substantial portion of such distributions may be derived from
interest on tax-exempt obligations which, if realized directly, would be exempt
from such income tax.
Dividends declared by a Portfolio in October, November, or
December of any year payable to shareholders of record on a specified date in
such months will be deemed to have been received by shareholders and paid by the
Fund on December 31 of such year, if such dividends are actually paid during
January of the following year.
Each Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross sale proceeds paid
to shareholders who have failed to provide a correct tax identification number
in the manner required, who are subject to 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). Each Portfolio intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income each year to avoid liability for this excise tax.
MISSOURI TAX CONSIDERATIONS. For each year in which a Portfolio
qualifies as a regulated investment company for federal income tax purposes,
shareholders of such Portfolio who are Missouri resident individuals, trusts or
estates resident in Missouri, or corporations subject to Missouri taxing
jurisdiction (collectively, "Missouri Taxpayers") will not be subject to
Missouri income taxation on dividends distributed to them to the extent that
such dividends (a) qualify as exempt-interest dividends of a regulated
investment company under Code section 852(b)(5), (b) are the subject of the
written notice to shareholders required by 12 C.S.R. section 10-2.155(2), (c)
are attributable to interest on (1) obligations issued by the State of Missouri
or any of its political subdivisions or authorities, or (2) certain obligations
of the United States, any territory or possession of the United States, or any
authority, commission, or instrumentality of the United Sates, to the extent
exempted from Missouri income tax under federal law, and (d) are properly
reported on the Missouri income tax returns of the shareholder in the respective
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Portfolio. In connection with the obligations described in paragraph (c)(2)
above, the amount of State income tax-exempt interest dividends shall be reduced
by the amount of (a) the federal corporate dividend received deduction
attributable to such dividends, and (b) interest paid or expense incurred to
produce such dividends, to the extent that the interest paid or expense incurred
exceeds five hundred dollars.
To the extent possible, the Missouri Tax-Exempt Bond Portfolio
intends to invest in obligations which will permit distributions attributable to
interest to be excludable by Missouri Taxpayers. Despite this intention,
Missouri Taxpayers generally will be subject to Missouri income tax on other
types of distributions received from the Missouri Tax-Exempt Bond Portfolio,
including distributions of interest on obligations of other issuers and all
long-term and short-term capital gains.
Except as noted above with respect to Missouri income taxation,
distributions from a Portfolio may be taxable to shareholders under other state
and local laws imposing taxes on or measured by net income, even though such
distributions were derived, in whole or in part, from interest on obligations
which, if realized directly by the shareholder, or by a shareholder of another
type, would be nontaxable.
The foregoing discussion of Missouri law does not apply to
shareholders that are subject to the Missouri bank tax or other comparable forms
of specialized Missouri taxation.
THE TAX-EXEMPT PORTFOLIOS
The policy of each Tax-Exempt Portfolio is to pay to its
shareholders each year as exempt-interest dividends substantially all of its
municipal security interest income net of certain deductions. In order for a
Tax-Exempt Portfolio to pay exempt-interest dividends for any taxable year, at
the close of each quarter of its taxable year at least 50% of the aggregate
value of the Portfolio's assets must consist of exempt-interest obligations. An
investment in a Tax-Exempt Portfolio is not intended to constitute a balanced
investment program. Shares of a Tax-Exempt Portfolio would not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, not only would the shareholder not gain any
additional benefit from the Tax-Exempt Portfolios' dividends being tax-exempt,
but such dividends would be ultimately taxable to the beneficiaries when
distributed.
Shareholders who might be treated as a "substantial user" or a
"related person" to such user with respect to facilities financed through any of
the tax-exempt obligations held by a Tax-Exempt Portfolio, are advised to
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a). A "substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person (i) who regularly uses
a part of such facilities in his trade or business and (ii)(A) whose gross
revenues derived with respect to the facilities financed by the issuance of
bonds are more than 5% of the total revenues derived by all users of such
facilities, (B) who occupies more than 5% of the usable area of such facilities
or (C) for whom such facilities or a part thereof were specifically constructed,
reconstructed or
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<PAGE> 95
acquired. "Related persons" include certain related natural persons, affiliated
corporations, partnerships and its partners, and S corporations and their
shareholders.
STATE AND LOCAL TAXES
Shareholders should note that dividends paid by a Portfolio may
be taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest on obligations
that, if realized directly, would be exempt from such income taxes.
The Treasury Money Market Portfolio is structured to provide
investors, to the extent permissible by federal and state law, with income that
is exempt or excluded from taxation at the state and local level. Shareholders
should note that many, but not all, states permit all or a portion of a
regulated investment company's dividends which are derived from interest on U.S.
Treasury obligations (and obligations of certain U.S. Government
agencies)("Treasury Obligations") to be exempt or excluded from state and local
taxation. In addition, only certain states allow dividends of a regulated
investment company that are derived from dividends of other regulated investment
companies investing directly in Treasury Obligations to be exempt or excluded
from state and local taxation. Some states reduce a shareholder's allowable
deductions by interest on debt incurred to carry obligations producing state
tax-exempt interest and by other expenses related to such obligations. Income
earned by the Portfolio from repurchase agreements generally is not exempt from
state or local income tax.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Tax provisions regarding financial instruments, foreign currencies and
foreign corporations may from time to time cause a Portfolio to recognize income
in excess of cash received in a transaction. Moreover, a Portfolio's investment
alternatives will to some extent be considered by tax requirements applicable to
regulated investment companies.
CONCLUSIONS
The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisors
concerning the application of federal, state and local taxes and with specific
reference to their own tax situation.
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<PAGE> 96
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Portfolios 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 Treasurer, St. Louis
St. Louis University The Board; University, August 1996
3500 Lindell President and to present; Treasurer,
Fitzgerald Hall Director Washington University,
St. Louis, MO 63131 1981 to 1995
Age: 55
Robert M. Cox, Jr. Director Senior Vice President
Emerson Electric Co. 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 Treasurer,
Iron Workers International International Association of
Union Bridge, Structural and Orna
1750 New York Avenue, N.W. mental Iron Workers (Interna-
Suite 400 tional Labor Union), January
Washington, D.C. 20006 1994 to present.
James C. Jacobsen Director Director, Kellwood Company,
Kellwood Company (manufacturer of wearing
600 Kellwood Parkway apparel and camping softgoods)
Chesterfield, MO 63017 since 1975; Vice Chairman,
Age: 63 Kellwood Company since May 1989.
</TABLE>
- ------------------------
* Mr. Woodham is an "interested person" of the Fund as defined in the
1940 Act.
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<PAGE> 97
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 years
Name and Address the Fund And other affiliations
- ---------------- -------- ----------------------
<S> <C> <C>
Donald E. Brandt Director Senior Vice President,
Ameren Corporation Finance and Corporate
P.O. Box 66149 Services, Union Electric
St. Louis, MO 63166-6149 Company (electric utility
Age: 44 company); Director, Huntco, Inc.
(intermediate steel processors).
Patrick J. Moore Director Vice President & Chief
Smurfit-Store Container Financial Officer since
Corporation 1998 and Vice President
8182 Maryland Avenue & General Manager,
St. Louis, MO 63105 1994-1996, of Industrial
Age: 44 Packaging Division and
Corporate Vice President
& Treasurer, 1993-1994,
Jefferson Smurfit Corporation
(paper, paperboard and packaging).
Ronald D. Winney* Director and Treasurer, Ralston Purina
Ralston Purina Company Treasurer Company Since 1985.
Checkerboard Square
St. Louis, MO 63164
Age: 56
W. Bruce McConnel, III* Secretary Partner of the law firm of
Suite 1100 Drinker Biddle & Reath
1345 Chestnut Street LLP, Philadelphia,
Philadelphia, PA 19107 Pennsylvania Since 1977.
Age: 56
Walter B. Grimm* Vice President Employee of BISYS Fund
3435 Stelzer Road and Assistant Services.
Columbus, OH 43219 Treasurer
Age: 53
David Bunstine Assistant Employee of BISYS Fund
3435 Stelzer Road Secretary Services.
Columbus, OH 43219
Age: 33
</TABLE>
- ------------------------
* Messrs. Grimm, Winney, McConnel and Bunstine are "interested persons"
of the Fund as defined in the 1940 Act.
Each director receives an annual fee of $10,000 plus
reimbursement of expenses incurred as a director. The Chairman of the Board and
President of the Fund receives an additional annual fee of $5,000 for his
services in these capacities. For the fiscal year ended November 30, 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.
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<PAGE> 98
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:
<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 ADVISORY AND SUB-ADVISORY AGREEMENTS
Mississippi Valley Advisors, Inc. ("MVA") serves as investment
adviser to each Portfolio. MVA is an indirect wholly-owned non-banking
subsidiary of Mercantile Bancorporation Inc., a bank holding company
("Mercantile").
For the services provided and expenses assumed pursuant to its
investment advisory agreement with the Fund, MVA is entitled to receive fees,
computed daily and payable monthly, with respect to the Treasury Money Market
and Money Market Portfolios, at the annual rates of .40% of the first $1.5
billion of each such Portfolio's average daily net assets, .35% of the next $1.0
billion of net assets and .25% of net assets in excess of $2.5 billion, and with
respect to the Tax-Exempt Money Market, U.S. Government Securities, Intermediate
Corporate Bond, Bond Index, Government & Corporate Bond, Short-Intermediate
Municipal, Missouri Tax-Exempt Bond, National Municipal Bond, Equity Income,
Equity Index, Growth & Income Equity, Growth Equity, Small Cap Equity, Small Cap
Equity Index, International Equity and Balanced Portfolios, at the annual rates
of .40%, .45%, .55%, .30%, .45%, .55%, .45%, .55%, .75%, .30%, .55%, .75%, .75%,
.40%, 1.00% and .75%, respectively, of the average daily net assets of each
Portfolio, respectively. For the fiscal year or period ended November 30, 1998,
MVA received advisory fees (net of waivers) at the effective annual rates of
.35%, .35%, .35%, .45%, .35%, .24%, .45%, .33%, .45%, .34%, .62%, .23%, .55%,
.75%, .75%, 0%, 1.00% and .75% of the respective average daily net assets of the
Treasury Money Market, Money Market, Tax-Exempt Money Market, U.S. Government
Securities, Intermediate Corporate Bond, Bond Index, Government & Corporate
Bond, Short-Intermediate Municipal,
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<PAGE> 99
Missouri Tax-Exempt Bond, National Municipal Bond, Equity Income, Equity Index,
Growth & Income Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index,
International Equity and Balanced Portfolios.
MVA may from time to time voluntarily reduce all or a portion of
its advisory fee to increase the net income of one or more Portfolios available
for distributions as dividends. The voluntary fee reduction will cause the
return of any such Portfolio to be higher than it would otherwise be in the
absence of such reduction.
In addition, Clay Finlay serves as sub-adviser to the
International Equity Portfolio. For the services provided and expenses assumed
pursuant to its sub-advisory agreement with MVA, Clay Finlay receives from MVA a
fee, computed daily and payable monthly, at the annual rate of .75% of the first
$50 million of the International Equity Portfolio's average daily net assets,
plus .50% of the next $50 million of average daily net assets, plus .25% of
average daily net assets in excess of $100 million. For the fiscal year ended
November 30, 1998, Clay Finlay received sub-advisory fees at the effective
annual rate of .75% of the International Equity Portfolio's average daily net
assets. Clay Finlay bears all expenses incurred by it in connection with its
services under the sub-advisory agreement.
Pursuant to the advisory and sub-advisory agreements, MVA and
Clay Finlay have agreed to provide investment advisory and sub-investment
advisory services, respectively, as described in the Portfolios' Prospectuses.
MVA and Clay Finlay have agreed to pay all expenses incurred by them in
connection with their activities under their respective agreements other than
the cost of securities, including brokerage commissions, if any, purchased for
the Portfolios.
The investment advisory agreement (and sub-advisory agreement for
the International Equity Portfolio) provide that MVA and Clay Finlay,
respectively, shall not be liable for any 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.
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<PAGE> 100
For the fiscal year or period ended November 30, 1998, MVA was
paid advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 983,103 $140,506
Money Market Portfolio $4,836,247 $690,964
Tax-Exempt Money Market Portfolio $ 595,181 $ 85,029
U.S. Government Securities Portfolio $ 459,829 $ 0
Intermediate Corporate Bond Portfolio $ 203,401 $ 91,356
Bond Index Portfolio $ 329,684 $142,709
Government & Corporate Bond Portfolio $ 913,545 $ 0
Short-Intermediate Municipal Portfolio $ 153,355 $ 62,423
Missouri Tax-Exempt Bond Portfolio $ 484,088 $ 0
National Municipal Bond Portfolio $1,389,193 $663,264
Balanced Portfolio $ 944,820 $ 0
Equity Income Portfolio $ 577,324 $280,161
Equity Index Portfolio $ 104,594 $ 35,308
Growth & Income Equity Portfolio $2,595,524 $ 0
Growth Equity Portfolio $ 702,079 $ 0
Small Cap Equity Portfolio $1,776,373 $ 0
International Equity Portfolio $ 731,113 $ 0
</TABLE>
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<PAGE> 101
For the fiscal year or period ended November 30, 1997, MVA (and
with respect to the Growth Equity Portfolio, the predecessor adviser) was paid
advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 544,658 $ 132,471
Money Market Portfolio $3,205,706 $ 734,416
Tax-Exempt Money Market Portfolio $ 518,456 $ 74,067
U.S. Government Securities Portfolio $ 357,824 $ 0
Intermediate Corporate Bond Portfolio(1) $ 0 $ 175,432
Bond Index Portfolio(1) $ 0 $ 312,722
Government & Corporate Bond Portfolio $ 743,332 $ 0
Short-Intermediate Municipal Portfolio $ 0 $ 160,035
Missouri Tax-Exempt Bond Portfolio $ 414,195 $ 0
National Municipal Bond Portfolio $ 0 $1,812,782
Balanced Portfolio $ 885,481 $ 0
Equity Income Portfolio(2) $ 0 $ 681,294
Equity Index Portfolio(3) $ 0 $ 51,115
Growth & Income Equity Portfolio $2,392,991 $ 0
Growth Equity Portfolio(4) $ 86,057 $ 0
Small Cap Equity Portfolio $1,783,322 $ 0
International Equity Portfolio $ 590,822 $ 50,950
</TABLE>
- ----------------------
1. For the period from commencement of operations (February 10, 1997)
through November 30, 1997.
2. For the period from commencement of operations (March 7, 1997) through
November 30, 1997.
3. For the period from commencement of operations (May 1, 1997) through
November 30, 1997.
4. For the period October 1, 1997 through November 30, 1997.
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<PAGE> 102
For the fiscal year or period ended November 30, 1996, MVA was
paid advisory fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 882,177 $179,300
Money Market Portfolio $2,787,213 $628,005
Tax-Exempt Money Market Portfolio $ 334,446 $ 47,714
U.S. Government Securities Portfolio $ 280,649 $ 0
Government & Corporate Bond Portfolio $ 674,595 $ 0
Short-Intermediate Municipal Portfolio $ 0 $147,782
Missouri Tax-Exempt Bond Portfolio $ 327,773 $ 0
The National Municipal Bond Portfolio1 $ 0 $ 70,262
Balanced Portfolio $ 950,916 $ 0
Growth & Income Equity Portfolio $2,231,228 $ 0
Small Cap Equity Portfolio $1,556,817 $ 62
International Equity Portfolio $ 393,668 $140,840
</TABLE>
- ----------------------
1. For period from commencement of operations (November 18, 1996) through
November 30, 1996.
For the fiscal year ended September 30, 1997, MVA (and the
predecessor adviser, Mark Twain Bank) earned advisory fees of $468,080 with
respect to the Predecessor Growth Equity Portfolio, of which $0 was waived. For
the fiscal year ended September 30, 1996, Mark Twain Bank earned advisory fees
of $368,254 with respect to the Predecessor Growth Equity Portfolio, of which
$13,853 was waived.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc., located at 3435 Stelzer Road,
Columbus, Ohio 43219, acts as the Portfolios' administrator (the
"Administrator").
The Administrator generally assists in all aspects of each
Portfolio's administration and operation and also monitors and performs other
services pertaining to the Fund's arrangements under the Administrative Services
Plan described below. For its services, the Administrator is entitled to receive
a fee, computed daily and payable monthly, at the annual rate of .20% (.10% for
the Tax-Exempt Money Market Portfolio) of each Portfolio's average daily net
assets. For the fiscal year or period ended November 30, 1998, the Administrator
received administration fees (net of waivers) at the effective annual rates of
.05%, .05% and .05% of the average daily net assets of the Intermediate
Corporate Bond, National Municipal
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<PAGE> 103
Bond and Equity Income Portfolios, respectively, and .10% of the average daily
net assets of each of the other Portfolios. From time to time, the Administrator
may voluntarily waive all or a portion of the administration fees otherwise
payable by a Portfolio in order to increase the net income available for
distribution to shareholders.
The Administrator has agreed to maintain office facilities for
the Portfolios, furnish the Portfolios with statistical and research data,
clerical, accounting, and certain bookkeeping services, stationery and office
supplies, and certain other services required by the Portfolios, and to compute
the net asset value and net income of the Portfolios. The Administrator prepares
annual and semi-annual reports to the SEC on Form N-SAR, compiles data for and
prepares federal and state tax returns and required tax filings other than those
required to be made by the Fund's custodian and transfer agent, prepares the
Fund's compliance filings with state securities commissions, maintains the
registration or qualification of shares for sale under the securities laws of
any state in which the Fund's shares shall be registered, assists in the
preparation of annual and semi-annual reports to shareholders of record,
participates in the periodic updating of the Fund's Registration Statement,
prepares and assists in the timely filing of notices to the SEC required
pursuant to Rule 24f-2 under the 1940 Act, arranges for and bears the cost of
processing share purchase, exchange and redemption orders, keeps and maintains
the Portfolios' financial accounts and records including calculation of daily
expense accruals, monitors compliance procedures for each of the classes of the
Fund's Portfolios with each Portfolio's investment objective, policies and
limitations, tax matters, and applicable laws and regulations, and generally
assists in all aspects of the Portfolios' operations. The Administrator bears
all expenses in connection with the performance of its services, except that a
Portfolio bears any expenses incurred in connection with any use of a pricing
service to value portfolio securities.
From time to time, the Administrator may voluntarily waive a
portion or all of its fees otherwise payable to it with respect to the Fund's
Portfolios in order to increase the net income available for distribution to
shareholders.
For the fiscal year or period ended November 30, 1998, the
Administrator was paid administration fees, after waivers, as follows:
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<PAGE> 104
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 280,895 $ 280,909
Money Market Portfolio $1,381,828 $1,381,778
Tax-Exempt Money Market Portfolio $ 170,051 $ 0
U.S. Government Securities Portfolio $ 102,187 $ 102,181
Intermediate Corporate Bond Portfolio $ 46,054 $ 61,001
Bond Index Portfolio $ 157,468 $ 15,460
Government & Corporate Bond Portfolio $ 203,015 $ 203,004
Short-Intermediate Municipal Portfolio $ 39,233 $ 39,231
Missouri Tax-Exempt Bond Portfolio $ 107,578 $ 107,574
National Municipal Bond Portfolio $ 318,915 $ 427,432
Balanced Portfolio $ 125,979 $ 125,973
Equity Income Portfolio $ 97,524 $ 131,138
Equity Index Portfolio $ 46,635 $ 46,633
Growth & Income Equity Portfolio $ 471,926 $ 471,900
Growth Equity Portfolio $ 93,613 $ 93,608
Small Cap Equity Portfolio $ 236,856 $ 236,844
International Equity Portfolio $ 73,113 $ 73,109
</TABLE>
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<PAGE> 105
For the fiscal year or period ended November 30, 1997, the
Administrator (and with respect to the Growth Equity Portfolio, the predecessor
administrator) was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 217,115 $121,453
Money Market Portfolio $1,226,946 $743,132
Tax-Exempt Money Market Portfolio $ 148,129 $ 0
U.S. Government Securities Portfolio $ 79,519 $ 79,515
Intermediate Corporate Bond Portfolio(1) $ 17,544 $ 46,250
Bond Index Portfolio(1) $ 104,243 $104,239
Government & Corporate Bond Portfolio $ 165,196 $165,189
Short-Intermediate Municipal Portfolio $ 29,098 $ 29,097
Missouri Tax-Exempt Bond Portfolio $ 92,046 $ 92,042
National Municipal Bond Portfolio(1) $ 181,277 $478,060
Balanced Portfolio $ 118,068 $118,063
Equity Income Portfolio(2) $ 49,963 $131,717
Equity Index Portfolio(3) $ 17,039 $ 17,038
Growth & Income Equity Portfolio $ 435,186 $435,169
Growth Equity Portfolio(4) $ 16,610 $ 1,287
Small Cap Equity Portfolio $ 237,783 $237,775
International Equity Portfolio $ 75,322 $ 54,941
</TABLE>
- ----------------------
1. For the period from commencement of operations (February 10, 1997)
through November 30, 1997.
2. For the period from commencement of operations (March 7, 1997) through
November 30, 1997.
3. For the period from commencement of operations (May 1, 1997) through
November 30, 1997.
4. For the period October 1, 1997 through November 30, 1997.
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<PAGE> 106
For the fiscal year or period ended November 30, 1996, the
Administrator was paid administration fees, after waivers, as follows:
<TABLE>
<CAPTION>
FEES PAID
PORTFOLIOS (AFTER WAIVERS) WAIVERS
---------- --------------- -------
<S> <C> <C>
Treasury Money Market Portfolio $ 304,595 $196,144
Money Market Portfolio $1,055,556 $652,053
Tax-Exempt Money Market Portfolio $ 95,540 $ 0
U.S. Government Securities Portfolio $ 62,335 $ 62,398
Government & Corporate Bond Portfolio $ 149,866 $149,916
Short-Intermediate Municipal Portfolio $ 26,854 $ 26,878
Missouri Tax-Exempt Bond Portfolio $ 72,831 $ 72,846
National Municipal Bond Portfolio(1) $ 7,016 $ 18,530
Balanced Portfolio $ 126,789 $126,784
Growth & Income Equity Portfolio $ 405,497 $405,859
Small Cap Equity Portfolio $ 207,502 $207,666
International Equity Portfolio $ 80,098 $ 26,804
</TABLE>
- ----------------------
1. For period from commencement of operations (November 18, 1996) through
November 30, 1996.
For the fiscal years ended September 30, 1997 and 1996, Federated
Administrative Services, the former administrator of the Predecessor Growth
Equity Portfolio, earned administrative fees of $90,965 and $71,420,
respectively.
The Small Cap Equity Index Portfolio had not commenced operations
as of November 30, 1998.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
Mercantile Trust Company National Association ("Mercantile
Trust"), as assignee of Mercantile Bank National Association, an affiliate of
the Fund and a wholly-owned subsidiary of Mercantile Bancorporation Inc., with
principal offices located at One Mercantile Center, 8th and Locust Streets, St.
Louis, Missouri 63101, serves as Custodian of each Portfolio's assets pursuant
to a Custodian Agreement. In addition, Bankers Trust Company of New York, with
principal offices at 16 Wall Street, New York, New York 10005, serves as the
Sub-Custodian for the International Equity Portfolio. BISYS Fund Services Ohio,
Inc. serves as the Fund's transfer agent and dividend disbursing agent. Its
address is 3435 Stelzer Road, Columbus, Ohio 43219.
Pursuant to an agreement with BISYS Fund Services Ohio, Inc. and
in connection with the shares offered to its customers, a financial institution
(which may include Mercantile or its affiliated or correspondent banks) serves
as sub-transfer agent with respect to
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<PAGE> 107
the underlying beneficial owners of shares. For the account maintenance services
provided, a sub-transfer agent is entitled to receive an annual fee of $30 with
respect to each beneficial owner's holdings in shares (irrespective of the
number of Portfolios in which such shares are held).
Under a Custodian Agreement between the Fund and Mercantile Trust
Mercantile Trust has agreed to (i) maintain a separate account or accounts in
the name of each Portfolio; (ii) receive and disburse money on behalf of each
Portfolio; (iii) collect and receive all income and other payments and
distributions on account of each Portfolio's portfolio securities; (iv) respond
to correspondence relating to its duties; and (v) make periodic reports to the
Fund's Board of Directors concerning the operations of each Portfolio.
Mercantile Trust may, at its own expense, open and maintain a custody account or
accounts on behalf of each Portfolio with other banks or trust companies,
provided that Mercantile Trust shall remain liable for the performance of all of
its custodial duties under the Custodian Agreement, notwithstanding any
delegation. Mercantile Trust is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Portfolios, provided that
Mercantile Trust shall remain responsible for the performance of all of its
duties under the Custodian Agreement and shall hold the Fund harmless from the
acts and omissions of any bank or trust company servicing as sub-custodian.
Pursuant to the terms of the Assignment and Delegation Agreement, Mercantile
Trust National Association remains liable for the acts and omissions of
Mercantile Trust under the Custodian Agreement.
In the opinion of the staff of the SEC, since the Custodian is an
affiliate of the investment adviser, the Fund and the Custodian are subject to
the requirements of Rule 17f-2 under the 1940 Act. Accordingly the Fund and the
Custodian intend to comply with the requirements of such rule.
Pursuant to the Custodian Agreement with the Fund, each Portfolio
pays Mercantile Trust an annual fee. For each Money Market Portfolio this fee is
paid monthly and calculated daily at the rate of $.20 for each $1,000 of each
such Portfolio's average daily net assets plus, in the case of the Tax-Exempt
Money Market Portfolio only, $50 for each interest collection or claim item. For
the Equity and Bond Portfolios (except the International Equity Portfolio), this
fee, which is paid monthly, is calculated as the greater of $6,000 or $.50. For
the International Equity Portfolio, this fee, which is calculated daily and paid
monthly, is .17% of the Portfolio's average daily net assets for the first $50
million; .155% of the Portfolio's average daily net assets for the next $50
million; .13% of the Portfolio's average daily net assets for the next $150
million; and .105% of the Portfolio's average daily net assets thereafter. Each
Equity and Bond Portfolio also pays $15.00 for each purchase, sale or delivery
of a security upon its maturity date, $50.00 for each interest collection or
claim item, $20.00 for each transaction involving GNMA, tax-free or other
non-depository registered items with monthly dividends or interest, $30.00 for
each purchase, sale or expiration of an option contract, $50.00 for each
purchase, sale or expiration of a futures contract, and $15.00 for each
repurchase trade with an institution other than Mercantile Trust. In addition,
each Portfolio pays Mercantile Trust's incremental costs in providing foreign
custody services for any foreign-denominated and foreign-held securities and
reimburses Mercantile Trust for out-of-pocket expenses related to such services.
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<PAGE> 108
BISYS Fund Services Ohio, Inc. also serves as the Fund's transfer
agent and dividend disbursing agent (in those capacities, the "Transfer Agent")
pursuant to a Transfer Agency Agreement. Under the Agreement, the Transfer Agent
has agreed to (i) process shareholder purchase and redemption orders; (ii)
maintain shareholder records for each of the Portfolios' shareholders; (iii)
process transfers and exchanges of shares of the Portfolios; (iv) issue periodic
statements for each of the Portfolios' shareholders; (v) process dividend
payments and reinvestments; (vi) assist in the mailing of shareholder reports
and proxy solicitation materials; and (vii) make periodic reports to the Fund's
Board of Directors concerning the operations of each Portfolio.
DISTRIBUTOR
BISYS Fund Services Limited Services (the "Distributor"), an
affiliate of the Administrator, serves as the Distributor of the Portfolios'
shares pursuant to a Distribution Agreement. Under the Distribution Agreement,
the Distributor, as agent, sells shares of the Portfolios on a continuous basis.
The Distributor has agreed to use appropriate efforts to solicit orders for the
sale of shares. The Distributor also monitors the Fund's arrangements under the
Distribution and Services Plans described below. The Distributor is a registered
broker-dealer with principal offices at 3435 Stelzer Road, Columbus, Ohio 43219.
The Distributor may, at its expense, provide compensation to
dealers in connection with sales of Shares of any of the Portfolios. Such
compensation may include financial assistance to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns regarding one or more of the Portfolios, and/or
other dealer-sponsored special events. In some instances, this compensation will
be made available only to certain dealers whose representatives have sold a
significant amount of such Shares. Compensation will include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will also include the following types of non-cash compensation
offered through sales contests: (1) business and vacation trips, including the
provision of travel arrangements and lodging at resorts, (2) tickets for
entertainment events (such as concerts, cruises and sporting events) and (3)
merchandise (such as clothing, trophies, clocks and pens). Dealers may not use
sales of a Portfolio's Shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Portfolios or their shareholders.
With respect to each Portfolio's Trust Shares, Trust II Shares
and Institutional Shares, no compensation is payable by the Fund to the
Distributor for distribution services. The Distributor is entitled to the
payment of a front-end sales charge on the sale of Investor A Shares of the
Equity and Bond Portfolios as described in the Prospectus for such shares. For
the fiscal years ended November 30, 1998, 1997 and 1996, the Distributor
received front-end sales charges in connection with Investor A share purchases
as follows: U.S. Government Securities Portfolio -- $1,218, $2,052 and $823,
respectively; Government & Corporate Bond Portfolio --
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<PAGE> 109
$8,853, $9,635 and $4,655, respectively; Missouri Tax-Exempt Bond Portfolio --
$75,697, $46,690 and $23,210, respectively; Growth & Income Equity Portfolio --
$171,703, $167,110 and $74,288, respectively; Small Cap Equity Portfolio --
$26,651, $33,777 and $18,763, respectively; and Balanced Portfolio -- $37,468,
$20,227 and $2,705, respectively. For the fiscal years ended November 30, 1998,
1997 and 1996, the Distributor received front-end sales charges in connection
with Investor A share purchases of the International Equity Portfolio of $9,765,
$18,258 and $11,417. For the fiscal years ended November 30, 1998, 1997 and
1996, the Distributor received front-end sales charges in connection with
Investor A Share purchases of the Short-Intermediate Municipal Portfolio of $0,
$0 and $0. For the fiscal years ended November 30, 1998 and 1997 and the period
November 18, 1996 (commencement of operations) through November 30, 1996, the
Distributor received front-end sales charges in connection with Investor A Share
purchases of the National Municipal Bond Portfolio of $9,641, $4,340 and $0,
respectively. For the fiscal year ended November 30, 1998 and for the period
February 10, 1997 (commencement of operations) through November 30, 1997, the
Distributor received front-end sales charges in connection with Investor A
Shares of the Bond Index Portfolio of $1,026 and $13, respectively. For the
fiscal year ended November 30, 1998 and for the period February 10, 1997
(commencement of operations) through November 30, 1997, the Distributor received
front-end sales charges in connection with Investor A Shares of the Intermediate
Corporate Bond Portfolio of $1,662 and $1,114, respectively. For the fiscal year
ended November 30, 1998 and for the period March 7, 1997 (commencement of
operations) through November 30, 1997, the Distributor received front-end sales
charges in connection with Investor A Shares of the Equity Income Portfolio of
$25,690 and $829. For the fiscal year ended November 30, 1998 and for the period
May 1, 1997 (commencement of operations) through November 30, 1997, the
Distributor received front-end sales charges in connection with Investor A
Shares of the Equity Index Portfolio of $11,259 and $3,003. For the fiscal year
ended November 30, 1998 and for the period November 21, 1997 (date Predecessor
Growth Equity Portfolio reorganized into the Growth Equity Portfolio) through
November 30, 1997, the Distributor received front-end sales charges in
connection with Investor A Shares of the Growth Equity Portfolio of $14,772 and
$0. Of these amounts, the Distributor retained $21,393, $0 and $126,
respectively, and MVA and affiliates retained $1,206, $310 and $385,
respectively, with respect to the U.S. Government Securities Portfolio; the
Distributor retained $88 and $0, and MVA and affiliates retained $0 and $0 with
respect to the Intermediate Corporate Bond Portfolio; the Distributor retained
$216 and $0, and MVA and affiliates retained $0 and $0 with respect to the Bond
Index Portfolio; the Distributor retained $1,210, $0 and $0, respectively, and
MVA and affiliates retained $2,025, $6,721, and $3,535, respectively, with
respect to the Government & Corporate Bond Portfolio; the Distributor retained
$9,050, $23 and $416, respectively, and MVA and affiliates retained $2,814,
$4,700 and $5,850, respectively, with respect to the Missouri Tax-Exempt Bond
Portfolio; the Distributor retained $3,014 and $45, and MVA and affiliates
retained $3,395 and $466 with respect to the Equity Income Portfolio; the
Distributor retained $1,574 and $0, and MVA and affiliates retained $2,956 and
$25 with respect to the Equity Index Portfolio; the Distributor retained
$21,393,$2,387, and $1,850 respectively, and MVA and affiliates retained
$46,623, $56,664 and $27,769, respectively, with respect to the Growth & Income
Equity Portfolio; the Distributor retained $1,280 and $0, and MVA and affiliates
retained $3,738 and $0 with respect to the Growth Equity Portfolio; the
Distributor retained $3,284, $184 and $192, respectively, and MVA and affiliates
retained $8,880, $9,915 and $10,277, respectively, with respect to the Small Cap
Equity Portfolio; the Distributor
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<PAGE> 110
retained $6,170, $67 and $92, respectively, and MVA and affiliates retained
$5,029, $9,419 and $1,311, respectively, with respect to the Balanced Portfolio;
the Distributor retained $1,014, $0 and $1, respectively, and MVA and affiliates
retained $2,722, $7,433 and $8,226, respectively, with respect to the
International Equity Portfolio; the Distributor retained $0, $0 and $0,
respectively, and MVA and affiliates retained $0, $0 and $0, respectively, with
respect to the Short-Intermediate Municipal Portfolio; and the Distributor
retained $940, $0 and $0 and MVA and affiliates retained $0, $0 and $0 with
respect to the National Municipal Bond Portfolio.
The Distributor is also entitled to the payment of contingent
deferred sales charges upon the redemption of Investor B Shares of the
Portfolios. For the fiscal years ended November 30, 1998, 1997 and 1996, the
Distributor received contingent deferred sales charges in connection with
Investor B share redemptions as follows: Money Market Portfolio -- $0, $0 and
$0; U.S. Government Securities Portfolio -- $0, $8,968 and $3,640; Government
and Corporate Bond Portfolio -- $30, $4,075 and $4,258; Missouri Tax-Exempt Bond
Portfolio -- $0, $61,906 and $1,763; Growth and Income Equity Portfolio -- $817,
$121,999 and $30,345; Small Cap Equity Portfolio -- $0, $12,870 and $7,267;
International Equity Portfolio -- $0, $8,191 and $5,763; and Balanced Portfolio
- -- $1,053, $9,311 and $1,216. For the fiscal years ended November 30, 1998 and
1997 and the period November 18, 1996 (commencement of operations) through
November 30, 1996, the Distributor received $0, $34,256 and $0 in contingent
deferred sales charges in connection with Investor B Share redemptions of the
National Municipal Bond Portfolio. For the fiscal year ended November 30, 1998
and for the period March 7, 1997 (commencement of operations) through November
30, 1997, the Distributor received $0 and $10,382 in contingent deferred sales
charges in connection with Investor B Share redemptions of the Equity Income
Portfolio. For the fiscal year ended November 30, 1998 and for the period
November 21, 1997 (date Predecessor Growth Equity Portfolio reorganized into the
Growth Equity Portfolio) through November 30, 1997, the Distributor received $0
and $0 in contingent deferred sales charges in connection with Investor B Share
redemptions of the Growth Equity Portfolio. All such amounts were assigned to
MVA pursuant to the financing arrangement between the Distributor and MVA
described below under "The Plans -- Distribution and Services Plans."
The following table shows all sales charges, commissions and
other compensation received by the Distributor directly or indirectly from the
Fund's Portfolios during the fiscal year ended November 30, 1998:
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<PAGE> 111
<TABLE>
<CAPTION>
Brokerage
Commissions in
Net Underwriting Compensation on Connection with
Discounts and Redemption and Portfolio Other
Portfolio(4) Commissions(1) Repurchase(2) Transactions Compensation(3)
------------ -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Treasury Money $ 0 $ 0 $ 0 $ 456,747
Market
Money Market $ 0 $ 0 $ 0 $2,029,720
Tax-Exempt Money $ 0 $ 0 $ 0 $ 106,290
Market
U.S. Government $ 4,242 $ 3,024 $ 1,218 $ 37,777
Securities
Intermediate Corporate $ 1,662 $ 0 $ 1,662 $ 5,868
Bond
Bond Index $ 1,026 $ 0 $ 1,026 $ 15,363
Government & $ 16,047 $ 7,164 $ 8,883 $ 78,230
Corporate Bond
Short-Intermediate $ 0 $ 0 $ 0 $ 57
Municipal
Missouri Tax- $119,412 $ 43,715 $ 75,697 $ 68,057
Exempt Bond
National Municipal $ 16,655 $ 7,014 $ 9,641 $ 7,380
Bond
Balanced $ 59,092 $ 20,571 $ 38,521 $ 238,482
Equity Income $ 41,061 $ 15,371 $ 25,690 $ 5,432
Equity Index $ 11,259 $ 0 $ 11,259 $ 19,779
Growth & Income $286,586 $114,066 $172,520 $ 530,876
Equity
Growth Equity $ 23,197 $ 8,425 $ 14,772 $ 28,183
Small Cap Equity $ 36,548 $ 9,897 $ 26,651 $ 149,308
International Equity $ 12,613 $ 2,848 $ 9,765 $ 38,207
</TABLE>
- ----------------------
(1) Represents amounts received from front-end sales charges on Investor A
Shares and commissions received in connection with sales of Investor B
Shares.
(2) Represents amounts received from contingent deferred sales charges on
Investor B Shares. The basis on which such sales charges are paid is
described in the Prospectus relating to Investor B Shares. All such
amounts were assigned to MVA pursuant to the financing arrangements
between the Distributor and MVA described below.
(3) Represents payments made under the Administrative Services Plans and
Distribution and Services Plans that have been adopted by the Fund (see
discussion below).
(4) The Small Cap Equity Index Portfolio had not commenced operations as of
November 30, 1998.
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<PAGE> 112
THE PLANS
DISTRIBUTION AND SERVICES PLANS. The Fund has adopted separate
Distribution and Services Plans with respect to Investor A Shares and Investor B
Shares of the Portfolios pursuant to the 1940 Act and Rule 12b-1 thereunder. Any
material amendment to any of these Plans or arrangements with the Distributor or
Service Organizations (which may include affiliates of the Fund's Adviser) must
be approved by a majority of the Board of Directors, including a majority of the
directors who are not "interested persons" of the Fund as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors") and by a majority of the Investor A Shares or
Investor B Shares, respectively, of the Portfolio. Pursuant to the Plans, the
Fund may enter into Servicing Agreements with broker-dealers and other
organizations ("Servicing Agreements") that purchase Investor A Shares or
Investor B Shares of a Portfolio. The Servicing Agreements provide that the
Servicing Organizations will render certain shareholder administrative support
services to their customers who are the record or beneficial owners of Investor
A Shares or Investor B Shares. Services provided pursuant to the Servicing
Agreements may include such services as providing information periodically to
customers showing their positions in Investor A Shares or Investor B Shares and
monitoring services for their customers who have invested in Investor A Shares
or Investor B Shares, including the operation of telephone lines for daily
quotations of return information.
Under the Distribution and Services Plans, the Fund may pay (i)
the Distributor or another person for distribution services provided and
expenses assumed and (ii) Service Organizations for shareholder administrative
services provided pursuant to servicing agreements in connection with Investor A
Shares or Investor B Shares of a Portfolio. Payments to the Distributor are to
compensate it for distribution assistance and expenses assumed and activities
primarily intended to result in the sale of Investor A Shares or Investor B
Shares, including compensating dealers and other sales personnel (which may
include affiliates of the Fund's Adviser), direct advertising and marketing
expenses and expenses incurred in connection with preparing, printing, mailing
and distributing or publishing advertisements and sales literature, for printing
and mailing Prospectuses and Statements of Additional Information (except those
used for regulatory purposes or for distribution to existing shareholders), and
costs associated with implementing and operating the Distribution and Services
Plan. In addition, payments under the Distribution and Services Plan for
Investor B Shares will be used to pay for or finance sales commissions and other
fees payable to Service Organizations and other broker-dealers who sell Investor
B Shares.
Service Organizations and other broker/dealers receive
commissions from the Distributor for selling Investor B Shares, which are paid
at the time of the sale. These commissions approximate the commissions payable
with respect to sales of Investor A Shares. The distribution fees payable under
the Distribution and Services Plan for Investor B Shares (at an annual rate of
.75%) are intended to cover the expense to the Distributor of paying such
up-front commissions, and the contingent deferred sales charge is calculated to
charge the investor with any shortfall that would occur if Investor B Shares are
redeemed prior to the expiration of the eight year period, after which Investor
B Shares automatically convert to Investor A Shares. To provide funds for the
payment of up-front sales commissions, the Distributor has entered into
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<PAGE> 113
an agreement with MVA pursuant to which MVA provides funds for the payment of
commissions and other fees payable to Service Organizations and broker/dealers
who sell Investor B Shares. Under the terms of that agreement, the Distributor
has assigned to MVA the fees which may be payable from time to time to the
Distributor under the Distribution and Services Plan for Investor B Shares and
the contingent deferred sales charges payable to the Distributor with respect to
Investor B Shares.
Under the Distribution and Services Plan for Investor A Shares,
payments by the Fund for distribution expenses may not exceed .10% (annualized)
of the average daily net asset value of a Portfolio's outstanding Investor A
Shares and payments for shareholder administrative servicing expenses may not
exceed .20% (annualized) of the average daily net asset value of a Portfolio's
outstanding Investor A Shares.
Under the Distribution and Services Plan for Investor B Shares,
payments by the Fund for distribution expenses may not exceed .75% (annualized)
of the average daily net asset value of a Portfolio's outstanding Investor B
Shares and payments for shareholder administrative servicing expenses may not
exceed .25% (annualized) of the average daily net asset value of a Portfolio's
outstanding Investor B Shares.
Actual distribution expenses paid by the Distributor with respect
to Investor B Shares for any given year may exceed the distribution fees and
contingent deferred sales charges received with respect to those Shares. These
excess expenses may be reimbursed by Investor B shareholders out of contingent
deferred sales charges and distribution payments in future years as long as the
Distribution and Services Plan for Investor B Shares is in effect.
ADMINISTRATIVE SERVICES PLANS. Separate Administrative Services
Plans have been adopted with respect to Trust Shares and Institutional Shares of
the Portfolios. Pursuant to the Administrative Services Plan, Trust and
Institutional Shares are sold to banks and other financial institutions (which
may include Mercantile Trust or its affiliated or correspondent banks) acting on
behalf of their qualified accounts (such financial institutions collectively,
the "Service Organizations") which agree to provide certain shareholder
administrative services for their clients or account holders (collectively, the
"customers") who are the beneficial owners of such Shares. The holders of Trust
and Institutional Shares bear their pro rata portion of the fees which may be
paid to Service Organizations for such services at an annual rate of up to .25%
for the Money Market Portfolios and up to .30% for the Equity and Bond
Portfolios of the average daily net assets of a Portfolio's Trust and
Institutional Shares owned beneficially by a Service Organization's customers.
SERVICE ORGANIZATIONS
Pursuant to each Administrative Services Plan and each
Distribution and Services Plan described above, the Fund may enter into
Servicing Agreements with banks, trust departments, and other financial
institutions ("Trust Servicing Agreements") and with broker-dealers and other
organizations ("Servicing Agreements") that purchase Trust Shares, Institutional
Shares, Investor A Shares or Investor B Shares of a Portfolio, respectively. The
Servicing Agreements provide that the Service Organizations receiving such
compensation,
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<PAGE> 114
which may include Mercantile Trust and its affiliates, to perform certain
shareholder administrative support services to their customers who are the
record or beneficial owners of Trust Shares, Institutional Shares, Investor A
Shares or Investor B Shares, respectively. Services provided pursuant to the
Servicing Agreements may include some or all of the following services: (i)
processing dividend and distribution payments from the Portfolios on behalf of
customers; (ii) providing information periodically to customers showing their
positions in Trust, Institutional, Investor A Shares or Investor B Shares; (iii)
arranging for bank wires; (iv) responding to routine customer inquiries relating
to services performed by the particular Service Organization; (v) providing
sub-accounting with respect to shares owned of record or beneficially by
customers or the information necessary for sub-accounting; (vi) as required by
law, forwarding shareholder communications (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (vii) forwarding to customers proxy statements
and proxies containing any proposals regarding Servicing Agreements or the
related Plan; (viii) aggregating and processing purchase, redemption, and
exchange requests from customers and placing net purchase and redemption orders
with the Fund's Distributor; (ix) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (x) maintaining records relating to each customer's
share transactions; or (xi) other similar services if requested by the Fund and
permitted by law. In addition, Service Organizations may also provide dedicated
facilities and equipment in various local locations to serve the needs of
investors, including walk-in facilities, 800 numbers, and communication systems
to handle shareholder inquiries, and in connection with such facilities, provide
on-site management personnel and monitoring services for their customers who
have invested in Investor A or Investor B Shares, including the operation of
telephone lines for daily quotations of return information.
Under the Servicing Agreements and upon notice to the Fund, a
Service Organization may subcontract with one or more entities for the
performance of certain services provided under its Servicing Agreements with the
Fund. Such Service Organization shall be fully responsible to the Fund for the
acts or omissions of any sub-contractor as it would be for its own acts or
omissions. The fees payable to any sub-contractor are paid by the Service
Organization out of the fees it receives from the Fund.
The Fund understands that Service Organizations providing such
administrative services may also charge fees to their customers beneficially
owning such Shares. These fees would be in addition to any amounts which may be
received by such a Service Organization under its Servicing Agreement with the
Fund. The Fund's Servicing Agreements require a Service Organization to disclose
to its customers any compensation payable to the Service Organization by a
Portfolio and any other compensation payable by its customers in connection with
their investment in such Shares. Customers of such Service Organizations
receiving servicing fees should read this Statement of Additional Information in
light of the terms governing their accounts with their Service Organization.
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<PAGE> 115
For the fiscal year or period ended November 30, 1998, pursuant
to the Distribution and Services Plan for Investor A Shares, the Portfolios
(other than the Small Cap Equity Index Portfolio, which had not commenced
operations as of November 30, 1998) were charged the following amounts:
<TABLE>
DISTRIBUTION AND SERVICES PLAN - INVESTOR A SHARES
--------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
PAID PAID
TOTAL TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------- ----------- ------ ------
<S> <C> <C> <C> <C>
Treasury Money Market $ 34,881 $ 0 $0 $ 1,569
Money Market $417,872 $1,692 $0 $18,748
Tax-Exempt Money Market $ 34,084 $ 292 $0 $ 821
U.S. Government Securities $ 14,566 $ 400 $0 $11,556
Intermediate Corporate Bond $ 3,994 $ 401 $0 $ 244
Bond Index $ 498 $ 41 $0 $ 303
Government & Corporate Bond $ 14,977 $ 502 $0 $10,996
Short-Intermediate Municipal $ 37 $ 30 $0 $ 4
Bond
Missouri Tax-Exempt Bond $ 48,116 $1,304 $0 $21,324
National Municipal Bond $ 3,288 $ 214 $0 $ 1,562
Balanced $ 40,957 $ 450 $0 $22,010
Equity Income $ 2,868 $ 499 $0 $ 1,087
Equity Index $ 1,625 $ 11 $0 $ 196
Growth & Income Equity $151,609 $3,634 $0 $78,047
Growth Equity $ 11,411 $ 47 $0 $ 4,454
Small Cap Equity $ 44,946 $3,390 $0 $20,481
International Equity $ 9,280 $1,370 $0 $ 3,719
</TABLE>
All amounts paid under the Distribution and Services Plan for
Investor A Shares for the fiscal year ended November 30, 1998 were attributable
to payments to broker-dealers. For the fiscal year ended November 30, 1998, no
brokers of record waived fees.
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<PAGE> 116
For the fiscal year or period ended November 30, 1998, pursuant
to the Distribution and Services Plan for Investor B Shares of the CDSC
Portfolios, the CDSC Portfolios were charged the following amounts:
<TABLE>
DISTRIBUTION AND SERVICES PLAN - INVESTOR B SHARES
--------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
PAID PAID
TOTAL TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------- ----------- ------ ------
<S> <C> <C> <C> <C>
Money Market $ 717 $0 $ 717 $ 0
U.S. Government Securities $ 3,901 $0 $ 3,901 $ 0
Government & Corporate $ 5,773 $0 $ 5,773 $ 0
Bond
Missouri Tax-Exempt Bond $19,941 $0 $19,941 $ 0
National Municipal Bond $ 4,092 $0 $ 4,092 $ 0
Balanced $ 8,234 $0 $ 8,234 $ 0
Equity Income $ 2,564 $0 $ 2,564 $ 0
Growth & Income Equity $79,030 $0 $79,030 $ 0
Growth Equity $ 881 $0 $ 881 $ 0
Small Cap Equity $14,972 $0 $14,922 $ 0
International Equity $ 6,032 $0 $ 6,032 $ 0
</TABLE>
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<PAGE> 117
For the fiscal year or period ended November 30, 1998, pursuant
to the Administrative Services Plan for Trust Shares, the Portfolios (other than
the Small Cap Equity Index Portfolio which had not commenced operations as of
November 30, 1998) were charged the following amounts:
<TABLE>
ADMINISTRATIVE SERVICES PLAN - TRUST SHARES
-------------------------------------------
<CAPTION>
AMOUNT AMOUNT
PAID PAID
TOTAL TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------- ----------- ------ ------
<S> <C> <C> <C> <C>
Treasury Money Market $ 413,373 $0 $0 $ 236,972
Money Market $1,504,723 $0 $0 $1,504,723
Tax-Exempt Money $ 72,206 $0 $0 $ 77,206
Market
U.S. Government $ 0 $0 $0 $ 0
Securities
Intermediate Corporate $ 0 $0 $0 $ 0
Bond
Bond Index $ 0 $0 $0 $ 0
Government & Corporate $ 147 $0 $0 $ 147
Bond
Short-Intermediate $ 0 $0 $0 $ 0
Municipal
Missouri Tax-Exempt $ 0 $0 $0 $ 0
Bond
National Municipal Bond $ 0 $0 $0 $ 0
Balanced $ 21 $0 $0 $ 21
Equity Income $ 0 $0 $0 $ 0
Equity Index $ 0 $0 $0 $ 0
Growth and Income Equity $ 732 $0 $0 $ 732
Growth Equity $ 0 $0 $0 $ 0
Small Cap Equity $ 0 $0 $0 $ 0
International Equity $ 0 $0 $0 $ 0
</TABLE>
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For the fiscal year ended November 30, 1998, pursuant to the
Administrative Services Plan for Institutional shares, the Portfolios (other
than the Small Cap Equity Index Portfolio which had not commenced operations as
of November 30, 1998) paid the following amounts:
<TABLE>
ADMINISTRATIVE SERVICES PLAN - INSTITUTIONAL SHARES
---------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
PAID PAID
TOTAL TO THE AMOUNT PAID TO AFFILIATES
PORTFOLIOS CHARGED DISTRIBUTOR TO MVA OF MVA
- ---------- ------- ----------- ------ ------
<S> <C> <C> <C> <C>
Treasury Money Market $ 8,493 $0 $0 $ 8,493
Money Market $106,408 $0 $0 $102,837
U.S. Government $ 19,310 $0 $0 $ 18,508
Securities
Intermediate Corporate $ 1,874 $0 $0 $ 1,874
Bond
Bond Index $ 14,865 $0 $0 $ 14,865
Government & Corporate $ 57,333 $0 $0 $ 51,822
Bond
Balanced $189,270 $0 $0 $162,056
Equity Income $ 0 $0 $0 $ 0
Equity Index $ 18,154 $0 $0 $ 17,046
Growth and Income $299,505 $0 $0 $277,820
Equity
Growth Equity $ 15,891 $0 $0 $ 15,889
Small Cap Equity $ 89,440 $0 $0 $ 80,357
International Equity $ 22,895 $0 $0 $ 21,844
Short Intermediate $ 20 $0 $0 $ 20
</TABLE>
OTHER PLAN INFORMATION. The Board of Directors has approved each
Plan and its respective arrangements with the Distributor, Service Organizations
and broker-dealer based on information provided by the Fund's service
contractors that there is a reasonable likelihood that these Plans and
arrangements will benefit the Portfolios and their shareholders. Pursuant to
each Plan, the Board of Directors reviews, at least quarterly, a written report
of the amounts of distribution fees and servicing fees expended pursuant to each
Plan and the Service Organizations and the purposes for which the expenditures
were made. So long as the Fund has one or more of the above described Plans in
effect, the selection and nomination of the members of the Board of Directors
who are not "interested persons" (as defined in the 1940 Act) of the Fund will
be committed to the discretion of such Disinterested Directors.
Depending upon the terms governing the particular customer
accounts, Service Organizations and other institutions may also charge their
customers directly for cash management and other services provided in connection
with the accounts, including, for example, account maintenance fees,
compensating balance requirements, or fees based upon account transactions,
assets, or income. An investor should therefore read the Prospectuses and
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this Statement of Additional Information in light of the terms of his or her
account with a Service Organization, or other institution before purchasing
shares of a Portfolio.
REGULATORY MATTERS. Banking laws and regulations currently
prohibit a bank holding company registered under the Federal Bank Holding
Company Act of 1956 or any affiliate thereof from sponsoring, organizing, or
controlling the shares of a registered, open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
issuing, underwriting, selling, or distributing securities such as Shares of the
Portfolios. Such banking laws and regulations do not prohibit such a holding
company or affiliate, or banks, from acting as investment adviser, transfer
agent, or custodian to such an investment company, or from purchasing shares of
such a company as agent for and upon the order of customers. Mercantile Trust,
MVA, Service Organizations that are banks or bank affiliates, and broker-dealers
that are bank affiliates are subject to such laws and regulations, but believe
they may perform the services for the Portfolios contemplated by their
respective agreements and Prospectuses and this Statement of Additional
Information without violating applicable banking laws and regulations. In
addition, state securities laws on this issue may differ from the interpretation
of federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action
prohibit or restrict the activities of such companies in connection with the
provision of services on behalf of the Portfolios and their shareholders, the
Fund might be required to alter materially or discontinue its arrangements with
such companies and change its method of operation. It is not expected that
investors would suffer any adverse financial consequences as a result of any of
these occurrences.
If current restrictions preventing a bank from legally
sponsoring, organizing, controlling or distributing Shares of an investment
company were relaxed, Mercantile Trust or an affiliate of Mercantile Trust,
would consider the possibility of offering to perform additional services for
the Portfolios. It is not possible, of course, to predict whether or in what
form such legislation might be enacted or the terms upon which Mercantile Trust,
or such an affiliate, might offer to provide such services.
Conflict of interest restrictions may apply to the receipt of
compensation paid pursuant to a Servicing Agreement by a Portfolio to a
financial intermediary in connection with the investment of fiduciary funds in a
Portfolio's Shares. Institutions, including banks regulated by the Comptroller
of the Currency and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, should consult legal counsel before entering into Servicing
Agreements.
EXPENSES. Except as noted above, the Fund's service contractors
bear all expenses in connection with the performance of their services, except
that the Distributor is compensated pursuant to the Distribution and Services
Plans as described above. Expenses are deducted from the total income of each
Portfolio before dividends and distributions are paid. These expenses include,
but are not limited to, fees paid to the Adviser and Administrator, transfer
agency fees, fees and expenses of officers and directors who are not affiliated
with the
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<PAGE> 120
Adviser or the Distributor, taxes, interest, legal fees, custodian fees,
auditing fees, 12b-1 fees, servicing fees, certain fees and expenses in
registering and qualifying a Portfolio and its Shares for distribution under
Federal and state securities laws, costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes and for
distribution to existing shareholders, the expense of reports to shareholders,
shareholders' meetings and proxy solicitations, fidelity bond and directors and
officers liability insurance premiums, the expense of using independent pricing
services and other expenses which are not expressly assumed by the Adviser,
Distributor or Administrator under their respective agreements with the Fund.
The Fund also pays for brokerage fees, commissions and other transaction
charges, if any, in connection with the purchase and sale of portfolio
securities. Any general expenses of the Fund that are not readily identifiable
as belonging to a particular Portfolio will be allocated among all Portfolios by
or under the direction of the Board of Directors in a manner the Board
determines to be fair and equitable. Any expenses relating only to a particular
class of Shares within a Portfolio will be borne solely by such class.
INDEPENDENT AUDITORS
For the fiscal year or period ended November 30, 1998, KPMG LLP,
certified public accountants, with offices at Two Nationwide Plaza, Columbus,
Ohio 43215, served as independent auditors for the Fund. KPMG LLP performs an
annual audit of the Fund's financial statements. Reports of its activities are
provided to the Fund's Board of Directors. The financial statements dated
November 30, 1998, which are incorporated by reference into this Statement of
Additional Information, have been audited by KPMG LLP, whose report thereon is
incorporated by reference.
COUNSEL
Drinker Biddle & Reath LLP (of which W. Bruce McConnel, III,
Secretary of the Fund, is a partner), Suite 1100, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496, is counsel to the Fund and will pass upon
certain legal matters on its behalf.
MISCELLANEOUS
As of March 2, 1999, Mercantile held of record 99.99% and 81.78%
of the outstanding Institutional and Trust II Shares, respectively, in the
Treasury Money Market Portfolio; 92.39% and 79.76% of the outstanding
Institutional and Trust II Shares, respectively, in the Money Market Portfolio;
98.53% of the outstanding Trust II Shares in the Tax-Exempt Money Market
Portfolio; 99.96% and 96.51% of the outstanding Institutional and Trust Shares,
respectively, in the U.S. Government Securities Portfolio; 99.89% and 98.39% of
the outstanding Institutional and Trust Shares, respectively, in the
Intermediate Corporate Bond Portfolio; 88.26% and 99.03% of the outstanding
Institutional and Trust Shares, respectively, in the Government & Corporate Bond
Portfolio; 99.99% and 96.93% of the outstanding Institutional and Trust Shares,
respectively, in the Bond Index Portfolio;
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97.25% of the outstanding Trust Shares in the Short-Intermediate Municipal
Portfolio; 99.02% of the outstanding Trust Shares in the Missouri Tax-Exempt
Bond Portfolio; 99.60% of the outstanding Trust Shares in the National Municipal
Bond Portfolio; 96.02% and 86.49% of the outstanding Institutional and Trust
Shares, respectively, in the Growth & Income Equity Portfolio; 94.39% and 56.13%
of the outstanding Institutional and Trust Shares, respectively, in the Small
Cap Equity Portfolio; 96.77% and 91.60% of the outstanding Institutional and
Trust Shares, respectively, in the International Equity Portfolio; 69.35% of the
outstanding Trust Shares in the Equity Income Portfolio; 99.75% and 99.24%, of
the outstanding Institutional and Trust Shares, respectively, in the Equity
Index Portfolio; 91.21% and 99.98% of the outstanding Institutional and Trust
Shares, respectively, in the Balanced Portfolio; 99.99% and 77.56% of the
outstanding Institutional and Trust Shares, respectively, in the Growth Equity
Portfolio, and 100.00% and 98.54% of the outstanding Institutional and Trust
Shares, respectively, in the Small Cap Equity Index, as fiduciary or agent on
behalf of its customers. Mercantile is a wholly owned subsidiary of Mercantile
Bancorporation Inc., a Missouri corporation. As of March 2, 1999, Mercantile
Bank National Association and its affiliates possessed, of record on behalf of
their underlying customer accounts, voting or investment power with respect to
more than 25% of the Fund's outstanding Shares. Therefore, Mercantile Bank
National Association may be deemed to be a controlling person of the Fund within
the meaning of the 1940 Act.
As of the same date, the following institutions also owned of
record 5% or more of the Treasury Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares- BISYS Fund
Services, Mercantile EOD Sweep, 3435 Stelzer Road, Columbus, OH, 43219 (50.40%);
Hare & Company, One Wall Street, 2nd Floor, New York, NY 10286 (40.20%); Trust
II Shares- Pacific Century Trust, P.O. Box 3170, Honolulu, HI 96802-3170
(5.88%); Pacific Century Trust, P.O. Box 3170, Honolulu, HI 96802-3170 (12.34%);
Mercantile Bank N.A. Trust, P.O. Box, 387 Main Post Office, St. Louis, MO
63166-0000 (81.78%); Investor A Shares - National Financial Services Corp., The
Benefit of Our Customers, 200 Liberty Street, 5th Floor, New York, NY 10281
(99.50%); Institutional Shares - Mercantile Bank of St. Louis N.A., P.O. Box
387, St. Louis, MO 63166-0000, (99.99%).
As of the same date, the following institutions also owned of
record 5% or more of the Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - BISYS Fund
Services, Mercantile EOD Sweep, 3435 Stelzer Road, Columbus, OH 43219 (98.20%);
Trust II Shares- Pacific Century Trust, P.O. Box 3170, Honolulu, HI 96802-3170
(8.89%); Pacific Century Trust, P.O. Box 3170, Honolulu, HI 96802-3170 (9.78%);
Mercantile Bank N.A. Trust, P.O. Box, 387 Main Post Office, St. Louis, MO
63166-0000 (79.76%); Investor A Shares - National Financial Services Corp., For
the Benefit of Our Customers, 200 Liberty St., 5th Floor, New York, NY 10281
(94.63%); Investor B Shares - Alberta Buenemann and Ernie W. Buenemann, Alberta
Buenemann Revocable Living Trust, 1649 Sand Run Road, Troy, MO 63379 (6.23%);
Homer R. Turner and Edna M. Turner, Edna M. Turner Trust, 33409 E. Pink Hill
Rd., Grain Valley, MO 64029 (10.21%); John E. Hill, 806 Bitterfield Dr.,
Ballwin, MO 63011 (8.41%); Sandra L. Hill, 806 Bitterfield Dr., Ballwin, MO
63011 (8.41%); Lori L. Mercer, 11393 Lakeside Dr.,
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<PAGE> 122
Burlington, IA 52601 (13.75%); Institutional Shares - Mercantile Bank of St.
Louis N.A., P.O. Box 387, St. Louis, MO 63166-0000 (92.39%).
As of the same date, the following institutions also owned of
record 5% or more of the Tax-Exempt Money Market Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - BISYS Fund
Services, Mercantile EOD Sweep, 3435 Stelzer Road, Columbus, OH 43219 (100.00%);
Trust II Shares- Mercantile Bank N.A. Trust, P.O. Box 387 Main Post Office, St.
Louis, MO 63166-0000 (98.53%); Investor A Shares- National Financial Services
Corp., The Benefit of Our Customers, 200 Liberty St., 5th Floor, New York, NY
10281 (95.85%)
As of the same date, the following institutions also owned of
record 5% or more of the U.S. Government Securities Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, P.O. Box 387, St. Louis, MO 63166-0387 (35.28%); Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (61.22%); Investor A Shares - Edmund C.
Albrecht, 236 Carlyle Lake Dr., St. Louis, MO 63141 (6.74%); Investor B Shares -
NFSC FEBO M22-038563, NFSC FMTC IRA, FBO Betty J. Kolseth, 300 N 4th St. Apt.
2009, St. Louis, MO 63102 (5.27%); Evelyn Joan Sutton, 510 N Main Cross, Bowling
Green, MO 63334 (5.70%); NFSC FEBO M22-038326, NFSC FMTC IRA, FBO Lynette A.
Broeg, 60 Frontenac Dr., St. Louis, MO 63131 (6.30%); Richard Dell Woods, 3114
Pickett Rd., St. Joseph, MO 64503 (8.71%); NSFC FEBO M26-044865, June M. Swift,
2823 Seneca, St. Joseph, MO 64507 (8.98%); NFSC FEBO M22-805556, Mary L. Allen,
5514 Newport, St. Louis, MO 63116 (16.39%); NFSC FEBO M26-945293, NFSC FMTC IRA
Rollover, FBO Charlene V. Brunk, 17825 Hwy. 21, St. Joseph, MO 64505 (24.21%);
Charlie J. Vancil, 3073 Valley Drive, Festus, MO 63028 (5.16%); Institutional
Shares - Locust & Company, P.O. Box 387, St. Louis, MO 63166-0000 (94.74%);
Mercantile Bank, P.O. Box 387, St. Louis, MO 63166 (5.22%).
As of the same date, the following institutions also owned of
record 5% or more of the Intermediate Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, P.O. Box 387, St. Louis, MO 63166-0387 (9.11%); Olive & Company,
Mercantile Bank, P.O. Box 387, St. Louis, MO 63166-0387 (89.27%); Investor A
Shares - Jill Larson, 10835 Autillo Way, San Diego, CA 92127 (5.44%); George
Gregory Timmons, 1332 E. Desert Cv., Phoenix, AZ 85020 (5.44%); Lynn C.
Prescott, Lynn C. Prescott Trust, UAD 8-30-90, 4180 Rincon Circle, Palo Alto, CA
94306-3138 (11.20%); NFSC FEBO M24-007498, Dena M. Ver Steeg, 713 Jefferson St.,
Pella, IA 50219 (6.26%); Alice Ann Jones, 213 S. Clay /# 2-S, Kirkwood, MO 63122
(8.57%); Robert J. Barclay, 1612 Tamarack Drive St. Charles, MO 63301 (12.93%);
James A. Lynch, 915 Highmont Drive, Ferguson, MO 63135 (17.18%); David L. Otten
Sr., 300 Derhake Road, Florissant MO 63031 (19.98%); Institutional Shares -
Locust & Company, P.O. Box 387, St.
Louis, MO 63166-0387 (99.89%).
As of the same date, the following institutions also owned of
record 5% or more of the Bond Index Portfolio's outstanding shares as fiduciary
or agent on behalf of their customers: Trust Shares - Olive & Company, P.O. Box
387, St. Louis, MO 63166-0387 (96.93%); Investor A Shares - David Bornemann and
Janet L. Bornemann, 27 Lincord Drive,
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<PAGE> 123
St Louis, MO 63128 (5.99%); NFSC FEBO M27-901393, Judith T. Betz, 6539 Pernod,
St. Louis, MO 63139 (7.97%); Gertrude Louise Eschbacher, 11901 Wornall Road,
Kansas City, MO 64145-1698 (8.18%); Mary Therese Eschbacher, 1262 Moorlands
Drive, St. Louis, MO 63117-1527 (8.18%); James A. Lynch, 915 Highmont Drive,
Ferguson, MO 63135 (13.70%); David L. Otten Sr., IRA, 300 Derhake Road,
Florissant MO 63031 (15.84%); Robert J. Barclay, 1612 Tamarack Dr., St. Charles,
MO 63301 (5.12%); Institutional Shares - Locust & Company, P.O. Box 387, St.
Louis, MO 63166-0387 (99.99%).
As of the same date, the following institutions also owned of
record 5% or more of the Government & Corporate Bond Portfolio's outstanding
shares as fiduciary or agent on behalf of their customers: Trust Shares - Locust
& Company, P.O. Box 387, St. Louis, MO 63166-0387 (42.95%); Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (56.08%); Investor A Shares - Shirley R.
Schuepbach and Janet Gillespie, Shirley R. Schuepbach Revocable Living Trust,
13738 Michael Road, Highland, IL 62249 (5.03%); Eugene F. Tucker, 1517 Rue
Renee, St. Louis, MO 63122 (6.58%); Investor B Shares - Homer R. Turner and Edna
M. Turner, Edna M. Turner Trust DTD 04-17-90, 33409 E. Pink Hill Road, Grain
Valley, MO 64029 (6.34%); NFSC FEBO M25-025500, NFSC FMTC IRA, FBO Jackie L.
Stricklin, 10 Willowood Dr., North Little Rock, AR 72117 (8.35%); NFSC FEBO
M22-009954, Joseph H. Manda, 951 W. N. Service Road, Wright City, MO 63390
(6.70%); Institutional Shares - Locust & Company, P.O. Box 387, St. Louis, MO
63166-0000 (67.96%); Mercantile Bank, P.O. Box 387, St. Louis, MO 63166
(20.29%); BISYS Brokerage Services Inc., P.O. Box 4054, Concord, CA 94524
(11.74%).
As of the same date, the following institutions also owned of
record 5% or more of the Short-Intermediate Municipal Bond Portfolio's
outstanding shares as fiduciary or agent on behalf of their customers: Trust
Shares - Olive & Company, P.O. Box 387, St. Louis, MO 63166-0387 (97.24%);
Investor A Shares - NFSC FEBO M22-846333, Bettina H. Clouse Trustee, The Bettina
H. Clouse Revocable Trust, 1245 Nancy Jo Place, St. Louis, MO 63122 (91.73%);
James Sutten, P.O. Box 2465, Inverness, FL. 34451-2465 (8.18%).
As of the same date, the following institutions also owned of
record 5% or more of the Missouri Tax-Exempt Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, P.O. Box 387, St. Louis, MO 63166-0387 (6.24%); Olive & Company, P.O.
Box 387, St. Louis, MO 63166-0387 (92.78%); Investor B Shares - NFSC FEBO
M22-901580, Alban C. Hurlebaus, 6144 S. Grand, St. Louis, MO 63111 (5.66%); NFSC
FEBO M22-402761, Kenneth Russell, 320 Lake Apollo, Hannibal, MO 63401 (5.32%).
As of the same date, the following institutions also owned of
record 5% or more of the National Municipal Bond Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Olive &
Company, P.O. Box 387, St. Louis, MO 63166-0387 (99.60%); Investor A Shares -
Gail P. Ruga, 207 Aintree Road, Rolla, MO 65401-3760 (5.60%); Kim P. Wheeler,
1003 S. 19th, Rogers, AR 72758 (5.60%); NFSC FEBO M22-406252 Thomas G. Smith,
10214 Hobkirk Dr. St. Louis, MO 63137 (42.14%); NFSC FEBO M22-896209. Grace
Bommarito, 1546 Doris Dr., St. Louis, MO 63138 (5.26%); Nations Bank NA.
Katherine Hutting Hunt Tr 1, P.O. Box 831575, Dallas, TX 75283-1575
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<PAGE> 124
(42.14%); Investor B Shares - NFSC FEBO M22-988642, Ronald E. Ryan, 875 Glen Elm
Drive, St. Louis, MO 63122 (6.14%); NFSC FEBO M22-841897, Beatrice J. Teter,
5201 Asbury Ave. Apt. 232, Godfrey, IL 62035 (5.60%); NFSC FEBO M22-961817,
Gladine Coleman, 5945 Loughborough, St. Louis, MO 63109 (6.08%); NFSC FEBO
M22-423394, Nancy M. Prewitt, 16 Toussaint, O'Fallon, MO 63366 (5.17%); NFSC
FEBO M22-479039, Constance M. McManus, 4271 Wyoming, St. Louis, MO 63116
(10.46%); NFSC M22-841900 Leona B. Teter 5201 Asbury Ave. Apt. 232, Godfrey, IL
62035 (5.60%); NFSC FEBO M22-848700, Jessica Schumacher, 3204 Edwards St.,
Alton, IL 62002 (10.86%); NFSC FEBO M22-062731, John T. Johnston, 106 South Main
St., Caseyville, IL 62232 (14.19%); NFSC FEBO M22-967220, Cassata Revocable
Living Trust, 5658 Tholozan, St. Louis, MO 65109 (15.62%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Income Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (63.77%); Locust & Company, P.O. Box 387,
St. Louis, MO 63166-0387 (5.57%); Washington & Company, P.O. Box 387, St. Louis,
MO 63166-0387 (30.54%); Investor A Shares - David Bornemann and Janet L.
Bornemann, 27 Lincord Drive, St Louis, MO 63128 (5.43%); NFSC FEBO M22-406252
Thomas G. Smith, 10214 Hobkirk Dr. St. Louis, MO 63137 (6.25%); NFSC FEBO
M22-898880 William Oliver Shillington, II, 2917 N. Kristopher Bend, ST. Charles,
MO 63303 (7.59%); Sandra Kungle, Sandra Kungle Trust, 139 Arrowhead Court,
Boone, NC 28607 (8.54%); Investor B Shares - NFSC FEBO M24-914932, NFSC FMTC IRA
Rollover FBO Daniel L. Bodensteiner, 515 2nd St., Evansdale, IA 50707 (5.11%);
NFSC FEBO M26-820369, Kenneth D. Johnston, 2504 S. McCann Ave., Springfield, MO
65804 (6.40%); NFSC FEBO M23-031925, Anne Lloyd DuPont, 3500 NE Kingwood Ct.,
Lees Summit, MO 64064 (7.74%); NFSC FEBO M22-821691, Arlene T. Kleimeier
Trustee, 3033 Apt. G Country Green, Florissant, MO 63033 (12.32%); Institutional
Shares - BISYS Brokerage Services Inc., P.O.
Box 4054, Concord, CA 94524 (98.46%).
As of the same date, the following institutions also owned of
record 5% or more of the Equity Index Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (15.38%); Locust & Company, P.O. Box 387,
St. Louis, MO 63166-0387 (83.85%); Institutional Shares - Locust & Company, P.O.
Box 387, St. Louis, MO, 63166-0387 (99.75%).
As of the same date, the following institutions also owned of
record 5% or more of the Small Cap Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - American Bar
Endowment, 750 N. Lake Shore Dr., Chicago, IL 60611 (11.96%); Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (14.17%); Locust & Company, P.O. Box 387,
St. Louis, MO 63166-0387 (41.97%); Bankers' Trust Co., Sheet Metal Local 36, 648
Grassmere Park Road, Nashville, TN 37211 (9.35%); State Street Bank & Trust
Company, Pioneer Hi-Bred International Retirement Plan Trust, One Enterprise
Dr., North Quincy, MA 02171 (7.45%); Institutional Shares - Locust & Company,
P.O. Box 387, St.
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<PAGE> 125
Louis, MO 63166-0000 (80.82%); Mercantile Bank, P.O. Box 387, St. Louis, MO
63166 (13.57%); BISYS Brokerage Services Inc., P.O. Box 4054, Concord, CA 94524
(5.61%).
As of the same date, the following institutions also owned of
record 5% or more of the International Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Locust and
Company, P.O. Box 387, St. Louis, MO 63166-0000 (44.76%); Olive & Company, P.O.
Box 387, St. Louis, MO 63166-0387 (46.84%); Investor A Shares - Frances Dakers,
200 E. 89th St. 28D, New York, NY 10128 (13.18%); Institutional Shares - Locust
& Company, P.O. Box 387, St. Louis, MO 63166-0000 (96.77%).
As of the same date, the following institutions also owned of
record 5% or more of the Balanced Portfolio's outstanding share as fiduciary or
agent on behalf of their customers: Trust Shares - Locust & Company, P.O. Box
387, St. Louis, MO 63166-0387 (93.87%); Olive & Company, P.O. Box 387, St.
Louis, MO 63166-0387 (6.12%); Investor A Shares - Robert W. Davis, Rollover IRA,
818 Broadway, Elsberry, MO 63343-1109 (5.88%); Investor B Shares - NFSC FEBO
M22-033073, NFSC FMTC IRA, Charles R. Oldham, 5227 Westminster Pl., St. Louis,
MO 63108 (5.49%); NFSC FEBO M26-044423, NFSC FMTC IRA, FBO Wayne Brunk, 17825
Highway 71, St. Joseph, MO 64505 (8.93%); Institutional Shares Locust & Company,
P.O. Box 387, St. Louis, MO 63166-0000 (82.25%); Mercantile Bank, P.O. Box 387,
St. Louis, MO 63166 (8.96%); BISYS Brokerage Services Inc., P.O. Box 4054,
Concord, CA 94524 (8.79%).
As of the same date, the following institutions also owned of
record 5% or more of the Growth Equity Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Trust Shares - Olive & Company,
P.O. Box 387, St. Louis, MO 63166-0387 (64.09%); Locust & Company, P.O. Box 387,
St. Louis, MO 63166-0387 (13.46%); Washington & Company, P.O. Box 387, St.
Louis, MO 63166-0387 (20.54%); Investor A Shares - NFSC FEBO M22-540196, Tiger
Limited Partnership, 903 Claymark, St. Louis, MO 63131 (8.51%); Investor B
Shares - NFSC FEBO M24-914932, NFSC FMTC IRA Rollover, FBO Daniel L.
Bodensteiner, 515 2nd St., Evansdale, IA 50707 (5.54%); NFSC FEBO M23-820768,
James William Dunn, Route 1, Box 99A, Walker, MO 64790 (5.17%); NFSC FEBO
M23-003999, NFSC FMTC IRA, 1264 W. 72nd St., Kansas City, MO 64114 (6.48%);
Institutional Shares Locust & Company, P.O. Box 387, St. Louis, MO 63166-0387
(99.99%).
As of the same date, the following Institutions also owned of
record 5% or more of the Growth & Income Equity Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares - Locust &
Company, P.O. 387, St. Louis, MO 63166-0387 (47.15%); Olive & Company, P.O. Box
387, St. Louis, MO 63166-0387 (39.33%); Washington & Company, P.O. Box 387, St.
Louis, MO 63166-0387 (9.02%); Institutional Shares - Locust & Company, P.O. Box
387, St. Louis, MO 63166-0387 (90.37%); Mercantile Bank, P.O. Box 387, St.
Louis, MO 63166 (5.64%).
As of the same date, the following Institutions also owned of
record 5% or more of the Small Cap Equity Index Portfolio's outstanding shares
as fiduciary or agent on behalf of their customers: Trust Shares-Locust &
Company, P.O. Box 387, St. Louis, MO 63166-0387
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(98.54%); Investor A Shares- NFSC FEBO M27-822221, NFSC FMTC IRA Rollover, FBO
Janice Matthews, 7736 Attingham Lane, St. Louis, MO 63119 (60.31%); NFSC FEBO
M22-855448, Michael C. Schafer, 5301 Springfield Drive, Edwardsville, IL 62025
(34.21%); Stephanie Rene Homorody, 2939 Springridge Lane, Dublin, OH 43017
(5.42%); Institutional Shares- Locust & Company, P.O. Box 387, St. Louis, MO
63166-0387 (99.99%); .
As of the same date, the following Institutions also owned of
record 5% or more of the Conning Money Market Portfolio's outstanding shares as
fiduciary or agent on behalf of their customers: Conning Money Market Portfolio,
200 Market St., St. Louis, MO 63101 (99.99%)
On the basis of information received from these institutions, the
Fund believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal year or
period ended November 30, 1998 has been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") are incorporated by reference into this Statement of Additional
Information. The Financial Statements included in such Annual Report have been
audited by the Fund's independent auditors, KPMG LLP, whose report thereon
also appears in such Annual Report and is incorporated by reference. The
Financial Statements in such Annual Report have been incorporated herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's ("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
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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.
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"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."
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"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.
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"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
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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
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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
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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.
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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.
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APPENDIX B
----------
The U.S. Government Securities, Intermediate Corporate Bond, Bond
Index, Government & Corporate Bond, Equity Income, Equity Index, Growth & Income
Equity, Growth Equity, Small Cap Equity, Small Cap Equity Index, International
Equity and Balanced Portfolios may enter into futures contracts and options for
hedging purposes in furtherance of their respective investment objectives as
described in this Statement of Additional Information. Such transactions are
described further in this Appendix.
I. Interest Rate Futures Contracts.
--------------------------------
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, each Portfolio may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Each Portfolio presently could accomplish a similar result to
that which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term bonds
and investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures market,
the protection is more likely to be achieved, perhaps at a lower cost and
without changing the rate of interest being earned by the Portfolio, through
using futures contracts. A Portfolio would engage in an interest rate futures
contract sale to maintain the income advantage from continued holding of a
long-term bond while endeavoring to avoid part or all of the loss in market
value that would otherwise accompany a decline in long-term securities prices. A
Portfolio would engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous interim
investments, for example, shorter-term securities whose yields are greater than
those available on long-term bonds.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific
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securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A Portfolio would deal only in
standardized contracts on recognized exchanges. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury Bills; and
ninety-day commercial paper. The Portfolios may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments.
II. Stock Index Futures Contracts.
------------------------------
A stock index assigns relative values to the stocks included in
the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Portfolio will sell stock index futures contracts in order to
offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. The Portfolio may do so either to hedge
the value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio will purchase stock index futures contracts in
anticipation of purchases
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of securities. In a substantial majority of these transactions, the Portfolio
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.
In addition, the Portfolio may utilize stock index futures
contracts in anticipation of changes in the composition of its portfolio
holdings. For example, in the event that the Portfolio expects to narrow the
range of industry groups represented in its holdings it may, prior to making
purchases of the actual securities, establish a long futures position based on a
more restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of the
securities to be sold as part of the restructuring of the portfolio will decline
prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
----------------------------------------
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of a foreign currency, for an
amount fixed in U.S. dollars. Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
the U.S. dollar and other currencies arising from multi-national transactions.
IV. Margin Payments.
----------------
Unlike when a Portfolio purchases or sells a security, no price
is paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Portfolio has purchased
a futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
the adviser may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation
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margin is then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or gain.
V. Other Hedging Transactions.
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Although noted above, none of the Portfolios presently intend to
use interest rate futures contracts and stock index and foreign currency futures
contracts (and related options) in connection with their hedging activities.
Nevertheless, each of these Portfolios is authorized to enter into hedging
transactions in any other futures or options contracts which are currently
traded or which may subsequently become available for trading. Such instruments
may be employed in connection with the Portfolios' hedging strategies if, in the
judgment of the adviser, transactions therein are necessary or advisable.
VI. Accounting Treatment.
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Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
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